Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone, and welcome to Bci's Second Quarter 2019 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 no 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 to 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 conference over to Mr. Andres Atala, Bci's Head of Investor Relations. Please go ahead, sir.

[Andrés Atala S., executive]

Thank you. Hello, everybody. Good morning to all of you, and welcome to our second quarter 2019 conference call. I'm Andres Atala, Head of Investor Relations. Today, I'm joined by Jose Luis Ibaibarriaga, Bci's CFO; Mr. Jose Marina, CFO of City National Bank of Florida; and Mr. Sergio Lehmann, Corporate Chief Economist.

As you know, the figures in this presentation were prepared based on Bci's consolidated financial statements in accordance with the International Financial Reporting Standards methodology and the regulations of Chile's Financial Market Commission, the CMF.

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

[Sergio Lehmann, executive]

Thank you, Andres. The Chilean economy is showing a slight recovery after GDP growth of just 1.6% year-on-year in the first quarter of the year. We estimate that the second quarter growth will be close to 2% year-on-year while the economic performance in the second half of this year will be better with an around 3.5% year-on-year forecast growth rate. Nevertheless, GDP growth expectation has moved downward to around 2.8% for 2019.

The global scenario has become more complex, recognizing a weaker economic dynamic, especially in emerging economies, greater uncertainties and concerns about how trade negotiations between U.S. and China will conclude. This has led to a decrease in the world GDP growth perspectives and a volatility increase in emerging financial markets. Nonetheless, the Chilean risk premium remains at historical low levels, recognizing strong economic fundamentals and high liquidity in international financial markets.

The Chilean economy shows a deacceleration in private consumption figures, mainly in durable goods component. A less dynamic mining output and a reduction in economic global growth has led to an exports decrease, while investments has maintained its positive momentum. Looking forward to 2019, mining sector will gradually recover and service providing sector will continue leading the GDP growth. We expect that [ investments ] will be the main driver of economic growth in the next quarters, growing at 4.8%, in average, during the year.

Please move to the next slide. A more complex growth scenario which incorporates a decrease in GDP world growth and domestic structural factor has impacted expectation over the Chilean economic performance. We expect, however, that the tax modernization proposal and pension reform will be approved by the end of the year, driving to a stronger confidence, higher investments and a recovery of growth towards 2020.

Considering a widening in the economic gap output and low inflation pressures, the Central Bank of Chile cut past June the monetary policy rate to 2.5%, and could probably deliver a new monetary stimulus next September. Local nominal interest rates have moved downside to historical minimums, incorporating this information and capturing the external trend of interest rates.

U.S. economy will grow around 2.3% in 2019, still above the estimated potential growth and in line with convergence to a more sustainable growth rate. U.S. economy grows 2.1% in the second quarter of 2019 driven by better private consumption. However, investments and exports have decreased, capturing the effects of the trade war.

Labor markets is near to all-time high. Trade tensions with China, however, and a global economic deacceleration impose greater risk for the U.S. economic growth in the middle term. In response, the Federal Reserve recently cut the monetary policy rate by 25 basis points and probably will implement an additional cut at the end of this quarter, that means next September.

The state of Florida grew 2.9% in the first quarter '19, in line with U.S. national average. Florida showed the fifth best GDP growth among U.S. states last year. Construction and real estate are the main contributors to GDP growth in 2018 followed by trade, retail and services.

Personal consumption has been the main driver in the first quarter GDP growth due to a strong labor market, which is reflected in Florida unemployment rate at historical low. We expect that financial and business services will continue to be the most dynamic sectors in 2019. Then 2019 GDP growth will be in line with the national average, being around 2.5%.

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

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio. We will now go over Bci's second quarter highlights.

Please move on to the next slide. We increased our quarterly consolidated net income by 14.23% year-over-year and 11.4% considering the year-to-date results. We would like to highlight the contribution of the subsidiaries to our net income, accounting for 59.3% of the total. Additional provisions [ made in the ] quarter amount to $12.5 million, as an anticipation of the new regulatory requirements. We have been able to improve efficiency by more than 200 basis points since December last year.

Also this quarter we announced an agreement to form a new acquired network together with EVO Payments, an international company with 30 years of experience in the field. In addition, Bci joined Google and VISA to become one of the first banks in Chile to allow purchases by mobile phone using Google Pay application. Lastly, as part of our corporate sustainability plan, this quarter we launched a $50 million green bond through our EMTN program.

Please move on to the next slide. As of June 2019, Bci had assets of nearly $63.4 billion. As you can see in the chart, our loans abroad account for 26%...

[Technical Difficulty]

[Operator]

Pardon the interruption. This is the operator. And at this time I have reconnected our speakers, and I will ask you to please continue, sir. Thank you.

[José Ibaibarriaga Martínez, executive]

Thank you to all of you, and sorry for the interruption.

We are on Slide #8. As of June 2019, Bci had assets of nearly $63.4 billion. As you can see in the chart, our loans abroad account for 26% of Bci's total portfolio, where City National Bank of Florida represents 24%. Our loan market share is 16.95%, including City National Bank of Florida, and 13.69% in the domestic market.

This first half of the year Bci had a consolidated bottom line of $341 million, where this quarter accounts for $165 million. This quarter, we had a strong 22.27% increase in the financial margin and 22.39% in net fees, in line with the incorporation of TotalBank and Financial Services. I will also like to highlight the bank's soundness reflected in our Tier 1 capital ratio of 10.22% as of June 2019.

Please move on to Slide 9. As part of our strategy, we aim to be leaders in the omnichannel experience and expand boundaries, generating deeper relationships with clients, anticipating their needs and delivering customized solutions in a fast and convenient way. In this sense, it is critical to take advantage of the existing ecosystem, and a clear example of this was the recent announcement of an agreement to form a new acquired network together with EVO Payments.

The aforementioned agreement is a joint venture that seeks to solve important needs that today are not covered by the local business models. It aims to increase the acceptance of cashless payments in Chile while promoting financial inclusion, especially in the small businesses.

EVO Payments is a world-class company and a leader in the payment market which has extensive experience in the field while delivering comprehensive solutions. It operates in 13 countries, has an immediate digital affiliation, various mobile devices solutions customized for different segments, value-added services, management and support tools and an excellent e-commerce system.

We believe that we have an opportunity to continue growing through the introduction of cashless solutions. According to our studies, there are more than 400,000 businesses in Chile that do not accept electronic payment. However, with this new offer we will be able to become part of the payment network, boosting their sales, increasing security in their transactions and improving customer services. For example, with this new acquired network they will be able to work with data analytics. In this sense, we strongly believe that Bci will become a relevant and an active player in this market.

Another milestone this quarter was that Bci joined Google and VISA to become the first bank in Chile to allow purchases through the mobile phone using the Google Pay application. To operate this new form of payment, users may have an Android phone with contactless technology and subscribe the Bci VISA credit card in the Google Pay app. We estimate that Bci customers who have Android cell phones and who occupy the bank's mobile application account for nearly 75% of our customers. This payment system operates in 29 countries, such as the United States, Brazil, Singapore, among others.

Please move to Slide 11. Regarding our disruptive innovation called MACH. We reached almost 1.5 million total users by the end of June and more than 1 million MACH prepaid cards, which account for over 50% of the number of international credit card operations. We want to highlight that this quarter we have included new features such as payment in national stores through Webpay. In addition, MACH continues to have one of the best rating in the App Store and Google Play within banks and fintechs.

Please move on to the next slide. We will now go through the main figures in our domestic market operation. This quarter, operation revenue increased 21.41% mainly due to the incorporation of Financial Services and the positive result of the financial division. When we exclude this recent acquisition, we reached a growth rate slightly above 8%.

Please move on to the next slide. In the domestic market, our loans grew 7.9%, including Financial Services operation. Commercial loans grew 2.1%. This is below the 9.5% of the first quarter 2019 since we have seen a more competitive environment in terms of prices. As you may know, we have placed a special focus to increase the bank profitability rather than volume generation. In addition, in the corporate segment we have seen that companies are looking for funding by issuing bonds, taking advantages of the historical low rates that have increased market liquidity.

In the consumer segment, we have grown 7.4% year-over-year and 31.1% year-over-year when adding the Financial Services portfolio. And lastly, mortgages loan grew 10.5% year-over-year in the domestic market. In terms of 2019 loan growth, we estimate we will be between 8% to 9%, below the 9% to 10% that we forecasted at the beginning of this year due to the less favorable macroeconomic conditions that Sergio discussed early in this presentation.

Please move on to Slide 14. Regarding the Financial Services operation, we would like to highlight the following points. The consumer loan book had a sound [indiscernible] growth since last year. This growth is a reflection of the implementation of commercial initiatives, a positive client reception of the Walmart Chile-Bci partnership and the incorporation of a comprehensive market debt information which has enabled us to improve campaigns and customer [ targeting ]. As you can see in the second chart, this year nonperforming loans have been below 4%, where we want to highlight the incorporation of digital channels in the collection process. And lastly, we want to highlight the positive performance of this operation, outperforming our initial business case.

Please move to Slide 15. In the domestic market, the net interest margin show a positive trend, mainly explained by the growth of the consumer loan book after the incorporation of Financial Services, which has a positive impact in the bank margin. And two, the spreads of new loans in the commercial and consumer segment increased this quarter due to the implementation of a corporate profitability plan, impacting NIMs positively. The fee income ratio accounts for 23.1% where we want to highlight an 18% increase year-over-year of net fees, mainly explained by the incorporation of Financial Services operations and our cross-selling strategy.

Let's continue with the provision expenses. In terms of risk, this quarter our provision expenses were $149 million. This increase in provision respond to the following factors. One, provision of $29 million after the incorporation of the Financial Services operation. Two, additional provision of $12.5 million have been made this quarter as an anticipation of the implementation of new regulatory requirements for standard model for group lending. In terms of provision expenses, the main effect will be reflected in the month of July.

It is important to consider that since last year we have been preparing for the implementation of this regulation, recording additional provision the first half of the year of $33.2 million. In spite of this affecting result, we expect to soften this impact in the following months as a consequence of several risk management initiatives that we are implementing in both the risk and the commercial area.

Nonperforming loans were 2.01% this quarter, an increase of 26 basis points year-over-year. In the consumer segment, this ratio reached 2.43% and 2.14% when excluding City National Bank and Financial Services. This increase can be attributed to the following effects. First, the incorporation of Financial Services, which is a business with higher profitability that has greater risk levels. By June, its nonperforming loans ratio was 3.8%.

Also as we mentioned in our last call, this year we have integrated Nova customers to Bci, which allows Nova's former clients to access a wider range of products and services. It should be noted that after the migration of this portfolio and during the transition period we have seen an impact on sales and in nonperforming loans. The reason for this increase is mainly explained by the adjustment in the collections models towards a centralized process, which was previously leveraged in the same branches. It is important to mention that according to our analysis we are already entering a collections normalization, and as a result, we should expect an improvement in the following months.

In the commercial loans, there is increasing nonperforming loans, aligned with lower-than-expected economic growth. In this case, we have to differentiate 2 segments that explain this increase. One, we have seen a greater deterioration in SMEs portfolio, which are included in the commercial portfolio. The aforementioned is in line with macroeconomic indicators, where we have seen a slowdown in the economy. In spite of this increase, the bank has already taken the necessary measures in the origination, administration and collection processes to manage this portfolio within specific models.

On the other hand, in the wholesale segment the greater nonperforming loans ratio is explained by specific cases related to housing real estate projects located in the North Zone, where they have received reorganizations and in which we hope to recover in the medium term. It is estimated that there will be no significant increase in nonperforming loans regarding real estate projects, [ staying free ] of a specific event due to this phenomenon.

Please move on to the next slide. The quarter operating expenses were $280 million, growing 20.1% (sic) [ 20.3% ], excluding City National Bank of Florida. Regarding this increase, it's important to mention that $26 million corresponds to Financial Services operation. In addition, it should be noted that this first half of the year Bci has managed to keep control operating expenses, growing 4.6% year-over-year, excluding Financial Services and City National Bank.

In terms of our local efficiency, we are able to improve this ratio to 47.9%, which is in line with our commitment to reducing the efficiency ratio by 200 basis points by the end of the year.

Please move on to the next slide. Net income amounted to $122 million for operations in Chile. This income is slightly higher than last quarter. However, we must consider that this quarter we have recorded additional provisions, as we recently noted.

Our return on average assets and return on average equity reached levels of 1.02% and 12.8%, respectively, including net income of City National Bank of Florida.

Regarding the implementation of a new general banking law, as you may be aware, it was approved by the president in January of this year and seeks to align capital requirements in Chile with Basel III guidelines. However, it's important to mention that the detail of its implementation has not been disclosed yet, such as the definition of anti-cyclical and systemic buffers or the weighting of credit risk-weighted assets.

Having said that and considering our current Tier 1 ratio of 10.22%, we believe that we are in a good position to comply with the new requirements of Basel III.

Now I will leave you with Jose Marina, CFO of City National Bank of Florida.

[Jose Marina;TotalBank;CFO, executive]

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

Good morning, everyone. My name is Jose Marina, and I am the CFO for City National Bank of Florida. I'm joined here by Dan Kushner, our Chief Strategic Adviser. We are pleased to join Jose Luis, Andres, Sergio and the rest of the Bci team on this call.

As I mentioned before, we are proud of the growth and transformation that has taken place at City National Bank over the last several years, and we continue to build a premier Florida banking franchise.

Please turn to Slide 24. As you can see, the second quarter was another strong quarter, with strong balance sheet results that translated to strong earnings, as well. Allow me to point out some of the financial highlights of the most recent quarter.

Looking at the balance sheet, total assets increased by $269 million in the quarter, with loan and lease portfolio contributing about $262 million of that growth, translating to a 10% annualized loan growth rate for the quarter. On a year-over-year basis, assets increased by $952 million, to $15.1 billion, largely due to the $699 million of loan and lease growth. The investment portfolio declined by $348 million in the quarter, driving a $166 million decline in Federal Home Loan Bank advances, as well.

Net income totaled $39 million in the quarter and $77 million year-to-date, a 48% improvement over each time frame. Core earnings increased by $48 million, or a more significant 61%, year-over-year since core earnings does not consider the impact of the $6 million of quarterly intangible amortization resulting from the TotalBank transaction that we closed a year ago.

Net interest income increased by 33% year-over-year but declined 2% from the first to second quarter due to higher premium amortizations on the bond portfolio.

While operating income has increased by 35% year-over-year following the TotalBank acquisition, noninterest expenses have only increased by 12% as the bank enhances its efficiency.

Looking at the key metrics, you will see that capital remains a strength, asset quality is strong and all of our profitability ratios demonstrate a favorable trend.

As we move on to Slide 25, you can see that 76% of our revenue is generated by our loan/lease portfolio; in particular, CRE loans which comprise 42% of generated revenue. This is followed by commercial loans of 16%, residential loans generating 14% of revenue. Our investment portfolio is also a strong contributor to our revenues, generating 15% of our revenues, as well. Fee revenue continues to be an area of opportunity as we move forward. We launched our wealth management unit earlier this year, and we continue looking for opportunities in the secondary loan market to generate fee income in the future.

Moving to the balance sheet, loans comprise 70% of our assets as of June 30. On the liability side of the balance sheet, deposits are a primary source of funding, at 78%. Other borrowings comprise 9% and are primarily comprised of Federal Home Loan Bank funding.

Turning to composition of our credit portfolio, 72% of our loans have real estate collateral, while the C&I, commercial and industrial, proportion represents 20% of the portfolio, 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 one property type representing more than 20% of the commercial real estate segment.

Customer deposits constitute 83% of our funding liabilities and DDAs continue to be one of the largest components, comprising 31% of customer deposits and 29% of all deposits, including brokered deposits. Money market accounts have become the largest segment of customer deposits. At the present time, 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 Slide 26, where you can see that our loan portfolio increased by $229 million in the quarter, while our lease portfolio increased by $46 million. Our loan growth was driven by organic loan production by all of our lines of business.

Year-over-year, our loan/lease portfolio has increased by $699 million. This is net of about $400 million in portfolio loan sales over this period. So our loan growth would have been closer to approximately 11% over the past year had we not sold those loans from the portfolio.

Our investment portfolio declined in the quarter by $348 million, which then reduced our Federal Home Loan Bank advances by $166 million as part of our balance sheet management initiatives. Year-over-year, however, the investment portfolio has grown by $632 million, or 28%.

While our noninterest-bearing deposit activity was relatively flat in the quarter, our year-to-date growth is strong, at $126 million, an annualized 8% growth rate. Noninterest-bearing deposits represent 29% of total deposit base.

Total deposits increased by $364 million in the quarter due to strong interest-bearing customer deposit growth of $288 million. Year-over-year, our deposit base has increased by $895 million, net of a $61 million decline in brokered deposits. So our customer deposit growth year-over-year is actually closer to $956 million.

Given our aforementioned year-over-year loan growth increase of $699 million, we have been able to increase our customer deposits by 37% more than our loan portfolio, thereby further enhancing the overall liquidity positioning of our balance sheet. Our primary focus continues to be on creating value through the ongoing generation of noninterest-bearing deposits and low-cost customer deposits.

Please turn to Slide 27. City National Bank has grown its loan and deposit base consistently over the past 4 years. The loan and deposit growth rates over the past year are 26% and 28%, respectively.

Tier 1 capital has grown as a result of the bank's earnings and was supplemented in 2018 with Bci's $570 million capital contribution to facilitate the TotalBank acquisition and ensure the bank had sufficient capital to meet its organic growth needs in the short and medium term.

Net income growth has also consistently increased year-over-year, as indicated by the 30% compounded annual growth rate over the past 4 years.

Please turn to the next slide, where you can see our consolidated income statement. Our net income for the second quarter totaled $39.3 million, bringing our total for the first half of the year to $77.2 million, a 48% increase over the first half of 2018. Our core earnings improved by a higher percentage, of 61%, since the $6 million of quarterly intangible amortization resulting from the TotalBank transaction, inclusive of goodwill amortization, is not included within core earnings.

Although net interest income increased by 33% year-over-year, substantially due to the TotalBank transaction, net interest income slightly declined, by $2 million quarter-over-quarter due to higher premium amortization in the investment portfolio arising from declining rates.

While operating income has increased by 35% year-over-year following the TotalBank acquisition, noninterest expenses have only increased by 12%, as the bank enhances its efficiency and focuses on expense control.

Please turn to Slide 29, where we review some profitability ratios. On this slide, you can see that ROAA, ROE and the efficiency ratio all demonstrate improving trends. The normalization of the 2019 ratios is primarily due to the impact of the TotalBank intangible, which is primarily driven by the amortization of goodwill.

Our NIM of 2.98% is 7 basis points lower than 2018, as a result of the declining rate environment and its impact on premium amortization in the investment portfolio as well as lower levels of accretion on purchased loans.

As we move to Slide 30, we can review some key metrics and allow us to give you a summary of CNB's performance over the previous years. As you can see from these figures, we have consistently produced strong results over the last 6 years and expect to continue to do so.

While we have discussed many of these metrics already, please focus on the asset quality ratios on this slide. Our NPLs are at significantly low levels, comprising only 26 basis points of our total loans, the lowest level over the past 6 years. Our normalized ROAA and efficiency ratios also demonstrate a continually improving trend.

Let me conclude by commenting on what we expect in 2019 and our key priorities, going forward. First, continued focus on regulatory excellence and asset quality. This is fundamental to our business. We will continue to invest in risk management.

Second, enhanced focus on sales effectiveness in order to continue to generate consistent low-cost deposit growth that will enhance our NIM and drive fee income.

Third, diversification among business and geographical lines will continue to be part of our strategy, continuing to generate new business opportunities such as we did with the leasing and wealth management companies in recent years as well as consolidating our position in Tampa and Florida.

Finally, the management team remains focused, and we are confident that CNB will continue to produce strong results for Bci as we expand our team 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 we look forward to the next time we join you on an earnings call.

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

[José Ibaibarriaga Martínez, executive]

Thank you very much, Jose, and thank you very much to all City National Bank team.

This quarter we continued to carry out programs and initiatives to enhance culture in 4 aspects: collaboration, innovation, agility and empowerment. All this effort is supported by a change management plan. The change management is a key driver for this massive transformation.

Bci culture. We aspire to the best place to work and develop, maintaining an organizational culture while adopting new ways of working. We are renewing our cultural framework. We renewed our purpose, our vision, our value and the Bci profile that incorporates new competencies and we seek to encourage to our employees.

The Bci Leader Academy. Bci builds leaders through the leadership academy whose objective is to lay the groundwork for and promote the Bci culture and leadership style. Our new academy training curriculum incorporates issues such as collaboration, agility and innovation.

Value proposition. We have strengthened our employee value proposition to attract and retain talent all across the bank and in areas that are critical to the digital transformation.

Aligning all programs and processes with the objectives of this strategic plan, we recently launched the renewed benefit manual, including key areas and making important improvements in each one.

Finally, we think we are in the right track. According to a recent Merco talent survey which identified 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.

And lastly, we would like to invite you to our Investor Day on August 20. You can be in present here or you can follow it via streaming. And we are going to talk about EVO Payments and Bci Nace, which is the program that we do have to support all the new [indiscernible].

So thank you very much, and now we can continue with questions and answers.

[Operator]

[Operator Instructions] And our first question today will come from Gabriel da Nobrega, of Citibank.

[Gabriel da Nóbrega, analyst]

During this quarter, we saw that your operating expenses were around 22% year-over-year. However, when you exclude City National Bank and Financial Services, it was, well, you say in your press release that it was about 4% year-over-year. So I'm just wondering here if you could maybe guide us through how the integration process has been going within CNB as well as with the Walmart and the consumer finance segments. What synergies have you been seeing? And when should we begin to see this stop pressuring your costs? And I'll make a second question afterwards.

[José Ibaibarriaga Martínez, executive]

Thank you, Gabriel. Yes, as you mentioned, we have a growth in expenses of 4.6% year-over-year. The main issues here is basically that we are working in all different areas and we are starting to capture some synergies of investments that we have made in the past. And as we mentioned, we expect to decrease by 200 basis points by the end of this year. And we are in line with that expectation.

Regarding the integration of TotalBank in City National Bank, it was completely done by December 2019 (sic) [ 2018 ]. So we have been able to capture the synergies starting in January of this year. The good thing is that everything went really smooth and we have not lost customers, loans or deposits.

And in Chile, the integration of Walmart Financial Services, basically that is a subsidiary that we will maintain it as they are. And the synergies are coming from the use of data analytics and all the strengths that we have been building in Bci. And that is why that subsidiary has grown 23% year-over-year.

[Gabriel da Nóbrega, analyst]

All right. That was very clear. And as for my second question, looking at your MACH results, they keep on increasing. You have more than 1 million cards right now. So could you maybe just talk about how has the development of MACH been over the few past quarters and what have been the main challenges that you have encountered there?

[José Ibaibarriaga Martínez, executive]

Well, as you know, MACH is a way that Bci leading the financial inclusion in Chile. It's a free application that every customer can use it, customers and noncustomers, which allows them to make person-to-person payments in less than 15 seconds and at the same time provide access to an international prepaid card and now to national payments.

We have been developing services as we talk, and we will continue doing it. We want to position MACH as the payment system of Chile. You will hear from some new features that we will have in very closely, and we are working in a payment ecosystem and MACH is one of those tools that we are using it.

The attraction that has had MACH is really incredible. The satisfaction of the customers is around a little bit lower than 5 points on this app. So we are really, really happy with the attraction, and it's taking more and more attraction as we increase the places where you can use this app.

I don't know if I answered your question, Gabriel.

[Operator]

Our next question today will come from Yuri Fernandes of JPMorgan.

[Yuri Fernandes, analyst]

My first one is regarding payments, if you can provide more color on the EVO joint venture you announced and if you have any target of number of clients, what you plan to do with your stake on Transbank, how the distribution will be for this. It's going to be, you're going to use the branches to distribute this? You're going to have employees also selling those POS? So basically how the JV should look like in the future. And also if you have a timing for that. When should we start to see you getting more vocal on the payments? That's one. And I can make my second questions later.

[José Ibaibarriaga Martínez, executive]

Yuri, I will leave you with Enairo Urdaneta, who is leading this EVO joint venture. And as well, I invite you to the Bci Day on the 20th, where we are going to talk deeply about this EVO agreement. Enairo, can you address it, please?

[Enairo Urdaneta-Ponte, executive]

Sure. Yuri, to give you more color on the EVO JV, bigger picture, basically we believe that as Bci moving or the industry moving to the 4-party model, we're going to be able to increase competition and improve the value proposition for the merchants in Chile, something that we have been eagerly expecting for many years and that we appreciate all the efforts that the different players in the industry as well as the regulators have done to take us to this model.

We think the advantage, in general, for this model is that the merchants are going to have more options in terms of payment acceptance methods. And the differentiation is going to come through more alternative payment methods. So there's going to be a lot more innovation and there's also going to be an improvement on the overall service levels.

That is what we're pursuing with the partnership with EVO, which we hope to -- and you were asking about timing. The timing really is going to depend on a couple of things that need to happen in the market. Well, first of all, we need to get approval from the Superintendent of Banks, or the CMF, nowadays.

We also need to make sure that there is the interoperability for the card schemes, which means that the interchange rates scheme is going to come into play. And that's probably going to be sometime first quarter of 2020. Okay?

You were asking about the strategy on how we plan on selling this. The joint venture looks at leveraging each party's assets: from EVO's perspective, the technology, their know-how in the industry; from Bci's perspective, we plan to leverage not only our channel but also our data capability as well as our customers. And yes, we plan to distribute this as a value proposition through our channel to our customers.

And then there was one more question about Transbank and our stake in Transbank. This is a very dynamic market. We have not taken any position specifically about it. And when it comes to us making a decision, we will obviously analyze all the different alternatives that are on the table.

And then finally, one of the other things that we'll look at and why we see this migration to the 4-party model a good thing is because it's going to promote the financial inclusion of those merchants, those more than 400,000 merchants in Chile, that are left behind in terms of card acceptance. I think I covered all of your points. If I did not, just let me know.

[Yuri Fernandes, analyst]

No, no. Super clear. Just a follow-up, you mentioned today in Chile you have about 450,000 merchants and the idea is that this number should be higher given, like, the lower-end market and you providing more service. That's the idea, right? Just follow-up, how MACH strategy plays with this EVO Payments? Because I think MACH you can also make, like, [ QR code ] transfers and things like this. Don't you see kind of a competition between the 2 payment strategies here?

[Enairo Urdaneta-Ponte, executive]

Not really. It's actually going to be a way of complementing the overall value proposition. That's the way we see it. It's going to be a complement.

[Yuri Fernandes, analyst]

No, no. It's very clear. Many thanks. My second question is regarding asset quality. We note a worsening in the quarter, and it was somewhat expected given, like, the consolidation of the acquisitions, especially the Financial Services. But regarding Nova, why should Nova drive worsening asset quality? Like, this was part of your portfolio. You knew the clients. Like, why did consolidation of Nova clients in the bank itself could be driving a more worsening on asset quality? Is it basically those guys taking more product, leveraging more on your products? What explains that?

[José Ibaibarriaga Martínez, executive]

Yuri, as you mentioned, the Nova client portfolio has the same risk. What happened was that when we merged these 2 banks, we have some transition period when we went from manual collection in branches to automatic collection in our systems. You have some period there, and in that period we lost some sales and we lost some collection traction. And we believe that, as today, we are coming back and we are having the same numbers that we used to have. So it was part of the transaction, the consolidation and the adjustment period of time.

[Yuri Fernandes, analyst]

Jose Luis, can you remind us the cost of risk guidance you have and the potential impact in July from the additional provision?

[José Ibaibarriaga Martínez, executive]

The cost of what, Yuri?

[Yuri Fernandes, analyst]

The cost of risk. What are you expecting for the cost of risk now with all the consolidated entities and the July impact from the new risk models?

[José Ibaibarriaga Martínez, executive]

Okay. The July risk models will be public in a couple of days. I can't tell you the numbers today, but what I can tell you is that the numbers are going to be what we have been telling in the conference call. And basically, we have been provisioning it in order to anticipate the cost. And we are not going to and you are not going to see any differences that what we have been publishing.

[Yuri Fernandes, analyst]

Okay. So the number you said was CLP 30 billion, CLP 31 billion. You did CLP 8.5 billion this quarter. This is around CLP 20 billion, CLP 22 billion, CLP 23 billion, something like that, right?

[José Ibaibarriaga Martínez, executive]

What we have been provisioned during this year has been CLP 22 billion, and we did some provisions last year. So you are going to see an impact in the financial statement according to that.

And the other question that you did was the cost of risk that we are estimating. For 2019 we estimate that the cost of risk will be in a 1.2% to 1.3% range. This year, we have been taking into consideration all the effects that you already know: the incorporation of Financial Services, a nonrecurring effect due to the higher provision in the commercial segment and the loan growth that will be between 8% to 9%. So in the case of the provision, it should grow in a similar magnitude, when excluding Financial Services and the nonrecurring effects such as the B1 provisions that we are going to do in July.

[Operator]

And our next question today will come from Jose [ Barmeister ], of Itau.

[Thiago Bovolenta Batista, analyst]

I have a question related to City National Bank. We can see the net interest income is improving and the loan growth has been very good so far. But I would like to know what are the prospects for amplifying the noninterest income, the oil-related fee income services that you are thinking about. If you can tell a little bit about it?

[José Ibaibarriaga Martínez, executive]

Jose, can you take that question, please?

[Jose Marina;TotalBank;CFO, executive]

Yes, of course. So you can see our noninterest income has been pretty steady the last couple of quarters, just over $14 million each quarter. We are looking -- as we indicated, we launched a wealth management unit about a year ago. That has been generating some fees. That will take a little bit of time to augment our fee income. Right now, we have over $400 million in assets under management. So we have some good growth prospects there in a short amount of time.

We also recently did $75 million of BOLI. That closed actually in July. So you're going to be seeing that impact in future quarters.

And then we're also going to be generating more gain on the sale of loans, especially in the residential market. So we're refocusing the strategy: a little bit less portfolio-driven and a little bit more fee income sale-driven in order to augment our noninterest income.

So you're going to see that in future quarters we'll be able to steadily increase our noninterest income, moving forward. So that is one of our key initiatives, and we're also exploring other opportunities. We want to have a greater source of our operating income coming from noninterest income opportunities. So that's something we're actively working on and exploring other fee income opportunities.

[Thiago Bovolenta Batista, analyst]

Okay. And related to the prospects that you are seeing so far, can you please tell us a little bit about the main risks that you are looking at, the operation in the U.S., mainly, all related to this trade war? And if you can give a little color of how the trade war impacted the corporates there in Florida?

[Jose Marina;TotalBank;CFO, executive]

Of course. So we've had this trade war out there now for several months and the tariffs being placed on China, et cetera. As far as the impact on the economy, as we saw in the first few slides, the Florida economy and the U.S. economy continue to be quite strong. Unemployment rate in Florida continues to decline, the number of employees continues to increase.

So we haven't seen a -- Florida is more of a real estate-driven economy. As you saw, over 70% of our loans are real estate-secured, and that activity continues to be strong. A lot of our loan growth has been generated, as you saw on Slide 26, through the commercial mortgage market segment of the portfolio.

So we haven't seen any really slowdown of significance in loan demand. Economic fundamentals continue to be strong. Obviously, rates, as a result of the trade war, rates have been coming down, as you may have seen yesterday, especially on the longer end of the curve. So that is not the ideal situation for banks as the rate curve flattens.

But so far from a pure economic -- and asset quality continues to be strong, as well. As you saw, we've had the lowest nonperforming loan ratio, 26 basis points, over the last several years. So asset quality is pristine. So nothing has manifested itself for asset quality, either.

And obviously, it's a situation that we continue to monitor, but all fundamentals continue to be strong. And in the short term, as we've seen with rates coming down, there could be some short-term pressure on the net interest margin, but that's the only place we've seen any pressure so far.

[Operator]

Our next question today will come from Sebastian Gallego, of Credicorp Capital.

[Sebastian Gallego, analyst]

I have some questions. The first one, on the share issuance that was made in July. It seems that there were more shares than historically Bci has issued for what you guys called [Foreign Language]. Can you provide a bit more color on that and how should we expect that, going forward?

And the second question is regarding profitability at the consolidated level. We have here you guys here and we see efficiency improving. We see strong results at CNB. But yet we're not seeing an improvement, or a major improvement, in profitability at the consolidated level. Can you provide, as well, some color on how do you expect to achieve higher profitability at the consolidated level?

[José Ibaibarriaga Martínez, executive]

Sebastian, we are looking and we are seeing an increase in the consolidated net income profit if you compare year-over-year. If you take into consideration that last year we have a change and sales of Credicorp shares who create a one-time profit that we do not have this year. So if you isolate that impact you will see a significant increase year-over-year.

And our expectation is that we are going to have an important increase year-over-year even taking into consideration the implementation of B1 this year, and you are going to be able to see it in a couple of days.

And giving more details, if you see how we are growing our gross margin and net income -- excuse me, our expenses, you're going to see that we have a positive trend. And at the end of the day we will have an important increase in our profit. So we are pretty comfortable. We are performing better than budget. And we are in good shape.

Regarding the shares, why we increased the numbers of shares in July, that was a way of having more shares in the market so we can increase our flow. One of the things that investors have been asking us, how we increase our flow daily. We have been, and you are one that can lead this thing, we went through around $2 million in transactions in a daily basis to $4.5 million in transactions, and we want to increase that flow. So one of the ways of doing that is increasing the number of stocks outside. So that is the main reason.

[Sebastian Gallego, analyst]

Okay. And just a follow-up, Mr. Jose, can you tell us your long-term profitability target at the consolidated level for the medium term?

[José Ibaibarriaga Martínez, executive]

The what?

[Sebastian Gallego, analyst]

In terms of ROE.

[José Ibaibarriaga Martínez, executive]

The ROE. In the ROE, Sebastian, we have to open it in two. As we mentioned, around 30% of our assets is outside, mainly in U.S., where we have a return on equity that is lower than in Chile, aligned with the risk associated to operate in the U.S. That average return on equity is around 10%.

The other percentage is around 70% that we have our assets in Chile. We have a return on equity that is today in the range of 14% that is being affected by the capital increase that we did on December of last year, one thing. And the other thing is that we are, as we have mentioned several times, we are going through a major digital transformation and we are investing in several areas, like IT architecture, journeys, data analytics, innovation and all the security part of the business.

So those 2 things are affecting the return on equity that we do have. But having said that, as I mentioned in the conference call, we are working really heavily to improve our profitability in order to increase our return on equity.

[Operator]

Ladies and gentlemen, this will now conclude our question-and-answer session. At this time I'd like to turn the floor back over to Mr. Jose Luis Ibaibarriaga for any closing remarks.

[José Ibaibarriaga Martínez, executive]

Thank you very much. Thank you very much to all of you. And as always, we are open in Investor Relations to receive any of your questions. So please feel free to do it by all the different channels that we have in place.

So thank you very much, and we look forward to see you as much of you as you can on the 20th.

[Operator]

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation.