Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2022-Q3

[Andrés Atala S., executive]

Good morning to all of you, and welcome to our Third Quarter 2022 conference call. I'm Andrés Atala, Head of Investor Relations. And as usual, I'm joined by José Ibaibarriaga, Bci's CFO, who will take you through our strategy and corporate results. Furthermore, this call will be enhanced by the insight of Juan Enrique Pino, our Head of Credit Risk Management, who will talk about the current status of Bci's credit portfolio; and Jose Marina, CNB's CFO, who will discuss the financial performance of our position in the U.S.

Now I will pass the mic over to Sergio Lehmann, our Chief Economist, to give us an update on the macroeconomic figures.

[Sergio Lehmann, executive]

Thank you, Andrés. As Andrés said, I will bring you an economic summary of recent developments in U.S. and Chile. The global economy continues to battle with inflation in the third quarter of 2022. Prices continue to rise in the U.S. and in Europe and certain banks have carried on increasing interest rates sharply.

For time being, economic activity have slowed down gradually, but the forecast indicates that Global growth will be more clearly hit in the next few quarters. In the U.S., inflation is lowering, but some components are still rising. Recession expected in the coming quarters and GDP will grow by 1% in 2023. The labor market remains tight and in Florida, the employment rate has reached the lowest of 2.5%.

In Chile, the economy is facing high inflation, larger interest rates and consumption deceleration. The GDP grew by 5.4% year-on-year in second quarter '22. And we expect 0.2% year-on-year in third quarter 2022 and in coming recession for the next quarter.

We're forecasting minus 1.2% GDP growth in 2023, mainly explained by lower internal demand. If we were recede, but it could be -- it's going to take some several quarters to achieve the 3% inflation target. The, monetary policy rate will remain in 11.25%, at least till second quarter '23, conditioned by inflation expectations. We highlight the current strong dollar cycle, which is having a major impact on currency worldwide.

On the next slide, we present the main economic figures in U.S. and Florida. U.S. GDP grew 2.6% on a [ life ] quarter-on-quarter in third quarter '22, but a de-acceleration expected in coming quarters and according to various surveys, the probability of the economy falling into a recession next quarter is over 50%. The labor market remains tight and wages keep pricing. The unemployment rate is rapidly falling and in Florida the unemployment rate is near historical lows.

Please move to the next slide. Inflation continues to be the main concern, it was 8.2% year-on-year as of September, with a surprising increase in core inflation, without food and energy, that rose to a peak of 6.6%. Services prices reflect high inflation persistence, which indicates the risk that inflation will remain over 2%, which is the target of the Fed is going to be for a long time.

In response to this, the Federal Reserve has increased interest rates sharply to record high levels and with prospects of further hikes in the next few quarters to control inflation. This is putting pressure on economic activity and the labor market along with the yield curve, which markedly rose in the third quarter of this year.

On next slide, we see Chile's main GDP and labor figures. The economy grew 5.4% year-on-year in the second quarter, somewhat more than anticipated but confirming the that prospects that an economic slowdown is going on. As it was mentioned, we're expecting negative figures for the coming quarters, establishing that it's going to be -- it will be phased recession.

The labor market is stagnant. This is a low pace for job creation and the labor force participation rate remain contained. The unemployment rate was 8% in the third quarter and formal labor is losing ground in the latest. Additionally, contract termination due to company needs have been increasing.

Please move to the next slide. Inflation in September dipped slightly to 13.7%, and the forecast is a gradual decrease in the next few months. Underlying inflation has started to fall, but there are still large price increase of some goods and services. Food prices, in particular, continue to rise. The Chilean Central Bank has conducted a highly contractionary monetary policy to contain inflation expectations and increased interest rates to 11.25%, the highest level in recent history.

During the third quarter of this year, the Chilean yield curve increased, but it's starting to recede in the latest. We forecast that there might be not more interest rate hikes with the aim now being to maintain high rates for the time needed to control inflation. Subject to the rate of the drop in the inflation, the monetary authority could start a gradual normalization process on the second quarter of the next year.

Finally, on the next slide, we see recent currency developments due to tough global scenario and the imbalances of the Chilean economy, the Chilean peso has continued to depreciate against the dollar in the third quarter, in a similar trend to other comparable economies. The Chilean Central Bank foreign exchange intervention processes came to an end in September, easing part of the volatility and tension in the Chilean foreign exchange rate market for prior month.

But the Chilean peso is still under pressure, the strong dollar cycle is having major impacts on currency around the world and Chile is not an exemption. In coming monetary policy decision and inflation developments could be determined for the value of the Chilean peso in the coming quarters.

Now I will introduce José Luis Ibaibarriaga, our corporate CFO.

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call. We will now review Bci's main third quarter highlights. Related to ESG, we are proud to inform that the recently joined by the IDBs Green Bond Transparency Platform, becoming the first Chilean financial institution to be part of this bond network.

Regarding our customer experience strategy, we were ranked in the first place in the large bank sector of the Procalidad National Customer Satisfaction raking as the Best Digital Bank in Chile, in the Retail and Corporate categories by Global Finance.

In terms of consolidated financial results, the highlights of this quarter were, one, we closed this quarter with a positive financial results, as we will discuss later in this presentation. We want to highlight that City National Bank reached USD 24 billion of assets and has continued with tremendous momentum reaching a solid bottom line this year of around USD 180 million, as Jose Marina will outline further in this presentation. The consolidated efficiency ratio has reached 44.9%, despite this improvement, we continue to invest heavily in our digital ecosystem and international initiatives.

Please move to the next slide. As you can see in this slide, Bci is the largest financial institution in Chile with more than USD 85 billion in assets. As part of our national strategy, we continue to bolster our international presence, which now account for 37% of the bank loan portfolio.

Please move to the next slide. I will now address our digital ecosystem strategy, which aim to build the biggest in Chile. We have built capabilities for more than 5 million clients with a low level of linkage between them. In addition to this business unit, we have incorporated one of the leading pharmacy drug store chain in Chile, Salcobrand, adding more than 800,000 clients.

We are also working on adding new players to this ecosystem. MACH is a key element in the fulfilling of our aspiration of being a leading digital bank in Chile. We recently launched a loyalty program, Bci PLUS, which will allow our customers to shop at a wide variety of stores and obtain cash back directly into their digital account as a benefit.

We have also launched MACH Pay, which allowed money transfer between more than 5 million customers quickly, safely and simple by means of their cell phones number. It would also facilitate payment via QR code in thousands of shops.

In this slide, we present some of the quarter highlights. We continue to grow in terms of total users and quickly approaching to 3.6 million customers. In addition, our saving account Cuenta Futuro continued its sound performance and keep growing in terms of total amount [ saves ]. Average balance per use and total number of accounts, indeed, it now accounts for over 16% of MACH total noninterest-bearing deposits.

This quarter, we continued focusing on improving our product offering by strengthening our buy now, pay later solution and by allowing transfer to third parties, bank's account and both Android and iOS users, which is another step toward our goal of becoming the main bank of our clients.

All of our efforts to lead to have some improvement of our customer experience indicators, such as Net Promoter Score reached over 74% and high valuation in after-store ratings, as you can see on the right side of the slide. Please move to the next slide.

Now let's go through the main figures of our consolidated operation compared to third quarter 2021. Operating income surged 22.5%, driven by loan growth, positive price management and high inflation. Operating expenses increased by 32%, and we will address this effect further in this presentation.

Provisions and write-offs, excluding the recovery account, were relatively flat. However, we should consider that last year, this provision considered the constitution of voluntary provisions, as Juan Enrique will comment later in this presentation.

Regarding tax expenses, the depreciation of the Chilean peso against the dollar in the last few months has lead to a high investment valuation of City National Bank of Florida. Likewise, last year, there were another effect in term of taxes. It should be noted that both the market-to-market losses and the losses from the sales of instrument under Article 104 of the law on income taxes do not generate a tax profit. If they have losses, they cannot be reduced from the taxable base.

Moving to our loan portfolio, the 15.7% year-on-year increase was mainly driven by the growth of commercial and mortgages loans, as you can see on this slide. Commercial loan growth considered the following effects. This year, the wholesale division has had strong growth as corporate client are searching for funding in terms of corporate loans due to the lower liquidity of the bond market.

And second, appreciation of the dollar this quarter considered that nearly 28% of the commercial portfolio is in U.S. dollars. Regarding mortgage loans, continue to have solid growth of 17.5% and a significant part of this growth has -- was from the last year's growth, combined with higher inflation. In real terms, we continue to see a slowdown in loan production due to higher interest rates, inflation and commercial conditions. Lastly, the consumer loans increased by 8.5% year-over-year, mainly driven by the credit card businesses.

Please move on to the next slide. The local increase in NIM of 126 basis points year-over-year was mainly driven by the growth of loan and higher inflation which generated higher income from interest and indexation, partly offset by greater funding costs. On the other hand, net fees decreased by 6.5% year-over-year. The decrease compared to third quarter 2021 of minus 4.9% on the net fees was mainly explained by fees paid in this quarter associated with non-recurring effects with Visa as well as in the commission associated with custody and deposit services.

The OpEx in this quarter increased 26.2% and the main effects were increased human resources expenses associated with salary adjustment linked to inflation, which we carry out twice a year. Similarly, we have non-recurring effects related to our 85 years benefit.

Additionally, we strongly accelerate the execution of the digital ecosystem and we are beginning to materialize the implementation of different actions, such as the loyalty program and one stop shop associated with the above. In this quarter, we developed the constitution of provisions from multiple alliances and programs that we will promptly communicate.

On the left side of this slide, we show the evolution of the funding mix. Our total deposit base grew 15% year-over-year. We have seen a shift from demand deposit to time deposit as rates have continued to raise. As you can see in this slide, this was reflected by non-interest bearing deposits decreasing by 12%, while time deposits increased by 50.4% year-over-year. The effect on capital account mainly dropped the decrease of 31 ratio due to higher Chile and U.S. freight and greater inflation expectation.

Now I will pass this call over to Juan Enrique Pino, who will discuss our asset quality and loan portfolio composition.

[Juan Enrique Visinteiner, executive]

Thank you, José Luis. Good morning to everyone. 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 to give you more details on our loan portfolio situation. Our local loan portfolio remains very well diversified, as you can see in the chart, by business line, economic sector or by customers.

On the left side of this slide will present, as usual, the local loan distribution among the different segments. And on the right hand, we take a closer look at the commercial loan portfolio and its composition. There's something [indiscernible] like this.

We turn to the next slide, please. Okay. This is the second quarter in a row in which we have been observing NPL ratio trending upwards as we have seen -- have said before, still at a very moderate and significantly below pre-pandemic levels, but showing a trend that we are likely to continue seeing in the upcoming quarters.

As the portfolios do not manifest their expected performance during the period when the government injected liquidity into the markets, Bci built up significant voluntary provisions, which are shown in the black dotted line above. This represents the ratio of total loan loss provision, including voluntary provisions relative to total loans, which is over 1.5x the ratio, excluding voluntary provisions and 1.3x the level of this ratio before the pandemic hit the country.

As to commercial loans, we continue to lead -- it continued to lead the growth in the loan book with demand for new good quality loans recovering since mid last year, more than offsetting the scheduled payments of the government-guaranteed loans that were granted basically in 2020 and a little bit also in the first half of 2021. The NPL ratio had an upward trend in the first and second quarters, but it's still very far below pre-pandemic levels.

The ratio of loan loss provisions to total commercial loans remains relatively flat. Unlike other portfolios for the PDOs primarily loan loss provisions in the commercial loan book, nearly 90% of the exposure is individually risk classified. So the risk is captured way below before the borrowers become past due.

The other concern is primarily accounted by the small and medium enterprises commercial loan portfolio, SMEs, which was hardly hit by the pandemic. However, SMEs were the segments more supported by the bank and by government guaranteed-lending programs. The SME portfolio had an increase in [indiscernible] and NPL ratios. However, they're still way below pre-pandemic levels. So we're confident that the support measures helped many SMEs to cross -- to the other side of the pandemic.

As to mortgage loans, the residential mortgage portfolio has maintained its resilience in the current scenario with the portfolio size increasing and NPL ratio still performing way below pre-pandemic levels. As to consumer loans, as decline in the portfolio size in 2020, finally due to great liquidity, lower demand and a more restrictive risk appetite, we have started to gradually see a recovery in volumes since the second half of last year, partly due to greater consumer demand for credit and partly due to greater flexibilization of credit terms, which were tightened during the most of the pandemic.

As NPLs after reaching lows by the end of 2021, we're now seeing a trend of them returning to pre-pandemic levels or slightly higher, slightly lower at Bci and faster at Servicios Financieros, which is more concentrated in the lower income segment than Bci.

Voluntary provisions were built for these portfolios to recognize those risks. At the same time, the level of past due obligations were [ efficiently ] low because of the extraordinary liquidity from the various government support programs in place during the pandemic.

I will pass you now to Jose Marina, who will address CNB. Jose Marina, the CNB CFO.

[Jose Marina, executive]

Thank you, Juan Enrique, and good morning, everyone. My name is Jose Marina, and I am City National Bank's Chief Financial Officer. I'm excited to be with you here this morning to discuss our third quarter results.

We started 2022 with a strong first half of the year and continued that tremendous momentum into the third quarter. Our total assets increased by $1 billion quarter-over-quarter, surpassing the $24 billion mark. As of September 30, we had $24.2 billion in total assets representing $3.6 billion or 17% of year-over-year asset growth.

During this morning's presentation, you will see the asset growth was built upon our significant deposit growth in 2020 and 2021 when we expanded our deposit base by $7 billion. The combination of our organic growth engine and the strong macroeconomic conditions in Florida resulted in new loan commitments of $1.9 billion for the third quarter of 2022, which was about $735 million higher than the third quarter of the prior year. This resulted in $1.2 billion of loan growth, excluding PPP, which is significantly higher than the industry growth rate. You also see that we continue to improve our already strong asset quality metrics.

We also continue to focus on deposits, which grew by $922 million or 5% year-over-year, CNB maintains the largest deposit market share, almost 8% in Miami Day County outside of the big 4 of the big 4 U.S. banks. While you will see that our deposits contracted in the most recent quarter, we continue to focus on augmenting our deposit base.

Our significant growth translated to strong results as well. In fact, our core net interest income, which excludes the impact of PPP fees, increased by $6.8 million quarter-over-quarter and $36.5 million in the same quarter of 2021. Overall, year-to-date net income of $206 million is 17% higher year-over-year.

We will conclude our comments this morning by discussing the fundamentals are in place that have positioned us to continue in our success into 2023 and beyond. But first, let's review our third quarter financial achievements and results with you. On this, slide we can see that our assets increased by $1 billion for the quarter, reaching $24.2 billion. This represents a year-over-year growth rate of $3.6 billion or 17%.

Our asset growth was purely organic as we have not closed any acquisitions for the last 2 years. Our loan-to-deposit ratio remains low at 81% due to the impact of our deposit growth during 2020 and 2021, which we will discuss shortly.

You can see that we remain very well capitalized as evidenced by our strong capital ratios, which are significantly above all regulatory thresholds. The significant loan growth has resulted in a normalization of our cash position which represents about 6% of our total assets a year ago versus 1.24% as of September 30 of this year.

Our investment portfolio increased quarter-over-quarter and still represents around 28% of our assets. Our investment yield increased 20 basis points from the last quarter as our new purchases have come in at higher coupons due to an increased overall market rates. We have increased our deposits by $922 million year-over-year or about 5%. However, the deposit capture became increasingly challenging among banks as interest rates have increased, resulting in an overall contraction in deposits within the banking industry.

In the third quarter of 2022, client deposits decreased by 4.8%, which was partially driven by temporary inflows during the second quarter that have flowed out during this most recent quarter. As you can see, we utilized broker deposits to help fill this temporary funding gap. We continue to focus on cross-selling deposits on all of our new loans as well as during the loan renewal process, and we're equally focused on attracting deposit-only clients to the bank as well.

Our spot cost of client deposits increased 30 basis points quarter-over-quarter and remains very low at 67 bps, specifically, especially considering that as of September 30, the Federal Reserve has raised the target Fed funds rate from 25 basis points in early '22 to the 3.25 range at the end of this most recent quarter.

We will discuss more about our deposit betas later in the presentation. all contributing to our low cost of client deposits is our large share of noninterest-bearing deposits, which represents 38% of our total client deposit base.

On the right-hand side of this slide, you can see CNB maintains the largest deposit market share in Miami Dade County after the top 4 money center banks. As a result, have the most deposits of any banks in the headquarter in Miami Dade County.

We also have the most amount of deposits in the state of Florida of any bank headquartered in the state of Florida. With the exception of Raymond James Bank and EverBank, which is more of an online bank headquarter in Jacksonville with a national focus. Therefore, we possess more Florida-based deposits than any commercial bank headquartered within the state of Florida.

The combination of our long-proven loan production capabilities, combined with the strength of the Florida market, resulted in $1.2 billion of loan growth, excluding PPP in the third quarter. This represents an increase of 8% over the prior quarter 33% annualized rate. On the right-hand side, you can see that our loan growth rate quarter-over-quarter year-to-date and year-over-year are greater than the banking industry as a whole. These loan growth rates include the impact of declining PPP balances.

On this slide, we can see that our outstanding loan portfolio is very well diversified with only 44% of our portfolio classified as commercial real estate. You can also see on the right-hand side of the slide that there is ample diversification within the commercial real estate category with only 2 segments slightly exceeding the 20% mark.

It is also important to note these real estate secured loans have a very low weighted average LTV of only 36%. In fact, CRE owner-occupied, CRE and residential, all have weighted average LTVs of 61% or below indicating the loan portfolio has been assembled in a very conservative manner.

Finally, you can see that our CRE concentration ratio, which measures our CRE exposure over our regulatory capital is -- remains at 290.5%, which is below the 300% guidance threshold established by regulatory authorities.

Now I'd like to discuss our asset quality trends. You can see that our loan deferments are minimal. They have declined all the way down to $3 million, decreasing from $21 million at the beginning of the year. You can also notice on the bottom left of the slide of all remaining deferments, our residential mortgages with a very conservative weighted average LTV of 61%.

Our NPLs have also significantly declined from 96 basis points as of December 31, 2020 to 32 basis points as of December 30. Similarly, past dues are also at a low level, representing only 18 basis points of total loans as of this most recent quarter.

Finally, due to our outstanding organic loan growth, we recorded $13.7 million of loan provisions in the first 3 quarters of 2022. Overall, the deferment trend is strong. The remaining deferments are minimal and well-secured and there are already strong asset quality indicators continue to improve.

Moving to our results for the quarter. Our net income totaled nearly $16 million year-to-date. Our net income -- I'm sorry, our net income for the quarter was about $68 million. Year-to-date, our net income totaled almost $206 million, representing an increase of $30.5 million or 17% over the prior quarter. This improvement was mainly driven by increasing our core net interest income, excluding PPP and MSLP as you will see in the next slide.

We have also increased our noninterest income by $14.2 million or 25% over the prior year as we will detail later as well. Additionally, our expenses have increased around 12% as we continue to attract top talent and build our digital and operational capabilities, but while also reducing our efficiency ratio year-over-year by 3 percentage points.

You can also see in the chart at the bottom that our ROA and ROE for the year are both strong at 1.2% and 13%, respectively. ROA is 4 basis points higher year-over-year and ROE 188 basis points greater. Our efficiency ratio is also strong at 43% and declined year-over-year, as I just indicated.

In summary, we are generating strong results [Technical Difficulty] despite this, we have been very disciplined with our deposit repricing. As you can see on this slide, our cost of client interest bearing deposits and overall cost of funds have increased by only a third versus the increase in average effective fed funds.

Average effective fed funds increased by 250 basis points as of September, compared to December of last year. While the cost of our client interest-bearing deposits increased by only 80 basis points, implying a 32% beta. Similarly, our overall cost of funds rose by 69 basis points for only a 28% beta. We have been very strategic about deposit rate increases on our appropriately adjusting rates, on a case-by-case basis, in an effort to maximize deposit retention while also minimizing our cost of funds. Non-interest income has 25% year-over-year or about $14 million.

[Technical Difficulty]

Again, our positioning contributed to NIM expansion that we have experienced year-over-year. As you can see on this slide, 40% of our loan portfolio reprices within 1 year and 38% of our deposits are also non-interest-bearing deposits, which also serves to provide great value in a rising rate environment.

Also worth mentioning is that we entered into $325 million of forward starting swaps over borrowings during 2020 when the rates were at historically low levels. Those forward-starting swaps have a duration of about 6 years and starting to fund this past June, and we'll continue to fund through 2023 at an average cost of about 55 basis points, providing significant value as rates increase.

In short, our balance sheet is well positioned for the rate environment. As you saw during this morning's presentation, we closed our third quarter in an extremely strong fashion and the bank is well positioned to keep this performance the remainder of the year. As we carry this momentum in the fourth quarter and into 2023, there are a few distinguishing factors that provide City National Bank with a strong opportunity to continue outperforming our peers.

First, despite uncertainty around the U.S. economic outlook in the near future, we are operating in a state with 1 of the best economic environments in the nation, affluent individuals and sizable businesses are relocating form the Northeast and other parts of the U.S. to Florida on a daily basis. We have to scale products and market experience to continue benefiting from these favorable economic conditions.

Second, the City National Bank has unparalleled talent throughout the organization. We are focused on continually augmenting our talent base with the best talent in the markets that we serve while also offering a work environment and culture that maximize employee retention. Third, we continue to invest in technology and our digital transformation initiatives and continue to build upon our recent investments that enabled many of our key accomplishments during the recent year.

In the past quarter, we rolled out our new loan pricing system called [ Precision Lender ] which enhances our ability to price loans on a relationship basis. Fourth, we are in one of the best markets in the nation with tremendous potential for growth outside of our core Miami market. As a result, our geographic expansion, we partnered with the NBA's Orlando Magic and we are proud to be that team's official bank.

This is our first ever multiyear marketing deal with an NBA franchise and as a natural continuation of our plan to expand into Central Florida, reflecting our deep commitment to that region. These partnerships send a clear message to the marketplace that we are more than a Miami-based bank, we are Florida's Bank.

Finally, we have a strong brand in Florida that has been developed and earned since we first started operating in Miami over 75 years ago. As a result, we're excited not only about delivering strong results in 2022, but for years to come.

In conclusion, we have achieved tremendous growth translating into strong earnings. Our loan growth exceeds the banking industry as a whole. Our asset quality metrics, which were already strong, continued to improve. The strong loan growth that we have been able to generate, coupled with our low loan-to-deposit ratio, will ensure that our strong results will be sustained even as this market continues to evolve.

And with that said, let's turn the call back to the Bci team for some additional thoughts and wrap up.

[José Ibaibarriaga Martínez, executive]

Thank you very much, Juan Enrique and Jose. Finally, regarding environmental, social and governance ESG Group [indiscernible]. We have made significant progress with executing our strategic plan regarding financial inclusion, the environmental, transparency, employees and investors. Among these initiatives, I would like to highlight the following. This quarter, the Wholesale Investment Banking division recently implemented the partnership for Carbon Accounting financial methodology to measure the company's carbon footprint in the portfolio. And Bci, Corredor de Bolsa recently released and presented its 2023 stock market recommends report, the first in the country with an ESG analysis for the 32 IPSA shares.

With this, we end our presentation. And now if you have any questions, we will be glad to answer them.

[Andrés Atala S., executive]

Thank you very much, José Luis. And everybody, we have the first question is from Jorge Pérez from Itaú.

[Jorge Pérez Araya, analyst]

So a couple of questions on my side. The first one, just to understand why the cost of risk in the third quarter was so low compared to the previous quarter. I just want to know if something special happened? And what should we expect for the next couple of quarters for 2023?

My second question is if you have an estimate of the impact for the new regulation in the consumer loans. And the last one, in the local book, you showed that the exposure to real estate is 16%. So do you have a specific concern there, considering the negative news that we have been reading in the last couple of weeks. So those 3 questions.

[José Ibaibarriaga Martínez, executive]

Thank you, Jorge. Juan Enrique, can you address the cost of risk and the estimate consumer loan, the B1 and then I'll address the -- or you can make the real estate too.

[Juan Enrique Visinteiner, executive]

Sure. Super. okay. So, Jorge, regarding the cost of the new regulation regarding provisions on the consumer loans, which is intended to be in place early next year. As you have seen, the government gave a rough estimate when [ advance ] paid for consultation, and it was about $1 billion for the whole system. In rough numbers, we believe we would get our a pro rata of that number.

So that means about 10% of it give and take. You know that, that regulation is still under consultation. So there might be some changes whilst the bank and the regulators have met and make any adjustments if needed. Your other question was about why the cost of credit in the third quarter of this year was low. And if there was any particular situation explaining that.

And no, there is no particular situation, as you saw from the numbers that I showed. We continue seeing a move of the NPL ratio in most of the exposures going up still way below pre-pandemic levels. So cost of credit is in line with that, particularly for those portfolios where the NPL ratio is the driver of provisions in those portfolios where NPL ratios is not necessarily the first driver, which are the wholesale portfolios, which are individually classified.

We build cost of credit based on the classification of those loans. And so I don't know whether there's any more specific questions that we haven't that. Okay, on real estate, you saw in the first slide that we -- I think we showed that the real estate portfolio represented about 15% of the local wholesale portfolio and 5% of the total bank portfolio. Bci has been implementing a very selective approach towards lending to this business. It's a big business for us, it's a good business for us.

We -- of course, is a sector that has been hit by the macroeconomic situation, increase in interest rates, increasing prices of raw materials, lower demand due to higher inflation and higher interest rates. We have been working with our borrowers from a long time before now, and we're confident that most of them are going to get out of this crisis in a good shape. We're helping them as we can, but it's a good portfolio. We have good obligors, very well secured, and we're managing those few loans that are experiencing weaknesses.

[Jorge Pérez Araya, analyst]

Okay. Thank you, Juan Enrique. And just a follow-up. The provision was very small in the third quarter, and we saw a significant deterioration or decrease in the coverage ratio in consolidated level. So I just want to know in what levels do you feel comfortable in the coverage ratio, especially when we are entering into recession?

[Juan Enrique Visinteiner, executive]

Yes. Well, you know that the provision that you see on the regulatory report is only the division of the specific provisions on the portfolios, but you know that we have built more than $400 million in voluntary provisions, which represent a significant portion of our provisions linked to the portfolios.

So when you add up the specific provisions plus the voluntary provisions, as we saw at the very beginning, we are significantly above the provision levels that we had pre-pandemic levels. So we believe that among the 2 of them, we are well prepared not only to face the effects of the maybe delayed impact of the pandemic on some customers, but also the beginning of this significant and severe macroeconomic conditions. But we cannot say they're enough, we still have to follow up on how the situation evolves, and that will tell us whether there's a need for incremental provisions or not.

[Andrés Atala S., executive]

Thank you, Jorge. Now we have Daniel Mora from CrediCorp.

[Daniel Mora, analyst]

I have a couple of questions. The first one is regarding capital ratios. We observed again a new law in the CET1, and I have several questions in this front. The first one is if you are worried about this performance or what will could be or what could be the short-term target for the CET1 in the coming quarters in 2023?

The second question here is that until when do you think that we are going to see the net losses of the available for sale investments impacting the equity of the company. And I made this question because we still need to see higher rates in U.S.A. and in Chile, it seems that we already reached the maximum point of the cycle coming from the Central Bank. So until when we see the negative impact of this investment.

And the last one, if we can start thinking about a capital increase given the increase in the segment ratio. I made this question considering the challenges are that we're going to have in 2023 and the impact of the higher interest rates -- and also if we can -- if you can tell us about the impact of the devaluation of the Chilean peso also on capital ratios on equity. If there is any impact there?

And the other question is just if you can provide us the 2023 guidance of ROE and what could be the key drivers given the challenging scenario in the industry?

[José Ibaibarriaga Martínez, executive]

Thank you, Daniel. You have a couple of questions regarding CET1. How is the short-term view, the impact of interest rates in U.S. and inflation in Chile? Capital increase, the capital increase, I didn't understood very well. So if you can persist a little bit, I will appreciate and the other one is devaluation and expectation for return on equity in 2023. So if you can clarify the third part of your question, I would appreciate it, and then I will answer it.

[Daniel Mora, analyst]

Yes, of course, sideJosé Luis, I mean given that we are seeing a new law in the CET1 and that the scenario is that we're going to continue having these impacts of the higher interest rates, where we -- maybe we're going to see a CET1 ratio decreasing below the 9% figure. So if we see a CET1 decreasing further, can we start thinking about a capital increase or this is an option that is not currently on the table and we are not going to see this event in the short term, at least?

[José Ibaibarriaga Martínez, executive]

Super. Thank you, Daniel. The -- as you know, we have had an incredible year in loan production, and our assets has grown 26% year-over-year. At the same time, as you will mentioned, we have loan and investment portfolio in the U.S. that has been affected by interest rate increases and the impact of that in our equity has been around $500 million decrease in equity. The expectation is that we will finish this year with a CET1 around 9.3%.

We are expecting that we will be in the 10% next year, having in consideration that we will grow a little bit lower than 5% in loan portfolio in Chile and around 10% in U.S. take in consideration that we will have around $1 billion net income this year in profit and take in consideration that roughly we capitalize around 70% of that, and we distribute 30% in dividends.

So what I'm trying to say is that we are with CET1 that is growing. We are in the 9.2% today because we grew too much and because we have an unexpected growth in interest rate. When the interest rate is going to come back in U.S., who knows? I don't know. But what I do know is that if you go 50 years back and you see how interest rate has grown before a crisis and during a crisis and how fast the interest rate recover is very -- is superfast. So our expectation is as soon as the market start to believe that inflation is under control in the U.S., our expectation is that interest rates are going to come down superfast, and we will recover a significant part of that equity.

Do we have a capital increase in our mind? The answer is that we always have the decision and that possibility in the table. Basically is more associated to a nonorganic growth, but it's not something that we are working right now, but it's always there. And devaluation do not have a major impact in CET1 as is -- we have a hedge between assets and investment. So the only impact that we have in the asset is related to the portfolio that we have in U.S. in Chile that is around 30% of the commercial loans.

And regarding return on equity for next year, we are in the process of finishing our budget process. We expect to be finishing by the end of this month present it to our Board by December. And in that moment of time, we can give you more color but today, it's a little bit early to do that.

And finally, we are not anticipating that we are going to be below 9% CET1 ratio. We have a full program that we feel very comfortable. And again, I just want to finish this -- your question saying that we are in that 9.2%, 9.3% because we grew 26% year-over-year and two, because we have an unexpected interest rate increase basically in our portfolio in the U.S.

And finally, Daniel, we have a strong commitment of our Board that we will be with a CET1 ratio of 10% year-over-year.

[Andrés Atala S., executive]

Thank you, Daniel. The next one is from Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

Guys, can you hear me?

[Juan Enrique Visinteiner, executive]

Yes, Yuri.

[Yuri Fernandes, analyst]

I have a question regarding costs like G&A. We know FX impact a lot, G&A, this quarter, the right, like stronger dollar. But even looking to the local business in Chile, we saw some subsidiaries growing expenses by 18%, 20%, like not the retail bank, but the SME, the corporate bank in Chile, right? So my question is why we are seeing a higher expenses growth? I know inflation is high in Chile. That can be part of the laser, but still, it's higher than inflation in Chile.

And what is the outlook for G&A for 2023, right? Because I guess everybody knows next year will be more challenging. So what is the management idea on cutting costs? Like what should be a target for us to expect -- expecting cost growth in Chile for the next year?

And if I may, just a second one and a follow-up on capital. If you had to choose José Luis next year to grow less to improve capital position, what is your take here? Like how to improve this capital position, if you need them? Would you be comfortable in growing less the bank to improve your capital ratios?

[José Ibaibarriaga Martínez, executive]

Thank you, Yuri. I will address your capital question first as we can relate to the resilience. The short answer is yes. Basically, we are in a strong process of allocating capital to the line of businesses that are profitable. Our expectation for Chile, as Sergio mentioned, for next year is GDP, a growth of minus 1.4%. So we are not expecting to have a strong growth in Chile.

Commercial loan portfolio is going to be under pressure. Consumer loan portfolio, excuse me, it's going to be under pressure. The mortgages loan has decreased the demand to have. We will -- we believe that with the interest rates that are today and the expectation of growth, mortgages loans are going to be moderate. And the commercial area is going to be moderate, too.

So we are expecting that in Chile, we are going to have a moderate growth that will allow us to increase our capital ratio. Having said that, the opportunities that we are seeing in U.S., even though Sergio mentioned that U.S. will have more than 50% probability to enter in a recession. Florida is having a lot of demand is having the lowest employee -- or dis-employment rate. And our expectation is that as Jose mentioned, we are becoming a Florida bank more than a Miami bank so we have an opportunity there.

What I'm trying to tell you is that, yes, we are not looking for market share. We are looking for profitability and to increase our capital ratio. And for that, we are allocating capital in a very detailed manner.

Regarding costs, the answer here is the following. We have been growing this year in around 15% year-over-year. Yes, we have inflation of around 13.4%. Yes, we have an exchange rate has increased and impact our IT -- mainly IT contract. But a part of that we have been investing heavily, and we have not stopped our investment on the construction of our ecosystem, digital ecosystem, meaning that MACH is becoming a digital bank.

This year, you are going to finish with a bank at December that you will be able to put money, transfer money, save money as for -- by now, pay later, you have a credit card, you have a debit card. So at the end of the year, much with more than 3.5 million customers is going to become a digital bank. And with that, we believe that we are going to contribute to a bank [indiscernible] and we are going to be part of this digital ecosystem.

In parallel, we are building a loyalty program that's going to be open and it's going to give cash back. We already launched it with us, incredible success. We are going to -- we launched it as a pilot with our creative success and we are ready to launch it to the rest of the company. And we are building on -- on top of that, we are building a one-stop shop where we are going to put customers with companies altogether with a lot of benefit together.

If you take that in consideration, that asset that has a lot of value, and you add that we are investing in a bank in Peru that we opened it this year and -- all of you know that when you build a bank from a scratch that means that we are investing in systems, in people and we do not have the net income this year, obviously, and that is impacting our efficiency ratio and our expenses.

And to finish that, we are investing in order to change our distribution channel. We have closed more than 139 branches in the last couple of years, meaning that when you start closing it, you have several expenses that we're having on it. And in the long term, we will benefit of a lower expenses of our branches. But in the meantime, we are spending both in the retail channel and the expenses in order to close those branches.

So overall, Yuri, expenses is something that we are really working on it. Having said that, we strongly believe that we are building a digital bank and a digital ecosystem that will allow us to lead the payment ecosystem in Chile, and we know that crisis come and goes. And when this crisis come, it's a good opportunity to take advantage on creating this differentiated asset that will allow us to grow in the future. A little bit long answer, Yuri, but I want you to have a full understanding of what are we doing?

[Yuri Fernandes, analyst]

No, no, no. I know it's just is concerned, right, because we see a challenging year and trying to understand how to balance, but it's tough, right? It's you choose between 5 years in the future or 1 year in the future, right?

[José Ibaibarriaga Martínez, executive]

The easy action, Yuri, is to take cost down, not create a [ bank in Peru ] in this moment or not create this ecosystem. That is the easy answer to a period like that. But if you believe that you want to be another 85 years in the market, you have to invest in this period of time.

[Andrés Atala S., executive]

Thank you, Yuri. And the last one is from Nicholas Walker from Goldman Sachs.

[Nicholas Walker, analyst]

My first question is on net income guidance for this year. You previously stated guidance of about 40% to 50% growth in net income. Do you think this can be at the high end of that range? Or how should we think about the fourth quarter? And second, on ROE, you mentioned that you were looking at the 2023 budget, but how should we think about more long term, the sustainable ROE past just 2023 and maybe comparing that in the U.S. versus in Chile?

[José Ibaibarriaga Martínez, executive]

Super, Nicholas. Thank you very much. We are expecting that this year, we are going to be in the high end of this on your assumption, we are having a very good year, not only for inflation, that obviously, an inflation of 13.8% really has an impact in the margin. But if you take out inflation and you just leave what is the margin associated with customers. We are having a strong growth, and we are leading the growth in customers' margin in that sense. So is it going to be the high end of your question.

And regarding return on equity, we still believe and we maintain the expectation that for the next coming years, we are going to have a return on equity between 40% to 50%, taking in consideration both the Chilean return on equity that is going to be a little bit higher and the U.S. return on equity that is going to be a little bit lower. Having said that, a return on equity of 12%, 12.5% in the U.S. is extremely strongly good results.

[Andrés Atala S., executive]

Thank you, Nicholas. And that was the last question. Rarely -- we didn't have any questions from City National Bank. So, sorry, Jose. But I just want to say, thank you all.

[José Ibaibarriaga Martínez, executive]

Thank you, everyone, for joining this call. And as always, we are open to any additional questions that you may have. Investors is willing to take it, and we will answer as soon as possible. Thank you very much. And thank you, Sergio, Jose, Juan Enrique for joining us and investor team to preparing this presentation.

[Juan Enrique Visinteiner, executive]

Thank you.

[Sergio Lehmann, executive]

Thank you.

[Jose Marina, executive]

Thank you.