Banco de Credito e Inversiones

SGO:BCI

Earnings Call Analysis

Bank Shows Robust Growth Despite Challenges

Since 2015, the bank's assets nearly tripled from $36 billion to $90 billion, and loans increased from $25 billion to $56 billion, with net income at third quarter 2023 reaching $0.8 billion. They have diversified by expanding in the U.S. and launching in Peru, growing their client base 6-fold, and tripling their digital client base. They have reduced their branches from 361 to 189, pivoting towards a digital and efficient model. Delinquencies have increased in the retail segment, and the Net Interest Margin (NIM) fell by 60 basis points quarter over quarter due to rising inflation, while operating expenses dropped by 10.86% year over year, reflecting their productivity measures.

Impressive Growth and Diversification

Over the past seven years, the bank has exhibited remarkable growth, nearly tripling its total assets from $36 billion in 2015 to almost $90 billion in September 2023. Lending activity has seen a simultaneous increase, with total loans climbing from $25 billion to $56 billion. This expansion was not just in scale but also in diversity, with the bank extending its international operations, evident by a sixfold increase in its client base and a threefold rise in active digital clients. Optimizing the operational model has led to a reduction in branches by nearly 50%, pivoting towards a more efficient and agile business structure that benefits customer service.

Strategizing for Digital Ecosystem and Growth

The bank's digital platform, MACH, has significantly contributed to the bank's strategy, soon entering a new phase to monetize its customer base by offering high-margin financial services. The plan includes the introduction of credit cards and customer loans, capitalizing on a rich data reserve collected over years of operation and a robust risk culture. The digital shift aims to make MACH the primary bank account for its customers.

Enhancing Merchant Growth with BciPlus

BciPlus is integral to the bank's strategy of connecting merchants with over 5 million customers within the BCI ecosystem. To date, the program has onboarded more than 860,000 customers and over 200 active merchants, providing them with a substantial platform to augment sales.

Stable & Strong U.S. Operations Despite Challenges

In the U.S., City National Bank has faced high funding costs due to increased interest rates on deposits but maintained a stable $11 billion in client deposits. The bank's commitment to liquidity and capital has resulted in strong financial metrics, including the reduction of uninsured and uncollateralized deposits from 51% to 36% of the total deposits since the end of 2022. A conservative approach to investment has also been maintained, with a high-quality, low-risk investment portfolio.

Robust Liquidity and Capital Ratios

Liquidity and capital ratios have shown improvement, with the TCE ratio, both including and excluding HTM, registering healthy growth. The available liquidity, representing a significant portion of the bank's total assets, has increased substantially when compared to the previous year-end figures. This positions the bank with a strong buffer against potential financial uncertainties.

Asset Quality and Efficient Operation

Asset quality metrics continue to perform admirably, supported by a robust credit culture and low-risk appetite, keeping non-performing loan ratios low. The bank also highlighted a well-diversified and conservatively managed commercial real estate portfolio with a strong loan-to-value ratio, indicating solid financial prudence.

Future Outlook and Strategic Goals

Looking ahead, the bank aims to maintain a growth trajectory and access profitability targets while delivering risk-adjusted returns to investors. With a recently executed capital increase, the bank plans to further fortify its financial position and align capital ratios with internal targets and upcoming Basel III standards. This strategic move reaffirms the bank’s capacity to grow and deliver value through a portfolio of innovative value-creation initiatives.

Earnings Call Transcript 2023-Q3

[Andrés Atala S., executive]

It's 11:00 o'clock sharp. So good morning to all of you and welcome to our third quarter 2023 conference call. I'm Andres Atala, Head of Investor Relations. And today I'm joined by Jose Luis Ibaibarriaga, BCI CFO; Sergio Lehmann, Chief Economist, and Juan Enrique Pino, Head of Credit Risk of BCI. We are also joined by Jose Marina and Cristian Saffie in Miami. Jose Marina is our CNB's CFO. As we usually do, at the end of this presentation, we will leave room for questions where we kindly ask you to raise your hands and also in Slide#2. As you can see, these presentations will cover the main aspects of the bank for the third quarter, broken down into the topics shown below.Now I will leave you with our Corporate Chief Economist, Sergio Lehmann, who will take you through the main macroeconomic figures in Chile, Peru, and the U.S.

[Sergio Lehmann, executive]

Thank you, Andres, and good morning, everybody. Global risks increase, recognizes persistent inflation pressures in developing economies, tensions in the Chinese real estate market, the already long invasion of Ukraine, and more recently the Israel-Hamas war. Global growth for 2024 was revised down by the IMF. The U.S. economy is still in good shape, showing to be highly resilient to a very contracted monetary policy. The Fed rose the Fed fund rate to 5.25% to 5.50%, and then it has sustained that level expecting that this will be enough to ensure a coming economic adjustment and reduced inflation pressures. In Peru, the economic activity has been impacted by the political crisis and natural disasters. Inflation, on the other hand, is going down as quickly as expected, and then the Central Bank, following other countries in the region, started an easing cycle. In Chile, the economic activity has been in line with projections and current with an unexpected GDP contraction of 0.5% in 2023. Inflation on the other hand has dropped slightly quicker than expected. The Central Bank cut the monetary policy rate to 9% in last September, last monetary policy meeting, and suspended the international reserve accumulation or recomposition, which is initiated some months ago.The CLP, the Chilean Peso, on the other hand, has been facing significant pressures during the last 3 months mainly due to external factors. In its advance estimate release of the Bureau of Economic Analysis indicated that the U.S. economy grew by 4.9% quarter on quarter annualized pace in the third quarter of this year. This result was mainly driven by an increase in personal consumption and inventories. The economy is expected to grow to around 2% in 2023 and significant upward revision compared to last month's estimations. [Technical Difficulty] data for Florida GDP, but it has been overperforming the national average for the third quarter. The labor market has not deteriorated as expected, still continuing to show new employment position with wages increasingly to around 4% annually. The unemployment rate for the U.S. and Florida are at its minimum historical level.Headline inflation has been diminishing but following a slower-than-expected path. Core inflation, on the other hand, has also continued to decrease, recognizing some impacts on its evolution, given a contracted monetary policy. It is estimated that inflation will be slightly over 2% annually at the end of this year and then will diminish very gradually getting to the 2% target of the Fed just in 2026. The Federal Reserve has increased the Fed Fund rate from 5.25% to 5.50%. It has estimated, given the maintenance of that level during the last 2 monetary policy meetings, that this very contracted stance will conduct to an appropriate adjustment in the internal demand and contain inflation pressures. We're expecting gradual cuts in the monetary policy rate starting by the third quarter of 2024.Please move to the next slide. The U.S. interest rates have increased, especially in the long term, during the third quarter '23, recognizing positive economic data, better-than-expected business expectation, and fiscal deficit pressures. We acknowledge the end of a long period of low interest rates.Please move to the next slide. Peru GDP fell by 0.5% year on year in second quarter '23, driven by a contraction in private investment and inventories. This was a result from the political crisis which started at the end of last year, due to disruptions in some value chains and the impact of natural disaster. GDP is expected to grow less than 1% this year. The CPI is falling as expected and is currently around 5% year over year in its latest data. The Central Bank, as a consequence, started to slow easing cycle. Local interest rates hit by the international upward trend, given a recognized high correlation between them.Please move to the next slide. In Chile, GDP fell by 1.1% year over year in the second quarter of this year. This was driven mainly by a fall in domestic demand. We are still expecting a GDP contraction of 0.5% for this year. The labor market, on the other hand, has continued to deteriorate. Unemployment rate has risen and is at 8.9% in September. Labor force participation rate has stalled, and the number of unemployment workers are increasing.Please move to the next slide. Inflation has dropped quickly since our last conference, mainly due to goods, food, and energy prices. Services are still showing some resilience. The CPI will fall to 4.3% year over year at the end of this year and would be around the Central Bank target at mid-year 2024. In response, the Chilean Central Bank cut the monetary policy rate by 50 basis point to 9% in the last monetary policy meeting, and we expect that the rate will reach at 8.50% by the end of this year and will reach the neutral level in beginning 2025. This path is a little bit more gradual than previously expected given the important depreciation of the Chilean peso in the last month and the potential pass-through to [ consumer ] prices. The CLP has been under pressure in the last few months, falling to its lowest level of the year, mainly due to external factors, especially from U.S. The Central Bank ended its international reserve increase program, and by the end of the year, we're expecting that the CLP, the Chilean peso, will be around CLP 890 per $1.Now I will leave you with Jose Luis, who will continue with the presentation. Jose Luis?

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call in which we will review the main message of last week's roadshow and the third quarter results. Let me share some key highlights of our performance before we go deep dive. Hold on a second, please. Can you hear me?

[Andrés Atala S., executive]

Yes, sir.

[José Ibaibarriaga Martínez, executive]

Okay. Sorry for that. Good morning, everyone, and thank you for participating in this conference call in which we will review the main message of last week's roadshow and the third quarter results. Let me share some key highlights of our performance before we go deep dive into the details. We have successfully ended our capital raise process in order to strengthen the bank's position regarding its financial capabilities while maintaining sound capital ratios. We accomplished the subscription of 94.7% of total share agree to be issued, and the remaining 5.3% was action on the Santiago Stock Exchange. Thus, we ended with raising more than CLP 617 billion, or 100% of the capital increase.We are very grateful for the support of the shareholders of the capital increase, especially given the market circumstances in which they occurred, which demonstrates clear support for the strategy we have been developing and the clear possibility of the future value. Regarding our digital strategy, more than 860,000 customers signed up for the BciPlus cashback loyalty program in the first 4 months since its launch, and MACH digital platform exceeded 11 million transaction in September 2023.Our consolidated balance sheet, loans increased by 5.08% quarter over quarter. Deposit rose 4.35% quarter over quarter. And we maintained a strong asset quality, with a coverage ratio of 204.39% in third quarter 2023. Overall, this quarter's performance was positive despite being affected by nonstructural factors, which we'll discuss further in this presentation. These factors primarily include increased funding costs due to the high treasury rate impacting City National Bank's NIM, a raise in delinquency rate in financial services due to the reduced market liquidity and higher unemployment in Chile and higher taxes resulting from an increase in the value of the investment in City National Bank.Please move to the next slide. In this slide you can see a snapshot of the bank and key figures, the diversification of the business, and the integral services offerings that we have. Also, I want to address that despite the change of the outlook on sovereign by Standard & Poor's, the outlook for BCI was not downgraded, and Standard & Poor's recognized BCI well established brand in the Chilean financial system and the strategy to expand outside Chile supported its sound competitive position.As you can see, our figures demonstrate that we have been growing impressively, almost tripling our total asset from $36 billion in 2015 to almost $90 billion at September 2023, increasing our total loans from $25 billion to $56 billion in the same period. This growth has been accompanied with healthy level of profitabilities as our net income reached $0.8 billion at third quarter 2023. This growth has also been accompanied with increased diversification. Over the same period of time, we have expanded our international presence and business diversification by growing our businesses in the U.S. and more recently launching our operations in Peru. We have also significantly increased our client base, that is almost 6x what it was in 2015. We have tripled our base of active digital client across platform, and we have optimized our operational model by reducing our branches from 361 in 2015 to 189 today. This transformation paved the way to a more efficient business model while allowing us to serve our clients better and faster.As mentioned before, we have experienced an unparalleled increase in our total asset, of which an important part of it were in our operations abroad. Our international operation has increased an impressive rate of 19% year over year since 2015, becoming as a top 10 bank in Latin America in term of assets. What we have achieved could not have been possible without organic movement and inorganic acquisition. We have 1 of the most successful stories of Latin American banks, expanding beyond the regional market. We have built a strong regional operation from south to north that includes our operation in Chile, a fast-growing emerging bank in Peru, and operations in Florida, U.S., which has been able to quadruple since the original acquisition of City National Bank in 2015. Our internationalization strategy has allowed us to build a regional corridor on which we can provide a holistic service offering to our customers through several type of products that our subsidiaries in Chile, Peru, and Florida provides.Regarding our digital ecosystem development, MACH has been a key enabler strategy. When looking back at the development of MACH, we can summarize it in 3 main phases as you can see in the slides. As 1 look forward, we are entering into a new phase whose objective is to monetize our customer base by offering high margin of financial services with significant value added. Our strategic roadmap include the launch of credit card and [ inter-platform ], customer loans, which will allow us to capitalize on what we have built over the years, underpinned by a strong risk culture, internal controls, a significant amount of data gathered after all these years of operations. MACH performance put us in evidence what we are heading to become the primary bank account for our customers. Our client base grew 11% over the last year, while total transaction increased roughly 30%.In addition, the average transaction surged almost 50%. Client balance in MACH increased around 60% over the course of the year, which is also a key indication of the increasing adoption of MACH as the main account for our clients. It is worth highlighting that in May of this year, we developed our digital checking account, which has presented a notable increase in the number of enrolled clients with that account. And it is important to note that all new enrolled clients are enrolled with a MACH checking account. As of today, over 2,000 users have signed for the account that are already showing improvement of the key metrics previously mentioned, boosting MACH's path of success. The deployment of this product represents a key development for MACH as it means an universal acceptance in merchants, something that travel or prepaid card uses. The quick migration to checking account represent a milestone toward the monetization objectives and suggests that the commencement of our profitability phase.BciPlus is instrumental to help merchants grow their businesses. We are helping them to increase their sale by connecting enrolled merchants and our 5 million customers of BCI ecosystem. To date, more than 860,000 customers have enrolled in our program. In addition, more than 200 merchants have already joined and most of them are active in the platform.Now let's go through some figures of consolidated operation compared to the result of third quarter 2023. Firstly, we are experiencing increased funding costs from the United States due to the high interest rate on deposit, which have impacted City National Bank net interest margin. Although provisions and writeoffs were slightly lower year over year, we have seen a rise in the delinquency rate of financial services, affecting the entire retail financial industry exceeding our estimates. This is due to the end of the excess liquidity in the market and a high level of unemployment. Delinquency increased in the retail segment due to weaker economic scenario.Regarding consolidated operating expenses decreased by 10.86% year over year as part of our efficiency and productivity plan. And finally, the lower tax rate was mainly due to the valuation of the investment in City National Bank of Florida and the monetary correction associated with the change in CPI. In summary, we believe these 4 points are not a structural effect. Overall, we have a strong performance this quarter.Our NIM decreased by 60 basis point quarter over quarter, mainly associated with increasing inflation levels. Our margins were exceptionally high during 2022 as a result of the high level of inflation and is returning to normalized levels as inflation converge toward the target. Regarding net fees, the 5.6% decrease is mainly due to the higher fees paid for the license to use debit card brands.Our local operating expense is experienced 0.3% increase year over year, which is well below the inflation rate. This growth was achieved by the implementation of our productivity plan, designed to optimize costs while maintaining operational efficiency. One example of this is the successful optimization of the number of branches and at the same time developing a new branch model. In the next slide, you can see how the recent capital increase positions us with a regulatory capital well above the regulatory requirement and our internal rates. As you are all aware, Basel III is currently under implementation and capital requirements shall be phased in gradually to comply with the necessary capital ratios by 2025, including additional capital buffers for Pillar 1, systemic conservation, and countercyclical buffers. Currently, our regulatory requirements stand at 6.6% as of September, and we are at 9.8%. With the current capital increase, we reach around an increase of 120 basis points. Looking ahead to 2025, when Basel III is fully implemented and considering certain assumption, we estimate that requirement will be around 9.25%, while our internal target is 11%, significantly exceeding our regulatory norms.Now I will leave you with Juan Enrique Pino who will continue with this presentation.

[Juan Enrique Visinteiner, executive]

Good morning. My name is Juan Enrique Pino. I'm the Head of BCI's Credit Risk Management team. I'm happy to be here with you once again. Here we can see the performance of the entirety of our loan portfolio. On 1 side, we're happy to see that there's a stable growth in asset volumes, while nonperforming loans ratio seem to be stabilizing at levels similar to pre-pandemic levels and below industry average. And with a stock of loan loss provisions, including voluntary provisions, that is stronger than pre-pandemic levels. As to the commercial loans portfolio, it continues to be 1 of the main drivers in loan volumes, with MPL ratios still showing the first signs of stabilization around pre-pandemic level, which is in line with the general trend in the industry.As to mortgage loans, residential mortgages portfolio has maintained its resilience in the current economic scenario with volume stabilized at current levels, given lower demand for new loans, and with our nonperforming loans ratio gradually trending towards pre-pandemic levels and with significant larger provisions. We remain highly confident as to the high quality of our mortgage lending portfolio given a strong loan-to-value ratios, our conservative credit policies, and strong culture of families in owning their homes and staying current in their residential debt.As to the consumer loans portfolio, it remains highly impacted by the effects of the higher inflation and unemployment rates, as Jose Luis was mentioning before, and in general by the economic slowdown which have impacted volumes through lower demand, together with a more conservative lending criteria. As predicted a few quarters back, credit performance indicators have moved past back towards pre-pandemic levels and beyond, and with NPL ratios as well as most risk indicators starting to stabilize at current levels since 3 to 6 months ago.I'll leave you now with Jose Marina, our CFO for City National Bank, Florida.

[Jose Marina, executive]

Thank you, Juan Enrique. Good morning, everyone. My name is Jose Marina, and I'm the CFO of City National Bank. Notwithstanding the challenges experienced in the banking landscape and challenging interest rate market, I am pleased to inform you that we had good results this quarter, especially in terms of liquidity, capital, and asset quality metrics.Before going any further, I want to provide you with a brief summary of the metrics most relevant in the current environment. First of all, deposit capture has become increasingly challenging among banks. Interest rates have significantly risen, resulting in an overall contraction in deposits within the industry. Despite overall outflows in the system, our client deposits have remained stable, whereas the banking industry experienced deposit attrition of 3% annually through September, even when including broker deposits. We maintained approximately $11 billion of available committed liquidity covering 139% of our uninsured and uncollateralized deposits. Our uninsured and uncollateralized deposits represent only 36% of total deposits, improving from 51% at the end of 2022.We continue to enhance our already strong capital profile with $403 million of excess capital in our common equity tier 1 ratio, even if we apply our unrealized AFS and HTM losses to our capital base. We maintained an investment portfolio with minimal credit risk that provides significant annual cash flow and has lowered its duration to 4.9 years. Finally, our CRE portfolio continues to perform well with a very low weighted average loan-to-value of 50% and in one of the best economic markets in the country. These results reflect our reputation in the market built over 77 years, our relationship-centric business model that focuses on diverse business segments and the strong culture we have fostered across our dedicated employees.Deposit capture has become increasingly challenging among banks, with deposits migrating to higher-yielding products such as Treasuries and competitive pricing dynamics, resulting in an overall contraction in deposits. Moreover, the industry events in the first quarter resulted in depositors migrating from midsize and community banks to major banks. Despite these major challenges, our client deposits remained stable year to date, with a slight decline of about $105 million through September.Now, looking at overall deposits, including brokered deposits, our total deposits increased by $1.2 billion, or 6%, year to date as you can see on the left-hand side of the slide. You can also see that our noninterest-bearing deposits declined by $1.7 billion year to date and represent 23% of our total deposits. This rebalancing of deposits, as rates increase, is adversely impacting net interest margins across the industry as we will see later in the presentation.On the right-hand side of the slide, you can see that the banking industry as a whole saw deposits contract by $240 billion, or 2% year to date. These industry figures include brokered deposits. Overall, our client deposits have remained stable despite turmoil in the industry and historic rate increases. This slide summarizes the year-to-date improvement across various liquidity and capital ratios. First, our TCE ratio, excluding and including HTM, improved by 21 basis points and 2 basis points, respectively, and remained strong. Second, we were able to reduce our uninsured and uncollateralized deposits by 16 percentage points year to date, and our available liquidity covers 139% of those balances. Finally, we have approximately $11 million of available liquidity sources, representing 41% of total assets, adding $600 million of liquidity compared to December 31 of this year. It's also important to mention that our available liquidity covers 139% of our uninsured deposit, significant increase since the beginning of the year.On this slide, you can see that our assets grew by $821 million or 3% year to date. Our loan-to-deposit ratio remains low at about 81%. We remain very well capitalized, as evidenced by our total risk capital ratio and our tier 1 leverage ratio, which were 14% and 9.5% as of September 30, respectively. On the right-hand side of the slide, you can see we had moderate loan growth, excluding PPP, of $165 million, or 1%, in the third quarter. Our core loans, excluding PPP, grew $1 billion, or about 6% year to date. Non-owner-occupied CRE represents 47% of the total portfolio. We have moderated loan production in the current market, focusing on high-quality deals in the market with strong spreads and solid deposit relationships. We will discuss the composition of our loan portfolio and dive into the CRE portfolio in the upcoming slides. Our strong credit culture and low risk appetite continue to result in excellent asset quality metrics. Our NPL ratio, for instance, remained low at 73 basis points of total loans with minimal past dues, representing 27 basis points of total loans.On this slide, we present the details of our commercial real estate portfolio by property type. Overall, our CRE portfolio had a conservative weighted average LTV of 50% and is supported by a strong debt service coverage ratio of 1.8x. Additionally, our disciplined and comprehensive credit process has historically resulted in exceptional asset quality, as evidenced by the minimal nonaccrual in our CRE portfolio of less than 1%. 82% of the portfolio is within Florida, which is a significant differentiating factor given the economic growth that is occurring in the state.This slide shows further detail on our commercial real estate retail and office segments by collateral type. The left-hand side of the slide focuses on retail, our largest commercial real estate segment, demonstrating how well balanced the portfolio is with anchored and credit tenants, which are the lowest risk profile sectors, accounting for 57% of the total exposure. Again, this is a very strong portfolio with sound client selection, as evidenced by the low weighted average loan-to-value of 55% and a high debt service coverage ratio of 1.7x. On the right-hand side of the slide, we highlighted our CRE office segment. This segment is one that has been drawing attention due to the lingering effects of the pandemic. When you look at our office segment, it is a balanced and conservatively underwritten portfolio focus on Class A and B properties. It is accompanied by great fundamentals with a 55% weighted average loan-to-value and a strong 1.8x debt service coverage ratio. I would also like to emphasize again the strength of our marketplace, with Florida being the fastest-growing state since the pandemic and the comprehensiveness of our credit risk framework, which has resulted in historically better asset quality metrics and lower charge-offs than peers.Moving to our operating results. Our net income for the quarter was $42.7 million. This represents an $8 million reduction quarter over quarter. The main driver is NIM compression, which is a common theme across the industry given the competition for deposits and the migration of noninterest-bearing deposits that has been taking place. However, our profitability continues to be strong, with an exceptional year-to-date efficiency ratio of about 51% and ROE of 9.4%. On the left-hand side of the slide, we present the evolution of our net interest margin and our core NIM since the beginning of the current rate cycle. On the right hand, we have a quarterly average effective Fed Funds versus our cost of funds. Current rate cycle is historic given the velocity and magnitude of the rate increase. This has led to significant deposit repricing, sizable DDA migration to interest-bearing products, resulting in overall NIM compression.We will continue to be vigilant in managing our cost funds, balancing the needs to continue growing our deposit base while also optimizing our NIM. I want to conclude today by discussing several strategies we have implemented to navigate this current environment. First, we have increased our minimum spread for new loan for new commercial loans and renewals to a minimum of 325 basis points. We're being highly selective on the lending side, not only from a credit risk and spread perspective, but also from a relationship perspective by focusing our lending activities on clients with a more holistic banking relationship that includes a relevant deposit relationship.We're also including such terms as deposit covenants, repayment penalties and floors on new loans as needed. Next, we have also executed $2.75 billion of pay fixed interest rate swaps during 2023, projected to generate $21 million in additional NIM in '23 and about $33 million in 2024 based on the forward curve. These swaps are made in the shorter to medium end of the curve to protect against rates staying higher for longer while also preserving our ability to expand our net interest margin once rates start to decline. Deposits are at the core of our list of banking approach. We have several deposit gathering strategies in place which have been vital to navigate the current environment. I should also mention that in Q3, we optimized our staffing model by approximately 8%, eliminating 85 positions representing $12 million in annual savings.These eliminations were in specific areas of lower strategic focus, such as the residential business. This has been a common practice for banks across the country and locally given current market conditions. Lastly, we are eliminating transactional lending and focus our residential lending efforts on secondary market business to enhance fee income. As we face some headwinds in 2023, we continue to deliver significant results. We have fortified our already strong liquidity and capital position.Our portfolio holds highly liquid investments with minimal credit exposure and decreasing duration. Our commercial real estate portfolio is well diversified with low loan to values and strong debt service coverage ratios. And finally, although we are experiencing [indiscernible] ratio has been better than peers, and we are well positioned for declining interest rates.On that note, I will pass it back to the BCI team for final comments. Thank you for participating this morning.

[Sergio Lehmann, executive]

Thank you Jose. We would like to continue with the presentation and before we finish, we would like to pass along the following key messages. The first is that we have significantly transformed a business over the last 7 years, almost tripling the bank's asset doubling loans and net income, growing and consolidated our international footprint and developing a unique digital capabilities that are core to our entire business.The strength that we have developed will allow us to reach a profitability target and deliver attractive risk adjusted return to our investors while adding additional value through our concrete portfolio of tangible value-creative initiatives. Our operation in the U.S. market is strong and is performing well. City National bank has a sound balance sheet with extensive sources of liquidity and sound capital ratios as you hear from Jose.We intend to continue with our local and international growth strategy that has positioned ourselves as the eight largest bank in Latin America and the first one of the banks in Brazil and Mexico. The capital increase was executed recently will allow us to further to strengthen our financial position, aligning our capital ratio with the internal target and with Basel III latest standards. Thank you very much for attending to this conference call and I will leave you with Andres to go through question and answer session.Thank you very much.

[Andrés Atala S., executive]

And the first question is coming from Tito Labarta from Goldman Sachs.

[Tito Labarta, analyst]

Hi, good morning. My question is I guess how you think about the profitability of the bank from here. I know you have some longer term targets, but interest rates may stay higher for longer. We're seeing some pressure on TMB, also lower inflation in Chile, pressure on the margin as well. You have the capital increase loans growing in the mid single digits. So just to think about what is the right level of -- how should it evolve from here and what could be the drivers to increase it?

[José Ibaibarriaga Martínez, executive]

Yes, you are right. The inflation, as Sergio mentioned, is coming down to the target of the Central Bank. GDP will growth around 1.5%. That will allow us to growth our loan portfolio in around 5% in Chile, and we are targeting an 8% growth in U.S. plus Peru. And with the capital increase that we have just successfully finished, we have a pressure in retainer and equity. How we are going to do it as we mentioned in the roadshow.We have some strategic plans, we have some business as usual incremental target, and we have some savings in the cost structure that will help us to arrive to the 14% return on equity target that we mentioned in the roadshow for 2026. So the way that we are going to achieve that, Tito, is by combining our international strategy that as you are aware, the Fed has maintained the interest rate yesterday and it has been taking longer to start decreasing. Having said that, the message of the Fed yesterday in some way or another gives some guidelines that will start generating a decrease by 2024 to 2026, as Sergio mentioned.Second, in Chile we have a good growth of 5%. You have mentioned and you have here [ Juan Gabino ], that we have a solid risk ratios and with that component we are going to aggregate margin enough to do it. And the other part that is in this equation is that we are growing our expenses at a pace of inflation plus 1% and with the growth of the margin of 8% and maintaining the risk level, as we estimated Juanovic told us, is the way that we are going to achieve this growth year after year. Obviously next year, as we have just finished the capital increase, we will have some pressure in the return on equity. But as we said, the trend of the digital ecosystem, growth in commission the business as usual, the international strategy and controlling costs is the way that we are going to deliver the 14% return on equity for 2026.

[Andrés Atala S., executive]

All good?

[Tito Labarta, analyst]

Great, thanks. I couldn't unmute myself. Great though. Thanks [indiscernible]. That's helpful. Maybe just one quick follow up, I guess on that, because if loans are growing 5% expenses inflation plus one, you would need some margin expansion. So how dependent is it on interest rates coming down and perhaps inflation picking up in Chile to help the NIM or is there some other factor that can boost your margin?

[José Ibaibarriaga Martínez, executive]

Tito, as you hear from Sergio, we are not expecting that inflation will catch up in Chile. We are expecting that inflation will be targeted of 3%. We do expect that the interest rate in the U.S. start to decrease when, who knows? But as Sergio mentioned, from 2024 to 2026 the interest rate will arrive to the target of the Fed and that will alleviate in some aspect the cost of fund in City National Bank.Yes, we have a curve associated with a roadmap, but the way that we are going to do it, as I told you, is that we are expecting to have a margin growth around 8%, 7% to 8% and expenses growth of around 4%, and that 4% differences when the margin is double the expenses allowed us to arrive to the 14%. We can go in detail on that, but that is the way that we are forecasting for the next couple of years in order to reach the level of basin 3 requirement. Internally we have 11%. And for that we need a 14% return on equity to achieve that too and continue growing and taking the opportunities that we have in Chile, in the U.S. and recently in Peru.

[Andrés Atala S., executive]

Now we have Yuri Fernandes from J. P. Morgan. SPEAKER A

[Yuri Fernandes, analyst]

I have a question regarding cost of risk and asset quality. I think Jose Luis already mentioned in the presentation that some figures are improving here. When we looked at the data, your cost of risk was 0.7. And I think your soft guidance for cost of risk is around 1, 1.1. And when we look, it's basically coverage consumption, right? So you provision below your new [indiscernible] formation. So my question in this line is, if you can provide a little bit more color on asset quality, how you see asset quality evolving, the level of cost of risk, and if the company will continue to use the reserves to provision a little bit below the formation on cost of risk, maybe cost of risk may be a tailwind, at least for the short term for ROEs. And then I can ask a second question.

[Jose Marina, executive]

So Yuri, on cost of credit. As we were describing below, we believe that the effects of the pandemic and thereafter the effects of the excess liquidity that affected the cost of risk numbers, I think we're way behind that now. We're confident that the current levels of risk are a fair reflection of what we should be seeing going forward, provided that the economic situation remains within what Sergio mentioned as the outlook. So we remain very positive as to the performance of the commercial portfolio. As I mentioned, we have seen a stabilization in the trends in consumer lending.So what we are expecting going forward is now a move back towards pre pandemic levels because we have stabilized our cost of risk back way above pre pandemic level. And that's the target now to start moving that downwards. And on residential mortgages, we believe there might be a quarter or two with indicators still going up and then stabilizing. So in general, we believe the overall credit portfolio should perform similar to in the next year, similar to the current one, with the commercial loan portfolio driving the improvement in quality, followed by retail portfolios with a lag of eventually 6 to 9 months.

[Andrés Atala S., executive]

Okay, the next question is coming from Daniel Mora from Creditcorp.

[Daniel Mora, analyst]

Hi, good morning and thank you for the presentation. I have a couple of questions. The first one is regarding the digital strategy. I would like to understand if you can provide more details regarding the monetization of match. You mentioned that it should come from credit cards, consumer loans, investment products, and else. However, I would like to understand what will be the target of the monetization per year. For example, of the 3.9 million clients that you have, you expect to reach 30% of these clients monetized the end of the next year, 50% by 2025. I think that with those numbers it will be very helpful for us to understand what is the base case scenario for you regarding the monetization of Match and Biscuit Plus and all the other initiatives that you have in the ecosystem. That will be my first question.

[José Ibaibarriaga Martínez, executive]

Daniel. One of the takeaways that we bring from the roadshow is that we have to give more color in the digital strategy. And in this moment we are internally working in order to give that kind of information. Not only in much but in BCI plus in one stop shop in Spain. I'm not prepared right now to give you that information, but you will hear from us soon as we understand that we need to give it in order that you make your analysis and value all the strategy or digital strategy. So Daniel, in this moment we are working on it and you will hear from us soon.

[Andrés Atala S., executive]

Just to compliment it's something that we will work with you Daniel and all the market in order to know your specific and general and specific questions so you will know about us in this line, as Jose just mentioned. Do you have any more question, Daniel?

[Daniel Mora, analyst]

Perfect, I wasn't unable to unmute myself. Yes, that is clear. Well, I hope that you can provide that information soon to the market. But just an additional question regarding this matter is the 14% ROE target for 2026 is dependent on the successful implementation of this monetization, right?

[José Ibaibarriaga Martínez, executive]

Not necessarily Daniel. As we mentioned in the roadshow, basically the incremental value in order to achieve the 14% will come from three-third and I'm talking about the incremental. One third of the incremental value will come from the business as usual, meaning the bank in Chile, the bank in U.S., the affiliate that we have in Chile growing at the pace that I already mentioned, 5% more or less 8% in the U.S.The second third of the value will come from a specific strategic plans that we are developing in basically some affiliates and some international growth Peru the insurance broker dealer, the mutual fund where we are making specific programs that are going to grow much faster than business as usual. And the third of the incremental value will come from one third is coming from the distribution channel project where we are going to capture a lot of savings.As I mentioned, we have been closing and changing branches from 361 to less than 190. So the third 3rd are coming from savings, another third is coming from the digital ecosystem and another third is coming from a specific target in the wealth management arena. So the answer, Daniel, is that the main part of the incremental value is not coming necessary from the digital strategy but it's an important permit. I think that we give some information in the roadshow, and we are more than glad to share with you that information in order you can make your models.

[Daniel Mora, analyst]

Just the last question is in the last call you mentioned that you plan to reach the 14% target in 2025. Just to make sure that I hear it well. Now you plan to reach it in 2026, right? And it will be a transition period the next year, given the capital increase. If the new plan is to reach it in 2026, what change for you inside the bank to move the long term target one more year? Now 2024 and 2025 will be transition years for you?

[José Ibaibarriaga Martínez, executive]

No, I think that 2025 Daniel we are going to be close. But what is changing is that the Fed is taking longer to start decreasing the interest rate. And that is having an impact in the deposits. The cost of deposit is that NIM of City National Bank. If the Fed accelerates the normalization of the interest rate, the target of return on equity on 2025 of 14% will be achievable. But we want to be caution in that sense, because it not necessarily depends on us.

[Andrés Atala S., executive]

Next question is coming from Neha. Neha from HSBC. Hi, Neha.

[Neha Agarwala, analyst]

Hi, everyone. Thank you so much for taking my question. Two questions. First is continued good cost control. How much more room do we have to improve efficiency and show good cost control? And my second question I didn't quite get why the effective tax rate was so much higher during this quarter. What should we expect for the coming quarters? If you can give us some sunset.

[José Ibaibarriaga Martínez, executive]

Thank you Neha. Regarding the cost control, we do have an important space of improvement. The main reasons for that are the following. We arrive to a level of investment in order to update our It architecture, infrastructure, all the safety in the safety well, the liquidity safety investment in It, we have updated all the systems. And the investment that we are projecting for next year and next year are an important way below what we are investing now basically around $50 million to $60 million less from the peak that we have last year. And at the same time, all the investment that we did in order to roboticize and actualize all the core systems by microsystem, etcetera, is generated savings that we need to capture and we are already capturing in the operational model.So the first question, Neha yes, we do have a space. We will finish at efficiency ratio of around 47%. We need to arrive to 45%. And the efficiency are coming from savings and improvement in our operations because of the investment that we did. And the impact of the tax rate is associated to two things. One is that we do have an investment in City National Bank that is reflected in U.S. dollars. When the dollars or the exchange rate increases, we have a gain in the investment of City National Bank and that investment has to pay taxes and that has had a significant impact in the tax rate and the other impact is as inflation decreases, the monetary correction of the equity decreases and that is a credit to taxes. So as the inflation decreases, the credit to tax decreases. That are the two main effect in the tax rate Neha.

[Andrés Atala S., executive]

I think that we answered the question of Neha and the last one, and we are running out of time is from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My first question is a follow up on [indiscernible]. So considering the expectations inflation rate next year, how should we think about the trend on [indiscernible]? Can you remind us what is your sensitivity inflation and rate for every change on 1,000 basis points at a consolidated level, so at PCI level. And my second question is on fees. We're seeing fees are likely to decrease this year. So thinking of next year, you think this frame would prepare considering better economic growth, moving from a recession and well that we can start to see some accelerated growth in digital channels and match products. And my next question is a follow up on fees, so given the capital increase, would it be reasonable to spec an ROE between 11%, 12% next year?

[José Ibaibarriaga Martínez, executive]

I will try to answer your question a little bit fast because we are running a little bit out of time. Return on equity. Yes, we are expecting a return on equity over 11% for next year. We have not finished our budget process but what we have seen so far is yes that we are going to be over 11%. Regarding fees, we are estimating an increase in fees between 8% to 9%. The main sources of that will be an increase in transactions associated with insurance. We are going to increase our loan portfolio and that meaning loan consumer portfolio and that means some increase in fees and the third one is in the digital ecosystems and the fourth one is the credit card arena. So it's around 8%. And the NIMs you ask for inflation and interest rate inflation 100 basis point of inflation is around CLP 35 billion and more or less the same in interest rates around CLP 35 billion. That is not consolidated Ernesto, that is in Chile. The impact in City National Bank, if you wanted, Jose can address it.

[Jose Marina, executive]

Sure, Jose Luis. So Ernesto, we position the balance sheet here at City National Bank to be liability sensitive. So we will benefit when rates and short term rates decline. Decline in Rates of about 100 basis points would Increase the NIM by about 5% once you get to minus 200, minus 300 [indiscernible] 10% to 15% respectively there. So again we focus -- we've executed almost $3 billion of swaps this year, most on the shorter between 1 to 3.5 years in order to preserve our ability to expand our NIM once rates start to decline.

[Ernesto María Gabilondo Márquez, analyst]

It seems that the worst for NIM will decline. And when we [indiscernible] rates, we can actually have NIM expansion coming from the [indiscernible].

[José Ibaibarriaga Martínez, executive]

Ernesto, correct me because I said CPL 35 billion, is CPL 35,000 billion. So thank you very much to all of you for participating in this call. As always, we are really interested in hearing from you any additional questions that you may have the Investor Relations team is open and available to answer all your additional questions. Thank you very much and have a nice Thursday.

[Ernesto María Gabilondo Márquez, analyst]

Thank you all.

[Operator]

The recording has stopped.