Banco de Credito e Inversiones
SGO:BCI
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Earnings Call Analysis
Q2-2024 Analysis
Banco de Credito e Inversiones
The company reported robust results for the quarter, driven by a 17% year-over-year increase in operating income, highlighting the solid performance of its local operations. The growth in local loans, which soared by 11.1%, was primarily fueled by commercial and mortgage loans, supported by favorable foreign exchange effects and inflation. This is a testament to the company's strategic focus on sustainable growth and its ability to adapt to dynamic market conditions.
Despite facing a challenging macroeconomic environment, the company managed to increase its net income by 5.7%. This was partially offset by higher taxes due to the depreciation of the dollar against the peso, which impacted the operations of City National Bank. On the expense side, consolidated operating expenses grew by 14.3%, driven by a mix of operational expansion and nonrecurring events. Nevertheless, the company aims to keep local expense growth below the inflation rate.
The Net Interest Margin (NIM) showed mixed results with local NIM increasing by 41 basis points to 4.23%, while the NIM for City National Bank rose by 8 basis points in June, surpassing the 2% mark. The local loan portfolio demonstrated a 7% year-over-year growth, primarily due to a 9% increase in commercial loans. On the other hand, consumer loans decreased by 2.1%, reflecting higher interest rates and challenging economic conditions.
The digital ecosystem continues to be integral to the company’s strategy. The MACH premium plan launched in Q2 led to a 4% quarter-over-quarter increase in transactions, totaling 12.2 million. The company added more than 600,000 current account customers, leveraging digital platforms to enhance customer engagement. The MACH platform has become a critical component of the retail ecosystem, driving financial inclusion and transaction growth.
The company's international footprint, notably in Florida, has solidified, making it the largest Latin American bank in the U.S. This quarter marked the 25th anniversary of its Miami branch. Additionally, in Peru, the company issued its first public bond, which was oversubscribed by more than 2.1 times, showcasing strong market confidence. The company also launched a Global Sustainable Debt Mutual Fund, aligning with its commitment to ESG principles.
The company adjusted its guidance, increasing the forecasted net income by approximately 10% compared to the previous year. This is driven by a higher operating margin in Chile and a sound net interest margin, with local loan growth expected to be between 5% and 7%. The focus remains on productivity plans and controlling local expense growth amidst a higher-for-longer interest rate environment, particularly impacting City National Bank.
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Good morning, and welcome to our second quarter 2024 conference call from Santiago in Chile in this beautiful day. We had rain from tonight. So we are enjoying the beautiful day. I'm Andres Atala, the Head of Investor Relations of Bci. Today, with me are José Ibaibarriaga, Bci CFO; Sergio Lehmann, Chief Economist; and Juan Enrique Pino, Head of Credit Risk at Bci. We also have been joined remotely by Jose Marina, CNB's CFO; and Christian Saffie.
Today, we will present our sound results, which manifest the growth and transformation strategy implemented over the past few years despite the highly competitive and complex industry. After reviewing our performance, we will leave room for the Q&A session as usual. So please hold your questions and raise your hands at the end.
To begin with this presentation, Sergio will contextualize explaining their macroeconomic figures.
Thank you, Andres. I will give you a quick macroeconomic review about the U.S., Peruvian and Chilean economies. The global economy has been moderating its dynamic as a response to contracted interest rates, some developed economies led by the Eurozone initiated the [indiscernible] monetary policy easing process, recognizing lower inflation pressures. Lower risk remained high, however, given the possibility of more persistent inflation, especially from services side, higher international iteration and geopolitical factors.
The U.S. economy has continued showing a gradual deceleration. Inflation, as a consequence, has been decreasing even more rapidly than that was anticipated. Moving market expectation, which now anticipates 3 Fed fund rates cut before the end of the year. The yield curve has moved downward during the last month.
In Peru, the activities show an acceleration in the first half of the year, while inflation has been decreasing actually inside inflationary range. The Central Bank, however, has slowed its interest rate cost cutting process.
In Chile, the economic activity is showing a gradual recovery, responding to monetary policy normalization, which was initiated a year ago. The Chilean peso is still under pressure due to mainly external factors.
Please move to the next slide. In advanced economies -- in its advanced estimate release, the bureau of economic analysis indicated that U.S. economy grew by 2.8% quarter-on-quarter, annualized in the second quarter of this year, above the expectation. It was driven by an increase in personnel consumption, mostly through other goods and investment, particularly equipment and inventories.
The economy is expected to grow around 2.4% in 2024, and Florida GDP has continued to be overperformed the national average. The labor market has been recently degenerated. The unemployment rate and the U.S. economy and Florida, however, are at low levels, although the national average has been slowly rising during the year.
Please move to the next slide. Headline and core inflation continue to gradually decrease. It's estimated that inflation will be below 3% annually at the end of this year, closer to the Fed target. The Fed fund on the other hand has remained at 5.5% to 5.25% range since July 20, 2023, a very contracted stance in line with Fed signals provided in the last monetary policy meeting, market expectation incorporates a first cut of 25 basis points next September and then another 2 additional cuts before the end of the year.
Please move to the next slide. As a consequence, the U.S. yield curve moved downward last month given an indication of a more rapid decrease in deflation rate and a clear signal of economic adjustment.
Peru GDP grew by 1.4% year-on-year on the first quarter '24, driven by a recovery in the domestic demand. We expect a growth rate at 2.4% this year, mainly explained by better consumer expectation due to a well controlled inflation and lower interest rates. The Central Bank initiated an easing monetary policy cycle in September 2023 accumulating since then 150 basis point cuts in the [indiscernible] rate. The local interest rates in the long term has been moving according to external trends.
Please move to the next slide. In Chile, GDP grew by 2.3% year-on-year on the first quarter of '24, driven by a recovery in household consumption and export, mainly in the mining sector. Increase in mining production at the end has been especially important due to investment projects initiated some years ago. We expect GDP growth at 2.3% this year.
The labor market has improved slightly, particularly due to the contribution from the commerce side, unemployment rate has fallen and the labor participation rate is close to pre-pandemic levels.
Please move to the next slide. Inflation has been reducing as a response to a contracted monetary policy. The latest data show some new pressures associated to electricity prices increases after this being fixed by the authorities in the pandemic. Total CPI will end the year at 4.5% annual-based and will reach the central target -- inflation target at the beginning of 2026.
In response, the Chilean Central Bank has cut the monetary policy rate to 5.75%, sustaining that level in the last policy meeting. We estimate that we'll reach 5.25% at the end of this year and 4.25%, which is the neutral level finishing 2025.
Please move to the next slide. The Chilean yield curve have shown mixed movements since March, induced by changes in expectations above the velocity of policy rate reduction and external trends. In the last 3 months, the Chilean peso has continued to be under pressure. In the first semester, high copper prices contributed to contain its depreciation. However, more recently, we have seen significant reversion of this factor.
[indiscernible] with respect to other LATAM currency has been a key variable given significant interest rate differentials between Chile and the rest of the countries in the region. By the end of this year, we are expecting an exchange rate below CLP 900 per dollar based on a more synchronized monetary policy with respect to U.S. and other economies in the region.
Now I will leave you with Jose Luis, who will continue with this presentation. Please, Jose Luis, the floor is yours.
Sergio, thank you very much, and welcome everyone to this conference call. I am pleased to share with you the strong and positive results we achieved this quarter, primarily driven by our local operations. These results undercoded our strategic focus and commitment to sustainable growth. Our operation income grew by 17% in the first 6 months, highlighting the sound performance of our local operations with lower risk compared to last year.
First and foremost, our local loans have grown by 11.1% year-over-year, driven primarily by commercials and mortgages loans bolstered by FX effect and inflation. This growth is a testament of our ability to meet the evolving needs of our clients and support their financial aspirations.
Additionally, our local NIM increased by 41 basis points to 4.23%, while City National Bank NIM rose by 8 basis point in June, surpassing the 2% mark.
Fees increased by 16.1% when comparing second quarter of 2023 to second quarter 2024, reflecting our ability to enhance revenue streams and deliver value to our stakeholders. We have also seen a positive transaction in local deposits, shifting from time deposits to demand deposits resulting in a 9.8% increase.
This shift has positively impacted our cost of funds, further strengthening our liabilities strategy. Our capital position remained robust with a CET1 capital increased by 130 basis points year-over-year to reach 11.12% as of June 2024. This improvement reflects our product capital management and resilience in a dynamic market environment.
In terms of digital account traction, both at Bci and MACH, we have significantly increased our current account customer by more than 600,000 customers. This growth highlights our success in leveraging digital platforms to enhance customer engagement and accessibility.
Turning to our international operations, I would like to highlight 2 key elements: First, our presence in Florida has been consolidated, making Bci the largest Latin American bank in the U.S. This quarter, we celebrated the 25th anniversary of a Miami branch, marking a significant milestone in our international expansion.
Simultaneously, in Peru, we successfully issued our first public bond, achieving demand that exceeded 2.1x the offer. This strong market confidence underscores our credibility and the robust performance of operations in the region.
Lastly, in line with our sustainability goals, we have launched the Bci Global Sustainable Debt Mutual Fund, which invests in debt instruments with ESG criteria. This fund promotes sustainability through responsible investment strategies aligned with our commitment to environmental, social and governance priorities.
In this slide, we present a snapshot of the key financial figures. Now let's review the key figures of our consolidated operations in the first quarter of 2024. Bci's operating income recorded a 9.1% year-over-year increase, primarily driven by an increase in net interest income explained by our effective pricing strategy. Furthermore, net fees experienced a substantial year-on-year increase due to higher fees from intermediation and insurance administration, which we will address further in this presentation.
Turning to our expenses. Consolidated operating expenses increased by 14.3%. It is worth noting that we had a nonrecurring event that we will explain later in this presentation. Nevertheless, we reinforce our commitment to keep local expenses in line with the inflation as we will address further.
Lastly, I want to highlight that our net income has climbed by 5.7%. This increase was partially offset by higher taxes due to the monetary correction of capital given depreciation of the dollars against the peso, which affect the operation of City National Bank.
Moving to our local loan portfolio. The 7% year-over-year increase was mainly driven by the commercial loans as we can see in this slide. This quarter's growth is primarily attributed to the increase in volume of commercial loans by 9%, highlighting our pricing strategy and the market share gain in this segment. Moreover, it is worth mentioning that the growth in commercial loan is also influenced by the appreciation of the dollar, which impact the growth of these loans.
Regarding mortgages loans, the slowdown we have seen in the last couple of years is mainly explained by macroeconomics and commercial conditions that Sergio explained.
On the other hand, the consumer loan portfolio decreased by 2.1% year-on-year, mainly to a decline in installment loans and credit card usage driven by higher interest rate and challenging macroeconomic conditions.
Please move to the next slide. This slide provides an overview of MACH, highlighting key enhancements and performance metrics. In Q2, MACH premium plan was launched. This slide outlines the new benefits offered by the plan, which can be accessed through the monthly fees. This benefit includes improve in cash-in options with credit cards, additional interest in Cuenta Futuro, which is our savings account, enhanced cash back through Bci Plus and preferential customer service.
Furthermore, in terms of transaction growth, we saw a 4% increase quarter-over-quarter, totaling 12.2 million transactions with 40% attributed to purchases and over 30% of -- to cash-ins. Additionally, the slide showcases a 30% growth in gross merchandise value on our payment platform, which now accounts for more than 70% of the domestic transactions along with a successful expansion of international e-commerce capabilities. An example of this is the launch of [indiscernible] store this quarter.
Moving forward, as you can see in this slide, I want to highlight the positive growth in NIM and fees. Net interest margin experienced a 41% -- a 41 basis point increase year-over-year. This growth is mainly attributed to effective business volume management and the reviews of our local businesses, optimizing our loan portfolio and maintaining a strong treasury management strategy has been key to drive for this growth.
And regarding fees, the increase was primarily due to higher commissions earned from the mutual fund administration and insurance brokerage. Meanwhile, commissions and credit card services decreased during this period.
This quarter, local efficiency reached 46.81% supported by a robust growth in operating revenues by nearly 7%. Despite an increase in consolidated expenses of 13.6%, we achieved a moderate growth in local operating expenses by 4.5% when adjusted for currency, [indiscernible] and nonrecurring effects.
First, the 35% of growth consolidated operating expenses is attributed to activities in the United States, mainly driven by the operation of City National Bank and the strengthening of the dollar against the Chilean pesos.
Secondly, in May, we experienced a nonrecurring effect related to the accounting of provisions for strategic initiatives that we are developing during this month. Adjusting for this currency effect and the other one timers items, local operating expenses increased by 4.5% quarter-over-quarter.
The main drivers of the increase in operational expenses are related to personnel expenses. Our local operation personnel expenses grew 4.7% with -- this growth is primarily due to salaries being indexed to the consumer price index and solid adjustment implemented in March.
We have observed positive result from a cost control and efficiency program, which is primarily due to the disciplined measures and efficiency gains from branch optimization and process digitalization.
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 has exceeded 1.5% growth year-over-year. This growth is underlined by an increase in local noninterest-bearing deposits by 9.8% and a decrease in demand deposits by 3.3% year-over-year.
Regarding our regulatory capital levels, as shown in the upper right chart, our common equity Tier 1 capital has seen an increase of 3 basis points compared to the same period last year. This improvement is attributed to higher net income for the period, a reduced loss in other comprehensive income account related to our available for sale portfolio and a positive impact on hedge accounting cash flow derivatives.
Additionally, last February, we issued a Tier 1 bond amounting to $500 million, which strengthened our capital base in line with the implementation of Basel III.
Now we will discuss our asset quality and loan portfolio composition with Juan Enrique Pino.
Thank you, Jose Luis. Hi, everyone. My name is Juan Enrique Pino. I'm the Head of Credit Risk Management, and I'm happy to be here with you once again to give you some more details about our loan portfolio set. In this slide, we can see the performance of the entirety of our local loan portfolio. As you can see, loan volumes remain with a growth momentum, as Jose Luis just mentioned before.
As to NPLs, they remain with an upward trend, but at level still below industry levels. This trend is observed in different degrees in all business segments, and we will -- as we will see afterwards as a reaction to slower economic growth, still high interest rates and by the residual effect of the former higher inflation rate. Our loan loss provisions ratio is strong, thanks to the voluntary provisions proactively built a few years back.
As to commercial loans, they remain, as Jose Luis has mentioned, one of the main volume growth drivers, while the NPL ratio shows signs of stabilization at around 1.8%, only distorted this last months by an exposure to our customer in the telecom industry, were around $75 million, which filed for Chapter 11. We expect this case to be restructured in the coming months.
As to the residential mortgages portfolio, we continue observing a growth in volumes. However, a very soft one, as demand is still contracted. In the same line of stores, NPLs remain with an upward trend, but very well within industry levels. This is smartly explained by still higher interest rates by the current 8.3% unemployment rate and by the high inflation rate accumulated from previous years as most loans have the rate index to inflation.
The combination of strong LTV ratios and average tenure, reflecting a mature portfolio gives us confidence that -- with interest rates gradually trending downwards, there's a window open for the restructuring past-due obligations in terms that would be way more accessible to borrowers than in previous months.
As to the consumer loan portfolio, it has started to regain traction in terms of volume growth and quality with NPL ratio stabilizing in the neighborhood of 2.9%, only slightly above pre-pandemic levels. Bci sees this as a very attractive segment to boost growth, along with a rebalancing towards more resilient customer segments and with a risk-appetite more commensurate with a still challenged macroeconomic environment.
Let me leave you now with Jose Marina, City National Bank's CFO.
Thank you, Juan Enrique. Good morning, everyone. My name is Jose Marina, and I'm the CFO of City National Bank. It is my pleasure to be here with you this morning to discuss our performance during the second quarter. I am pleased to inform you that we have strong results this quarter. We have extended our NIM. Our liquidity and capital positions remain strong, and CRE portfolio continues to perform exceptionally well.
First of all, banks are finding it increasingly difficult to capture deposits nowadays given the historic increase in rates. However, our client deposits increased by $593 million in the first half of the year growing at an impressive annualized rate of 6.7%, surpassing the banking industry's annual growth rate of 2%, which includes broker deposits.
We maintained approximately $10 billion of available liquidity, representing 37% of total assets and covering 123% of our uninsured and uncollateralized deposits. Our net interest margin expanded for the second consecutive quarter, growing 6 basis points quarter-over-quarter. For the month of June, NIM surpassed the 2% mark and has expanded 23 basis points since the month of October. Our net interest income in June reached its highest level over a year.
We continue to enhance our already strong capital profile with about $750 million of excess capital in our common equity Tier 1 ratio, even if we apply our unrealized AFS and unrealized HTM losses to capital. We maintained an investment portfolio with minimal credit risk to provide significant annual cash flow and a lower risk duration to about 4.5 years.
Our CRE portfolio continues to perform well with a weighted average LTV of about 50%. Florida continues to perform significantly better than the rest of the U.S. as a whole. These results reflect our reputation in the market built over 78 years, our relationship-centric model focusing on diverse business segments, the strong culture, [indiscernible] employees and our remarkable success in executing our strategic vision.
The U.S. banking system has changed rapidly over the last year with considerable migration of non-interest bearing deposits to higher-yielding products and increasing betas on the cost of funds. Moreover, the industry events in the first half of last year led to depositors migrate from midsized community banks to major banks.
Despite all these headwinds, our client deposits significantly increased by $593 million or 3.4% in the first half of the year. For the quarter, our client deposits decreased by about $600 million. However, this is primarily related to an unexpected outflow from a client having a temporary inflow earlier in the first quarter of the year, as we previously communicated in the first quarter results.
Our strong client deposit growth enabled us to reduce our brokered deposits by $665 million year-to-date. Furthermore, our cost of client deposits decreased by 3 basis points quarter-over-quarter due to the cost of funds flattening out and more stabilization of [indiscernible] balance.
Total non-recurring deposits represent about 22% of total deposits. On the right-hand side, you get to the banking industry as a wholesale deposits modestly increased by about $171 billion or about 1% year-to-date. However, these industry figures include brokered deposits for all figures in the left exclude brokered deposits.
This slide shows that our assets remained flat quarter-over-quarter with just a slight increase of about $77 million. Our loan-to-deposit ratio remains low at about 84%, remains very well capitalized as evidenced by our total risk capital ratio in Q1 leverage ratio, which were 14.9% and 10.3% as of June 30, respectively.
Additionally, the unrealized losses in the investment portfolio remained virtually flat in the second quarter, despite the increase in the 5- way treasury rate we saw during the quarter.
Core loans excluding PPP, increased by $232 million quarter-over-quarter, as shown on the right-hand side of the slide. We continue to focus on high-quality deals with strong spreads and solid deposit relationships.
Our strong credit culture and low-risk appetite continues to result in excellent asset quality. The NPL ratio for INSYS remained low at only 67 basis points of total loans. Cash deals are also minimal, only 36 basis points of loans, decreasing by 9 basis points quarter-over-quarter. We also increased our net service coverage by 7 basis points quarter-over-quarter.
On this slide, we provide detail on our CRE portfolio, which represents 49% of our overall loan book. Our CRE portfolio has a conservative weighted average LTV of 50%, supported by a strong debt service coverage ratio of 1.8X with full or partial reports on 63% of the loans. It is also very well diversified across all segments.
Our pure-play Florida bank strategy resulted in only 17% of CRE loans located outside of Florida, representing only 8% of our total loan portfolio. The CRE portfolio outside of Florida is well diversified with the largest exposure in growth states in the southern portion of the country. Additionally, they have a conservative weighted average LTV at 59%, supported by a robust net service coverage ratio of about 1.6x.
Our sound credit approach is complemented by the best CRE market in the nation, Florida. Our business-friendly climate continues to attract new businesses and is a preferred destination for wealthy individuals. As analysis done by CoStar shows, lower vacancy rates and higher rent growth for the South Florida office market outperforming most -- major U.S. cities, as you can see on the left-hand side of the slide.
Additional 8 of the 10 office markets for the strongest office rent growth are in the state of Florida with Miami ranked #1. This is in sharp contrast to the other large office markets that have experienced declines in rent and office property valuations over the past few years.
A similar story that's shown in the retail market on the right-hand side of the slide, with South Florida market outperforming the rest of the country with lower vacancies and higher rent growth. Florida economy consistently outperforming the rest of the U.S. provides a secure foundation for our comprehensive credit risk framework.
Our historical minimum losses are a testament to that with a cumulative CRE net charge-offs of only $1.1 million in 2016 and effectively no charge-offs over the past 5 years.
This slide shows that our pretax, pre-provision normalized net income increased by $3 million or 6% quarter-over-quarter, primarily due to higher net interest income of $2 million as our NIM expanded by 6 basis points in the second quarter. Also, noninterest expenses decreased by $3 million as compared to the prior quarter.
Moving to our operating results. Our net income for the quarter was $31.6 million. Core earnings increased quarter-over-quarter by $2.7 million or 4% due to higher net interest income and lower expenses. We proactively provisioned nearly $16 million of loan losses primarily related to the impact of the updated Moody's economic forecast and a recalibration of our loan loss models.
Asset quality ratios remain strong, as previously discussed. Our profitability continues to be strong with NIM expanding quarter-over-quarter by 6 bps to 196 for the quarter and by 12 bps compared to the fourth quarter of 2023. Also, our efficiency ratio improved to 55%.
On this slide, we demonstrated our net interest income increased quarter-over-quarter by $1.6 million as the NIM expanded by 6 bps, mainly due to lower cost of funds by 3 basis points and higher yield on loans also 3 basis points. In June alone, both our net interest income and margin were the highest in over a year since May 2023.
Our NIM expanded by 8 basis points in the month of June as compared to May surpassing the 2% mark. In inclusion, the deposits and the pricing pressure has reduced, allowing the pricing on the loan portfolio to drive NIM expansion. We continue to expand our NIM even as rates have stayed higher for longer while positioning our balance sheet to benefit from any potential rate cuts in the near future.
I want to conclude by mentioning several strategies implemented to navigate in the current environment. First, we executed $3.75 billion of pay fixed interest rate swaps during 2023. These swaps are made at a shorter to medium end of the curve to protect against the rates staying higher for longer while also preserving our ability to expand our net interest margin once rates start to decline.
Next, we have increased our minimum spread for new commercial loans and renewals to 325 basis points. Through June, our weighted average threat for new commercial originations is 340 basis points. We're being highly selective on new -- on the lending side, not only from a credit risk and spread perspective, but also from a relationship perspective, by focusing our lending in activities and clients with a more holistic banking relationship that includes a relevant deposit, relationship. We're also including such items as the deposit covenants, [indiscernible] as needed.
Deposits are at the core of our relationship banking approach. We have several deposits gathering strategies in place, which have been vital in navigating the current rate environment. At the end of 2023, we executed the sale of $108 million of corporate bonds at a mild loss, replacing them with floating rate securities, including our NIM by about 2 bps. The strategy aims to enhance profitability and balance sheet repositioning moving forward.
We're also prioritizing residential lending in the secondary market to increase fee income. As we mentioned last quarter, we also sold the Bci Capital platform to align with strategic priorities with that prioritize the relationship banking over to transactional lending. As we now [indiscernible] higher for longer, we have initiated pricing strategy [indiscernible] selectively adjusting certain client deposit rates. The initiative resulted in a reduction of 10 basis points and over $3 billion of selected deposit accounts with rates above 3.5%, reducing our interest expense by about $3 million annually.
We are also currently working on repositioning our wholly investment into higher-yielding contracts, the BOLI restructuring will improve NIM, liquidity and overall profitability in the coming months, enhancing our results by about $7 million on a recurring after-tax basis.
We continue to invest in our human capital to drive organic growth. We are pleased to share that we have added a new commercial team led by a market president to spearhead our expansion in the Tampa market. This new team of 6 seasoned professionals complements our already existing commercial team in the market and will be solely focused on expanding our presence and deposit share in this key market.
Additionally, we have launched a new capital markets team focused on originations of loan syndications, capital placement and specialty capital. This new team of approximately 10 professionals will allow us to originate loan syndications as a leading bank, work with CRE prospects in existing clients and placement of third-party debt and equity, et cetera. We will also hire new directors of our wealth management and residential lending units, both for seasoned and well-respected leaders, who believe our strategy to increase client portfolio penetration and fee generation.
In conclusion, we are focused on continually operating our account base with the best talent in the markets that we serve while also offering a work environment and culture that maximizes employee retention. Our results are a direct reflection of our people. We're excited not only about delivering strong results in the first half of the year but also in the years to come.
On that note, I would like to pass it back to Bci team for final comments. Thank you for participating in the call this morning.
Thank you, Jose. Regarding our guidance, as you can see on the slide, we are adjusting our expectation and increasing the forecasted net income by approximately 10% compared to last year. This is driven primarily by a higher operating margin in Chile and a sound net interest margin, considering a local loan growth by 5% to 7%.
A key element that I want to address is our focus and effort on our productivity plan, which is a key catalyst of our midterm goals. With this, we reiterate our commitment to ensuring that local expenses growth will be below inflation rate.
In terms of NIM, we expect it to remain flat compared to last year. While the higher for longer rate scenario is expected to impact City National Bank's operational results, the strength of our local operations in sound finance strategies will more than compensate for these effects.
As we conclude this conference call, I would like to highlight several key points. Our local operations level delivered solid results, effectively mitigate the impact of higher for longer rates since City National Bank [indiscernible].
As Bci, we maintained sound liquidity and capital ratios, along with a strong asset quality in both Chile and City National Bank. Our operation has consistently demonstrated the robustness and stability reflected in our strong financial position, liquidity and capital ratios that exceed regulatory requirements.
Additionally, our digital ecosystem remains integral to our strategy with much solidifying its position and introducing new functionalities to enhance monetization reflected in our customer base of more than 6 million customers.
In conclusion, we have an excellent first half of 2024 despite the higher for longer rate scenario and sound results were achieved in our local operations make us confident that we will exceed this year initial budget as we already mentioned in the updated guidance for the consolidated net income.
Now I will pass you Andres that will lead the question-and-answer sections. Thank you very much.
Thank you, Jose Luis. From Goldman Sachs. We have Tito Labarta with the first question. Tito, how are you?
Thanks for the update and the updated guidance. I guess one question on -- in terms of your margin because we did have your margin coming down this quarter, even though inflation was higher in Chile and you're guiding for basically stable margin for the full year. Just to think about -- I want to just clarify a little bit, why did the margin overall fall even though inflation was higher in Chile. And then in terms of -- if you think it's just kind of the quarterly inflation. Do you expect it to remain sort of stable-ish at these levels? Or do you expect any movements in the second half of the year?
Thank you, Tito. The margin was down because the line of the Central Bank of Chile FCIC that was issued during the pandemic was canceled, and that was with an interest rate of 0.5% and that was the reason. In July, it was fully paid. For the second semester, we expect margin to be flat in a consolidated basis.
Okay. Perfect. And one other follow-up, if I can. Just on the -- on your cost of risk, that was also a bit lower this quarter. You know we did see MPLs pick up a little bit, just understanding why provision is declining with NPLs going up and how you expect that to evolve from here?
Super. Juan Enrique can you take that?
Sure. Tito, much of the NPL upward trend is represented by our residential loans portfolio, which is highly secured, and therefore, it does not impact in provisions. And in the SME side of the commercial loans, which are benefited by strong government guarantees, which we have been very highly effective in collecting when needed. So that would be the reason.
Okay. So maybe another way to add, is this level of cost of risk that we saw this quarter? Or do you think that's sort of a sustainable like 0.6% or...
Yes, I would say so. Yes.
The first question is coming from Daniel Mora from CrediCorp.
I have two questions. The first one is regarding loan growth strategies. In the report, you mentioned about increasing market share in foreign trade loans and also we observed a contraction of the consumer portfolio. So I would like to understand if this strategy is the one that we will see in the coming quarters and also maybe in 2025, in which we are going to see a stable rate, some more control inflation and probably better economic activity. That will be my first question. And then I will ask my second one.
Daniel, thank you for participating. The loan growth that we are estimating in Chile is basically in the commercial side. As Sergio mentioned, we have a lot of opportunities there. In the consumer side, even though the economy is recovering, we have taken a lot of strategic decision a couple of years ago where we have focused our growth in this segment -- in the higher-level segment, which has decreased our risk levels, and that is something that will continue.
We have an expectation that we will grow in the consumer side, both in Bci as in Servicios Financieros. Having said that, our growth will be in the better segment of both companies. Did I answer your question, Daniel?
Yes. Yes. Perfect. Jose, it is very clear. My second question will be regarding fees. During this quarter, we observed a very relevant increase in fees, but mainly related to a decrease in expenses -- in fee expenses. Can you provide more color on what we observed that performance and if the growing fees will continue to be explained by lowering expenses?
See. Daniel, as you know, the interchange rate changes. And therefore, the balance between incoming and outgoing payment changes. And the -- what we are seeing is that we will face something similar to what we have today, but increasing the incoming fees.
The other thing that you have seen is that we have a significant increase in fees during this quarter compared to the same quarter of last year of this semester compared to last -- the first, and that is basically because the ecosystem that we have in best is giving a lot of benefits.
We are increasing the fees on the mutual fund arena. We are increasing fees in the insurance arena. And as I told in the conference call, we have launched an account in MACH that has some charges where we have the aim of monetizing all that areas.
So in summary, what you should see in net between payment commissions and revenue commissions is a positive trend in the second quarter -- second semester.
Next one is coming from Ernesto Gabilondo from Bank of America.
My first question will be on your net income growth guidance. So you're expecting around 10% growth for this year? I think before you were expecting around 16%. So can you elaborate on what are the key differences in your assumptions for having these higher earnings growth?
And then for my second question will be a follow-up in the asset quality. I think I heard there was a deterioration in a specific corporate in the telecom sector. So what is one of the recent declines the NPL deterioration on a quarter-over-quarter? And then on a consolidated basis, wouldn't it be reasonable to spare the cost of risk around 1%?
And finally, my last question would be in terms of your ROE guidance for the year. Just because you're increasing your net income, wondering where you're seeing the ROE for the year? And also, if you can, again, remind us the medium-term targets for the ROE?
Okay. Enrique, I will answer the net income and the ROE, and you go with the risk. Ernesto, what we were seeing and why we increased our guidance for net income of this year is that the strategy that we have been following in the commercial side, increasing the loan portfolio of the commercial segment in our -- in the best customer rates with a price strategy that we have held in the allocation of capital has been very successful this year.
We grew in that segment significantly in the last period of -- last year and the initial month of this year. So we are generating a lot of interest rate -- interest that we didn't have in the forecast that we gave you before.
At the same time, that we are overperforming in the commercial side. The control of expenses has been very successful, even though you are not seeing it because we have had one time effect that we have shown in the financial statement, but the projection that we have is that we are going to be below inflation and the better behavior of the risk of the consumer segment that is performing much better than our budget.
The combination of the 3 things allowed us to have a net income that is better than that what we thought. Even though that we said that our budget estimate some full interest rate decreases in the U.S. and that have not happened so far, even though that will be over our net income in last year around 10%. So it's the combination of the three.
And return on equity, we have not given guidelines of return on equity, but as you have our equity and you have the forecast that we are giving you, it's very easy to calculate it. We are not giving it.
[indiscernible].
No, for the 2026 remain the 14% a consolidated basis that, meaning Chile around 15.5% and the U.S. is going to be around 12%. And we are on track and we are in line with that guidelines.
Juan Enrique, can you answer the second?
Sure. Ernesto, I guess your question was how much of the NPL ratio has been impacted by the telecom. So if and when -- so it represents 50 basis points of the NPL ratio of the commercial loan portfolio and 19 basis points of the overall local loan portfolio. So if and when restructured those -- that would be the reversal in the NPL ratio.
And in terms of the cost of risk, how should we think about that. In terms of a consolidated basis, how should we think about the cost of risk?
We were confident that the cost of risk of the remainder of the year should not change radically from what you have been observing in the first 2 quarters. I don't know if you've referred particularly to this case or to the overall portfolio. My answer refers to the overall portfolio.
Jorge Perez from Itaú is coming from -- with the next question.
I have 2 questions from my side. The first one is on OpEx. So when we see on a consolidated basis, OpEx is growing above 10%. So just to understand what is happening? In this quarter, we saw a large increase in other operating expenses. So to have more color on that point? And what should we expect on efficiency ratio for this year for 2025?
And my second question is on the CNB. So I just want to understand the evolution for the margins, how sensitive the bank is to fed rates. So those are my questions.
Okay. Jose, can you take the Fed rate. I will go through the OpEx. Regarding OpEx, what's going on, Jorge? We have been -- and it is important to mention it because sometimes we forget. We have been investing more than $500 million in transforming the bank in the last 6 years, 7 years. The bank has grown 3x from what we were in 2015. And we have changed significantly our IT's infrastructure, the operational -- the operations in the back -- all operations where we have automatized and robotized a lot of things. So expenses went up in a period of time.
Today, we have more than 25% of our employees in the IT arena at which they earn like 2 to 3x a normal people that work in branches. We closed around 50% of the -- now we close after -- well, we closed 50% range. Having said that, we are right to the moment that we are seeing an improvement in the OpEx.
What happened in this semester specifically? Basically 3 things. One is that last year with Silicon Valley Bank fail, the authority in the U.S. came out to support all the depositors -- deposits in the U.S. And then before the end was finishing, we have to pay back to that entity, around $20 million, that was something -- a percentage of the uninsured deposit of $5 billion. Each bank that have -- that amount multiplied by 0.5 and you have to pay that in order to have the money, again, that entity, if something happened.
Well, this year, at the very end -- beginning of this year, they told us that they were -- they made miscalculation, and we have to pay $5 million more. So one effect is that we have to pay $5 million, so that was not in the budget. The second thing is that the exchange rate of all the expenses in the U.S. when we consolidated in Chile, you have to translate it to Chilean pesos, and the exchange rate has been higher during the whole period of this semester of what we thought it was going to be, and it was what was last year.
And the third thing is that, we are going through several strategic initiatives that we did a provision in May, a significant provision that increase our expenses. That is going to be mitigated in the second semester. If you take out that or if you take that, we are growing in Chile 4.6%.
Having said that, the expectation taking in consideration what I told you, in Chile, with provision that we did in May, we are going to finish in Chilean pesos at the end of the year below inflation. And the only division that we can have is regarding the exchange rate of the expenses that we have in City National Bank, which honestly, we don't know today with the numbers that appears in U.S., my expectation was that exchange rate was going to go down today, and you can see that it didn't. So difficult to tell you, but that is basically the explanation, Jorge.
And Jose, can you go through the impact of the Fed rate in the U.S., please?
Of course, Jose Luis. So Jorge, we positioned our balance sheet to be slightly liability sensitive so that when rates come down, we will benefit. As I indicated in the conference call, we have done over in 2023, about $3.75 million of swaps, to protect against rates higher for longer, but all in the short to medium term between 1 to 3.5 years. Those swaps are starting to roll off.
And for every one, 200 basis point shock and rates coming down, our NIM will expand into 3% to 5% range, so call it 6 to 10 basis points roughly. And you also saw, as I mentioned in the presentation that we have already proactively reduced the rate on about $3 billion of planned deposits by an average of about 10, 11 basis points. So we've already done that. When rates start to come down on the short end, we're going to be very proactive in reducing our rates, and that will help our NIM.
Jorge, are you done?
I have a follow-up on OpEx. So just -- I understand the FX, the FX impact of the CNB when you translate to CLP. But thinking on the efficiency ratio, that should be neutral, right? Because also you are changing the U.S. dollar to Chile -- to a higher Chilean pesos, right? So for revenues, it's also positive. So just understanding in terms of efficiency ratio. What should be the level in terms of efficiency ratio on a consolidated basis for Bci thinking for this year, for example?
For this year, I will give you some range because we're not -- because the exchange will affect, and I will explain you why is not mitigated. We are going to be around 46% -- 45%, 46% in a consolidated basis. And let me explain you why it's not straightforward. The efficiency ratio this year, particularly in City National Bank, it has been affected because we have the Fed rate that Jose just explained.
As the exchange rate didn't increase the efficiency ratio in City National this year, particularly went a little bit high. We believe that taking in consideration that effect plus what I told you before, we should be between 45%, 46% this year consolidated basis and the target that we have for '26 is to be 42%.
Next one is coming from Andres Soto from Santander Investment. Andres, we have time for one question, if you don't mind.
My question is related to MACH. You guys have some impressive numbers in terms of increase of transaction of 40%, balances over 60%. I would like to understand what is the economic contribution that is MACH making either in terms of growth or either in terms of transactional income. And when do you guys expect this to be profitable or at least reach for a standpoint?
Thank you very much for your question. MACH is -- I want to give you a broader answer because it's not direct. The direct answer is we are going to be in breakeven point at the end of 2026. But I think that it's important to understand how much contribute in the overall strategy of Bci. We are building a retail ecosystem where MACH and the Bci Plus program with each which we have the unique and -- we are the only one with a loyalty program that give cash back.
And with the Bci payment and with alliance that we have with Walmart and with Salcobrand and we have like 10 companies. We are trying to be in the day-to-day transactions of our customers more -- and give more benefit to all of them taking the opportunity to connect all our customers that we have with all our merchants that we have altogether.
What is MACH. MACH was started with the aim to generate a lot of inclusion of customers that were out of the financial system. We did it. A significant number of transactions came from people that didn't have the possibility to pay Uber or Netflix because they were transaction in dollars.
And today, what we are doing is we create a digital account where we are charging, and that is creating a lot of tractions in transactions and in the income statement. We are in the trend to monetize that investment, which we never have to forget that part of the MACH intention is to create financial inclusion to a segment that they didn't have before. Long answer, Andres, but I think that it's important some time to give a little bit of context of what is the role of MACH in all of this ecosystem.
And the last one is coming from Yuri Fernandes from JPMorgan.
Also on those strategic discussions, can you give a quick color on Bci Pagos? I know there was EVO, global payments. Now we have Banco de Chile also launching. So if you can spend some few minutes discussing the payment strategy. And just a quick follow-up on asset quality and cost of risk. It was not super clear for me, the 0.6% cost of risk.
You're not giving a guidance, but you are implying that they should not change a lot from where they are. I'm asking this because of the coverage, right? You have been using the coverage and part of the lower cost of risk. It's not necessarily [indiscernible] improving, but coverage is decreasing. So where should the coverage be or maybe you can do more recovers, maybe the mix of commercial loans. I'm just trying to get more confidence on this 0.6% -- around 0.6% cost of risk level?
Yuri, the -- if we go to the financial system and the role that plays the wholesale businesses and the treasury, the consumer side, that is basically what we have seen during many years now adapting to the customer needs and value proposition, but where it really is changing and where you have a lot of companies and fintechs trying to enter is in the payment arena.
And how -- what value proposition you have in order that in the moment of the payment, a customer choose your company. And for that reason, you are seeing a lot of movement in the Chilean market. Even though we are -- it's a small market, it's a very competitive and sophisticated market.
And then you see Santander [indiscernible] that make a first move that was great. We did it with Bci payment. And in the first partner, we have a lot of issues because we are entering and they didn't have the software and a lot of it, then was bought by another company, and we are gaining traction significantly.
Banco Chile is moving. Everyone is moving. But the main reason of all of these attackers or followers is because the real change in the financial system is how to be relevant in the moment of the payment. The statistic says that if you are relevant in that moment and you have the principle, you have all the other cross-selling and you can monetize better to that customer. That is the main reason, Yuri, why you are seeing all this movement.
And regarding cost of risk, Juan Enrique can you give some color on that?
Sure, Yuri, so the reason why we're saying that cost of credit should -- is expected to remain relatively flat -- of course, we cannot be sure about it, it's because on the consumer side, we have already reached kind of stabilization in the commercial side as well, with the exception of that 1 case.
In the mortgage side, we continue seeing an increase in NPLs. But as you know, it's a highly secured exposure. And we -- I think we mentioned that loan-to-value ratios are very, very conservative, and it's a mature portfolio. So this -- there's a very big opportunity now that interest rates have gone -- are going down to restructure those customers that are past due.
And on the commercial side -- on the SME side, much of the exposure that is past due is almost fully guaranteed by government programs that have proven to be extremely successful in the collection side.
So that's the rationale behind our expectation to cost of credit remaining relatively in the same levels that we have seen in the last 6 months.
With all of this, we can conclude this conference call. So Luis final thought and wrap up.
Thank you very much all of you. Thank you for all the questions. I think that you saw and you hear Jose Marina telling how well positioned and super well results that we have there. We are very solid in the fundamentals in Chile in the right direction, increasing revenue, controlling costs, both expenses and risk. So we feel that we are in very good shape and expected for the next semester. And thank you very much for your always good interest to participate in this call.
As I always mentioned, please feel free to contact Investor Relations team. Any additional questions that you may have we are always available to answer it. Thank you very much, and have a nice weekend.