Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2021-Q2

[Cristian Saffie, executive]

Good morning to all of you, and welcome to our second quarter 2021 conference call. My name is Cristian Saffie from the Investor Relations team, and I really hope that you and your families are doing well and staying safe. Today, I'm joined by José Luis Ibaibarriaga, Bci's CFO; Juan Enrique Pino, Head of Risk -- Credit Risk Management; Jose Marina, City National Bank CFO; and Sergio Lehmann, our Chief Economist.

During this Zoom presentation, which is being recorded, we will ask you to please keep your microphone and cameras turned off until the Q&A session. And we will leave room for questions at the end of this presentation, when you will be able to raise your hand using the button that you can see below your name. I would like to start this presentation by sincerely thanking you, our investor, by recognizing in our Institutional Investor magazine at the Latin America level for the fifth consecutive year, which motivate us to continue working to delivering qualitative information in a timely matter.

Now I will pass the mic to José Luis Ibaibarriaga, our CFO.

[José Ibaibarriaga Martínez, executive]

Thank you, Cristian, and thank you, everyone, for participating in this conference call. The presentation -- Andrés is not here because he has a personal issue this morning. I will leave you with Sergio Lehmann first. Then we will have Juan Enrique to talk about -- a little bit about risk. We do have the member of the team of the payment ecosystem, if you have any doubt, and we will go through the main macroeconomic figures.

So Sergio, can you start with the macroeconomic figures, please?

[Sergio Lehmann, executive]

Sure. Thank you, José Luis, and good morning, everyone.

The world economy was hit hard by COVID-19, but in the second quarter of 2021, the activity has continued to grow, especially in developed economies, led by the United States and China. Global economic sentiment is improving based on expectation of better health condition and massive support of recovery. IMF projects 6% world GDP growth in 2021 but with an improvement in developed economies and a bit less of growth in emerging nations. The recovery will be asymmetric among countries and by economic sector due to unequal sanitary and financial conditions that is already in the world. Another risk is the Delta variant, which is already hitting the U.S. and Europe.

U.S. GDP will grow around 7% in 2021, generating larger job gains. Florida is expected to grow at a similar pace this year. In monetary policy, the Fed is expected to not increase the Fed fund rate until late 2022 but could start scaling back its monthly bond purchases.

In Chile, there's expected larger growth in the coming quarters due to additional massive government aids, a fast vaccination process and a more positive external outlook reflected in higher commodity prices, particularly in the case of copper. Inflation has increased in recent months and will be above 4% for most of third quarter '21. Given this development, the central bank initiated a recalibration of the monetary policy in July. The Chilean peso has been one of the most depreciated currency in the world in the last year despite the rise in copper price. Political developments and coming election at the end of this year are playing a significant role in these movements.

Please move to the next slide. The U.S. economy has continued to recover in second quarter '21, driven by product consumption. Fiscal stimulus and rapid vaccination process are generating a positive impact on internal demand in the coming quarters, and the IMF estimate GDP growth rate of 7%, as I said before, one of the highest in the recent decades. According to official figures, Florida GDP growth is above the national level and will maintain a similar pace for the rest of the year. Job gains are accelerating in the U.S. and Florida, but total payrolls are still below the pre-pandemic levels.

Please move to the next slide. In Chile, the economic recovery is going to accelerate in the second quarter and the third quarter of 2021, thanks to significant increase in government aid and lifting mobility restriction given a successful vaccination process. Retail sales and construction are growing fast, but the service sector is still lagging. Bci research has recently revised the GDP growth outlook upward to 9.2% for 2021. The labor market is still showing a slow recovery and will take some years to reach pre-pandemic levels. [ Informal ] jobs are rising, and unemployment rate is currently at 9.5%.

Please move to the next slide. Inflation has risen in Chile in the last 3 months, driven mainly by energy prices, although goods and services prices are also increased. On a 1 year-on-year basis, inflation will continue to climb in the coming months, but it should soften in the second half, ending around 3.8% in December. This new trend in inflation, partially transitory, drove the Central Bank to initiate, as I said, a recalibration of the monetary policy. The monetary policy rate is expected to be at 1.5% in December.

And the Chilean peso has depreciated in recent months despite the increase in the copper price. The depreciation and the volatility in the FX market reflect foreign investment outflows, political uncertainty and pension fund withdraws. We expect that the election at the end of the year and the debate of the new constitution will contribute to easing the current political tension through the installation of dialogue and agreement given the high quorum required to the new legal framework.

Now I will leave you with José Luis Ibaibarriaga. Please, José Luis?

[José Ibaibarriaga Martínez, executive]

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

First, we continue to be close to our clients, providing them financial support. Indeed, through the newest version of the FOGAPE program and the FOGAPE Reactiva, we have generated around $900 million in loans this year while the second draw of PPP loans reached more than $750 million.

As one of our key priorities, we have placed a special focus on our efficiency plan. The bank has strengthened its commitment to keeping expenses under control, recording a slight increase of 0.73% year-over-year in nominal terms, well below inflation. Pagos y Servicios, known as Bci Pagos, secured authorization from the Financial Market Commission and began operating this quarter, thereby strengthening our digital payment ecosystem.

The bank maintained a strong financial position. Bci soundness is once again reflected in our liquidity and capital ratios, which are both well above regulatory limits. The bank's liquidity coverage ratio is over 200% for local operations, well above regulatory limits, while noninterest-bearing demand deposits continue to grow strongly at a rate of 31% year-over-year. This reflects the high growth of retail checking accounts and the soundness of the bank's value proposition for companies.

In terms of consolidated financial results, here are some highlights from the second quarter. Our financial margin increased 14.6% year-over-year on a year-to-date basis, mainly driven by higher inflation and lower cost in deposits due to an increase in noninterest-bearing deposits. Regular provisions have decreased as a result of resilient customer behavior, which reflect that unusual and additional liquidity support received by our clients and improvements in the payment process. Additionally, we have recorded nearly $100 million of additional voluntary provisions this year, raising our coverage ratio to over 240%.

Please move to the next slide. Today, Bci is the largest financial institution in Chile by assets with nearly $80 billion. We have been consolidating our process as the largest bank in Chile in assets, and we are among the top 10 banks in LatAm according to Standard & Poor's. We have successfully diversified our operations by adding new line of business and also by expanding geographically, where City National Bank of Florida plus a branch in Miami currently account for almost 28% of total bank portfolio and 35% of our net income.

Also, this quarter, Standard & Poor's changed Bci's outlook from negative to stable and affirmed the A- long-term rating. The revision of the bank's outlook incorporated the positive impact of the decreasing risk for banks operating in the U.S. due to faster economic rebound on the back of government stimulus, extraordinary action by the Federal Reserve and vaccine distribution.

Please move to the next slide. Regarding our strategic priority, we recently adjusted our corporate structure to face new challenges and build a sound ecosystem strategy, reaching more than 5 million customers. In this sense, transforming into a financial services platform require adjustments in the internal structure, which is what the bank is currently at today. Two fundamental pillars are the creation of 2 new divisions: investment and finance and the digital ecosystem division.

In particular, the digital ecosystem will be another fundamental platform in the evolution of Bci with more than 5 million customers. It will operate with a scalable, efficient model that will allow the bank to adapt to a competitive and challenging environment that is nonetheless full of opportunity and marked by strong global and regional growth.

Regarding MACH, this quarter, we reached another milestone. We successfully implemented Mambu, a state-of-the-art core banking system that will enable us to deploy our strategy of becoming a digital bank. Also this quarter, we are very proud to report that MACH has reached more than 3 million users and more than 2.8 million MACH prepaid cards, of which 2.5 million are active cards.

Additionally, we took a further step forward in the construction of the digital ecosystem. This quarter, Bci Pagos, the company behind Bci joint venture with EVO Payments, received its CMF authorization to operate. We partnered with a leading acquirer with a proven track record around the globe to develop our own merchant acquiring business. EVO has business activities in 50 markets and more than 150 currency around the world and is among the largest fully integrated merchant acquirers and payment processors in the world.

This joint venture will leverage Bci's branch network and existing customer behavior and EVO's Payment experience to build a scalable market share. Through EVO, we can offer a range of products and services, including merchant discounts, payment gateways, POS tools and developer tools. With these services, we can provide specific product and tools that customers need to accept payments in a way that works best for their different kind of businesses. The entire EVO platform is now available for businesses in Chile, allowing us to differentiate ourselves in all segments of the pyramid.

Please move to the next slide. Since regulatory approval, we have been building a top-of-the-line acquiring business, delivering the following plan. We incorporate Pago Facil, which will bring benefit for SMEs and other businesses, expanding our payment platform and our ability to support thousands of businesses to strengthen and develop their e-commerce capabilities. In addition, thanks to our early onboarding campaign, Bci Pagos started its operation on day 1 with over 3,000 merchants.

Now let's take a look at the bank's performance this quarter. Please turn to the next slide. Let's go through the main figures of our consolidated operations. The bank posted a net income of $169 million...

[Technical Difficulty]

[Cristian Saffie, executive]

I think José Luis has some trouble with the connection. As he was mentioning, the bank had posted net income of $169 million, where the bank had good results in terms of the financial margin, growing 10.86%. Also this quarter, the bank has continued to record additional provision, a process that started in 2020, which Juan Enrique will address later in this presentation. Finally and as you can see in this slide, in terms of taxes, we recorded slightly higher tax expenses in the first half of the year after adjusting the projected year exchange rate upwards with the increase of the CNB value investment.

Please, if we can move to next slide. In terms of the local level, as you can see our local operation, we see a similar trend of the consolidated financial results. The main difference is in terms of the fee income line, which show -- represents a much larger increase on a year-on-year basis.

Moving please to Slide #18. In terms of the domestic margin -- the domestic market, sorry, the net interest margin, as you can see in the upper side chart, increased 48 basis points despite the significant decrease in the consumer loan book. The higher margin was mainly due to higher inflation plus lower funding costs following the increase in noninterest-bearing deposits vis-à-vis time deposits.

Moving to Slide #19. One of the bank's key priorities in 2021, as José Luis mentioned in the last call, a key priority for us is keeping expenses controlled in order to reach the target efficiency and, of course, the ROE we have talked in the medium term. In the local operation, this year, OpEx has increased 1.7%, well below inflation. This quarter, 6.6% increase is driven by a 9.4% hike in the personnel expense, mainly related to bonuses, followed by an increase of nearly 6% in management expenses due to investing in technology and MACH, plus maintain and repair fixed assets due to return of leased offices.

Also, the bank's second quarter efficiency ratio was 14 -- 47.36%, above second quarter [ 2020 ] but almost 60 basis points below the 48% of the previous quarter. Additionally, this year, the execution and implementation of several initiatives continue as part of the corporate efficiency plan.

Please move to the next slide. In terms of our loan portfolio, Bci local loan portfolio amounted near $38 million this quarter, presenting a decrease of roughly 3%. While mortgage loan maintained a sound 13.7% growth this quarter, commercial loans contracted 8%. This largely reflects a higher comparison base due to the disbursement of the FOGAPE programs, over CLP 2 billion. In addition, in the first half of 2020, the whole segment was particularly active in terms of loan generation.

On the other hand, consumer loans do not seem to be rebounding yet, falling almost 12% year-on-year. This is partially explained by the greater liquidity of households as a result of several government support measures and the pension fund withdraw for the second half, which we expect a change in the trend in line with the improvement in the activity in the labor market.

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

[Juan Enrique Visinteiner, executive]

Thank you, Cristian. Thank you all. I'm happy to be with you. My name is Juan Enrique Pino. I'm the Chief Credit Officer for Bci. And happy to be here with you once again.

So on this slide, as you can see, our local loan portfolio is pretty well diversified by business lines, economic sectors. On the left side, you can see that we present as usual the local distribution among the different segments. And on the right side, we take a closer look at the commercial loan portfolio, which represents nearly 16% in our mix. And the chart shows our portfolio diversification among different sectors and industries.

And as you can note, Bci's exposure to hotels, health and restaurant sectors combined is well below 4%. These are not the only sectors that have suffered the most out of the pandemic but are probably the ones where everyone is more focused on.

Let's go to the next slide, please. Here, we can see the trend in the total loan portfolio. As you can see, the orange line, the nonperforming loans have decreased across the different segments, especially in the second half of 2020. The above is mainly explained by greater liquidity that helped to improve the quality of the portfolio as a result of the different support programs granted by Bci as well as by the government, such as extensions in the mortgage loans and many extensions also in -- for SMEs and for consumers.

Likewise and as we have mentioned in the previous call, we believe that the current risk indicators are at historical lows and are not aligned with the expected outcome based on the analysis and what this model suggests for this year as the level of uncertainties that began in 2020 continues to extend during the current period. And that's the reason why the black lines, which reflects the level of provisions relative to the loan portfolio, we have been building them up.

Let's go to the next slide. So now we take a closer look at the commercial loan portfolio. As you can see, the NPL ratio has started trending downwards, again, during this second quarter in part due to the gradual reopening of the economy and in part also due to the continued Bci and government support programs to SMEs in particular, which includes subsidies such as the VALOR PYME, and the new FOGAPE program called Reactiva, which is focused not only on loan restructuring but also on fostering growth.

However, the loan loss provision to loans ratio remains trending upwards but at a lower speed. And it's mainly explained by the regular due diligence that we perform on our wholesale exposures in order to properly recognize the most current financial condition in our loss, loss -- in our loan loss provisions. It's important to take into consideration that with the new FOGAPE programs, both COVID and Reactiva, Bci has granted nearly $2.9 billion in additional financing and that much of those proceeds under the FOGAPE-COVID program in particular led companies to double their debts. So this group of companies obtained the necessary liquidity to support the stressful period with a reasonable extended time frame to repay those debts, but on the other hand, increasing the debt size significantly and compromising the future debt payment capacity.

So far, many of these companies have accommodated to this new reality. However, some of them have taken advantage of the new FOGAPE Reactiva program, which has some refinancing figures that extend even further the payment scheme. So the original FOGAPE-COVID program, you may remember was up to 5 years, and this one is up to 7 years.

Let's go to the next slide, which addresses the mortgage loan portfolio. As you can see, the mortgage loan portfolio has been particularly resilient to this current situation with NPL ratios reaching historical lows. This is mainly explained by the greater liquidity, again, of households and the sound growth of the portfolio that José Luis and Cristian mentioned recently.

Let's go to the next slide. And here, we're focusing on the consumer lending. Consumer support measures by both Bci and government, along with the digitization of the payment process, has allowed the improvement in the NPL ratios you can see in the chart. The greater liquidity continues presenting a positive trend in the quality of the portfolio as a result of the different benefits granted by Bci and by the government, such as extensions in mortgage loans, bonus payments and pension funds withdraws.

Let's go to the next one. The next one addresses the consumer loan portfolio of our affiliates, Servicios Financieros S.A., which was born from the acquisition nearly 3 years ago of Walmart's financial division. The downward trend in the NPL is similar to the one that we saw in the previous slide and even deeper in -- than in a traditional consumer lending division, as you can see in the chart. Again, we believe this is a very positive performance, has been due to the several government-sponsored cash support programs granted to individuals and to families, plus implementation of Bci -- in Bci of digital collection channels, which today in Servicios Financieros represent 40% of the total loan collection activity to this segment.

So let's go back to the -- let's go to the next slide and the last one in my section. So here, we address the voluntary or additional provision that Cristian was mentioning earlier. Since the beginning of the pandemic, we have booked voluntary loan loss provisions in order to anticipate future risk, increasing our loan loss coverage ratio and building even more conservative financial statement which will allow us to face potential downside scenarios that our risk models may not be fully capturing. In the second quarter of 2021, we continue to record those additional provisions.

In total, by now, we have now recorded more than $300 million in total provisions, both in Chile and in South Florida. This conservative approach to additional provisions has allowed the bank to increase its loan loss coverage ratio from 157.7% in the second quarter of last year to 241.5% in the second quarter of this year, as José Luis mentioned earlier in anticipation of future loan portfolio deterioration resulting from the COVID crisis, which may have not fully manifested yet given the strong set of financial relief measures granted to both individuals and to companies.

Let's go to the next one. And now I'll leave you with Jose Marina, our CFO for City National Bank.

[Jose Marina, executive]

Thank you again, Juan Enrique, for the opportunity to join you and everybody else in the Bci team on this quarterly earnings call to review City National Bank's performance over the past year. Good morning, everyone. My name is Jose Marina, and I'm City National Bank's Chief Financial Officer. I'm excited to be here with you this morning to discuss our results for the first half of the year.

After being focused on PPP and MSLP during 2020 and the second round of PPP during the first quarter of this year, we were excited to get back to the business of traditional lending as economic fundamentals in Florida and nationally continue to improve. During this morning's presentation, you will see that we are deploying the significant deposits we have accumulated over the past year into quality loans with production levels exceeding pre-pandemic levels. We will also demonstrate to you our strong financial results for the first half as well as our improving asset quality trends. We will then conclude by discussing our priorities for 2021.

So let's jump into it. As you can see, we increased our core loans that exclude PPP, which you can see in the green portion of the bar, from $10.6 billion to nearly $11 billion, an increase of over $400 million for the quarter alone. This strong loan growth was propelled by about $2.2 billion of non-PPP loan production for the first half of the year, a 28% increase over 2019 pre-pandemic levels.

City National Bank has historically generated top-quartile loan growth, and we've quickly regained our loan production momentum in one of the most vibrant markets in the country. Our annualized loan growth rate for the year excluding PPP is about 6%, and we expect to maintain that pace for the remainder of the year at a minimum. It is also important to note that we crossed the $20 billion asset mark during the second quarter, a significant benchmark. We have increased our assets by nearly $3 billion over the past year as a result of the market share we have gained in deposits, which we will discuss shortly.

On this next slide, you can see the evolution of our PPP loans and fees. We funded $1.85 billion of loans a year ago with $57.1 million in fees. During the course of 2020, we forgave $197 million of those loans and recognized $23.6 million in fees as income, leaving us with $1.65 billion in loans and $33.7 million of fees outstanding at the end of 2020. During the first half of the year, nearly $1.1 billion of PPP loans were forgiven, and we recognized nearly $27 million in fees.

As I indicated earlier, we were active in the second round of PPP and funded $781 million of new PPP loans with $29 million in fees. As a result, we closed June 30 with nearly $1.36 billion in total PPP loans outstanding and $36 million of PPP fees that will be substantially recognized over the next year or so as these loans are forgiven.

Our outsized participation in PPP and MSLP along with our cross-sell efforts resulted in $4 billion in customer deposit growth year-over-year, a growth rate of 31%. Our acquisition of Executive National Bank in the fourth quarter of 2020 only added about $400 million of deposits, so our deposit growth has been substantially organic. After a strong 2020, we've increased our deposits by an additional $1.8 billion over the first half of the year, reducing our loan-to-deposit ratio to below 74%.

A substantial amount of our growth is in noninterest-bearing deposits, which now account for 39% of our deposit base. Our noninterest deposits increased by nearly $400 million in the second quarter and by over $2 billion year-over-year, a 46% growth rate. We have also been able to reduce our spot cost of deposits down to 17 basis points, a reduction of 22 basis points over the prior year. We have made additional deposit rate cuts in July that will be reflected in our third quarter results.

On the right-hand side of this slide, you can see how our deposit growth rates over the last quarter, last 6 months and over the prior year compare to the banking industry as a whole. City National Bank's deposit growth rate significantly exceeds that of the industry for all 3 time horizons, demonstrating that our cross-sell efforts have paid significant dividends. As a result, we have ample liquidity to continue funding our strong loan demand.

Now I'd like to discuss our asset quality trends. You can see that our loan deferrals have declined all the way down to $84 million, which represents under 80 basis points of our loans excluding PPP. As you can see in the bottom left of the slide, 75% of the deferments are in residential mortgages with another 25% in the hotel CRE sector. It is also important to note that the weighted average LTV of the real estate secured loans on deferral is a very conservative 51%. As of today, deferrals are down to about $62 million and are fully comprised of residential loans.

Our ALLL coverage ratio excluding PPP loans declined slightly by 8 basis points to 1.38% since year-end as a result of the loan growth that we've had. Our NPLs also declined in the quarter by about $14 million, down to $69 million, and our past dues also declined substantially to 31 basis points of loans outstanding excluding PPP, as you can see on the top right. So our past dues are less than half of the year-end totals.

As a result of these improving asset quality indicators, we have not added any loan loss provisions in 2021, with the increase in organic loans driving the aforementioned slight decline in the ALLL coverage ratio. Overall, the deferment trend is strong, and the remaining deferment are well secured. And already strong asset quality indicators continue to improve.

Moving to our results for the quarter and for the first half of the year. Our net income for the quarter totaled $61 million, a 16% improvement as compared to the linked quarter. Our year-to-date net income of $113.8 million is 96% higher than the prior year due to $41 million of additional net interest income and $31 million of lower loan loss provisions. As a result of the improving asset quality trends that we just reviewed, along with the strong economic conditions in Florida, we have not recorded any loan loss provisions in 2021.

Looking at core earnings, which excludes provisions, intangible amortization and other nonrecurring items, our core earnings improved by $7.4 million as compared to the linked quarter and $35.5 million or 27% year-over-year. The improvement in core earnings is driven by our increasing net interest income trends due to our growth in earning assets. We will discuss our increasing net interest income trend further and the related PPP impact in a couple of slides.

You can also see in this chart, in the bottom, that our ROA and ROE for the quarter are both strong at 1.2% and 10.7% (sic) [ 11.7% ], respectively, for the most recent quarter. Our efficiency ratio also remained strong at 41%. In summary, we are generating strong results in 2021, and our core earnings trend is very favorable.

On the left-hand side of this slide, you can see the evolution of our net interest income compared to the linked quarter and the second quarter of 2020. The dark green part of the bar represents our net interest income excluding the impact of PPP and MSLP. And you can see that our core net interest income increased by nearly $6 million over the linked quarter and by $12 million over the prior year. Our significant growth in earning assets, driven by a 26% increase in customer deposits over the prior year, has driven our net interest income growth excluding PPP fees. PPP fees totaled $13 million in the second quarter and actually declined by $700,000 as compared to the linked quarter. Therefore, the overall increase in net interest income of $5 million over the linked quarter is driven by our core net interest income, not PPP fees.

On the right-hand side of the slide, you can see our net interest margin evolution as well. Our core NIM excluding PPP and MSLP increased by 7 basis points over the prior quarter to 2.67%. Our NIM for the quarter was 2.8%, including the impact of PPP, which had a 13 basis point impact on our NIM. You can also see that our cost of funds declined by 7 basis points in the quarter, down to 24 bps and will continue to decline modestly. In conclusion, although our net interest margin is declining in percentage terms due to increased liquidity and the impact on asset mix, our net interest income trend is very favorable.

On this slide, you can see that we're able to increase our noninterest income by $6.5 million or 21% year-over-year excluding swap fee income, primarily due to our deposit service charges increasing by $4.1 million due to the new treasury management clients that we onboarded during the course of 2020 through our PPP and MSLP cross-sell efforts. The increase in other income of $4 million is due to the MSLP servicing fee income, gain on the sale of assets from our leasing company and deposit covenant fees. We continue to remain focused on enhancing our noninterest income, which is one of our top priorities for the year.

On that note, I'd like to conclude by briefly discussing our top priorities for 2021. First and foremost, we are focused on active portfolio management in order to maintain our asset quality and minimize provisioning needs during 2021. Identifying and executing on cross-sell opportunities is also a key component of our portfolio management strategy. Deepening client relationships through cross-sell is part of City National Bank's DNA. As we saw, our asset quality metrics are continuing to improve during 2021.

Second, we currently have excess liquidity due to the extraordinary deposit growth generated in 2020 and through the first half of 2021, and we are focused on identifying opportunities to generate new high-quality loans to further enhance our margin. As we discussed earlier, we generated $2.2 billion of loans in the first half of the year, which is a 28% increase over 2019 production levels.

Third, we will continue to invest in technology and our digital transformation initiatives and continue to build upon our recent digital investments that enabled many of our key accomplishments during the recent year. Fourth, we continue to be focused on our fee income growth. Cross-selling treasury management, wealth management and mortgage banking services will continue to enhance our fee income. As we just saw, we had significant fee income growth in 2021.

Next, we will continue to remain focused on deposit growth. Again, we are a relationship bank and will continue to require a depository relationship on all new loans that we fund. We will not take our eye off the ball when it comes to quality deposit growth. To this end, our deposit growth rates for the first quarter -- first 6 months of the year significantly exceeds the deposit growth rates of the industry as a whole. Finally, we are focused on delivering an optimal client experience, combining our best-in-class personal service with our best-of-breed technological solutions.

In conclusion, we have gotten off to an excellent start in 2021. We continue to augment one of the best deposit franchises. Our asset quality metrics, which were already strong, continue to improve, and we are generating significant earnings growth. While our results are benefiting from the impact of PPP forgiveness, the strong loan growth that we are generating now and will continue to generate will ensure that our strong results will be sustainable.

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

[José Ibaibarriaga Martínez, executive]

Thank you, Jose, and thank you, all of you. Well, we are in a real-time event. As you all witnessed, we are not exempt from connection issue that we have all experienced through this pandemic. So thank you very much for your patience and understanding.

We continue to carry out programs and initiatives within our sustainability plan. This quarter, we made concrete progress on strengthening our ESG framework. The bank launched the VALOR PYME program, developed by Bci together with a strategic alliance, dedicated to empowering all SMEs in Chile, clients and non-clients, by delivering different solution that allows them to recover growth, generate new job opportunities and empower themselves to face technological and adaptive changes. Second, BCI Asset Management launched its new mutual fund Bci Sustainable ESG Actions, a new financial tool that stands out for being the first mutual fund in the national market that seeks to generate a positive impact on society and the environment, in line with the 17 sustainable development goals of the United Nations.

Also this quarter, we have promoted "B" Impact Assessment (sic) [ Impact Assessment "B" ] as an instrument to measure and manage the sustainability of suppliers. Over the last 3 years, we have issued this initiative in all areas of influence: governance, workers, community, environment, customers. These programs allow us to have an ecosystem of sustainable suppliers that respond to demands of our community and regulators.

In summary, we are proud to state that today, Bci is still the largest institution in Chile by assets and is among the top 10 banks in Latin America. After the authorization of Bci Pagos, the entity will play an important role in the evolution of Bci digital ecosystem strategy, reaching more than 5 million customers. MACH with 3 million users has consolidated as the main alternative for online purchases in the local market, thus reflecting Bci commitment to advancing financial and digital inclusion through simple and accessible solutions.

Key focus for the bank have been risk management and expense control. We have booked nearly $300 million in provisions in order to anticipate future risk. We have strengthened our commitment to keeping expenses under control. The bank maintains a strong financial position, and its soundness is once again reflected in our liquidity and capital ratio, which are both well above regulatory limits.

I want to conclude this conference call by strengthening our commitment to continue making firm progress in the essential role that as a bank, we have in the economy, the environmental and social development: contributing to be a more inclusive and equal society; accompanying our clients in the transition towards a more sustainable future; the essence of the daily work of our employees on generating social and environmental impact from the business, thus increasing the value for superior and sustainable profitability. With that, we finish this part of the conference call. Thanks very much for participating. Sorry for the disconnection. And now we'll be more than glad to go to the question-and-answer section.

[Cristian Saffie, executive]

Thank you very much, José Luis. We appreciate your interest in the Q&A section, where we will take the questions in the order they were asked, as you can see in the participant menu. Also for the Q&A session, with us will be Enairo Urdaneta, who is the Head of Business Development, who can address EVO Payments question.

[Cristian Saffie, executive]

The first question is from Ernesto Gabilondo from Bank of America. We welcome Ernesto to this conference call, who recently initiated the formal coverage of the bank.

[Ernesto María Gabilondo Márquez, analyst]

Congratulations in your results. My first question is on how do you see your NIM evolving in the next quarters, considering high inflation levels but also higher interest rates. Can you walk us through how is your NIM sensitivity to inflation and to interest rates? And as a third variable, when do you see consumer loan growth improving to support better NIMs in the next quarters? Do you think better economic activity and better labor figures would be enough to compensate the high liquidity from potential pension withdrawals? So this is my first question, and then I will make my second question.

[José Ibaibarriaga Martínez, executive]

Thank you, Ernesto, and glad that you are here. First, regarding NIM, there are several factors to take into consideration. In one hand, lower funding cost following the increase in noninterest-bearing deposits vis-à-vis time deposit have developed to have a better-than-expected NIM. However, we should see demand deposit start decelerating, where we could see some migration from demand deposit to time deposit.

In addition, as Sergio mentioned, inflation in Chile is well contained, but transitory inflation is expected due to demand and supply stock. On a year-on-year basis, inflation has been going up this last month, but it will be softer in the second half, so ending around 3.8% in December.

So -- and the other thing that is affecting NIM is, as a consolidated basis, the PPP program has also helped strengthen this NIM in 2021. So finally, taking in consideration our loan mix, we should have a tailwind in the NIMs because we are mainly growing in lower-spread loans such as mortgages and state-guarantee loans. This could be somehow offset once consumer loans begin to reactivate.

And in this sense, if we take -- I will address your third question, is how we are seeing the loan growth for the second quarter and next year. And basically, what we are seeing is that, as Sergio mentioned, we are facing and looking at strong recovery for the second semester of this year. Having said that, we are not seeing a strong demand in the loan portfolio. In the consumer side, we are seeing in Chile around 0.5%; in the commercial loan portfolio, around 0.5%, no more than that; and very strong in the mortgages loan of around 12%.

The other part that is really interesting is the situation in U.S., where the loan portfolio, as Jose mentioned, is starting to grow strongly separate from the government process. So the answer -- the short answer is loan portfolio in Chile is going to grow in the next quarter, according to the demand and the recovered economy. We are not expecting more than 0.5%, 1% in consumer and commercial, a strong growth in mortgages, a strong growth in the U.S.

And in the NIM, you have mix effects that we believe will create, for some reason, a more sustainable NIM growth next year more than this year. And the sensibility (sic) [ sensitivity ], Ernesto, that you asked in your second question, it's tough to mention as the different variables that affect NIMs as the time deposits and inflations and the loan portfolio, they are moving so fast that the sensibility to give you a simple answer in this conference call is not easy.

[Ernesto María Gabilondo Márquez, analyst]

This is super helpful. I have another question related to your digital transformation. As you have mentioned, you have added a new investment and finance platform, and also, you have a new digital payments ecosystem. I want just to double check if you are creating a new digital bank and that it is called Mambu and if you expect to migrate MACH and the rest of the digital ecosystems to Mambu.

And if that is true, I want to say congrats on that as you will become the first digital bank in Chile. So my question is when do you expect the creation of this new digital bank? And when do you think you can start to provide some key performance indicators and targets?

[José Ibaibarriaga Martínez, executive]

Okay. Ernesto, we have a strong -- a really strong commitment to become the leader digital player in the country. One of the biggest investment that we have done in the last couple of years has been in creating all the capabilities to become the best digital player in the country. And to do that and in order to strengthen even more that position, we have just recently created a special division that is called digital ecosystem, where we'll have -- we'll report to that division much that it will become a digital bank -- Mambu is the core system, Ernesto.

We'll become a digital bank, and you will start to see services and features in the next coming months. This is a process that step by step is going to become a digital bank. Today, we have 3 million customers. And you will see in the next couple of months, we are not talking about years, we are talking about months, where you're going to start seeing how we become a digital bank.

But coming back to this ecosystem that is very, very ambition (sic) [ ambitious ]. We'll have MACH reporting to them, Financial Services reporting to them, all the different alliances that we are creating to develop this value proposition to our customers where we have a lot of fintechs integrating with us in order to provide that kind of services. So the short answer is, in the next couple of months, you would see significant progress on becoming a digital bank in MACH and significant progress in this ecosystem arena.

When we are going to be able to give some guidelines on this digital bank or digital ecosystem, we are working on it. I think that we are more close than far to give that kind of guidelines, Ernesto, but we are not prepared to give it in this conference call as we have just started.

[Ernesto María Gabilondo Márquez, analyst]

This is very helpful. Congrats again in this digital transformation. And just let me elaborate a last question on the City National Bank of Florida. As you mentioned, the ROE has improved to 11.7% in the second quarter. So where do you see it evolving in the second half of the year and the full year? And what would you say is your digital transformation phase when compared to Bci?

[Jose Marina, executive]

Well, looking at the second half of the year...

[José Ibaibarriaga Martínez, executive]

Yes. Jose? Sorry, Jose.

[Jose Marina, executive]

Sorry. I was going to say so looking at the second half of the year, I think we're still going to continue to see an impact of the PPP forgiveness. We still have $36 million of fees to be recognized over the next year or so. And I think in the second half of the year, we're going to see continued strong loan growth. I think we've started that in the second quarter. We have a strong pipeline. And as I indicated during the course of the call, we're going to at least see that same level of growth the rest of the year and -- if not more.

So business activity is at a high level here in South Florida. It's a very attractive market. There's a lot of opportunities to lend. So that's going to help with our margin and obviously, our ROE and help sustain our ROE as we move forward, replacing some of the liquidity that we have with some quality loans.

In terms of digital transformation, we embarked in that about 2 years ago. And we launched Salesforce. We have a system called -- that we call internally Elevate as a CRM that we deployed about a little bit more than a year ago. We're working to maximize that system and -- on a daily basis and enhance it. We're also in the process of rolling out nCino, which is an automated loan origination system. So we're working those workflows, and that will make our processing of loans more efficient as well.

So we're -- City National Bank is much more of a private commercial bank. We're not so much a retail bank like our parent company is. So our digital transformation is focusing on those items that will help us move the needle from a CRM perspective, also from a loan origination perspective and then in the future, deposit -- automated deposit account opening as well. Did I answer your question?

[Ernesto María Gabilondo Márquez, analyst]

No, this is very helpful. Perfect.

[Cristian Saffie, executive]

Moving to the next question, it's Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

A couple of questions also. I guess on your cost of risk, right, asset quality has been doing well, cost of risk at fairly low levels. You've put a lot of provisions. How should we think about that going forward? Do you think the cost of risk will need to increase from here? Or do you think you can maintain at these low levels?

And with these additional provisions that you booked, what is the plan for those? Can you eventually reverse them? Or do you hold on to those for a rainy day? Just to think about how the cost of risk evolves from here.

And then my second question, I guess, on the ROE more at -- sort of at the group level. How do you see the sustainable ROE from here? You're 12% this quarter. Is there room to increase that from here? Or what do you think is a sustainable level of ROE?

[José Ibaibarriaga Martínez, executive]

So Juan Enrique?

[Juan Enrique Visinteiner, executive]

Let me address the first one and you take the second one. So thank you, Tito, for your question. As to cost of risk, we agree that they are at very low levels. We should think that cost of risk should evolve at least going back to the pre-pandemic levels and beyond those levels. That wouldn't be a surprise. That is basically our base assumption. So regardless of the trending downward that we have seen and that we continue to see, we are prepared to see those indicators going upwards, and that's the reason why we have been building those additional reserves.

Now it may happen that all the government support measures that have -- that we consider them transitory may have a structural effect in borrowers, and not all of the manifestation of risk that we're expecting in the future takes place. In fact, it has been a significant amount of money that the government has put into SMEs and into individuals. And eventually, those levels of risk that we have seen may not even go back to the pre-pandemic level. So it's still very uncertain in order to take a position on that.

So our base assumption is they're going to go back, sooner or later, to pre-pandemic levels and beyond. So the timing for eventually releasing some of those additional reserves does not seem to be near. So we're thinking about that for eventually next year as we see the portfolio manifestation getting consolidated at levels that we feel confident that they are going to stay there.

And of course, the uncertainty has not even disappeared. We still don't know what is going to happen with the pandemic with another wave so we need to be prepared for that. So on reserves, we believe we may continue to build up some more additional reserves, and the time for being released is going to be discussed next year.

[José Ibaibarriaga Martínez, executive]

Thank you, Juan Enrique. And regarding your second question, Tito, we are working to arrive to a 14% return on equity in 2023. We have been delivering all the milestones that we have put in this process. So we continue to believe that, that is the right target and we will be there in 2023.

[Daer Labarta, analyst]

Great. Very helpful. Maybe just one follow-up. Given you have presidential elections later this year, still new constitution, how do you see the political environment potentially impacting some of your expectations?

[José Ibaibarriaga Martínez, executive]

That is an easy question, Tito. Sergio, can you address that, please?

[Sergio Lehmann, executive]

Yes, sure. We recognize that the political uncertainty has increased in recent months. And this is captured by the risk premium of Chilean assets, particularly in the case of [ actuarial rate ] in the stock market, also in the fixed income market. In our view, after the primary election, before the presidential election at the end of this year, that was weeks ago, we observed some movement to the center. In our view at least, a polarized position, a more radical position were defeated. So in that sense, we are looking at the end of the year some moderate votes in the presidential election.

There is another issue that is quite important at the end of the year: the scenario in terms of economic situation with the labor market increasing, creating some new position, employments; and also some much better sanitary scenario given the successful vaccination process; and also, in that sense, a more favorable social scenario. We also expect that the moderate vote is going to be -- dominate the election at the end of the year. So we recognize there is a high political uncertainty, but we are expecting it to be rather decreasing given this much more positive scenario in these 3 dimensions.

[Cristian Saffie, executive]

Thanks, Tito. Our next question is from Sebastián Gallego from CrediCorp.

[Sebastian Gallego, analyst]

I have 3 questions today. The first one on consolidated fees. When you look at this line of operating revenues, it continues to be depressed roughly over 10% compared to pre-pandemic levels. I just want to get a sense if you could elaborate a bit more on the strategy to bring back those fees to pre-pandemic levels.

Second question regarding Bci Pagos and the whole ecosystem you have discussed. Can you talk a little bit more about what are the targets that you guys have in terms of merchants or in terms of transactions? How do you expect to achieve that considering also new entrants to the business?

And third question, maybe if you could discuss a little bit more about your efficiency target when considering an ROE of 14% by 2023. That will be helpful. How do you think about efficiency ratio?

[José Ibaibarriaga Martínez, executive]

Okay. Enairo, I can go with the fees and efficiency, and you answer the Pagos. Sounds good for you?

[Enairo Urdaneta-Ponte, executive]

Yes, that's great.

[José Ibaibarriaga Martínez, executive]

Okay. Sebastián, so the first one, the efficiency target, in order to arrive to a 14% return on equity in 2023, we are expecting to have an efficiency ratio between 40% to 41%. We are going and we are taking all the steps to go in that direction. The plan is there. We have delivered all the steps so far. We are confident that if we continue taking advantage of all the digital investments that we have done and on top of that, continue with the optimization of some operations that we are doing mainly in the retail arena as adapting all our costs through the migration that our customers are moving from traditional channels to digital channels, we should arrive there. And we are confident that we will arrive there.

Regarding the fees, this year decreased around 7% in a consolidated basis. And that is basically due to the drop in the consumer loans, in part as a result of the extraordinary liquidity that households have received, as Juan Enrique and Sergio mentioned before; and the drop we have seen in the insurance fees and card -- credit card services as a result of economic slowdown of the COVID. In our local operation, we expect that fees should recover after the expected improvement in the economic figures due to the excellent vaccination process that we are having here in Chile. And if you see the last figures in the last couple of weeks, we are seeing a significant improvement in those figures. But all in, we would end 2021 below 2020, given that the growth in the retail portfolio, as I explained a couple of minutes before, and particularly in the consumer loan portfolio should arrive at the late quarter of this year.

And in the U.S. operations, as Jose mentioned, we have one of the strategic priorities there, is to recover the fees. And there is very -- there is a granular program in order to do that. So the short answer is we will not see an increase of fees at the level that we did have before, that was your question, this year. Having said that, with economy recovering in Chile and the strategic plan that we are putting together in the U.S., we expect to recover our fees next year. I think that I covered your 2 questions, unless you want me to go deeper in one of those.

[Sebastian Gallego, analyst]

Maybe -- it actually caught my attention -- the 40% to 41% target you plan to reach on the cost-to-income level and it caught my attention, yes, the optimization plan of some operations. Could you elaborate a bit more on that one? Because definitely the target seems very -- I mean it's a challenging one to get obtained.

[José Ibaibarriaga Martínez, executive]

Yes. If you project a gross margin growing at normal level, meaning GDP growth plus inflation, and you believe that GDP will be in the range of 2% to 2.5% in a couple of years, that gives you a reasonable -- not optimistic, reasonable growth in margin of around 8%. And if you see that we are maintaining our cost flat, that is the goal, you arrive to an efficiency ratio that is below 40%. So we are putting our target -- because we know that things happen and some costs are going to increase, but that is where we are putting it, between 40% to 41%.

And how we are doing -- and regarding the operations improvement, we have done a lot of investment, Sebastián, in IT architecture, changing all the micro systems. We are putting a lot of -- we are changing our business model end to end, and that is -- that means that you are leveraging a lot of cost. We are changing the way that we -- our customers make business with the bank using all our digital channels. So there are some channels like branches or operations that today are automatic and before were done by people. That is improving significantly, and our goal is to continue with that. We have just hired Mckinsey to help us in developing all our distribution strategy. And with that, we expect to continue decreasing our cost.

So we have a lot of initiatives in automatization, in robotics, in changing the business model in order to put processes end to end or front to back, whatever they name it, in order to be much more digital. And that means that we are eliminating costs and having the possibility to grow or to escalate without growing cost. That is basically the situation, Sebastián. Here is a lot, a lot of details that it's very hard to transmit in a conference like this. But the -- one of our strategic plans is efficiency, and we are so far delivering and exceeding our internal plans or internal goals.

[Enairo Urdaneta-Ponte, executive]

Thank you, José Luis. And Sebastián, regarding your question about Bci Pagos, what I can transmit is that we aspire to be one of the relevant players in the acquiring industry in Chile. As you probably know, there is one big player, that is Transbank. But there is a lot of space to grow in this industry, both because there's growth -- high growth expected in the digital payments aspect of it, and there's also a lot of growth expected in terms of number of merchants that need to be, if you will, onboard to accept payments today.

So what we aspire is probably north of 20% of market share in 5 years. And the way we're going to do this is with a 2-pronged approach. First, we're going to leverage our client relationships. We have -- we are an SME bank. So we have a lot of relationships there that we plan to leverage both at the SME, the wholesale, corporate and the micro merchant level. And we also plan -- as we build this business, we also plan to build a workforce within Bci Pagos to go after new customers, both for Bci Pagos and for the bank as well.

[Cristian Saffie, executive]

Our next and I think, final question comes from Yuri Fernandes from the JPMorgan.

[Yuri Fernandes, analyst]

I had just one on capital. The Tier 1 has been stable around 10%. But when we look to the RWAs, we see an increase on RWAs, and that's okay. Like your loan book was slightly up. But my question is about the mix, right? Like we are seeing mortgages growing more than consumer, like consumer decreasing double digits.

So my question is, shouldn't we expect RWAs to decrease? What is the weight factors of those loans? Because I guess you are having a safer mix nowadays, but we are not seeing that on RWA decrease and/or your capital position improving.

[José Ibaibarriaga Martínez, executive]

Yuri, let me be clear if I understood your question. Basically, the mix that we are having today is more concentrated in commercial loans that has lower spread versus the consumer loans. And how we are going to handle that in the future, that is your question?

[Yuri Fernandes, analyst]

No. My question is you are moving towards safer mix, right? Like we are seeing -- because of all the withdrawals, everything we know on fees, like consumer loans, they are not growing. And usually, consumer loans -- I don't know how it works in Chile, so I guess that's kind of the question. Like usually, consumer loans they require more capital. You need to allocate more capital for those loans. And we are seeing the bank moving towards a safer mix.

So my point is why RWAs is not improving in that outlook? Because what we are seeing is RWAs growing in line with the loan growth. And given the mix you're having, maybe I would expect RWA to shrink because, again, you're growing your mortgages. Mortgages will have collateral. So perhaps in the base, actually, framework in Chile, that requires less capital than a credit card loan. That's kind of my question.

[José Ibaibarriaga Martínez, executive]

Okay. Okay, Yuri. We -- as you know, we are in the middle of implementation of Basel III. This year is the first year where we start to give some information to the authorities, and we will complete all Basel III in a couple of years. In that sense, RWA are essential in order to grow in the right place, in order to have the right allocation of capital and the return of capital that we are looking.

So what we are seeing is, in Chile, we are putting a lot of focus in where to grow and how much capital to use. This answer is very obvious. But with Basel III with us, it needs much more attention, and we are working heavily with our commercial teams in order to use our capital at the most intelligent way as possible. This is a comment that is very obvious. Having said that, when you manage the bank with Basel III and with Basel I, it's completely different. So the change that you are seeing, I'm glad that you realize that, is that we are allocating our capital in such a way to maximize the return of them, the risk that is associated.

We have a strong team. When I say a strong team, we are more than 80 people working in this sense, that -- in the past, more than that. So we are very, very happy in this process because this is a long journey that we are going through, and we expect to continue improving in this sense. The answer was a little bit long and not specific, but what we are doing here is basically that: being much specific in allocation of capital where we can see lower risk in those assets and use more capital in those assets.

[Cristian Saffie, executive]

Thank you very much, Yuri. I think we don't have any more questions in the queue. We at Investor Relations are happy to answer any other questions. And I give back the mic to José Luis to close this call.

[José Ibaibarriaga Martínez, executive]

No, thank you very much, and thank you for the patience in the disconnection. Working at home is part of the game today. Thank you very much for your questions. And we always are available to answer any additional questions that you may have. The Investor Relations teams are there for that. So thank you very much, and see you in the next conference call.

[Cristian Saffie, executive]

Thank you.