Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2023-Q2

[Unknown Executive]

Good morning, and welcome to our Second Quarter 2023 Conference Call. My name is [ Christian Saffie, ] Investor Relations Officer. Today, I'm joined by José Luis Ibaibarriaga, BCI CFO; Ignacio Yarur, Corporate Head of Digital Acquisition, Sergio Lehmann, Chief Economists and [indiscernible] Head of Credit bridge of BCI. Also, as you can see, we are joined by [indiscernible], C&V CFO; and Daniel Kushner, who guess our [indiscernible] State Banking division.

At the end of this presentation, we will leave room for questions, where we will kindly ask you to raise you can. Can we please move to our next slide? Today's presentation will be divided in 3 sections. First, the macro scenario, then as we mentioned in last will address the digital ecosystem, and then we will have an overview of City National Bank. To assert this presentation, we will leave you with Sergio Lehmann, our Chief Economist. Sergio, the mic is all yours.

[Sergio Lehmann, executive]

Thank you, Christian. As Christian said, I will do a quick macroeconomic review of the U.S., Peruvian and Chilean economies. Lower risk remain high. In addition to greater inflation persistence, geopolitical risks are rising again, besides the world in Ukraine, the complex relationship between China and the United States takes the spotlight again. The U.S. economy is still not making enough adjustment and core inflation is still dropping slowly. Due to this, the fessed rate by 25 basis points last week, market expectation point to end of the cycle. However, the monetary policy normalization starting next year would be more gradual.

In Peru, the political crisis had a bigger-than-expected impact on the economic activity in the first quarter '23. Prices started to ease quickly and leave room for the Central Bank to start an easing cycle in third quarter ‘23. In Chile, the economic activity has been in line with our projection of a decrease of 0.5% of GDP for this year. Inflation has dropped quicker than expected, so the Central Bank cash demanding policy rate by 100 basis points in July to 10.25% starting and is in cycle. The Chilean peso volatility has continued to decrease, but is still above its historical levels. Please move to the next slide. In its preliminary estimation release, the Europe economic analysis informed that the U.S. economy grew by 2.4% quarter-on-quarter, annualized in the second quarter ‘23. It was driven by an increase in personal consumption, mainly associated to service sector and fixed investment and partially offset by net export. There are still expectation for a mild recession in the first half of the next year.

The economy is expected to grow by 1.4% in 2023. Prolia GDP has been overperforming the national average for several quarters. The labor market has not deteriorated as expected, still continues to create jobs. And although it's reis decreasing, the employment rate for the U.S. and Florida remain at their minimum historical level.

Please move to the next slide. Catalainistration has been dropping faster in the later data, mainly due to energy prices. Core inflation, on the other hand, has been at a lower rate than expected. Service prices are still not dropping as anticipated and have been more persistent. This estimated that inflation will be around 2% annually at the end of this year. The [ feareserve ] increased the Fed fund rate to 5.25% to 5.50% range last week. This should be the end of the tightening cycle, and now they should have paused until second quarter 24. The U.S. yield curve increase, especially in the short term during the second quarter '23 after better economic data and head-on rate increases expectation.

Please move to the next slide. Peru GDP fell by 0.4% year-over-year in the first quarter '23 driven by a fall in private investment, government consumption and export, barely offset by the private consumption. This was the result of the political crisis, which started at the end of the last year due to disruption in some value chain. The GDP is expected to grow less than 2% this year. Due to the disruption caused by the social crisis, the CPI didn't fall as expected in average between January and May was even above 8% year-on-year. June data showed an impressive fall, and this showing down trend should continue during this year, given the state for the Central Bank to start an easing cycle in the third quarter of this year.

Please move to the next slide. In Chile, GDP fell by 0.6% year-on-year in the first quarter, driven by a fall in household consumption and fixed investment. We are still expecting a GDP contraction of 0.5% for this year. The labor market has continued to deteriorate. Unemployment rate has risen. And in fact today, I mean in June data, at 8.5%, an increase to 8.8% at the end of the year. Labor cost participation rate as a whole after a reason at the beginning of this year. Nonetheless, real wages are rising in the last 3 months.

Please move to the next slide. Inflation has so quickly since our last comp, mainly due to food and enterprises. Service and duties are tieing to show integration. Total LCI will fall to 3.8% year-on-year at the end of this year and could be around the Central Bank target from the second quarter next year. In response, the Central Bank started an easing cycle in July by cutting the monte-policy rate by 100 basis points to 10.25%. We estimate that the rate will finish this year at 7.5%, and it will be its neutral level at 4% in mid-2024.

Please move to the next slide. The Chilean peso volatility has been falling down since September of last year. It has helped by less political uncertainty and higher copper prices. In the last couple of weeks, the action rate has been under pressure given a higher-than-expected tax of the monte-policy rate and a stronger global dollar. By the end of this year, we are expecting the exchange rate to be around PLN 820 per dollar. Now I will leave you with José Luis, who will continue with this presentation. Please, José Luis.

[José Ibaibarriaga Martínez, executive]

Thank you. Good morning, everyone. [Technical Difficulty] Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call in which we will discuss our second quarter results, some of the progress we have made on the strategy and the coming challenges. Let me share some key highlights of our performance before we go deep dive into the details. Our digital strategy has made significant progress due to our concert put for transformation and innovation, as Ignacio will go further in detail later in this presentation.

Our operations in Chilean continue to perform strongly, although in an environment of decreasing financial margins because of lower inflation levels in the economy. Likewise, our U.S. operations had a robust first half. City National Bank is very well established as a leading operator in the Florida market. As we all know, the recent events of March has pressured the cost of deposits for regional banks in the U.S. However, City National Bank team has demonstrated once again the strength and resilience of our organization, which counts on extensive sources of liquidity and a solid capital base. Also, last July, a capital increase of CLP 600 billion was approved. The proposed capital increase will further strengthen the bank's position providing additional financial capability to support our business plan and maintain some capital ratios well above Basel III requirements. We will address in detail in the following slides of this presentation.

Finally, our commitment to sustainability by the fact that we are the first Chilean private bank to join the [indiscernible] banking alliance. Now I will leave you with Ignacio Yarur, Corporate Head of our digital ecosystem, who will address the progress we have made in developing our digital ecosystem.

[Unknown Executive]

Thank you, José Luis. It's a pleasure being here. Thank you, everyone, for coming. Next slide, Claudia, please. This is very important for us, and as José Luis was saying, digital ecosystem, it's a main driver of our strategy. And this is because our clients have changed both in the way they do banking with us. And also in regard to the expectations, they have when it comes to being served by the financial institutions. And this is also important because the boundaries of the banking industry have also blurred through the years. And new competitors have come to play also on an arena that was traditionally controlled by and Cummins. And as BCI is a bank that wants to -- that aspires to lead the way we do business in every single business we play. We took the challenge 2 years ago, we took the talent of building a new digital ecosystem basing 4 pillars that are shown on the slide you have in your screen.

First of all, we decided to unify all the different platforms we have on our different vehicles, and I'm saying match Servicos Financieros, which is the credit card operation we run through a partnership with Walmart and BCI in one single P2P, P2M payment platform. And we add to that, the accept network we have been building with Besepagos in alliance with Global Payments. Once we have done that, we are also building the first open loyalty program in Chile to engage merchants and individuals, and we will discuss that later.

On the right side of your screen, you will see that for all of these merchants, we are also building a one-stop shop platform that will deliver them not only traditional banking products, but also value-added services that will enhance both the way we service them and the way they do business with their respective plans. All of this -- with our strong data analytics capabilities in the middle, we help we'll make the cost -- our individual customers and merchants transact more. And there's only one way to do to earn money in this business. If you want your customers to bank with you, you have to be present in our -- in their daily life through transactions and through payments.

Next slide, please. So what have we done so far? As I was saying, we unified our different payment platforms that have little overlap, as you can see in the slide. And we have enhanced the experience we deliver to such customers through several partnerships. And as you can see here, all these partnerships have a couple of characteristics that are common to them. All of them are leader in their respective industries in Chile. All of them have significant scale. All of them are very present in our customers' daily life. So [indiscernible], which is the main last mile delivery company in Chile or it's a Chilean subsidiary of Delivery Hero. Then you have Colo-Colo, which is the main soccer club. Selco brand, which is the main drag chain company in Chile and Parque Arauco, which is the leader on commercial centers. All of them have entered into significant alliances with us, and all of them are already part of the value proposition we deliver to our clients.

Next slide, please. And in this regard, when it comes to our digital ecosystem, match is a major pillar behind that. Match has given us scale, which was something very important if you want to be a leading Chilean ecosystem. And it has given us a scale, and it has given us engagement with our clients through helping them to solve their limits. And what has been a match strategy so far. 5 years ago, when we started this, we launched a prepaid debit card, mainly a virtual one without any physical card. And we did that because that was the easiest way to achieve critical scale without putting too much friction on the onboarding process.

So 5 years ago, we started with that. It was basically peer-to-peer, QR payment for P2M services and some other added services. A couple of months ago, once we have achieved that scale, we launched our checking account, which is basically a checking account with all the services that are usual a common checking account have but with the match experience. It also comes with a savings account. You can do remittances, which is an increasing business here in Chile. You can do mutual funds, you can have a savings account. You can do Buy Now Pay Later, you can do a lot of things there. Now we are something to move all of these critical mass of clients that don't have the frictions that they used to have when they have the prepaid credit card into a massive loyalty program that we are going to explain later on during this presentation and go. And the diesel strategy can – it's shown in this time line, right?

We started 5 years ago with a very simple value proposition. And now we have moved -- once we saw the product had marketed we start growing significantly and that we have strengthened not only our value proposition but also our core operation. We move into a cloud service core provided by Mambu. And we added more financial products Visas already in-app checking account and payroll services for companies lose. And this has shown a significant success. We launched the checking account without making too much noise, and this is going to be launched massively by the end of this month through a very intense marketing campaign. And this checking account solves all the major fractions that our clients used to have. The product has gaining traction significantly. We already have more than 80,000 checking accounts sold, which is more than check-- it's more than the amount of checking accounts that any Chilean bank sells within a whole year.

And we have also seen a significant change of our customer behavior. Their balance has increased significantly. The way they -- the number of monthly transactions have increased significantly. And the purchases they made through match app has also increased significantly. So we are seeing a lot of more engagement with our customers, which is right on path to our strategy. So we can -- with these transactions, we have the aim of monetize them later, the way I'm going to show you in the next slide. So now we have 3.8 million customers already in our platform, -- of those, and this is a question some of you have asked before, more than 30% are active customers. And when I say active customers are not only customers that log in to see their account balance, but customers that already do something with their money. They buy something, they pay something, they buy a product through Beseagos. Anything that any feature that it's within the Match app with the best NPS in the Chilean banking services.

And recently, as I was saying, we have seen an increase in transactions through the launch of the taking account. And also, the features and the platform that are part of the -- our digital ecosystem is also working. So more than 300,000 have already paid with P2M during the last months, more than 28,000 clients have an active line on Buy Now Pay Later credit line, which is something where we took a lot of time experiences because it's very easy to burn your hand here. We already found which is the right model, the right segment, and the right offer to make this product make money. And more than 130,000 clients already have a saving account in Match... Vale Cloud.

Second pillar, as I was saying, is [indiscernible]. And [indiscernible], it's the first cash-back based loyalty programs for individuals in Chile. Loyalty programs in Chile have quite a bad rep because of their small trends because they are at CC, I mean, it's very difficult to get your money back. It's very difficult to get the products you been promised to have, et cetera, et cetera. So here, anyone can join. It's catchment base. And your cashback is directly received either directly, either on your BCI or your mention account. And you can have personalized benefits depending on the behavior you have shown in the past, right?

And this is also helping us to serve the merchants that are part of this program in a much better way. So we are helping them to sell more because we are making them able to be part of a 6 million market, which is -- it wouldn't be possible without BCI plus for any of these merchants. And we are helping them to sell better. How? By providing them CRM as a service products. So you do have Bespagos as an acquired platform. You do -- you are also part of BCI plus a margin for U.S. merchants. And we are helping you to sell on a much more targeted way and to provide benefits to the customers you really need to benefit. So now on since its launch, that haven't 4 weeks ago through a very high-profile marketing campaign and more than 700,000 clients have already enrolled in BCI Plus and making this outstanding success. More than 80,000 have already used, BCI Plus to buy stuff. And since we started piloting this and that was late March, we have seen significant growth in our active base. And not only that, more than 200 merchants have already joined this program and more -- and most of them are already active in the platform.

And when I say active, is that they have already sold products or services as part of the program. By having discussed all these pillars, especially March and BSI Plus , now you can see how our business model works. On the left side of the screen, you see a mass market of 10 million individuals. That's we want to reach. Now we have 6 million, but through alliances, we're getting more and more clients. Individuals that are serving -- that are getting much a value proposition that are unified through one single platform that are receiving extraordinary experience through match.

And on the other side, you have merchants that are being able to access a huge mar -- a huge market, a massive market and where we are getting all the information to sell them better, to bank them better and to make their business much more possible. Where is the man, the money? And on discuss the [Technical Difficulty] especially when we have customers that are much more engaged because of the way they do their daily needs with us. It's of common knowledge that once you transact the more you transact, the more your willingness to do business with your bank. But other revenue streams are getting here, too.

First of all, match its expanding its value proposition. So you'll soon see credit cards, you'll soon see payroll services for companies. You'll soon see many products that are taking interment increasing project we are experiencing here. Then you see a fees that are paid by the merchants that are part of our program. So every time any merchant sell a product through Vespas takes also a fee to BCI. And among that, it's not only the way we are increasing our customer base, but also the way we are enhancing all this value proposition with our main partners.

Having said that, I think the floor is José Luis.

[José Ibaibarriaga Martínez, executive]

Thank you, Ignacio. Now we will review the financial results of this quarter. Let's go through the main figures of our consolidated operations compared to the results of second quarter 2023. BCI's operational income decreased 8.31% year-over-year due to lower inflation margins and fees caused by lower inflation and increase in interest rates. Although provisions and write-offs are slightly lower year-over-year, delinquency increased in the retail segment due to a weaker economic scenario. Regarding consolidated operating expenses, we have maintained a growth rate below inflation. Finally, a lower tax rate was mainly due to the valuation of the investment in City National Bank of Florida and the monetary correction associated with changes in CPRI.

As a result of the [indiscernible], our net income decreased 19.7% year-over-year. Moving to our local loan portfolio. The 1.9% year-over-year increase was mainly driven by mortgage loans, as you can see on this slide. Regarding commercial loans, we have slightly increased the volume of loans highlighting our pricing strategy and the increase of market share in this segment. Also, this quarter, we continue with great traction in 360 [indiscernible], which is reflected in increasing levels of online credit. The consumer loans portfolio decreased by 11.2% year-over-year, mainly because of a drop in loans and instalment and in credit card, driven by higher interest rates and market condition as Sergio recently addressed.

Our NIM decreased by 81 basis points year-over-year, mainly associated with the decrease in inflation levels. Our margin was exceptionally high during 2022 as a result of the high level of inflation and is returning to normalized levels as inflation converge towards the target. Regarding net fees, the 5.6% decrease is mainly due to higher fees paid for credit cards operation and greater expenses of our client loyalty programs. Our operating expenses increased 7.7% year-over-year, which is below the inflation rate. This growth was achieved by the implementation of our productivity plan designed to optimize cost while maintaining operational efficiency. One example of this is the success optimization of the number of branches, resulting in a reduction of 7% in the last year and at the same time, developing a new branch model.

Now we will present some key highlights from our liquidity levels and regulatory capital metrics. As shown in this slide, our total local deposit base demonstrated a growth of 3.3% year-over-year. We have observed a trend similar to previous years, with a shift from demand deposits to time deposits in line with increased interest rate scenario. This is evident from a decrease in local noninterest-bearing deposits by 20.3% and a corresponding increase in term deposits by 24.4% year-over-year. Now moving on to our regulatory capital levels, as you can see in the upper high chart, Set 1 capital was -- has seen an increase of 51 basis points compared to the same period last year.

Additionally, there was a 34 basis point increase compared to previous quarter. The main contributing factor to the growth during this semester was increase in equity. This was primarily driven by higher net income and reduced losses in capital account. Additionally, the correctional inflation expectation to the downside positively impacted our hedge accounting account. This effect were particularly mitigated by incorporating discount associated with Basel III, especially related to the hedge accounting intangible assets and deferred assets.

Now I want to refer to our recent capital increase announcement and its rationale. As you can see on this slide, we have been able to almost triplicate our asset base since 2015. While the financial system assets grew at 9% year-over-year, this year has achieved a remarkable 15% growth year-over-year since 2015, significantly up-facing the industry. This has allowed us to increase our industry share from 14% to 20%. We have done this though both organic growth and strategic acquisitions such as City National Bank of Florida in 2015, Total bank in 2018 and Executive National Bank in 2020. And additionally, last year, as part of our diversification efforts, we established a bank in Peru.

The increase in the size of our balance sheet has come in hand with sustainable profitability as we have been able to grow our net income by 14% year-over-year in the same period, rising from CLP 330 billion in 2015 to nearly CLP 800 billion in 2020. On this slide, you can see how the intended capital increase will position us with our regulatory capital levels well above the regulatory requirements and our internal targets. Basel III is currently under implementation, and capital requirement shall be faced in gradually in order to comply with the necessary capital ratio by 2025, including additional capital buffers for Pillar 1, systemic conservation and countercyclical buffer.

Moreover, we have set other limits with additional management buffers well above the regulatory standards. Currently, our regulatory requirement stands at 6.6%. And as of June, we are at 9.8%. With the proposed capital increase, we will reach 10.77%. Looking ahead to 2025, when Basel III is fully implemented and considering certain assumptions, we estimate that the requirements to be 9.25 with our target of 11%, significantly exceeding the regulatory norms. The capital increase will allow us to fulfill these 2 telgents without the need for the additional capital.

In summary, the proposed capital increase will further strengthen the bank's position within the region and provide additional financial capability to support the execution of the company's business plan. Additionally, as we implement Basel III regulations and ahead to more rigorous capital requirements, we will allow us to grow and maintain solid capital ratios.

Now we will discuss our asset quality and loan portfolio composition with Panrico [indiscernible]

[Unknown Executive]

Thank you, José Luis. Hi, everyone. I'm happy to be here with you once again to give you more details of our loan portfolio. So our local loan portfolio, as you can see on the left side of the chart remains pretty well diversified by customer segments, lines of business and economic sectors. As to economic sectors, our exposure to the most effected sectors in the years of the pandemic such as entertainment, sales and restaurants stands below 5% and around 80% of these loans are highly collateralized or government guaranteed.

As to the next slide, you can see that the NPL ratio remains trending upwards towards pre-pandemic levels, which is in line with the general trend of the [indiscernible]. It should be noted, however, that we maintain a very high level of voluntary provisions in our loan book and in each and every relevant portfolio. As to commercial loans, commercial loans have continued to drive the growth of BCI's loan book together with mortgage loans, as José Luis was mentioning before. The demand for new good quality loans has been recovering since mid last year, more than offsetting the scheduled amortization of the government-guaranteed loans granted during the pandemic years. Additionally, we see the positive impact of the various government-guaranteed loan programs and liquidity injection initiatives into the economy from previous years, reflected in the positive credit performance of some of the most impacted segments during the pandemic, particularly small and medium master prices, SMEs.

Lastly, our wholesale lending portfolio has been quite resilient to both the effects of the pandemic as well as to the current economic road. At the same time, certain more effective sectors were either not meaningful in our portfolio or were highly secured with enough questions to allow us for taking more flexible trade terms to help them out of the crisis. As to mortgage insurance, the residential mortgage loan portfolio has maintained its resilience to this current scenario with the size growing and its NPL ratio trending to more normal levels but still standing below pre-pandemic levels. The higher inflation rate of last year took at all on segments of borrowers with higher leverage ratios.

What we're doing all in our hands to help them the customers reduce their burden and go back to being current. A level of videos is absolutely within normal levels. We remain highly confident that the high quality of our mortgage lending portfolio will remain resilient. On the back of our strong loan-to-value ratios, our conservative credit policies and strong culture of families in owning their homes and in staying current in the residential mortgage debt. Finally, it is worth noting that the home prices have remained stable or growing. So in general terms, the equities families have in the cost is higher than their down payment plus what they have already amortized in debt.

As to the consumer loans, consumer loans portfolio remains impacted by the effects of the higher inflation rate and unemployment rates and in general, by the economic slowdown. As predicted credit performance indicators have moved fast back to pre-pandemic levels and slightly giving up. However, we can see that during this last quarter of the year, the slope of videos and NPL curves have started to stabilize and have remained in line or better than industry levels. These results have come from several actions taken in previous months and even a year back to moderate terms to certain groups given the tighter prevailing badge conditions, which affected particularly lower income segments and families more prone to higher leverage base, which are more sensitive to the impact of higher inflation and higher interest rates.

It's still too to categorically tell whether we have reached the selling, but we're confident that if we're not, we are very close to getting there. The word trend in NPL ratio is more visible in the affiliate service of Financieras, which is significantly more concentrating in lower income segments. This is a very attractive segment for BCI in the long run, even though it is more volatile and the macroeconomic stress, it is worth noting that this portfolio represents less than 2% of the bank's assets.

Lastly, it is [ faecal ] to note that the bank has established more than CLP 400 billion in additional voluntary provisions in all segments to face a more challenging macroeconomic scenario. So now let me leave you with Jose Marina, City National Bank's CFO; and with Daniel Kushner, who heads the Real Estate Banking division at City National Bank in Florida.

[Jose Marina, executive]

Thank you, one. Good day. Good morning, everyone. My name is Jose Marina, and I am the CFO of City National Bank. The accompanied this morning by Daniel Kushner, who heads our Real Estate Banking division. I'm excited to be here with you this morning to discuss our performance during second quarter. Notwithstanding the challenges experienced in the banking industry and company interest rate market, I am pleased to inform you that we had strong results this quarter, especially in terms of liquidity, capital and asset quality metrics.

So before we go any further, I'd like to provide you with a brief summary of the metrics most relevant in the current environment. First of all, we increased our client deposits in the first half of the year by $387 million, a 4% annualized growth rate. While the banking industry as a whole experienced a positive trend on up 4%, even when including broker deposits. We maintained approximately $11 billion of available liquidity and committed sources covering 142% of our uninsured uncollateralized deposits. Our unsorted unflattered deposits represents only 35% of total deposits, improving from 41% as in the first quarter and 51% at the end of 2022. We continue to enhance our already strong capital profile. We maintained an investment portfolio with minimal credit risk that provides significant annual cash flow and have lower duration to 4.7 years. Our CRE portfolio continues to perform well with a very low weighted average LCD of about 50% in the most -- in the best economic market in the country.

These results reflect our reputation in the market built over 7 years, our relationship-centric business model that focuses on diverse business segments and the strong culture we have fostered across our 1,000 dedicated employees. During the past few months, the past catastrophe has become increasingly challenging among banks and interest rates to increase, resulting in an overall subtraction in deposits within the banking industry. Moreover, the industry event in the first quarter resulted in positive migrated for midsized and community banks, Comm banks. Despite these challenges, we're able to increase our client deposits by $28 million in the first semester of the year.

Now looking at overall deposits, including broker deposits, we were able to increase our total deposits by $1.7 billion or 9%, as you can see in the left-hand side of the slide. This includes the already mentioned $387 million plan deposit growth. On the other hand, you can see that the banking industry as a whole, so deposits on track by $383 billion or 2% year-to-date. These industry figures conclude broker deposits. You can also see that our noninterest-bearing deposits fixing by $1.1 billion in the first half of the year, declining from $6.6 billion to $5.5 billion. The noninterest-bearing deposits represent 25% of our total deposit base. This rebalancing of deposits as rates increase is adversely impacting our net interest margins across the industry as well as look to later in the presentation.

Overall, our client deposits decreased while deposit in overall U.S. banking industry market timing. This slide shows the improvement quarter-over-quarter and year-to-date in the perception of in short and collateralized deposits, which improved to 65% as of June 30 from 49% at the end of 2022. This migration is a result of our success in rolling client in the ICS program, which offers full FDIC insurance from larger depositors and organic insured deposit growth. As you can also see in the bottom of the slide, we have a campus sources of liquidity available to us. As of June 30, the bank had $11.2 billion of committed and collateral life available liquidity representing 42% of our assets in covering 143% of our uninsured on tolerate. In conclusion, we have ample source of liquidity available to us, and we have meaningfully reduce or uninsured and unities.

On this slide, we can see the evolution of the unrealized losses in the best portfolio for both available to sales and health-to-maturity portfolio as well as our swap hedges. As license, the aggregate net losses improved by $52 million year-to-date or $39 million after tax. The OCI components, which include the available-for-sale portfolio in slots improved by $46 million pre-tax. Our OCI improved year-to-date despite the 5-year U.S. treasury rate decreasing since December 31 as a result of the bank reducing the portfolio duration to 4.6 years. It is also important to mention that 98% of our investment portfolio consists of highly liquid U.S. government and agency securities that provides about $800 million of cash flow annually.

This slide shows that our assets grew marginally to the most recent quarter to quarter. Our loan deposit ratio remains low at about 39%. We remain very well capitalized as evidenced by our total is base capital ratio and our Q1 leverage ratio, which were 13.9% and 9.3% as of June 30, respectively. On the right-hand side of the slide, you can see we had moderate loan growth in the quarter of $420 million, about 2.5%. Our core loans, excluding PPP, have grown by $836 million or about 5% year-to-date. We have moderated loan production in the current market, focusing on high-quality field in our market with strong spreads and solid deposit relationships. We will discuss the composition of our loan portfolio and diet the CRE portfolio in the upcoming slides.

Our strong credit culture and low-risk appetite continues to result in excellent asset quality metrics. Our NPL ratio for instance, remains low at 62 basis points of total loans with minimal past-dues representing only 8 basis points of total loans. Now Daniel Kushner, the Head of our Real Estate Banking division will discuss our Seri portfolio in more depth.

[Daniel Kushner, executive]

Thanks, Jose, and good morning, everybody. I'm pleased to be here with you to provide more insight into our commercial real estate portfolio. On this slide, we present the detail of our CRE portfolio by property type. Overall, all CRE categories have a strong loan-to-value of 67% or lower with a low weighted average of 52% and supported by strong debt service coverage ratio of 1.9x. Additionally, our disciplined and comprehensive credit process has historically resulted in exceptional asset quality as that is inside of minimal nonaccruals in our CRE portfolio of less than 1%. 17% of the portfolio is outside of Florida as a result of us financing transactions for our very best clients outside of the state. This slide shows further details on our CRE retail and office segments by collateral side.

The left-hand side of the slide focuses on retail, our largest CRE segment, demonstrating how well balanced portfolio is it anchored in credit as which are the lowest risk profile sectors accounting for 54% of the total exploiter. Again, this is a very strong portfolio with solid flying selection, as evidenced by the low weighted average loan-to-value of 56% and high debt service sure ratio of 1.66x. On the right side of the slide, we highlighted our CRE office segment. This segment has been the one that's been garnering intent to do the lingering effects of the poised. When you look at our office segment, it is a balanced conservatively underwritten portfolio focused on Class A and B properties. It is accompanied by great fundamentals with a 56% weighted average loan value at a strong 1.7x debt service coverage ratio. The weighted average loan to value of the Class C segment is even lower at 52%.

As we wrap up the commercial real estate discussion, I'd like to make a couple of additional points. First, we only have about 12% of the CRE portfolio maturing through the end of 2024, and we've recently stress-tested the debt service coverage ratios at those low with positive results. I'd also want to point out that our underwriting criteria over the years has consistently required us to underwrite loans to higher rate environment, which has enabled the portfolio to perform well through this cycle. Our sound-free approach is accompanied by the fact that we are located in the best real estate market in the U.S., Florida. On the left-hand side of the slide, we present an analysis done by CoStar on the 12-month rental growth rate of office spaces throughout the U.S. with the top TV office partners. You will notice that 7 of the 10 top 10 office markets with the strongest rent growth are in Florida, including Miami, right #1, [indiscernible]. On the bottom, you can see how other largest office markets outside Florida right towards the bottom in terms of rental rate increases.

For economy continues to outpace the rest in the U.S. On the right side of the slide is a compilation of a few headlines reflecting this reality. Our business-friendly climate continues to attract new businesses and is a prefers estimation for wealthy individuals as well. In addition to many serving as the gateway for Latin America, we are also increasingly becoming a business pro and home to many private equity firms. In short, Viavi's emerging as one of the most important cities in America. In 2022, Florida was the state with the most gained population. Affluent individual and sizable businesses are relocating from the Northeast, the West Coast and other parts of the U.S. Florida. Florida received more than 1,200 people per day, fueling our strong economy.

The labor market is also strong in the state. On the right-hand side of the slide, you can see that Miami and Florida's unemployment rates of 1.4% and 2.6%, respectively, are lower than the national rate of 3.4%. We also show here how Florida had 4 jobs for the first time in New York with over 9.5 billion employees in 2022. I believe these last couple of slides clearly demonstrate how core economy is differentiated from the rest of the country while we feel very comfortable with our CRE portfolio.

On that note, I'm going to pass it back to Jose to continue reviewing our results for the quarter.

[Jose Marina, executive]

Thanks, Daniel. So moving to our results. Our net income for the quarter was $50 million. This represents $7.9 million actually quarter-over-quarter. The main driver is NIM compression, which is a common theme across the industry as rates have significantly risen. Our profitability continues to be strong with an exceptional year-to-date core ratio of 49%, ROE of 10.3% and an ROA of 85 basis points. I think on this slide, you can see the evolution of our net interest income and net interest margin compared to the most recent quarter in the fourth quarter of 2022. The blue part of margin or net interest income and margins, excluding the impact of PPP fees. You can note that our core net interest income decreased by $6.5 million or 11.5% over the previous quarter, resulting in our 4 NIM declining by 36 basis points to 2.7%. This is a top requires in deposit costs, which [ sitio ] the bank community for in the first half of the year, given reductions in nonusage-baring deposit metals and the impact of increased deposit pricing given the rate of market competitive market dynamics.

Finally, you can see that our betas for both cost of funds and cost of [indiscernible] are 70% and 64%, respectively. Deposit betas are increasing across the industry given the market at [indiscernible]. We will continue to be vigilant in managing our cost of funds. That is the need to continue to grow our deposit base will also optimize our margin. As you can see in the slide, parkinsonian is balance. While our intent interest income is expected to modestly decline, we continued to mine with great increases, our net interest income is expected to expand when rates start to decline. We actively manage for balance sheet and opportunistically executed $2.75 million of ASC swaps during the first semester of the year, including $500 million in the most recent quarter in order to protect against higher short-term rates for a longer period of time. The swaps we executed are incurred between 1 year and 3.5 years in order to provide some near-term protections of higher short-term rates while also maintaining our position to benefit once short-term rates are declined.

Based on the forward curve, the swap will add around $31 million of additional net interest income during 2023. We continue to protect our NIM in the current requirement while positioning our balance sheet to benefit from the anticipated rate treatment in 2024. As we approach the end of the presentation, we want to summarize the year-to-date improvements we saw in various liquidity and capital-related ratios, many of which we have already addressed. First, our TCE ratio, excluding and including HCM, grew by 330 basis points, respectively, and remains trot. Second, we were able to reduce our uninsured unsided deposits by 16% points year-to-date are available to equity from 143% of the balances.

Additionally, we flagged a more significant amount of our investment securities posted raw on liquidity. Our loan-to-deposit ratio remains low at 79%. Finally, we increased client deposits at an annualized rate of about 4%. I want to conclude our comments by recaps some of the main conclusions from our presentation today and briefly touching on the outcomes here. As you see today, we have fortified our reads from liquidity and capital position and increase our deposit base in the banking environment for depositary plan.

Our investment portfolio holds highly liquid investments with minimal credit exposure and decreasing duration. Additionally, our commercial real estate portfolio is well diversified with low LTVs and strong debt service coverage ratios. We have robust credit management practices, coupled with a very strong party. Finally, although we are experiencing this compression, we are well-positioned for declining interest rates. While the first half of the year speaks for itself, we will continue to be vicious to monitor our deposit base, and we'll continue to effectively manage our loan portfolio. We are committed to listed banking approach, our patio fame and subdivision, which has set us apart over the years.

On that note, I will pass it back to the [indiscernible] final comments.

[Unknown Executive]

Thank you all for participating this morning. Thank you, Jose and Gary. We want to conclude the call by emphasizing that the market continues to recognize the progress we have made on strategic pillars related to innovation, customer experience and corporate governance. Our employees recognize us as the happiest company to work in the building happens 2023 rating. In the same line, we were recognized as one of the preferred companies among young technology professionals to work in Chile. Related to ESG, BCI is the first private bank in Chile to join the net zero banking alliance, an organization whose objective is to mobilize the transition to a low carbon economy, encouraging the best practices of its customers, individuals, suppliers, SMEs and large companies. We were the most responsible company and the best corporate governance in Chile.

Lastly, I would like to share the update guidelines considered the last micro conditions discussed in this presentation. We are adjusting our forecast of a net income decline from year-over-year from 10% to be [Technical Difficulty] 15% compared to the 2023 results. This is mainly explained by a lower NIM in Chile due to the decreasing inflation levels and in City National Bank associated with higher funding costs, as Jose explained early in this presentation.

Lastly, and to finalize the presentation, we would like to pass along the following key messages. We continue developing our leading digital ecosystem, including key fictionalities such as BCI. Our operations in the U.S. market is strong and is performing well. City National Bank has a sound balance sheet with extensive sources of liquidity and sound capital ratios. We intend to continue with a local and international growth strategy. That has a position us as the eighth-largest bank in Latin America. The capital increase we are executing with us further to strengthen our financial position, align our capital ratio with an internal target and with Basel III latest standards. We expect to execute the intended capital increase during the fourth quarter of 2023. Thank you for your time, and let's go back to Christian for questions-and-answer session.

[Operator]

Our first question is from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question is on your consolidated NIM sensitivity from lower rates and lower inflation levels. For every change of 100 basis points in rates and inflation, can you remind us what would be the impact on your consolidated NIM? And how should we think about BCI's NIMs next year? My second question is on your approved stockholders' capital increase of CLP 600 trillion billion. As you pointed out, it will help to increase the common equity Tier 1 ratio close to 11%. However, the issuing of 28 million new shares will imply an earnings per share dilution of roughly 12%. So how do you see the trend for BCI's earnings per share growth and the ROE next year to compensate the dilution? And then my final question would be in operating expenses and match. How should we expect OpEx growth next year, considering all these digital investments we notice much is obtaining a good number of deposits and be interesting or new checking deposits? But when do you expect to start the digital lending, which I think at the end will be the way to monetize the clients? And when do you see match to become profitable.

[José Ibaibarriaga Martínez, executive]

Thank you, Ernesto. I will try to go in order to answer your question. First, NIM, we have a consolidated NIM that is going to be decrease in Chile regarding inflation. Basically, the sensibility that we have is that unexpected 100 basis point interest rate is around CLP 38 billion and unexpected inflation is around CLP 39 trillion in because the gap has been open. Obviously, Ernesto, as you are very well aware, this is unexpected because if the market expects that the impact as much less. What we are expecting in this year? In Chile, we expect a decrease of around 80 basis point. And in City National Bank, as Jose explained around 100 basis points. And next year, as the interest rate in the U.S. is going to start decreasing.

As Sergio mentioned early in this presentation, we expect that this gap is going to start closer. Regarding CapEx, that is a very, very good question. We are expecting that all the investment that we have done, both in the business as usual business are creating the digital capability, as Ignacio explained in detail is going to bring us incremental revenues in the next couple of years. We -- our forecast for the next 2, 3 years and the expectation that we have is to have a 14% return on equity. Including this capital increase that we are going to make at the end of this year. So the 12% dilution that you are explaining, we have already considered it. And so we expect to have a 14% return on equity 256.

And regarding operating expenses, we continue to invest in this digital ecosystem. Having said that, for the next couple of years, we are expecting to grow revenues at double-digit growth and expenses and inflation plus 2%. So efficiency ratio will start improving. And we have a target that we are going to be in 45% efficiency ratio by 2025. I think that I answered your 3 questions, and Ernesto I don't know if you want us to go deeper in any of those questions.

[Ernesto María Gabilondo Márquez, analyst]

Just a follow-up in terms of match now. When do you expect to start the digital lending and when do you expect it to be profitable?

[José Ibaibarriaga Martínez, executive]

Regarding match, as Ignacio mentioned, we already have Buy Now Pay Later, and he mentioned that we have been very careful with the experience that we have seen in other parts of the world. But much is part of a whole ecosystem that includes all the assets that Ignacio explained. The overall monetization of this investment will start early at the end of this year, and it's going to pick up in 2024, '25 and '26. The incremental revenue that we are expecting for the next couple of years come significantly from this digital ecosystems. So it's not that much at itself, but as much as part of a whole ecosystem. Ignacio?

[Unknown Executive]

Yes, Ernesto, good question. In regard of the financial services, as José Luis was saying, we already start lending. In my presentation, I showed there are almost 3 -- I'm sorry, 30,000 clients with an existing credit line for Buy Now Pay Later. And we expect to launch our new credit card, which is going to be a part of the loyalty program that I was mentioning like 30 minutes ago by the second quarter of the next year. In terms of profitability, we expect the -- the first month to be on the blue line, I mean breakeven somewhere doing mid-25 for match only as a stand-alone business, regardless of the sources of income, it's generating for the rest of the ecosystem.

[Operator]

Next question is from Daniel Mora from CrediCorp.

[Daniel Mora, analyst]

I have a couple of questions. The first one is also related to the digital strategy considering the strong investment in the initiatives such as [indiscernible]. What will be the key milestones that we need to pay attention until 2026 to know if the strategy is going in the right direction? Because at the end, the increase in clients and transactions should translate into higher profitability. And if we consider that we are going to maintain an ROE around 14% for PCI, even after the capital increase, I'm wondering what will be the marginal increase in ROE coming from all this digital strategy. So that's why I would like to know what will be the milestones in these years and what will be the key channels to see the increase in profitability coming from the distort strategy?

[José Ibaibarriaga Martínez, executive]

Ignacio, can you answer the question, please?

[Unknown Executive]

Yes. In terms of milestones, you'll see more and more partners joining the ecosystem. You'll see more and more clients engage with BCI's ecosystem during the their daily life. So one metric you should put your attention on. It's a number of active clients. And when I say active clients, it's -- as I already said, not just the clients that log in to see their account balance, but clients that actually transact within the BCI's ecosystem.

Second, I will put a strong attention on the – on the -- the net margin that is generated on the retail and merchant from the retail and merchant clients because they are the ones where the -- where most of the income is going to come from either from traditional sources of revenue or from the new revenue streams we are generating such as match expanded value proposition, fees from merchants that are part of the program and value-added services, we're going to start marketing. We already start marketing to the merchants that are part of these programs. So another key metric you should put maybe attention would be ARPU, average revenue per user, which is also part of what we are monitoring from now...

[José Ibaibarriaga Martínez, executive]

Thank you, Ignacio.

[Operator]

Daniel?

[Daniel Mora, analyst]

And the second question will be related to what will be the fake or the impact on BCI coming from the expiration of the FSC, the liquidity line provided by the Central Bank in the first half of the next year?

[José Ibaibarriaga Martínez, executive]

Well, as you know, [ Marian, ] the line, we will start repay it. The impact of the different cost of fund that this line will have BCI is around $10 million. It's an important amount, but it's basically very material. Remember that we are going to be repriced for the other side, too. So I think the -- well, that is the answer. It's around $10 million decremental costs.

[Daniel Mora, analyst]

Perfect, José Luis. But just to know -- so what will be like the marginal pressures on margin coming from Francies exploration? Do you expect any -- because you already mentioned $10 million in the cost of fund. So this will translate into more expensive funding sources so pressure margins at the beginning of the next year?

[José Ibaibarriaga Martínez, executive]

See, what we are seeing, Daniel, is that the pressure that we are having in prices with decreased inflation and this kind of found is, in some way, another reflected in the prices that you're charging or investment that you're making. So the net effect regarding repricing and cost of funds that we calculated just isolating this FSI facilities is around $10 million. It's -- remember that this is part of a total way of funding the operations and it's very -- it's important, but it's very marginal, it's not a significant amount of money. So the impact it's not immaterial, but it's just $1 million.

[Operator]

Our next question is from Yuri Fernandes.

[Yuri Fernandes, analyst]

I had a question regarding asset quality. I guess in the previous call, you mentioned that you would be approaching DPL big. I guess the presentation you mentioned that it may be too early to comfort the peak, but ads are somewhat more stable. So my question is, how do see the cost of risk here? Should we continue to see cost of risk around 1%? And I guess more importantly, how do you see your coverage ratio behaving on this? Like you still have, I would say, an above historical average on coverage ratio. I think it's $220 million, $225 million I was stating 2017, '18 and '19, this was running around $130, $250. So my question is, how do see asset quality and assuming NPLs continue to deteriorate at the margin if the company will continue to move the coverage ratio down? And I can ask a second question after this. Thank you.

[José Ibaibarriaga Martínez, executive]

Super. Yuri, nice to see you again. Henrique, can you answer the question, please?

[Unknown Executive]

Sure. Thank you, Yuri, for your follow-up question. And yes, on the risk indicators on the consumer portfolio, I think they are in line with what we outlined a quarter ago all major indicators such as LPL and all type of videos have already reached a stabilization, which I was prudent to mention was that we do not know the future, but we are highly confident that we are there. We have reached the ceiling and that we shouldn't be expecting any major surprise in terms of the performance of the consumer portfolio, okay?

So I think we're pretty happy with the results of all the measures that we have taken in all the last quarters and since at least a year ago. As to the coverage of provisions to losses, yes, we you're right with the level and we should see that going downwards and approaching the pre-pandemic levels as well. That if you see the specific provisions built in the portfolios. Now if you add to that the voluntary provisions, you can imagine that we're very conservatively provisioned and it's a discussion that we always have as to whether it's time to start releasing or not, but it's not something that we have yet decided.

[Yuri Fernandes, analyst]

Just a follow-up on that. Like should we see cost of risk remaining around 1 million, 1.1 million? Like what is the sort of guidance? And regarding additional provisions, just the regulatory -- I'm update. I think it's part of the CMS agenda to have the consumer risk model. So if you have any color on that, like do you expect this to happen or not like just an update on what should we expect on that topic also.

[Unknown Executive]

Yes. Sure. So yes, you should expect the cost of credit ratio to stay where it is today and as to the regulatory initiative, you -- we gave a guidance a couple of quarters ago, you might remember and it was in line with what was published in by the media. We know that the regulator has taken longer in analyzing that regulation. So -- but of course, we believe it's going to represent any way some buildup in individual provisions that can be more than offset with a reduction in voluntary provisions that accounts for 2x or 3x the amount that could be built up in the individual provisions of the consumer portfolio.

[Operator]

[Operator Instructions] The next question is from [indiscernible].

[Unknown Analyst]

I guess just a follow-up, you mentioned potential ROE next year of 14%. Just want to understand how you would get there, right? Because you mentioned some potential pressure on margins as inflation comes down, you had a relatively low tax rate this quarter with a more normalized tax rate you'd be around that 14%, but you also have a capital increase, which could impact ROE about 100 bps. So just with some of the headwinds that you could face going into next year. How do you get to the 14% ROE? What should be the main driver to get there?

[José Ibaibarriaga Martínez, executive]

[indiscernible], give me the possibility to clarify what I said. I said that the 14% of return on equity was a target for 2025, 2026. Next year, for sure, as inflation is still here. The NIM completion that we will start -- we will continue having in City National Bank. We are not targeting for 2% next year. So we're expecting that next year is going to be around 12.5%, 13%, as we are going to have recently capital increase. And the 14% target is going to be in the 25%, 26%. So thank you very much, Thiago, for giving me the possibility to clarify. Maybe I was not clear in my answer before in the guidelines.

[Unknown Analyst]

And I guess same question out to you then in '25 and '26, what would be the driver would be inflation picking up, boosting margins? What will be the drivers to get there?

[José Ibaibarriaga Martínez, executive]

Yes. We are expecting to grow in the loan portfolio around -- in Chile around 5% to 6%. In City National Bank, around 8%. We are expecting to have an increase in NIM as interest rates between asset and liability is going to kind of normalize. We are going to expand expenses at a much lower rate than in the revenue side of inflation plus 2%. We are expecting that risk level is going to maintain what we are going to have this year. So -- and then we are going to have incremental revenues that are coming not for business as usual, and it's going to come from the ecosystem that Nacio explained in detail a couple of years ago. So that is the way that we are building our projections, financial numbers.

[Operator]

And our last question is from Nicolas Riva from Bank of America.

[Nicolas Riva, analyst]

Thanks very much, Christian, José Luis, Ignacio for tons of questions. I want to follow up on the capital increase. So you said as of now you expect it to launch in the fourth quarter this year. I want to confirm that the controlling family, the Xero family, the expectation is they would contribute with their pro rata share with about 60% of the CLP 600 million. And also, José Luis, in your projections for capital by 2025, I see that you are just including all of your capital would be common equity Tier 1. You're not including any Tier 1 or Tier 2. I wanted to then ask you if the expectation then would be given this capital increase, you are not expecting to raise AT1 at least for the foreseeable future? And also, kind of the question, why then you wouldn't make use of 81% or Tier 2 given that the cost of rating capital is lower than the cost of operating equity?

[José Ibaibarriaga Martínez, executive]

Super. Thank you, Nicolas. First, regarding the controlling group, they have publicly announced that they are going to go for her for them participation. They make a public announcement. So -- and we did it, and we said it in the extraordinary shareholder meeting. Second, yes, we are considering to have AT1 in order to achieve Basel III on 2025. We have not taken consideration this year as the issue of credit Swiss create a lot of noise in this market. And today, prices or spreads are really, really high. But we are seeing some 81 million in issues in Mexico. And so we are starting to see some coming back of this market, and we are expecting to issue 81 bonds on 2024 and 2025 to achieve Basel III ratios as you well mentioned in your question.

[Nicolas Riva, analyst]

So in their case, José is just to confirm, by 2025, the expectation would be you would have 11% common equity Tier 1 plus potentially this AT1 bucket that you could raise, for example, next year?

[José Ibaibarriaga Martínez, executive]

Yes.

[Operator]

And I pass the call back to José Luis for closing.

[José Ibaibarriaga Martínez, executive]

Thank you very much to all of you. As you can see, we have a strong first year as strong operations in U.S. Industrial, have the opportunity to explain to you in detail how profound and how deep is our digital strategy and building that ecosystem. So any additional questions that you may have as the investor team is always available for you. And thank you very much for participating in this call. Bye-bye.

[Unknown Executive]

Thank you. Thank you, guys.

[José Ibaibarriaga Martínez, executive]

Thank you, bye.