Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2021-Q3

[Andrés Atala S., executive]

Okay. Good morning, and welcome to our third quarter 2021 Conference Call. My name is Andres Atala, Head of Investor Relations team. And I really hope that you and your families are doing well and staying safe during this period.

Today, I'm joined by Jose Luis Ibaibarriaga, Bci's CFO; Mr. Juan Enrique Pino, Head of Credit Risk Management of Bci; Mr. Jose Marina, CNB's CFO; and Mr. Sergio Lehmann, our Chief Economist.

[Operator Instructions]. As usual, this presentation will cover the main aspects of the bank for the third quarter, broken down into the topics shown here. Now I will leave you with our Corporate Chief Economist, Mr. Sergio Lehmann, who will take you through our main macroeconomic figures.

[Sergio Lehmann, executive]

Thank you, Andres, and good morning, everyone. During the third quarter, the global economy continued to improve in spite of resurgence in COVID-19 cases and the spread of the delta variant around the world. The U.S. and Chinese economies are showing a good performance, though with some moderation lately compared to the last report. Global economic expectations have not changed significantly in the last few months. The IMF estimates 5.9% global GDP growth in 2021, mainly driven by developed countries.

The vaccination process, fewer mobility restrictions and the economic stimulus are key reasons to expect better figures ahead, but economic recovery is going to be different among countries and sectors due to unequal sanitary and financial conditions. Inflation has continued to accelerate worldwide due to the demand and supply shocks. On the demand side, government economic transfers to households are pressure in goods and services prices. While on the supply side, COVID-19 restructuring, higher commodity prices compared to the low base a year ago and greater transportation cost are pushing prices up.

Please move to the next slide. The U.S. economic figures continue to recover in the third quarter, although the latest data shows to be a bit of restraint. So the IMF has downgraded its GDP estimation for this year to 6% GDP. According to official figures, Florida GDP had a better performance than the U.S. aggregate in the first half of this year.

At the national level, the unemployment rate dropped to 5.8% in September, still above pre-pandemic levels. And the level of people employed is below March 2019 levels. Jobs in Florida are rising accordingly, and the state unemployment rate dropped to 5% in August 2021.

The national CPI rose to 5.4% year-on-year in September, the highest level in nearly 13 years. Services, energy and good prices surged sharply. In spite of this, the Federal Reserve has reaffirmed its monitor policy, saying price pressure are transitory, but it will start the tapering of asset purchases during November.

Please move to the next slide. Chile's economy recovery improved once again in third quarter '21, thanks to the fast vaccination process, government aid and fewer mobility restrictions. The fiscal stimulus is going to have impacts until the end of the year, especially in the retail and services sector. Political uncertainty is still high and will remain significant until having more clarity about the next government definitions. Bci Research estimates 10.8% GDP growth in Chile in 2021, and 1.4% next year.

Please move to the next slide. The recovery of payroll employment has improved in the last 3 months, but advanced indicators show this trend is now going to continue. The unemployment rate dropped from 13.1% in July 2020 to 8.5% in August 2021, still above pre-pandemic levels. But despite the increase in the labor for participation rate, which has been rising due to almost 0 mobility restriction right now. In Chile, CPI was 5.4% year-on-year in September, mainly driven by energy and durable good prices. On a year-on-year basis, inflation will go up to 6% in the coming months, reaching a high in the first part of 2022. And we'll return to the Central Bank target just in 2023.

The Central Bank of Chile has accelerated the monetary process started in July, and the monetary policy rate is expected to be at 3.5%. It's [indiscernible] estimation level by the end of this year, and we will estimate we'll reach 4.5% in the first half of [ 2022 ]. In the last month, the Chilean pesos has continued to depreciate against the U.S. dollar despite the increase in the copper price, which is at high 6-month levels.

Th factors explaining this trend are mainly domestic if recognized a structural adjustment related to higher public debt over GDP in the coming years, a reduction in potential growth and negative effects related to partial pension withdrawals. In addition, we have served impacts associated with the current political uncertainty, which consider the coming presidential election and the constitutional process.

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call. We will now go over Bci's main third quarter highlights. As one of our key priorities, we continue to place a special focus on our efficiency plan, keeping expenses under control. City National Bank of Florida celebrated it's 75 anniversary this year with important milestones reaching $20 billion in assets, more than 900 employees, on 31 banking location stretching from Miami-Dade County to Orlando.

City National Bank is 1 of the top 100 banking institutions in the United States, in addition to being one of the largest community banks in the nation. The bank maintained a strong financial position. Bci's soundness is once again reflected in our liquidity and capital ratios, which are both well above regulatory limits. The bank's liquidity coverage ratio, LCR, is still over 200%. The local LCR, including subsidiaries, was 246%, while consolidated noninterest-bearing deposits continued to grow strongly at a rate of 34.5% year-over-year. And particularly, City National Bank of Florida grew more than $2 billion in noninterest-bearing deposits over a year.

In terms of consolidated financial results, here are some third quarter highlights. Our operating revenues increased 11.55% year-over-year on a year-to-date basis due to the sound results both in Bci's local operations and City National Bank of Florida. Regular provisions has decreased as a result of resilient customer behavior, which reflects the unusual additional liquidity support received by our clients and improvements in the payment process. We have also recorded nearly $145 million of additionally voluntary provisions this year, raising a coverage ratio to over 260%.

Please move to the next slide. Today, Bci is the largest financial institution in Chile by assets with nearly $80 billion. We have been consolidated our presence as the largest bank in Chile in assets. We have successfully diversified our operations by adding new business lines and also by expanding geographically, where City National Bank of Florida plus our branch in Miami account for almost 28% of the banks total portfolio and 35% of our net income.

Likewise, we received all the regulatory approvals needed to establish Banco Wiese, Peru. Bci will open the doors of its subsidiaries, Banco Wiese, Peru in the first quarter 2022 and thus continue to strengthen its internationalization strategy. I would also like to mention that last October, Fitch rating affirmed Bci's international credit rating at A- with a stable outlook, placing a special focus on our international strategy.

Please move to the next slide. Regarding our digital strategy, MACH aimed to be the largest digital bank in Chile. In line with this ambition, we successfully implemented Mambu last quarter, a state-of-the-art core banking system that will enable MACH to focus on developing financial product quickly. We are working to deliver simple products that satisfy the financial needs of our users, such as saving; and buy now, pay later.

This quarter, MACH has continued to record sound growth with more than 3.1 million registered users, up nearly 23% year-over-year and 2.5 million active cards. In terms of experience, our consumers continue to rate us as delivering an outstanding user experience and a high-quality services, which is reflected in our 75% NPS. Additionally, one of our key sources of monetization remained strong with more than 23 million noninterest-bearing deposits. In terms of transactions growth, both digital card payment and physical payments are up year-over-year by 110% and nearly 360%, respectively, which is a clear reflection of how well our customers perceive our value proposition. And finally, in our merchant strategy, more than 100,000 businesses are currently using MACH pay.

Please move to the next slide. To enhance our user experience, this quarter we continue strengthening our alliance with companies with various industries to provide our customers with useful benefits that they can access through their MACH app. Today, we have connected with more than 90 businesses for delivering multiple business benefits to our users.

Now let's take a look at bank's performance for this quarter. Let's go to the main figures of our consolidated operations. The bank posted a consolidated net income of $144 million in the third quarter, which was a significantly 81.6% increase year-over-year. The bank has good results in terms of its operating revenues, growing 11.5%. The main effect we saw this quarter were an 8.4% decrease in net interest income, despite higher inflation and lower funding costs. The NIM dropped after the redistribution of fair value accounting hedge made in August. This was a onetime effect in order to better reflect hedging strategies.

However, this conservative approach in treasury has made it possible to maintain the bank's equity in this scenario of raising rates. This effect was offset in the financial operation income line. So it did not have an impact on the bank's bottom line.

Also this quarter, the bank has had a drop in risk expenses as a result of resilient customer behavior, which Juan Enrique will address later in this presentation. Finally, the bank's tax expenses increased significantly after the projected year-end. Exchange rate was raised to CLP 770 to the dollar, which increased the value of our City National Bank of Florida investment.

Regarding our balance sheet, as you can see in this slide, the bank's equity has increased $490 million, which reflects the conservative approach that the bank has taken to protect its capital in the current context. At the local level, the main line items following a similar trend to the consolidated results in terms of year-on-year changes, as shown here. To give you more detail on local operation, the next few slides further address the main financial indicators.

Regarding the local NIM. Compared to last year, the bank's NIM has remained relatively flat. However, this quarter, the ratio dropped 45 basis points compared to second quarter 2021, mainly explained by the effect of hedge accounting losses after the redistribution of fair value hedge accounting May this quarter in order to better reflect hedging strategy. The aforementioned did not have an impact on the bank's bottom line since it was offset in the financial operations. In addition, and despite higher inflation, consumer loans are still lagging with no sign of rebounding so far in 2021.

All of these effects have put some additional pressure on this ratio and mitigate the tailwinds associated with higher inflation and lower cost of [ pounds ]. Meanwhile, Bci's net fees increased by 21.2% year-over-year. This positive result was explained by both an increase in fee income and a drop in fee expenses. Regarding fee income, core services, which are the highest source of fee income increased to pre-pandemic levels. This was mainly driven by debit card-related fees, likely due to less restrictive health measures.

Furthermore, there was a significant increase in insurance brokerage fees. On the other hand, expenses from fees and services decreased, mainly driven by a lower cost of our operations, particularly credit cards. As we have discussed in our previous conference calls, one of the bank's key priority is to control experiences in order to reach our target efficiency and return on average equity in the medium term. In local operations, this year, OpEx has increased 2.4%, well below inflation. This quarter, 3.9% increase is mainly related to spending on our digital initiative in both Bci and MACH.

We have focused on efficiency in our day-to-day actions and more broadly in our technology and digitalization investment efforts. The bank ended third quarter 2021 with a local efficiency ratio of 43.8% for this quarter. From a return perspective, we saw a downturn in 2020 in terms of both return on average assets and return on average equity, yet we have already seen a significant uptick in both of these in the last 9 months.

As of September 30 consolidated return on average equity was 11.97%. These indicators reflect the improvement in earnings mentioned early, but they also incorporate the effect of greater equity due to strategies we have implemented to protect capital against market effects. Bci local loan portfolio amounts to $35.5 billion this quarter, an increase of 5.7% year-over-year. Commercial loans grew 3.9% year-over-year, mainly driven by corporate consumer -- customers and exchange rate depreciation of almost CLP 24 per dollar when compared year-over-year.

Meanwhile, mortgages loans maintained a sound 15.4% growth, although we expect a slowdown due to the rise in interest rates and commercial conditions. On the other hand, consumer loans contracted on a year-on-year basis, decreasing 5.5%. There was some degree of recovery this quarter. However, after the 12.4% decrease this last quarter. Over the last few years, we have strongly focused our effort on the liability side of the balance sheet: one, growing Bci's overall deposit base on making it sticker; two, further diversifying our funding sources; and three, enhancing our liquidity position.

We successfully achieved and surpassed our expectation within these priorities. Our deposit base in local operation grew 13.6% year-over-year. From a structural funding perspective, we have continued to engage with international investors and have so far this year issued more than $300 million in private placement to investors across the U.S., U.K., Japan and Taiwan, among others. And printed our first Formosa bond in Taiwan for $133 million.

Furthermore, in October, the bank issued a public bond in the American market for a total of $500 million with a 10-year term. And finally, from a structural liquidity perspective, the graph here in -- tell the story with a loan-to-deposit ratio of 134%, a liquidity coverage ratio of 246%. Meanwhile, in terms of capitalization, our BIS ratio was 13.18% as of third quarter 2021, well above the regulatory minimum of 8% and well above internal management targets.

With regards to Basel III implementation, so far, we have complied with 100% of the schedule associated with the delivery of new regulatory reports for credit, market and operational risk. Now -- I'm now going to pass this call to Juan Enrique Pino, who will discuss our asset quality and loan portfolio composition.

[Juan Enrique Visinteiner, executive]

Thank you, Jose Luis. Hello. My name is Juan Enrique Pino, I'm the Head of Credit Risk Management at Bci, and I'm very happy to be here with you once again in order to give you some highlights of our loan portfolio. As you can see in the slide, our local loan portfolio remains pretty well diversified by business lines, economic sectors and by concentration in individual customers. On the left side of the slide, we present, as usual, the local loan distribution among the different customer sectors.

And on the right side, we take a closer look at the commercial loan portfolio. As you can see, the sectors that have been more affected by the pandemic represent nearly 4% of our portfolio.

On this new slide, nonperforming loans have decreased to historical losses, as Jose Luis was mentioning before, accounting to only 1.28% of total loans in this quarter. This is mainly explained by the greater liquidity coming from the different support programs granted by Bci, but particularly by the government, such as the mortgage loan deferrals and the whole set of government initiatives.

As these support initiatives approach their end and individuals and companies start to return to the new normal, we believe it is reasonable to assume that our credit portfolio behavior should return back to pre-pandemia levels and eventually worse. As a result of that, we have been building voluntary provisions on portfolio, where portfolio specific provisions are linked to PBOs and NPLs. As under the current scenario, they may be understated. However, we do believe that some support initiatives have been so strong that they may have helped some customers to improve structurally and not only temporarily. So the net effect may be better than originally expected.

Let's go to the next slide, please. This one shows the commercial loan portfolio, which has shown this quarter signs of growth, mostly due to business expansion and to FX rate changes, as Jose Luis mentioned before.

This has more than offset the portfolio decrease, coming from scheduled payment amortizations of loans granted more than a year ago when the COVID crisis was hitting the economy hard. As to NPLs, we remain seen a very positive trajectory. Nevertheless, we have continued to build voluntary provisions in anticipation to what we believe should be the post-pandemia levels. As to the jump and drop in the NPL ratio line during this quarter, this was caused by one large corporate exposure, which was successfully restructured after facing difficulties in complying with the original payment scale.

Let's go to the next slide. Here, we're seeing the mortgage loan portfolio. The mortgage loan portfolio has maintained its resilience to the current scenario with NPL ratio still performing significantly before pre-pandemic levels. As to the slight increase in the NPL ratio curve during this past quarter, this is explained by the fact that the 12-months grace period on the interest-free loan granted by Bci last year to the first 6 months of dividends ended this last quarter.

So a small percentage of obligors that asked for that deferral have been challenged to service both the dividend on the principal loan plus the dividend on the deferral program loan. Different solutions are being considered to help borrowers to go back to the normal payment schedule based on the reality of each borrower.

The next slide shows the consumer loan portfolio, customers support measures by both Bci and the government, along with the digitization of the payment process, have enabled an improvement in the NPL ratio, as you can see in the chart. As said, the positive trend in portfolio quality continues to be driven by the greater liquidity enhanced from individuals as well as to Bci's support programs deployed mostly last year. Voluntary provisions have been built in order to recognize the higher risk in this portfolio, not just evidence in PBOs for NPLs, which remain extraordinary low.

Let's go to the next slide where we show the portfolio -- the consumer loan portfolio of our subsidiary, Servicios Financieros. Regarding Servicios Financieros, NPLs have fallen steadily since third quarter 2020, reaching a low point of 1.86 at the end of September compared to 2.62 one year ago. Similar to the bank's more traditional consumer loan portfolio described in the slide before, the low NPL levels are the result of greater liquidity in hands of customers, reflecting in higher payment rates with voluntary provisions built with the same purposes mentioned earlier.

Let's go to the next one. So as I said during the previous slide, since the beginning of this pandemic, we have been booking voluntary loan loss provisions to anticipate future risk, increasing our loan loss coverage ratio and building even more conservative financial statements. This would allow us to face potential downside scenarios that our risk model may not be fully capturing given the unique characteristics of the stress.

In the same line, we continue to record additional provisions in the third quarter of this year. In total, we have now recorded more than $328 million in additional provisions, both in Chile and in CNB in Florida. This conservative approach to additional provisions has allowed the bank to increase its loan loss coverage ratio to 261.4% in anticipation of future loan portfolio deterioration resulting from the current crisis, which may not have fully manifested yet, given the strong set of financial relief measures granted to both individuals and companies. So now let me leave you with Jose Marina, our CFO for the City National Bank of Florida. Jose Marina?

[Jose Marina, executive]

Thank you, Juan Enrique. Good morning, everyone. My name is Jose Marina, and I am City National Bank's Chief Financial Officer. I am pleased to join Jose Luis, Andres, Sergio, Juan Enrique and the rest of the Bci team on this call. I'm excited to be here with you this morning to discuss our results for the first 9 months of the year. After being focused on PPP and MSLP during 2020 and the second round of PPP during the first quarter of this year, we were excited to get back to the business of traditional lending as economic fundamentals in Florida and nationally continue to improve.

During this morning's presentation, you will see that we are deploying the significant deposits we've accumulated over the past year into quality of loans with loan production significantly exceeding pre-pandemic levels. We will also demonstrate to you our strong financial results for the year as well as our improving asset quality trends. We will then conclude by discussing our key priorities as we wind down 2021 and head into the next year. So let's jump into it.

We increased our core loans that exclude PPP, which you can see on the green portion of the bar from just under $11 billion to $11.4 billion, an increase of over $400 million in the second quarter. This strong loan growth was propelled by about $3.4 billion of non-PPP loan production through September 30, a 40% increase over the 2019 pre-pandemic levels. City National Bank has historically generated top quartile loan growth, and we've quickly regained our loan production momentum in one of the most vibrant markets in the country.

Our annualized loan growth rate for the year, excluding PPP, is about 9%, and we expect to maintain that pace for the remainder of the year. It is also important to note that we've increased our assets by over $3 billion or 19% over the past year as a result of the market share we've gained in deposits, which we will discuss shortly. Much of that asset growth has been in the investment portfolio, which now accounts for nearly 28% of our assets as indicated on the bottom of the slide.

On this slide, you can see the evolution of our PPP loans and fees. We funded $1.85 billion of loans a year ago with $57 million of fees. During the course of 2020, we forgave $197 million on those loans and recognized $23.6 million of fees as income, leaving us with $1.65 billion in loans and $33.7 million of fees outstanding at the end of 2020. During the first 9 months of this year, over $1.4 billion of PPP loans were forgiven, and we recognized nearly $35 million in fees.

As I indicated earlier, we were active in the second round of PPP and funded $790 million of new PPP loans with $29.5 million of fees. As a result, we closed September 30 with just under $1 billion of total PPP loans outstanding and $28.5 billion of PPP fees that will substantially be recognized over the next year or so as these loans are forgiven. Our outsized participation in PPP and MSLP, along with our ongoing cross-sell efforts resulted in $4 billion in customer deposit growth year-over-year, a growth rate of 31%.

Our acquisition of Executive National Bank in the fourth quarter of last year only added about $400 million of deposits. So our deposit growth has been substantially organic. After a strong 2020, we increased our deposits by an additional $2.3 billion over the first 9 months of the year, reducing our loan-to-deposit ratio to 72%. A substantial amount of our growth is in noninterest-bearing deposits, which now accounts for 41% of our deposit base.

Our noninterest-bearing deposits increased by $2.2 billion year-over-year, a 47% growth rate. We have also been able to cut our spot cost of our deposits in half to 17 basis points over the prior year as well. On the right-hand side of the slide, you can see that our deposit growth rates over the last quarter, the last 9 months and over the prior year compared to the banking industry as a whole. City National Bank deposit growth rates exceed that of the industry for all 3 time horizons, demonstrating that our cross-sell efforts have paid significant dividends.

As a result, we have ample liquidity to continue funding our strong loan demand. Our significant deposit growth has propelled City National Bank from 12th place in Florida deposit market share to 10th. With 2.07% of the deposit market share in Florida, we have the most deposits of any commercial bank that is headquartered in the state of Florida. Although Raymond James Bank and TIAA Bank are 2 Florida-based banks that are ahead of us in the market share rankings, they are niche banks with a national focus and are not considered commercial banks like the rest of the Florida-based banks reflected on the slide. The remaining banks ahead of us in the top 10 are all money center or super regional banks with many more banking centers throughout the state. In fact, of the top 25 banks on the list, only 5 banks have less branches than City National Bank, demonstrating the scalability of our business model.

Now I'd like to discuss our asset quality trends. You can see that our loan deferments have declined all the way down to $37 million, down from $84 million from June 30. As you can see in the bottom left of this slide, all remaining deferments are in residential mortgages. It is also important to note that the weighted average LTV of the real estate secured loans on deferral is a very conservative 58%. Our ALLL coverage ratio, excluding PPP loans, declined slightly by 15 basis points to 1.31% since the end of the year. Our NPLs have also declined significantly during the course of the year from 96 basis points as of December 31 to 74 basis points as of September 30.

Our past dues have also declined substantially to 42 basis points of loans, excluding PPP, as you can see in the top right. As a result of these improving asset quality indicators, we have not added any loan loss provisions in 2021 with the increase in organic loans is driving the aforementioned slight decline in the ALLL coverage ratio. Overall, the department trend is strong. The remaining deferments are well secured and all -- an already strong asset quality indicators continue to improve.

Moving to our results for the first 3 quarters of the year. Our net income for the quarter totaled $62.9 million, a $1.9 million improvement as compared to the linked quarter. Our year-to-date net income of $177 million is 95% higher than the prior year due to $59 million of additional net interest income and $74 million of lower loan loss provisions. As a result of the improving asset quality trends that we just reviewed, along with the strong economic conditions in Florida, we have not recorded any loan loss provisions in 2021.

Looking at core earnings, which excludes provisions, intangible amortization and other nonrecurring items, our core earnings improved by $4.5 million as compared to the linked quarter and $49 million or 24% year-over-year. The improvement in core earnings is driven by our increasing net interest income trend, which is a result of our growth in earning assets. We will discuss our increasing net interest income trend further and the related PPP impact in a couple of slides.

You can also see that in the chart at the bottom that our ROA and ROE for the quarter are both very strong at 1.2% and 11.6%, respectively, for the most recent quarter. Our efficiency ratio has also consistently been maintained in the low 40% range and is benefiting from the PPP impact, which we'll discuss further on the next slide. In summary, we are generating strong results in 2021, and our core earnings trend is very favorable. On the left-hand side of the slide, you can see that the evolution of our net interest income compared to the linked quarter and the third quarter of 2020.

The dark green part of the bar represents our net interest income, excluding the impact of PPP and MSLP. And you can see that our core net interest income increased by over $6 million over the linked quarter and by $22 million over the prior year. Our significant growth in earning assets, driven by our 31% increase in customer deposits over the prior year has driven our net interest income growth, excluding PPP and MSLP fees. PPP fees totaled nearly $8 million in the third quarter, actually declined by over $5 million as compared to the linked quarter.

Overall, net interest income increased by over $1 million over the linked quarter with the increase in core net interest income, excluding PPP fees, more than compensating for the reduction in the PPP fees. On the right-hand side of this slide, you can see the net interest margin evolution as well. Our core NIM, excluding PPP and MSLP, declined by 4 basis points over the prior quarter to 2.63%. Our NIM for the quarter was 2.69%, including the impact of PPP, which had a 6 basis point impact to our NIM.

In conclusion, although our net interest margin is declining in percentage terms due to increased liquidity and the impact on asset mix, the net interest income trend is very favorable. On this slide, you can see that we were able to increase our noninterest income by nearly $5 million or 9% year-over-year, excluding swap fee income, primarily due to our deposit service charges increasing by over $6 million due to the new treasury management clients that we have onboarded during the course of 2020 through our PPP and MSLP cross-sell efforts.

The increase in other income of $5.5 million is primarily due to MSLP servicing fee income, gain on sale of some assets from our recent company and some deposit covenant fees as well. We continue to remain focused on enhancing our noninterest income, which is one of our top priorities for the year. On that note, I'd like to conclude by briefly discussing our top 5 initiatives as we conclude 2021 and start heading into 2022.

First and foremost, we are focused on new business opportunities. The new opportunities we are focused on are primarily related to activities that generate additional fee income. Second, we have been building our internal strategy team and are focused on developing and enhancing short-term and medium-term strategies for various business lines with a special focus on our banking centers, residential business and our national leasing company, Bci Capital.

Third, we continue to invest in technology and our digital transformation initiatives and continue to build upon our recent digital investments that enabled many of our key accomplishments during the recent year. Fourth, we see ample opportunity in expanding our presence in Central Florida in addition to capitalizing on more opportunities in the Palm Beach and Fort Lauderdale markets that are just north of our core Miami headquarters. Although we have a presence in all of these markets, there is a tremendous opportunity for us to gain market share outside of Miami.

Finally, we are also focused on delivering an optimal client experience, combining our best-in-class personal service with best-of-breed technological tools. In conclusion, we have gotten off to an excellent start in 2021. We continue to augment one of the best deposit franchises. Our asset quality metrics, which are already strong, continue to improve, and we are generating significant earnings growth.

While our results are benefiting from the impact of PPP forgiveness, the strong loan growth that we're generating now, we'll continue to generate -- and we'll continue to generate will ensure that our strong results will be sustainable. And now let's turn it back to the Bci team for final thoughts and wrap up. Thank you.

[José Ibaibarriaga Martínez, executive]

Thank you, Jose. We have built our sustainability plan in 4 periods: financial inclusion, environmental, suppliers and investors. MACH will be a huge driver of sustainable growth for the bank with a clear focus on continued to promote a series of initiatives aimed to increasing financial inclusion. At Bci, we are fully committed to being a serial carbon footprint business. Our objective is to be -- is to reduce our footprint to 0 by this year, 2021. Regarding our employees, we recently launched the new Bci experience, a different way of working in which 70% of our employees will work in a mixed or fully remote format.

In terms of our ESG funding efforts, we have published our sustainability financial framework, which include a second poly option by Standard & Poor rating and which will be the platform for the issuing of our green, social and sustainability -- sustainable bond in the coming years. We would like to wrap up with some closing remarks.

First, we have successfully diversified our operations by adding new businesses lines and also by expanding geographically where City National Bank of Florida plus our branch in Miami account for almost 28% of the bank's total portfolio and 35% of our net income. Two, MACH, with more than 3 million users, has consolidated its position as the main alternative for online purchases in the local market, thus, reflecting Bci's commitment to contributing to financial and digital inclusion through simple and actable solutions.

Third, our operation revenues increased 11.5% year-over-year on a year-to-date basis due to the sound results, both in Bci's local operations and City National Bank of Florida. Four, we have booked more than $328 million in provisions -- voluntary provisions to anticipate future risk; and finally, the bank maintained a strong financial position, and its soundness is once again reflected in our liquidity and capital ratios, which are both well above regulatory limits.

I want to conclude this conference call by reiterating our commitment to making extreme progress in the sentinel role that we, as a bank, have in the economy, the environment and the social development. So thank you for participating in this call. If you have any questions, Sergio, Juan Enrique, Jose and I will be more than glad to answer them.

[Cristian Saffie, executive]

Thanks a lot, Jose Luis and the rest of the team. My name is Cristian Saffie from the Investor Relations team. We will be addressing the question in order that you raise your hand. I see that our first question is from Ernesto Gabilondo from Bank of America. Ernesto, please turn on your mic. Ernesto, we can't hear you. [Operator Instructions]. But our next question is from Francesca Rali. Francesca, you can unmute your mic.

[Unknown Analyst]

I have a question for Jose Luis. Could you give us more detail about how we continue strategy of extra NIM?

[José Ibaibarriaga Martínez, executive]

Well, Francesca, I assume maybe -- aware, we have experienced a significant increase in interest rates, basically more strongly in Chile. What we have experienced is that the margin overall increases. If you take in consideration a 100 basis point over the full curve of the interest rate. We have an impact in margin of around $12 million to $15 million. And then in the overall equity we have around a positive impact if we increase 100 basis points around $80 million to $90 million. So -- in Chile.

So what we experience is a positive effect both in margin, more or less $10 million to $12 million; and in equity, more less $80 million to $90 million. And I say more or less because, obviously, the 100 basis points is not the same all over the [ approval ].

[Cristian Saffie, executive]

I'm taking from here. Okay. We still have the hand of Ernesto. Ernesto Gabilondo, it's you?

[Ernesto María Gabilondo Márquez, analyst]

Yes, can you hear me?

[Cristian Saffie, executive]

Yes, we can hear you, man.

[Ernesto María Gabilondo Márquez, analyst]

Let me make you 3 questions. The first one is kind of a follow-up. I also wanted to understand the NIM impact related to the investment portfolio hedging. I'm just -- if not considering other variables, what would be the NIM impact in this quarter? And how should we think it should be improving in the fourth quarter if it was really a one-off? And then considering your expectations on inflation and higher rates, how do you see NIM pressure in 2022?

And then I don't know if you're thinking of a NIM expansion in 2023, supported by the loan repricing as we have seen these like kind of thoughts that we are seeing in the rest of the Chilean banks? And I don't know if, in this equation, the recovery of retail loans could help you to mitigate the impact of higher rates next year? So that's my first question.

The second question is on your cost of risk. We continue to see solid asset quality trends, a high reserve coverage ratio. So what do you see customer risk normalizing next year? And then for my last question is on your effective tax rate. We saw it jump to 44% from 25% last quarter due to the FX adjustments. So how do you see the effective tax rate in the last quarter and next year?

[José Ibaibarriaga Martínez, executive]

Thank you very much, Ernesto. The first one and the third one, I will answer. And Juan Enrique, if you don't mind, you can answer the cost of risk, please. Let me start for the third one, Ernesto. Regarding the tax effect, we do have basically 2 effects this quarter, and you will see in the last quarter too that are related to the following: the investment that we have in City National Bank of Florida, that is around $1.5 billion. Each time that the exchange rate increases, we have a positive effect in the equity of $1.5 billion regarding how much it increases.

And that increases has to generate us taxes. So each time that we see the exchange rate growing -- and the expectation is that at the year-end, it will finish on a higher exchange rate equity, and then we have to pay tax line in the profit and loss statement. The second issue that affect in a material way, taxes is related to the investments that we have in the portfolio and related to deposits that we made in the Central Bank of Chile that has a credit on the tax issue. And it's not affected for taxes, the profit that you gain in that investment.

What happen is that when interest rate increases, you generate a loss and that loss do not have the credit. So those effect has had the impact that you have seen in the tax line. And the expectation is that we are seeing that the exchange rate will finish by December 31 in CLP 820. That is an estimation that is moving, but that is the estimation. So in September, we did have a view that it was going to finish by CLP 770. So you will see an impact in the -- increasing our capital and both increasing the taxes in the last quarter. Before I go to the NIM question, Ernesto did I explain myself? Because this is very technical, the tax issue.

[Ernesto María Gabilondo Márquez, analyst]

Yes, perfectly understood.

[José Ibaibarriaga Martínez, executive]

Okay. So regarding the NIM issue, I think it was mainly driven by a redistribution of a fair value accounting hedge. In order to better reflect hedge strategies, which did not have -- and this is very important to remark, this did not have an impact on the bank's operating revenue. We just changed the line where these interests were reflected. Those fair value hedges are hedging interest rate risk associated with our available for sales portfolio. That is what I told you that it was in the Central Bank.

The redistribution occurred due to an internal review process of all of our hedge relationship in order to better reflect this hedge risk, which was -- or has contributed to the drop in the NIM ratio by about 25 basis points. So basically, Ernesto, what we did is that after a review of all our hedge and the way that we were making some accounting, we moved some interest from NIM to growth and that is a decrease of 25 basis points in NIM for just one time.

We do not expect it to continue in this thing. This is a -- it was a onetime specifically due to this effect that is impacting NIM. And it's important to mention that should not be affected again. Unlike are the factors that should impact such as inflation or increase in the monetary policy rate among others.

[Ernesto María Gabilondo Márquez, analyst]

Jose Luis, sorry to interrupt. So in this part, so shouldn't we think that in the fourth quarter, the NIM should be reverting this impact by at least 25 basis points that impacted in this quarter? So we should think of about NIM higher 25 basis points from third quarter. And then we should consider all the other variables such as inflation, potential retail recovery, all those factors. So is that correct, my impression, that we should think about this NIM recovery? And then what are your expectations on inflation, higher rates and how you see NIM evolving next year?

[José Ibaibarriaga Martínez, executive]

Okay. I just want to make use of more detail of this issue of the hedge that affects for onetime, 25 basis points and then address the rest of the question because it was a very large question that you did. What -- and I will pass the word to Sergio to tell you a little bit more about expectation in inflation and interest rates and Central Bank increasing or not interest rate. But basically, what we are seeing a higher interest rate that it will affect positively NIM.

At the same time, as you mentioned in your question, consumer loans are still lagging. We are not seeing a strong demand. We are seeing some increase in credit cards. But the rest of the NIM, we see that it will be flat or marginal increasing in the last quarter. And regarding next year and 2023, obviously, the repricing of the loan portfolio, especially the consumer and the commercial that has some period 18 to 24 months, depending of which you are.

Yes, we will see repricing. And we expect some marginal increase. How much, Ernesto, we are in the process of finishing our budget. So we are not prepared now to give you some specific guidelines of what is going to be '22 or 2023 regarding NIM, but more than happy to do that as soon as we finish our budget. And I don't know, Sergio if you can give some guidelines in the economy inflation. And then Juan Enrique can address the question of risk.

[Sergio Lehmann, executive]

Sure, Jose Luis. Ernesto, we are expecting that the inflation pressure will continue. We are expecting that inflation rate at the end of this year is going to be close to 6%. And then just gradually converging to 4% at the end of the next year and then just getting 3%, which is the target of the Central Bank into 2023. So it's going to be some very gradual process in order to recover the inflation control by the Central Bank. Given that we're expecting that the Central Bank is going to increase the amount of deposit rate in the next meeting, which is in December, and then it's going to be in stating 3.5%, 3.75%, which is estimated a neutral rate.

That is the main message that the Central Bank provided a month ago -- around a month ago. And then we're expecting to be contracted the monetary policy rate in 2022, getting to 4.5%. Given that it's expected that the dynamic on the employment market is going to be affected, given that is the reason of expecting some increase in the coming quarters. So this is our view about the inflation rate and the monetary policy rate in the coming years.

We're expecting, given this scenario that they economy is going to be decelerating very significantly in the next year. For that reason, we're expecting just 1.4% run rate in 2022, which also affect naturally the dynamic in the credit market.

[Juan Enrique Visinteiner, executive]

And Ernesto, as to your question on cost of credit, what we believe -- let's say that set up a starting point. What we have said is that we believe that gradually cost of credit should go back to pre-pandemic levels. Then there are different forces that you have to take into account as to whether we should see higher than pre-pandemic level or slightly lower than pre-pandemic levels. And that's on one side, that on certain segments of customers such as the SMEs, obligors are getting into the new normal with a higher leverage ratio than before entering that crisis.

However, with financings at tenors that are pretty long and government supported. So that may mitigate the effect of the higher leverage. On the other side, you're seeing headwinds such as higher inflation rate, higher interest rates, credit spreads and a higher expected unemployment rate. So those headwinds suggest [ Q2 ] foot on a more conservative side and say, yes, we should go gradually to pre-pandemic levels and slightly above that. That's our thinking right now.

[Andrés Atala S., executive]

Thank you, Juan Enrique. Thank you Sergio, Jose Luis. We don't have any more raised hands. If you don't have any further questions, we can go to Jose Luis to the final thoughts and wrap up.

[José Ibaibarriaga Martínez, executive]

Thank you, Andres. Thank you, Jose, Sergio, Juan Enrique and all the investor team. And thank you for participating in this call. This has been a great year in results and all the achievement that we have get. We always are here to answer any specific questions that you may have. So please feel free to contact our investor team. They will be more than happy to answer them. So have a nice day, a good afternoon for some of you. And see you in the next conference call. Bye-bye.

[Andrés Atala S., executive]

Thank you all.