Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2020-Q3

[Andrés Atala S., executive]

Okay. Good morning, everybody. We are just in time to start this conference call. And of course, good morning to all of you, and welcome to our third quarter 2020 conference call. I'm Andrés Atala, Chief of Investor Relations team, and I really hope that you and your families are doing well and staying safe.

Today, I'm joined by José Luis Ibaibarriaga, BCI CFO; Mr. Juan Enrique Pino, Head of Credit Risk Management; Mr. Jose Marina, CNB's CFO; Mr. Hugo Loynaz, CNB's Chief Credit Officer; and Mr. Felipe Ruiz, our Principal Senior Economist.

[Operator Instructions] In this presentation, we will cover the main aspects of the bank for this third quarter, during which we will review the following topics, as you can see in this slide.

Now I will leave you with Mr. Felipe Ruiz, who will take you through the main macroeconomic figures.

[Felipe Ruiz Saldivia, executive]

Thank you, Andrés. The world economy saw a fast recovery during the third quarter, but has been loosening both due to the impact of a second COVID-19 wave in Europe and the United States.

In Chile, sanitary conditions are improving, but risk remains high. Labor market has been improving around the world, but it will take some years to fully recover to pre-pandemic levels.

In Chile, fiscal challenges are rising, and given that Fitch updated our debt credit rating to A-. No significant impacts in the market were observed.

On the political side, Chile initiates a constitutional process, which will last until the second half of 2022. The delegates who will elaborate the new constitution will be elected in April 2021.

The next slide shows the forecast GDP growth to 2020 and 2021 by the IMF. Large negative economic impact is expected in Europe and some Latin American countries due to COVID-19 outbreak and the economic impact of sanitary measures.

On Slide #5, there are suggest paths to economic active in the U.S. and Chile by coming quarters. It is expected a fast economic recovery in the U.S. and -- in 2021, accordingly, with massive monetary and fixable expansionary measures, but sanitary conditions are the main downward risk in the short term.

In Chile, it is expected a gradual economic recovery, which will show an acceleration by the second quarter of 2021, subject to sanitary developments.

Private consumption and mining sector are on the rise, but the service sector and construction are still lagged. We expect a 5.6% contraction of GDP this year, while for 2021, we are projecting 4% growth and slightly below IMF estimation, led by public investment and export sector.

Please move on to the next slide. In Slide #6, we observe that the labor market is showing some recovery in the U.S. Florida jobs have shown a fast growing and nonfarm payrolls rises by around 600,000 from April to September.

In Chile, unemployment rate is 12.3% in the third quarter, and jobs are gradually recovering, but labor force participation rate is still around historical low. Improving labor market condition is one of the main economic challenges in coming quarters.

Slide #7 is about financial condition in Chile. The risk premium, measured by the 5-year credit default swap, is currently around 55 basis points, the lower level since the pandemic outbreak, the lower among Latin American economies and in line with other A- credit rating economies. Due to social and pandemic crisis, the fiscal spend is growing faster in Chile and is expected a budget deficit GDP at 8.2% in 2020. Budget deficit will decrease in coming years, but public debt to GDP will rise from around 30% to 45% in the next 5 years.

The main uncertainties for the Chilean economy are associated with the global scenario, the evolution of COVID-19 infection, which currently appears to be in control and the constitutional process. In relation to this, given the 2/3 quorum to approval requirements from the constitutional delegates for each article of the new constitution, we expect that the main pillars of the economy will be reinforced.

Now I will leave you with our corporate CFO, José Luis Ibaibarriaga, who will continue this presentation.

[José Ibaibarriaga Martínez, executive]

Thank you, Felipe. Good morning, everyone. Sorry for the delay. I have some issues within my audio. Thank you very much for participating, and hoping that you and your families are staying safe and healthy.

I would like to think that, once again, that this scenario has allowed us to affirm the strength of how we do business on our long-term strategy based on customer experience, sustainable growth and a strong culture.

Given this, I would briefly address what our top priority has been this year. First, we have been close to our clients, providing them financial support, so they can address the financial effect of the pandemic. An example of this is that nearly 55% of our clients have deferred their mortgages loans.

Second, our customers also continue to prefer our simple digital products, as we will further see in this presentation.

Third, risk management, implementing a proactive approach by booking additional provisions in Chile and in Florida as a way of addressing the complex economic scenario.

Four, as one of our key priorities, we have placed a special focus on our efficiency plan. This has been reflected by the positive trend of our efficiency ratio, which has improved 260 basis points since December last year.

Five, the bank maintains a strong financial position to deal with this crisis. BCI's soundness has once again been reflected by our liquidity and capital ratios, both well above regulatory units.

In terms of consolidated financial results, some highlights of this 9 months. First, we have a positive result, gross margin growing more than 8.2% year-over-year. This was mainly driven by a higher volume of commercial loans, particularly associated with customer support initiatives as good result -- as a good result in the financial division. On the other hand, we have seen higher risk largely explained by additional voluntary provisions in Chile and in the United States.

Furthermore, I will -- I should denote that in September, the bank recorded $47 million associated with the total deductible of FOGAPE COVID-19 loans, which Juan Enrique will cover further in this presentation.

Net income amounted to $294 million compared to last year of $409 million.

Please move to the next slide. Now we will address BCI's local results. BCI's portfolio amount -- amounted to $34.5 million in third quarter 2020, increasing 10.1% year-over-year. This growth was mainly driven by the commercial portfolio increasing 14.9%, in which we should consider that FOGAPE loan represent an increase of over $2 billion of the commercial loan portfolio, as we explained last quarter.

On the other hand, consumer loans decreased 10% year-over-year, in line with market contractions, reflecting the current macroeconomic conditions.

Lastly, mortgages loans kept up the growth momentum, increasing 11% year-over-year, and they remained stable compared to previous quarter.

Now I'm going to pass you over Juan Enrique Pino, who is going to discuss our asset quality and loan portfolio.

[Juan Enrique Visinteiner, executive]

Hi, everyone. My name is Juan Enrique Pino. I'm the Credit Risk Manager for BCI, and I'm happy to be here once again to give you some more details about our loan portfolio.

As you can see in the chart, which is up, our loan portfolio is pretty well diversified by line of business and economic sectors. You can see that 47.7% corresponds to wholesale banking, 39.5% to personal banking and 11.1% to small and medium enterprises, while the finance division account to 1.7% of the total portfolio.

As you can see in the upper right chart, our commercial loan portfolio is also pretty well diversified. So here, we're talking about basically wholesale and SMEs. It should be noted that the direct exposure to entertainment, hotels, health and restaurants, combined, represents less than 5% of the commercial portfolio. In addition, around 80% of these loans are either collateralized or government guaranteed.

I would also like to mention that if you see the chart at the -- below right section, the exposure to the commerce loan book is pretty well diversified as well and distributed on sectors such as shopping malls, car dealers, wholesale and retail businesses. And in terms of portfolio concentration, the top 20 largest customers account to less than 10% of the total wholesale loan portfolio.

Let's go to the next one. Okay. Here, you can see that as part of our long-term strategy with our customers, we're doing everything in our power to provide them with the necessary financial support. So as a result, you can see in the upper charts that much of the flexibility to customers was provided back in April, both to mortgage borrowers as well as consumer borrowers. You may remember that we -- nearly half of the mortgage portfolio was granted deferrals.

And in terms of the consumer banking, less than 10% of customers, but all which requested, was provided either restructures or deferrals with grace periods ranging from 3 to 6 months.

So everything that was -- and we're missing here what we did also with commercial, with the wholesale and SMEs, which was done basically in May. So most of the effort was fully completed between April and May. And as a result, in the below left chart, you can now see the first installments that became due as part of those restructures that were performed in April and May. And it's clear that much of that is happening in November, with wholesale and SMEs representing the blue and red sections of the bar, and that's basically everything related to the FOGAPE COVID-19 government support program. And the red -- the dark red section is -- or what relates to the mortgage loan portfolio.

So November is a key month for us. And of course, we have been tracking the performance of our customers with other means in order to predict how is it that they're going to be performing.

Let's go to the next one. Okay. So as you can see, we have increased the performing loans as a percentage of total loans. We believe this decrease -- this improvement is mainly related to 2 factors. One is the 10% withdrawal of the pension funds that much of consumers were allowed to take out of their funds as well as the recovery in the economy. Therefore, one could be understood as a one-timer, and the second one is something that we hope will come and stay.

Regarding financial services, the affiliate that provides financing to Walmart customers, and after picking up the nonperforming loans ratio at 6% -- 5.6%, the scenario has evolved positively, and the reasons are exactly the same ones that explained the improvement in the banking -- in the consumer banking NPL ratio, which is as well the 10% withdrawal of the pension funds and the recovery of the economy. We have estimated that about 1/3 of the funds that came from the 10% of the pension funds was used by customers to pay off their debts.

Let's go to the next one, please. Here, we're showing the NPL ratio at a bank level in Chile and then opened by the commercial loans, consumer loans and mortgage loans. As you can see in the chart below, the NPLs have remained relatively stable as of September 2020.

If we go to the commercial segment, NPLs are at 1.94% in the local market. Although in terms of ratio, that seems to be a decrease relative to the same period one year -- in 2019. We should also consider that there's a denominator effect because the commercial loans have increased materially since -- basically around 10% since last year, as José Luis just mentioned.

And as to the consumer segment, the NPL ratio reached 2.81% in the third quarter. In this case, it represents an increase relative to the same period of last year, and that's basically an effect of the drop in demand for consumer loans coming from our customers. So it's, again, basically driven by a denominator effect.

So let's go to the next one, please. So as you can see, given all the support that has been provided to customers, mortgage borrowers, consumer borrowers and wholesale borrowers basically through the FOGAPE COVID facilities, the performance of the loans have been pretty much mitigated, in addition to all the government measures that have been supporting these customers. So as a result, we have been getting prepared and building incremental reserves on a voluntary basis, and this is what is shown in the chart.

This adds up as of September of 2020 to around $150 million, and the plan is to continue months after months, taking a view as to whether voluntary reserves or provisions are needed. But we believe, in the next months, it will be time to start recognizing in our internal models the effect of the portfolios as we start seeing the performance of the payments.

So the bank recorded $58.5 million of additional provisions in the last quarter, with more than $100 million in 2020, $53 million in commercial loans, $3.5 million in consumer loans and $46.6 million in mortgage ones.

The provisions have been distributed based on the portfolio sensitivities and seeks to cover the projected impairments, which to date have not materialized in our models due to the multiple assistance to customers that we just mentioned.

Now that has allowed the bank to increase its coverage ratio from 131.43% in the third quarter of 2019 to 178% in third quarter of 2020. Furthermore, it should be noted that in September, the bank recorded more than $46.8 million in provisions associated to the deductible of the FOGAPE COVID loans.

So now let's go back to José Luis Ibaibarriaga to continue with the presentation.

[José Ibaibarriaga Martínez, executive]

Thank you, Juan Enrique. Now we will continue with the financial results of the local operations. This quarter, lower operating income is a result of several factors: low inflation figures; a significant drop in loans and fee in the retail segment; as well as higher risk expenses due to the recording of additional provisions and deductible of the FOGAPE loans, as Juan Enrique recently explained.

One -- on the positive side, we have an improvement in operating expenses, although not enough to offset the aforementioned effects resulting in a 47% contraction of our net income.

In the domestic market, net interest margin decreased 50 basis points mainly due to the lower inflation and higher growth of the commercial loan book segment, with lower spreads as much, such as the FOGAPE COVID program. The construction on the retail business also pushed down this ratio.

On the other hand, net fees decreased 17% year-over-year. This significant decrease is mainly explained by a decline in fee incomes, which, in turn, was mainly triggered by a drop in the retail business, both at BCI and financial services.

What has been challenging here, one of the bank's key priorities is to keep expenses controlled. As a matter of fact, this quarter, OpEx decreased by 2.5% after an improvement of expenses management and savings related to all investment in the digital transformation that we have done in the past.

This efficiency ratio reached 47.6% in third quarter 2020 and 45.6% on a year-to-date basis. This is an important of more than -- improvement of more than 200 basis points in one year, reaffirming our commitment to our corporate efficiency plan.

As we have stated in previous calls, today, more than ever, it has become clear to our effort focused on our digital transformation process has allowed us to respond quickly and simple to our clients' needs. As you can see in this slide, some examples are we have recently released new web functionality where SMEs customers can buy and sell online the Chinese yuan renminbi currency. With this incorporation, we have 13 currencies available online, so that our clients can have access to self-service and operate digital with us, reducing the operational burden.

This year, we have also seen historical car insurance and demand deposit figures. As an example of this, demand deposit online transactions reached 97% of the bank's operations, while mutual funds accounted for 59%.

We are also proud to state that we have recently been recognized as the best digital bank at national and Latin American level. This important worldwide recognition has a special focus on addressing how the pandemic has accelerated digital transformation.

MACH continue to have great traction, with more than 2.6 accounts -- million accounts and new functions launched, with over 1.8 million activated Visa prepaid cards. We also like to mention that more than 100,000 e-commerce, physical payments and e-app services already accept MACH. This outstanding growth is the result of great user satisfaction with a 76.2% Net Promoter Score, as you can see in this slide.

BCI has maintained high liquidity indicators. Different strategies has allowed us to successfully keep the flow of liquidity constant to the different business areas, local subsidiaries and in the bank, in general. The bank total deposit in Chile increased 12.7% year-over-year, with noninterest-bearing deposits growing 56% year-over-year, marked by the 10% withdrawal of pension funds.

The aforementioned, combined with high liquidity in the market and the issuance of subordinated bonds, has helped to increase the bank liquidity coverage ratio, the LCR, reach 274%, well above regulatory limits.

I would also like to address the bank's capital positions, and we are addressing the crisis with sound capital ratios and a solid capital base. Tier 1 ratio reached 9.8%, slightly below last year's ratio of 9.9%, mainly explained by the higher volume of assets, in line with our strong commitment to support programs of our clients, both in Chile and in the United States. Likewise, we maintain our commitment to have a ratio around 10% in the near term, as we mentioned in our last call.

As for the new banking law, as of October 2020, the Financial Market Commission has already published 15 standards in consultation with Basel III, of which 4 correspond to final regulation. The 15 standard specifically referred to a better capital composition, definition of additional buffers and methodologies to calculating credit, market and operational risk-weighted assets as well as guidelines on the self-evaluation and supervisory process for additional capital requirement. Indicated in Pilot 2 and disclosed in Pilot 3 information to the public.

Now I will leave you with José Marina, City National Bank's CFO; and Hugo Loynaz, the bank's Chief Credit Officer of City National Bank. Thank you very much.

[Jose Marina;CFO of CNB, executive]

Good morning, everyone. My name is Jose Marina, and I'm City National Bank's Chief Financial Officer. Hugo and I are pleased to join José Luis, Andrés, Sergio and the rest of the BCI team on this call.

City National Bank has made a significant positive impact on our clients and communities over the past 8 months, as I believe you will see during our discussion today. Given our collective for new focus, we will be addressing 4 themes during today's call. First, we will touch on the third quarter results and the impact of COVID-19 on those results in terms of provisions as well as loan and deposit fluctuations. You will see that we have been a significant participant in both the Paycheck Protection Program and, most recently, the Main Street Lending Program.

Second, we will spend some time reinforcing our strong liquidity, capital and asset quality positions as we embark into this period of increased uncertainty.

Next, we will demonstrate how we have assisted our clients during these challenging times, while successfully operating the bank remotely. We will also discuss loan segments directly impacted by the COVID-19 pandemic and provide you relevant details on the segments that are most impacted.

Finally, we will conclude by discussing our current strategic directives.

With that said, let's give you an overview of our robust and comprehensive response to COVID-19. Regarding operational resilience, we started executing our back-to-the-office plan on October 19 after successfully operating the bank remotely since mid-March without any disruption whatsoever. 1/3 of our employees are now rotating through the office weekly, and we have implemented strict protocols to ensure their safety. Until then, our 9,000 plus PPP loans and our Main Street Lending participation was all processed 100% remotely, serving as a testament to our operational resilience.

From a customer standpoint, our banking centers all remain open, with the appropriate safe protocols in place. We also implemented deferral programs for both commercial and consumer loans that we will discuss later in the presentation. And we have also provided extraordinary support through the Paycheck Protection Program and the Main Street Lending Program, as you will see.

Finally, the health and well-being of our employees and their families is also our top concern. To that end, we have enhanced our employee health benefits to include COVID-19 testing for all employees and their families. We are also persistently communicating with all of our employees as they work remotely and designed our back-to-the-office plan to ensure employee safety by implementing social distancing protocols, providing proximity bracelets to ensure social distancing, among other measures.

Moving to our financial results, we first want to briefly update you on our balance sheet fluctuations in the third quarter. Our gross loans declined by $174 million, with PPP loans increasing by $27 million to $1.85 billion.

As you will see in a couple of slides, most of our efforts in the third quarter were dedicated in supporting our clients through the Main Street Lending Program, which does not significantly affect outstanding balances given the bank -- given that the bank only retains 5% of the loans.

Our client deposits continued strong growth trends with a $410 million increase in the quarter, led by a $257 million increase in noninterest-bearing DDAs. Year-over-year, we have increased our client deposits by $2.2 billion, including a $1.3 billion or 37% growth in noninterest-bearing DDAs.

The next slide, you can see that loans, excluding PPP, declined by $262 million in the quarter, given our focus on Main Street, while our broker deposits are at minimal levels given our strong client deposit growth.

Here, you can see our PPP loan production by size and distribution between clients and prospects. 64% of the units generated covering 58% of the balances are for new clients that did not previously have a relationship with the bank. These customers turned to us when their previous banks could not provide the needed PPP loans in a timely manner. We are committed to helping our community and provided PPP loans for a significant amount of new clients. We are currently focused on cross-selling banking services to these new clients and converting these transactions to long-term customer relationships.

The $1.8 billion of PPP loan production generated $56 million of fees that will be realized over the next couple of years. It is important to note the outsized impact we had in our communities. Although City National Bank has 1.9% deposit market share in the state of Florida, we provided 6% of all PPP loans to Florida-based businesses. Therefore, we generated 3x our fair share of PPP loans based on our deposit market share.

As you may be aware, City National Bank is leading the U.S. banking system in Main Street Lending Program participation. Through September 30, we generated 97 MSLP loans, representing 38% of all loans funded in the U.S. and 23% of all dollars funded.

Similar to PPP, 47% of the loan recipients are new City National Bank clients, and we are requiring a full banking relationship prior to approving the MSLP loan. We are also assessing a 1% origination fee on the full amount of the balance, resulting in 95% of the fee accelerating into income once our participation is sold to the Fed. This activity augmented net interest income by approximately $5 million in the third quarter.

On this slide, you can see the increasing trend of our deposit base over the past 5 quarters, while we have also been reducing broker deposits. Regarding the composition of our deposit base, you can see the increase in composition of our noninterest DDA, and that totaled 35% of total deposits versus 30% pre-pandemic. We also have been able to reduce our cost of funds over the last 5 quarters, including a 54 basis point reduction over the past 2 quarters.

This slide provides some further details on our investment portfolio and demonstrates that our portfolio is substantially comprised of highly liquid and safe mortgage-backed securities. 11% of our portfolio is in corporate bonds, consisting of some of the largest bank names in the U.S. The portfolio has substantial unrealized gains as of September 30, totaling about $59 million.

Please note that we have a very liquid balance sheet, with 23% of our assets in cash and investments, and that our total available liquidity sources totaled $7.3 billion when considering availability of Federal Home Loan Banks and the Federal Reserve Bank's discount window.

On this slide, we clearly demonstrate our strong excess capital position. Our Tier 1 leverage ratio of 10.35% provides us with a significant capital buffer, as you can see. We have $400 million of excess capital to reach a still solid 8% Tier 1 leverage ratio, which is still well above the 5% results indicated below capital lines. These cash flow buffers do not take into account our strong preprovision earnings capacity that serves as our primary capital buffer, which we will discuss later.

Now I'm going to pass it along to Hugo Loynaz, our Chief Credit Officer, who is going to discuss our asset quality and loan portfolio composition.

[Hugo Loynaz, executive]

Thanks, Jose. I'm very pleased to join all of you on this earnings call and discuss our credit profile with you.

This slide illustrates a significant decline in our loan deferrals since the peak in May. As of October 23, our deferrals are down to $435 million or 4% of our loan portfolio, which excludes the PPP loans. 86% of our first deferrals resumed regular payment status after 3 months of deferral. Upon expiration of the first deferral, only 14% are requesting a second deferral. There was also an uptick in nonaccruals this most recent quarter, which we will expand upon in the next slide.

On this slide, you can see that our nonaccrual loans increased from $58 million to $112 million in the third quarter. But as you can see in the orange part of the roll forward, one loan relationship accounted for $46 million of that increase. This loan relationship is comprised of both hotel and land exposures with aggregate appraised values totaling $149 million, resulting in aggregate loan to value of about 32%, so we are very well secured.

Although the hotel component of this relation is stressing the borrower's cash flow, we certainly do not expect any loss in this relationship given the abundance of collateral.

Regarding the nonaccrual loan breakdown, 74% of our nonaccruals are in residential loans, commercial loans and in hotel loans.

On this slide, you can see that 73% of our loan portfolio is real estate secured, and that the segment of our portfolio that is real estate secured is well diversified. Also of note is our conservative lending approach, which results in a low weighted average LTV for all real estate secured loans of only 53%.

On this next slide, you can see the composition of our current remaining loan deferments, which again totaled just $435 million, or 4% of our loan portfolio. $88 million of the $194 million of commercial loan deferments are in the hotel industry, so all other CRE sectors have very low levels of current deferments. The category with the highest percent of loans on deferment is currently residential mortgages with $190 million.

On that note, I'd like to discuss the loan segments most directly impacted by COVID-19. As you can see, about 22% of our loan portfolio is in segments directly impacted by COVID-19, with only 6.7% of these loans on deferral as of October 23. The 3 largest segments are CRE retail, hotel travel and restaurants. These 3 segments comprised 3/4 of our impacted loans, so we will discuss each segment over the next 3 slides.

We have $802 million of exposure in CRE retail, with half of the exposure in anchored shopping centers, things like -- the anchors would be something like a Publix or a Walmart. As you can see on the wheel on the top left of the slide, the overall weighted average LTV of this segment is extraordinarily low at just under 50%.

Most importantly, you can see that the vintages of the portfolio on the bottom right is more concentrated in production from 2014 and prior, with very little in production originated from 2018 to 2020. Therefore, this is a well-seasoned portfolio with a very low weighted average LTV. The vintage distribution of LTV metrics are optimal for minimizing any potential future losses.

Hotels is the next segment that we will discuss. You can see from the graph on the top left that 95% of our hotel exposure is real estate secured with an even lower weighted average LTV of 43%. On the lower right-hand side, you can see that the vintages of the real estate secured exposure is very well distributed over the past several years, with very little production over the last 3 years. Just like the retail segment, this vintage distribution and lower LTV is optimal again for minimizing any potential future losses.

The segment of the wheel on the top left that, that is in red, representing 5% of our hospitality exposure, consists of non-real estate secured exposure, which is primarily related to large time share companies with a longstanding record of success, all of which are performing.

We are monitoring the activities of all of our clients in the hospitality industry in order to provide them with the relief that is needed through the various programs, as we've mentioned, PPP, MSLP, and to keep abreast of developments in their business activities.

The final COVID-19 segment that we will discuss is the restaurant segment. As you can see in the wheel on the top left of the slide, about 24% of the exposure is real estate secured. That exposure is broken out in the chart on the bottom right of the slide. And as you can see, the vast majority of vintages originate again prior to 2016, resulting in a very well-seasoned portfolio with LTVs of about 48%.

The red segment of the wheel represents our national franchise exposure, that is 68% of our total restaurant-related loans. You can see the detailed exposure in the chart at the bottom left, with all the exposure to value. Quick service brands have performed very well during the economic downturns. In fact, all of those franchise loans are currently paying as agreed.

Our current restaurant deferral rate of only 2.5% indicates that our restaurant exposure is in the right concept for this economic downturn.

The yellow segment of the wheel represents restaurant exposure in our markets, with much of that exposure also consisting of names you may recognize in Florida. Like our national franchise exposure, we are staying in close contact with all of our restaurant exposure, actively monitoring their activities.

Now I'm going to pass it back to our CFO, José Marina, to discuss our loss provisioning and income statement impact for the third quarter. José?

[Jose Marina;CFO of CNB, executive]

Thanks, Hugo. This chart shows the activity in our ALLL in the third quarter. We continue to account for the impact of COVID-19 through our macroeconomic factors based on changes in GDP and the unemployment rate as well as other relevant qualitative factors. Risk weight migration was another significant contributor to our provision in the quarter, accounting for about $20 million, as we continue to proactively risk rate our loans as appropriate.

It is important to mention that as a wholly owned subsidiary of BCI, CECL is not applicable to City National Bank until 2023 as the results remain under the incurred loss model that preceded CECL. Regardless, City National Bank will continue to actively provision in future quarters, as the economic impact of COVID-19 continues to develop, and we continue to estimate that impact on our loans and lease portfolio.

I'd like to now briefly discuss our third quarter results. Our net income increased by $7.2 million or 29% quarter-over-quarter, despite our loan loss provision expense increasing by $9 million as compared to the second quarter. As you can see, net interest income and noninterest income increased quarter-over-quarter by $3.2 million and $5.6 million, respectively.

As you will see in a couple of slides, our PPP and Main Street participation contributed to our increase in net interest income. The increase in noninterest income is driven by mortgage banking activities and nonrecurring volume benefit of about $3 million.

The $3.4 million decline in personnel expense quarter-over-quarter is driven by our -- by over 50 existing positions that we eliminated between the months of June to September as part of our efficiency initiative, and we also made a $1 million of COVID-related donation in the third quarter that explains the $700,000 increase in other noninterest expenses compared to the prior quarter.

The increase in net interest income and noninterest income quarter-over-quarter, combined with the results of our efficiency initiatives and expenses, resulted in our core earnings increasing by $11.4 million or 7% -- or 17% over the linked quarter.

Notwithstanding our proactive loan loss provisioning, you can see that City National Bank's core earnings engine remains strong. Our core earnings, which represent earnings before loan loss provision, taxes, intangible amortization and other nonrecurring items, actually increased year-over-year by $15 million or 8%. You can also see that noninterest income is a significant contributor to our core earnings growth, having increased 14% year-over-year, despite no swap fee income since Q1.

Expanding further on net interest income, you can see that we've been able to increase our net interest income over the past 5 quarters, but most notably over the past 3 quarters. You can also see our PPP activity was a significant driver in our net interest income over the past 2 quarters, while our participation in the Main Street Lending Program generated nearly $5 million of additional net interest income as a result of the 1% origination fee that we are assessing on 100% of the loan balance, with 95% of those fees accelerating into income once we sell the participation interest to the Federal Reserve Bank. Both MSLP and PPP will enhance future earnings as a result of the 6,000-plus new clients that we have brought to the bank and are actively cross-selling.

We are also pleased to announce that the Executive National Bank acquisition was successfully closed on October 9. The transaction is contributing about $448 million of low-cost deposits and over $240 million of loans to City National Bank. The bank's Tier 1 leverage ratio will remain strong following the transaction at just under 10%, and we expect the transaction to provide over $5 million of income annually, inclusive of nearly $2 million of goodwill amortization annually. Core systems will be integrated on December 7, and we are currently preparing for that successful integration.

Finally, I'd like to close by briefly discussing our strategic priorities. First and foremost, maintaining our regulatory excellence is at the foundation of everything that we do.

Next, we are focused on active portfolio management, identifying challenges early on and monitoring those clients that are most impacted will be key. Our extraordinary PPP and MSLP accomplishments will only help this effort.

Third, we will continue to focus on providing clients and prospects additional relief through the Main Street Lending Program, building upon the already significant impact that we've made.

Fourth, we will continue to enhance our sales effectiveness processes as an organization. We have attracted nearly 2,000 key prospects to the bank via our PPP and MSLP efforts and have also created a lot of goodwill with existing customers by timely processing their PPP and Main Street Lending Program applications and securing them funding.

The definition of success by our participation in these programs will be determined by our ability to cross-sell these clients and make them lifetime City National Bank clients, greatly enhancing the bank's long-term value.

Next, we will successfully integrate Executive National Bank and cross-sell our newly acquired client base.

Finally, we will continue to manage our expenses. You will be seeing the results of these initiatives in the upcoming quarters.

In conclusion, I'd like to restate that we've entered this period of uncertainty from a position of strength. We have all the characteristics of a fortress balance sheet, ample liquidity, significant excess capital and a strong credit culture that results in strong asset quality.

We are currently focused on all the relevant objectives that will not only preserve City National Bank's value, but will enhance our value once we emerge from this period.

Our commitment to assisting our clients and the goodwill that we have created through our active and outsized participation in both PPP and the Main Street Lending Program will undoubtedly enable us to emerge from this period stronger and even more profitable institution.

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

[José Ibaibarriaga Martínez, executive]

Thank you, Jose and Hugo.

Now I will briefly discuss our main advances in the sustainability initiatives. We continue to carry out programs within our sustainability plan. This quarter, we continued to strengthen set initiatives within ESG framework. With the following concrete progress in terms of employee engagement, we are proud to say that, this quarter, the organization climate survey reached an historical 93% ratio. This indicator measures employee satisfaction, pride and recommendation, where BCI is positioned well above the international benchmarks and has shown consistent improvement over time.

Promotion of financial inclusion through MACH and programs, such as Evoluciona, with more than 10,000 SMEs contacted. Through our financial education initiative called Con Letra Grande, we have also focused on helping people make informed decisions about their finances, while reaching 1.5 million users of the blog this year. We are fully committed to become a 0 carbon footprint business. The bank has also added the international standard in the industry. Since recently, it is subsidiary BCI Asset Management, adhere to the United Nations Principles of Responsible Investment.

In summary, the bank continued to have a strong financial position to deal with this crisis. We have focus on key areas, developing special plans for our customers, employees and suppliers. For what is expected to be a challenging and complex year in terms of profit for the banking industry, our key focus of control has been risk management and expenses control. We have booked additional voluntary provisions in order to anticipate future risk and, thus, have a conservative financial statements, which allowed us to address potential scenarios that may not currently be covered by our risk models.

That said, in terms of financial results, we believe, in the fourth quarter, we will faced the toughest month of the year. Despite of this, we have maintained a vision of preserving long-term relationship with all of our stakeholders, supporting them in order to be part of the solution of this crisis. I am really proud to say that in all these scenarios, we have managed to become stronger. And right now, it will not be different.

Thank you very much for participating in this presentation. If you have any questions, we will be more than glad to answer them.

[Daer Labarta, analyst]

Tito Labarta.

[Andrés Atala S., executive]

Tito, go ahead.

[Daer Labarta, analyst]

A couple of questions. Appreciate all the information here. Just on -- first on the loan growth, right? I think the loan growth has -- remains a little bit elevated given, I guess, the FOGAPE loans in Chile and maybe the PPP and MSLP in the U.S. How do you think that continues, I guess, for the rest of the year? When do these sort of government-supported loans go away? And what should that mean for loan growth, both in Chile and the U.S. for 2021?

And then second question, just to understand a little bit in your provisioning. And you just mentioned, right, that you expect 4Q to be the toughest month of the year. Does that mean you expect to see additional provisions in 4Q? When do you think you'll be done?

I understand it's probably limited visibility at this point, but just to get a sense of sort of your cost of risk, how that should evolve. And then once maybe any additional provisions are done, when do you think your cost of risk normalizes after this?

[José Ibaibarriaga Martínez, executive]

Yes. Okay, Tito, thank you for your question. Regarding the first one, Jose, can you explain a little bit when the PPP and MSLP program will be phased? And then I will talk about Chile.

[Jose Marina;CFO of CNB, executive]

Of course, José Luis. So what we're looking at, obviously, we have $1.850 billion in PPP loans. We're starting the forgiveness process now, and we expect to have a modest amount of those loans forgiven in 2020. But if we look ahead to 2021, most of that forgiveness is going to take place in 2021.

So despite the fact that we think we're going to have a reasonable amount of organic loan growth, our loan portfolio will -- we expect our loan portfolio to shrink overall in '21 given the impact of the PPP loan forgiveness that will be more weighted towards '21. So a modest amount of organic growth in '21, with net overall decline given the impact of the forgiveness.

[Daer Labarta, analyst]

Okay. And just you said $1.85 billion in PPP loans, so we should basically remove that?

[Jose Marina;CFO of CNB, executive]

Right. So we have $1.850 billion in PPP loans. We're expecting somewhere around 85%, 90% forgiveness overall. A small part of that will take place here in the fourth quarter that just recently started, where we've just gotten a handful of loans forgiven. So over the next 1.5 months or so, we'll continue to have some forgiveness. But we expect most of that to fall into the year '21. And probably, I think, around 85%, 90% overall forgiveness is what we're expecting.

[Daer Labarta, analyst]

Okay. Great. And then maybe just one follow-up on that. What would be a reasonable organic loan growth, excluding that?

[Jose Marina;CFO of CNB, executive]

I would say in the mid-single-digit range, 5%, 4% to 6% in that range, mid-single digits. I think there's reasonable loan demand here in the market. Florida is more open than most states, and I think we'll be able to achieve that.

[José Ibaibarriaga Martínez, executive]

Yes. Thank you, Jose. Felipe, can you talk a little bit how we see the loan growth for the next month and next year, please?

[Felipe Ruiz Saldivia, executive]

Okay, okay. Thank you, Tito, for your question. I will address it by talking about the Chile economy in 2021 and what we expect about the loans growth in the total system banking in Chile.

In order to economic relations and economic growth expected in 2021, we expect a 4% GDP growth next year, slightly below the IMF numbers. And according to this, we expect the total banking system loan will grow about 4% or 5% in 2021.

We have some scenarios, a negative scenario and a positive scenario, but we expect a total system growth loan about 2.5% to 5.5% in the best for the total loan system. So I expect -- we expect that the economy will gradually be recovering, but we'll face some challenge, and it will depend on sanitary condition and some lockdowns in coming quarters. So we believe that total system loan growth, about 4% or 5%, is correlated with the economic growth that we are projecting.

[Daer Labarta, analyst]

And would BCI grow at a similar pace as the system? Or let's say some [indiscernible] with BCI?

[José Ibaibarriaga Martínez, executive]

The idea, Tito, is that we will grow according to the system. Our main priority on the bank is to increase the return on equity. So we are looking to be competitive, but we are not looking to increase our market share significantly. So we will grow according to the system.

Regarding your second question about risk…

[Daer Labarta, analyst]

Sorry, if we go to provision, just as a follow-up there on the loan growth. And I guess, similar to -- in the U.S., is that 2.5% to 5.5% loan growth, would that be on top of the FOGAPE loans? Or do these FOGAPE loans get repaid next year and so you have loans declining of that [indiscernible]?

[José Ibaibarriaga Martínez, executive]

We-- okay, we believe that next year, we will have some part of the FOGAPE loans be paid, around 20% to 25% depending on some -- depending in the period we give the loan. But on top of that, on average, we believe that we are going to go roughly in the loan growth.

But what you have to take in consideration is that as we decrease during this year in the consumer loan, we are going to -- even though we're estimated to have a growth, the average is going to be less than this year in the consumer side. In mortgages, we still believe that we have some momentum there in the industry as a whole, so it will continue growing. This year, it grew around 10%. It will continue growing with good pace a little bit less than this year, but good pace.

And in the consumer side -- in the commercial side, we have a big growth this year, both for trying to it pay liquidity, and the second one was in the FOGAPE COVID program. So the next year will be lower growth relative to 2020. But still, as we believe that the economy will recover, we will see a pace, as Felipe mentioned. That is basically what we are thinking.

[Daer Labarta, analyst]

So just to make sure I understood. So roughly 20% to 25% of FOGAPE loans get repaid. And then excluding that, organically grow between 2.5% to 5.5%, in line with the system. Correct?

[José Ibaibarriaga Martínez, executive]

Yes, yes. Regarding your question about provisions in the last quarter, in this quarter, we will start to see the payment of all the credit that was deferred, like the mortgages, consumers and part of the FOGAPE loans started to be due on November and December. So the reality of the portfolio will be seen in this couple of months. That is why we are estimating that the next couple of months will be the time that we will see how the customers are behaving and paying their debt.

Our estimation is that we are starting to see a recovery in the economy, as the Finance Minister explained a couple of days ago, according to the figures of September. But still, we have a long way to go.

The COVID issue is not there. You have seen that in Europe, there has been some issues in Spain, England and Germany. So the second wave, it could happen, could not. We don't know if the vaccine is going to be ready or the treatment is going to be ready as soon as we finish our summer when the second wave could come.

So what we are doing, Tito, is to have a very conservative approach regarding provisions and regarding our financial statement. We are creating as much provisions as our -- as we can in order to be prepared for that worse scenario. And that is why we have created -- if you take in consideration the voluntary provisions that we have made in City National Bank that, according to the explanation that you already saw from Hugo and Jose, has been a great year.

But still, if you add the provisions there, plus the provisions that we have done here in Chile, we have more than $200 million in provisions -- voluntary provision. Why? Because we want to be really prepared to the worst-case scenario as soon as it arrives. And when we are going to see that scenario? Well, we will start to see it in November and December and January of this -- this year and next year when customers will have to start paying their debt. That is why was the comment that we did before. I don't know if that answers your question or you want to go in even more detail.

[Daer Labarta, analyst]

Sure. I guess just to follow up. So when you say the toughest month, I guess, that means in terms of asset quality and NPLs going up, not necessarily in terms of your provisions going up. Is that the right way to think about it? So like, we can see NPLs going up, but provisioning coming down.

[José Ibaibarriaga Martínez, executive]

We will see the NPLs going up, I think so. How much? We really don't know how much, Tito, as the risk model do not have a situation like the one that we are living today, where the whole world is being freeze for a while, and we have started to recover.

So I think that we will have much more information to give you as soon as we close December because we will have 2 months of -- where we will see the behavior of our customers.

[Daer Labarta, analyst]

Okay. And do you think you can be done with provisioning in the fourth quarter? Well, I know you don't have to say it, but just your best guess at this point given what you think.

[José Ibaibarriaga Martínez, executive]

My best guess is the following. We have been doing really good in generating growth. We have been growing close to 10% year-over-year. That has been fantastic. We have been able to control costs year-over-year, and the main issue is going to be what is the risk of our portfolio.

In order to be prepared for that, we are being very conservative, very conservative, and we will continue to be conservative until we really understand what is the real risk. And we want -- we are taking a very critical -- not critical, a very conservative scenario to be prepared for the worst. And then if the situation is better, we will be very prepared for the future.

That is my answer. I can't give you a specific answer because we are in the middle of this situation. We're -- it's not finished yet, and we believe that is not going to be finished until we have a team that can be used in a massive way in Chile, and that is going to take some time because it's not ready in any part of the world yet at -- in a massive way.

[Andrés Atala S., executive]

Okay. We have time for another question. It's Piedad Alessandri from CrediCorp.

[Piedad Cuevas, analyst]

I wanted to ask that you mentioned earlier that about 1/3 of the total withdrawals from the pension systems went to debt payments. That's of the total system. And how do you believe the clients will behave with the new withdrawal? And then I'm going to ask another question.

[José Ibaibarriaga Martínez, executive]

Yes, I don't know if the new withdrawal will be approved or not so, it's difficult to comment. What we can comment is that the 10% that was approved, basically, the amount of money that went to save was around 25% and that is one of the reasons why the deposits increased. 25% went to pay that debt, and that is why you see a significant improvement in [indiscernible] and a significant improvement in the retail business. And 50% of that money went to consumer, and that's why you saw an improvement in the GDP of the country not decreasing as it was expected by the economy -- economist.

So for the second one, I can't tell you because I don't know how it's going to be approved and if it will be approved.

[Piedad Cuevas, analyst]

Okay. And the next question I wanted to ask is, we saw some peers moving provisions from additional provisions to regular provisions during the quarter. Do you expect BCI to do some similar movement? And if you could give us a time line of when, down the road, do you believe this movement from additional provisions to regular provisions can be expected.

[José Ibaibarriaga Martínez, executive]

Okay. Thank you, Pia. The answer to your question, Pia, is that the additional provisions that we are creating, both in City National Bank and BCI, are basically to be prepared to have the regular provisions. So as soon as we start seeing a deterioration of our loan portfolio, we will use these voluntary provisions, as you saw in our peers the last couple of months.

We have not been -- we have not seen a deterioration of our portfolio that needs to make that reverse today. But obviously, in some point of time, we will do it. This is the reason why we did it, so that -- it's for this deterioration. As soon the deterioration arise, we will use it.

[Piedad Cuevas, analyst]

Okay. And that's over the high or further provision you will do down the road.

[José Ibaibarriaga Martínez, executive]

I do not know if I understood your question, Pia.

[Piedad Cuevas, analyst]

This movement from additional to regular provisions will be done automatically, not considering if you are increasing provisions down the road.

[José Ibaibarriaga Martínez, executive]

I think I'm not understanding the question.

[Unknown Executive]

So Piedad, It's not going to be automatic. I mean, as soon as we start seeing the evolution of the different portfolios, housing loans, consumer loans and commercial loans, we're going to be -- that -- that's going to be reflected in the specific provisions.

Now whether we're going to be transferring 100% of that out from the voluntary provisions or not is a decision yet to be taken, and that has to take into account how do we see the economy going forward and what's the risk of second wave of the pandemic and shutdown.

So we are not in a position to let you know that we are going to do a one-for-one dollar in terms of transferring money from the voluntary provisions back into specific provisions, that was your question. But we do believe that, that's going to start happening anyway during the last quarter of this year.

[Andrés Atala S., executive]

Okay. Thank you, everybody. We still have questions. We have the next one from Marlon Medina from JPMorgan.

[Marlon Robles, analyst]

I just wanted to know if you can provide a brief update on the insurance deal that was being discussed in Congress and if you have any estimates on -- of any impact for BCI.

[José Ibaibarriaga Martínez, executive]

Thank you, Marlon. I understand that the question comes from the discussion of the new bill associated with the cost of insurance, and this will be assumed between the financial institute and the consumers. That is your question.

[Marlon Robles, analyst]

Yes, that's my question.

[José Ibaibarriaga Martínez, executive]

Okay. This was approved by the Lower House a couple of weeks ago. And now it's in discussion in the Senate. Regarding this, we are delivering our technical argument to demonstrate that this type of measures ultimately end up affecting the cost of loans and, therefore, also the bancarization.

This has been set by the government. They are regulatory authorities, and we strongly believe that anything that affects the bancarization is not good for the country.

[Andrés Atala S., executive]

We have -- the last one is from Daniel Mora, also from CrediCorp.

[Daniel Mora, analyst]

I have 5 questions regarding the comment that fourth quarter will be the toughest of the year, and I want to have this one very clear. You already said that we are going to observe the expiration of most of the benefits during this quarter, but this is going to translate in higher provisions.

What will be the drivers in this quarter because with the higher inflation, we could expect that the net interest income should improve. And with the reopening of the economy, the net fees should also improve. So what will be the drivers to think that the fourth quarter will be the toughest of the year?

[José Ibaibarriaga Martínez, executive]

Daniel, we believe it's going to be tough. Even though we have a high inflation that is 0.6%, that will help because we believe that the period of time where customers do not have to pay anything is extending, unless the government agree to have another package that we have not seen yet.

So the reality of that situation is going to arrive. And when we said that it's going to be tough, it's because we are thinking in a very toughest scenario that could not present. But what we are trying to do at BCI is trying to take a conservative approach from a provisional point of view and a very -- that is why we believe that November and December is going to be tough from a provisional point of view compared -- and have a really conservative financial statement for the future.

We have talked several times this thing of the way that BCI think and act in the business, and almost all the decisions that we take is long-term decisions. And in order to do that, we want to have a solid financial statement. We have a lot of liquidity, as you saw. We have strong capital ratios, as you saw. And from a risk point of view, we want to have a conservative approach.

It's not that we have seen that deterioration. You saw the numbers in BCI. You saw the numbers in City National Bank. We have not seen a deterioration.

Having said that, the crude prices have not gone. We have unemployment of around, you name it, if you put everything on it or not, but it's between 15% to 25%, if you take in consideration people that are not looking for a job or people that is under the protection of some programs of the government. So -- but it's a 25% unemployment rate.

A decrease of the GDP of 6%, 5.5%, so it's a tough situation. And the -- our customers has been helped by BCI with special programs, like mortgages, by consumer and by BCI through some programs of the government has been the FOGAPE program.

So the reality of payment is going to arrive now, and we want to have a conservative approach. It's not that we have seen anything special. But if we want to be a solid player in the future, as we will be, and continue growing and be in the market for a couple of years, we want to have a conservative balance sheet from risk management, from liquidity, from a solid capital position.

That is why, Daniel, we are saying this thing. We are not -- if your question is how we are visioning something special. No, it's just that we want to be really strong in the future to continue growing in Chile and in Florida.

[Daniel Mora, analyst]

Perfect. So the continuing approach will translate in additional provisions to respond to the reality of payment.

[José Ibaibarriaga Martínez, executive]

On regulatory provisions.

[Andrés Atala S., executive]

Okay. We don't have any more questions. And of course, thank you for participating in this conference call. As usual, the Investor Relations team is -- will be available to answer any further questions. So thank you very much. Take care of yourselves, and see you on the next one. Thank you. Bye.

[Unknown Executive]

Thank you. Bye-bye.