Banco de Credito e Inversiones

SGO:BCI

Earnings Call Analysis

City National Bank Sees Strong Growth and Positive Outlook Ahead

In the most recent quarter, City National Bank demonstrated resilience with a 25.8% year-over-year net income increase, driven by a robust net interest margin (NIM). Despite a temporary client deposit decline of $200 million, normalized growth rates indicate a strong 6% annualized performance. Their strategic investments, particularly in high-yield securities, are expected to enhance future earnings by $18 million annually. The bank projects a net income growth guidance of 13% to 15% for the year, underpinned by sustained solid loan growth and prudent risk management strategies in the competitive Florida market.

Robust Growth and Strong Performance

In its most recent earnings call, the company reported a remarkable year-over-year net income growth of 25.8%. Compared to the previous quarter, the increase is even more impressive at 63%. This strong financial performance has been largely driven by effective pricing strategies and the expansion of its net interest margin (NIM), which increased by 28 basis points to reach 4.1%. Highlights of this achievement include a significant 13% quarter-over-quarter rise in operating income and a net interest income increase of 11%.

Strategic Actions to Enhance Earnings Growth

The bank has undertaken strategic actions to optimize its balance sheet, most notably by repositioning its investment portfolio to move from lower to higher-yielding bonds. This transition is projected to enhance the NIM by 10 basis points and generate about $18 million in additional recurring net income post-tax. The firm is also focusing on maintaining a prudent approach to cost control and efficiency, aiming to align expense growth with inflation.

Liquidity and Capital Strength

The company maintains a robust liquidity position with approximately $9 billion available, covering about 116% of uninsured and uncollateralized deposits. Moreover, the Common Equity Tier 1 (CET1) capital ratio has improved, reaching 11.67%—up 188 basis points year-over-year. This solid capital base ensures that the bank remains well-capitalized in the current market environment.

Client Deposits and Market Position

Total client deposits increased by $393 million year-to-date, although this includes a temporary outflow of $377 million from public depositors, which is expected to normalize in the next quarter. Excluding these seasonal factors, annualized deposit growth is estimated at around 6%, outpacing the broader banking industry's growth of approximately 3%. Furthermore, the bank is successfully reducing reliance on brokered deposits, having decreased them by $724 million year-to-date.

Guidance and Future Outlook

Looking ahead, the bank provides guidance for a net income increase of 13% to 15% in 2024, driven by stable operating margins and a projected local loan growth of about 5%. Importantly, despite the anticipation of some fluctuations due to interest and exchange rate movements, the expectation for sustained NIM stability remains. Year-end projections suggest a continuing positive trajectory with enhanced NIM due to effective market positioning.

Quality of Assets and Loan Portfolio Management

The bank's asset quality remains exceptionally strong. The non-performing loan (NPL) ratio is reported at a low 70 basis points, with minimal past due obligations. The strategic focus on high-quality loans is evidenced by the low loan-to-value ratios held in its commercial real estate (CRE) portfolio, which averages 49%. This disciplined lending strategy helps maintain strong credit quality and supports future growth.

Digital Growth and Customer Engagement

The company reported a successful expansion in its digital platform, with an increase of over 700,000 current account customers through its MACH initiative, showcasing its ability to drive customer engagement and adaptability in a competitive landscape. The commitment to technology and innovation will help it maintain an edge in the evolving banking sector.

Conclusion: A Strong Investment Opportunity

In summary, the bank's solid financial performance, strategic initiatives to enhance earnings through investment repositioning, strong capital and liquidity positions, and effective digital strategies make it a compelling prospect for investors. With a clear guidance for sustained growth moving into the next fiscal year and robust asset quality metrics, the firm is well-positioned to navigate future market conditions.

Earnings Call Transcript 2024-Q3

[Andrés Atala S., executive]

Okay. Good morning to all of you. Welcome to our third quarter 2024 conference call. I'm Andres Atala, Head of Investor Relations at Bci. With me today are José Luis Ibaibarriaga, Bci CFO; Mr. Sergio Lehmann, Chief Economist; Juan Enrique Pino, Head of Credit Risk at Bci. As usual, we also have been joined remotely by Jose Marina, CNB's CFO; and Cristian Saffie from IR team.

Today, we will present our results for the third quarter of this year, highlighting the robust performance and underscoring Bci's sound financial health and strategic delivery. After reviewing the results, we will leave room for the Q&A session. So please hold your questions and raise your hands at the end. To begin with this, Sergio will contextualize, explaining the macroeconomic figures.

[Sergio Lehmann, executive]

Thank you, Andres. I'll do a quick macroeconomic review of the U.S., Peruvian and Chilean economies. The global economy has been slowing down in response to periods of high interest rates. As a result, several central banks in developed economies have initiated their rate cutting process. Nevertheless, geopolitical risk remain elevated. The U.S. economy has been steadily moderating, yet it continue to exhibit resilience.

In this context, the Federal Reserve has initiated its rate cutting process in response to a labor market that has begun to show some signs of weakening. However, all data suggests that the economy is poised for a soft landing. Market expectations point to an additional 25 basis point rate cut for the remaining of this year. With respect to the U.S. election, Donald Trump will return to the White House, having control over both the Senate and probably, the House. In light of this victory, the market anticipates a short-term economic boost, given coming tax reduction according to Trump's program, though accompanied by a potential deterioration in public finance. This outcome is expected to drive higher interest rate and a more globally appreciated dollar. Furthermore, Trump's introduction of various new tariffs is likely to intensify geopolitical fragmentation and reduce global trade, signaling slower growth worldwide. As a consequence, we have seen some reduction in commodity prices.

In Peru, economic activity has demonstrated significant dynamism, reflecting the strength of its mining sector. In this regard, inflation remains within its target range, and the Central Bank is engaged in a gradual process of reducing its monetary policy rate. In Chile, domestic demand has shown a greater-than-expected deceleration and the labor market has exhibited a decline in job creation. As a result, the Central Bank of Chile has proceeded with its political normalization at a faster pace than originally forecasted, currently establishing the monetary policy rate at 5.25%. Pressures over the Chilean peso has reappeared, given the political scenario in the U.S. and expectation about Trump administration key definitions. We expect it to slow at the ground trend in coming months.

Please move to the next slide. In its latest release, Bureau of Economic Analysis reported that the U.S. economy grew by 2.8% quarter-on-quarter, annualized in third quarter of this year, above expectation and driven primarily by personal consumption. The economy is expected to grow around 2.6% in 2025, this year. And in the case of Florida, GDP has outpaced the national average. The labor market continued to showing some resilience, but anyway, at the end, has been showing some significant deceleration. The employment rate for the U.S. and Florida are at low levels, and the national average has moderated to 4.1%.

Headline and core inflation has continued to decrease as expected. It is estimated that inflation will be below 3% annually at the end of this year. As a result, the Federal Reserve began, as you know, its easing cycle with a 50 basis point cut in September, followed by 25 basis point reduction in November, bringing the Fed rate range of 4.75% to 4.5%. Current market expectations suggest the possibility of a pause in December.

Please move to the next slide. Regarding the U.S. yield curve, interest rate have risen for longer tenors in comparison to the second quarter. Please move to the next slide.

Peru's economy grew by 3.6% year-on-year in the second quarter of this year, driven by the mining sector. For this year, we expect activity to rebound, to grow and grow in line with improved business and consumer expectation, inflation in its target range and lower interest rates. The Central Bank of Peru continued to advance in its normalization cycle, with the current policy rate set at 5%. Please move to the next slide.

In Chile, GDP grew by 1.6% year-on-year in the second quarter, driven by a positive contribution of net exports. This year, domestic demand will recover at a slower pace than expected. Our baseline forecast state that Chile will grow at a pace of 2.2% for this year. The labor market has shown a notable deterioration in components over the recent months. In particular, the participation rate has been declining, while the employment rate has risen to 8.7%. Please move to the next slide.

Even though inflation has eased, it's remained somewhat elevated due to the increase of electricity tariff after a 5-year freeze. Our base scenario indicates that the CPI will end this year at 4.7% year-on-year and we expect to reach its target by the beginning of 2026. In response to a weaker internal demand, the Chilean peso or the Chilean Central Bank has continued its easing cycle, as I said, at a slightly higher pace than expected. We forecast that the monetary policy rate will be at 5% by the end of this year, December this year, and will reach its neutral level in 2025 -- at the end of this 2025. Please move to the next slide.

The Chilean yield curve has shown mixed movements compared to previous quarters. The Chilean peso will still under pressure by external factor, and we expect that it's going to be going to more aligned level as a comparison with its fundamental values. By the end of this year, we expect that the Chilean peso to reach CLP 930 per dollar. Now I will pass the mic to Jose Luis, who will continue with bank quarterly results. Jose Luis, the floor is yours.

[José Ibaibarriaga Martínez, executive]

Thank you, Sergio, for joining us for your review today. I'm pleased to -- I am pleased to greet you all and share positive results we achieved, primarily driven by solid performance in our local operations. The result underscore our strategic focus and commitment to sustainable growth.

Our net income showed a robust growth with an increase of 25.8% year-over-year and 63% increase compared to the third quarter 2023. In the same line, our local NIM rose by 28 basis points quarter-over-quarter to 4.1%, while City National Bank's NIM increased by 16 basis points in September, surpassing the 2% mark.

This quarter, we executed an investment portfolio repositioning at City National Bank. We transitioned from lower to higher yield bonds with the goal of enhancing our net interest margin in the coming years, which Jose Marina will address further in this presentation. As you have seen, this has been an exceptional good year on fee incomes, which shows our strategic return to regain track in this line, while we continue with the disciplined cost control approach, maintaining growth aligned with inflation level, aiming to our midterm efficiency target.

Our capital position remains robust, with CET1 increasing by 188 basis points year-over-year, reaching 11.67% as of September, highlighting our prudent capital management and resilience in a dynamic market environment. Additionally, we achieved a successful issuance of a second $500 million AT1 bond at a 7.5% annual rate with a strong demand, reflecting the bank's position on international market.

In digital account traction, both at Bci and MACH, we significantly expanded our current account customer base by over 700,000, demonstrating our success in leveraging digital platform to enhance customer engagement and accessibility. Finally, aligned with our strong culture goals, Bci was recognized as Chile's Happiest Company for the second year in a row in the Building Happiness by Buk ranking.

Please move to the next slide. In this slide, we present a snapshot of the key financial figures. Let's now review the main figures of our consolidated operation for the third quarter 2024. Bci operating income recorded an 8.8% year-over-year increase, primarily driven by growth in net interest income due to our effective pricing strategy. Additionally, net fee saw a substantial year-over-year raise, attributed to higher fees from intermediation and insurance administration, which we'll focus further in this presentation.

Turning to expenses. Consolidated operating expenses increased by 7.4%, while local expenses increased by only 0.4%. It is worth noting that there were nonrecurring events in City National Bank, which will be explained later in this presentation. Nevertheless, we reaffirm our commitment to keeping our expenses in line with inflation.

Finally, I want to highlight that our net income increased by 62.9% quarter-over-quarter, driven by strong operating income despite nonrecurring effect at City National Bank of Florida. Moving to our local loan portfolio, the 4.3% year-on-year increase, reaching USD 39.2 billion was mainly driven by mortgages loans, as shown in this slide. Mortgages loans grew 8% quarter-over-quarter, reaching USD 12.3 billion.

In contracts, the consumer loan portfolio decreased by 0.8% year-over-year, primarily due to the decline in installment loans and reduced credit card usage, driven by higher interest rates and challenging macroeconomic conditions. This slide provides an overview of MACH, highlighting key enhancements and performs metrics. Here is an update of MACH progress towards monetization powered by a strong customer engagement and performance in key areas. Started with a credit card launch, we began our Friend & Family phase in October, and we are track to reach 1,000 end users by the end of the year. Average balances reached $66 million as of September 2024, up 47% from the $45 million last year. This quarter, we achieved an 11% quarter over quarter growth across checking accounts, CPF accounts and saving accounts, reflecting both growth and customer trust.

Payment on Visa have reached USD 87 million in gross merchandise value, reflecting a 44% increase compared to last year, with growth in further underscored by a strong 37% quarter-over-quarter gain, demonstrating the continued moment and effective traction of our payment platform. Moving forward, as you can see in this slide, I want to highlight the positive growth in NIM and fees. Net interest margin experienced a 28 basis point increase year-over-year. This growth is mainly attributed to effective businesses, volume management and the robust of local business. Optimizing our loan portfolio and maintaining a strong treasury management strategies has been key drivers in this growth.

Local fees increased by approximately 15%, primarily due to lower commission expenses resulting from new rates for fund transfers, as well as higher income from management mutual funds, investment funds and other assets. In the case of mutual funds, Bci has successfully increased volume and achieved growth in short-term funds. This quarter, local efficiency reached 44.77%, supported by a robust growth in operating revenues, our client income generating capabilities and a strong operating expenses policy. Our local operating expenses maintained a flat tendency compared to third quarter 2024 in the same period of last year, highlighting the expenses control remain a priority and a key part of our productivity strategy.

As for the year to date growth compared to last year, the increase reflects various factors, including the main following 2: personnel, which contains a salary adjustment of CPI in March and September. The fact that even though we have some staffing decline, this more expensive mix of positions, more specialized individuals and objective focused incentive implemented. In the IT arena, expenditures related to amortization of generated software and requiring computer science and communication expenses. These initiatives undertaken as part of our efficiency plan, such as optimization, the footprint of our branches and leveraging efficiencies derived from digitalization in a process have all contributed to this outcome. Overall, we have observed positive results from our cost control and efficiency program, primarily driven by disciplined measures and efficiencies gain achieved through branch optimization and process digitalization.

Now we will present key highlights from our liquidity levels and regulatory capital metrics. As shown on this slide, our total local deposit base grew by 1.6% year-on-year. This growth has driven by a 5.2% increase in local demand deposits, partially offset by a 0.6% decrease in time deposit year-on-year. Regarding our regulatory capital levels, as displayed in the upper right chart, our common equity Tier 1 capital increased by 188 basis points year-on-year, reaching 11.67% as of September 2024. This improvement is attributed to higher net income for the period, a reduced loss in other comprehensive income account related to available-for-sale portfolio and a positive impact from hedge accounting cash flow derivatives. Additionally, we successfully issued a second $500 million AT1 bond at a 7.5% annual rate, with a strong demand. Now we will discuss our asset quality and loan portfolio composition with Juan Enrique Pino.

[Juan Enrique Visinteiner, executive]

Thank you, Jose Luis. In this slide, we can see the evolution -- sorry -- in this slide, we can see our domestic loan portfolio remains well diversified across customer segments, business line and economic sectors. As illustrated in the chart on the right, our domestic commercial loan book also showcases robust sector diversification.

In the real estate segment, the industry continued to experience stress. However, thanks to our focus primarily on the most seasoned players, viable projects and conservative loan-to-value ratios, the majority of our portfolio is performing exceedingly well. Where necessary, the extended repayment timeless we have provided have proven sufficient in aiding our borrowers deal with the effects of the sector's contraction. We financed reliable projects and high-quality assets underpinned by substantial collateral and very conservative LTV ratios. Furthermore, we have timely established appropriate provisions where necessary, including both name-specific and voluntary provisions.

Let's go to the next slide. In this slide, we can see the evolution of our entirety of the domestic loan portfolio. Loan volumes persist in a healthy growth trajectory, primarily driven by our commercial and particularly, housing mortgage segments, as Jose Luis just mentioned. You can also see nonperforming loans that maintain an upward trend and are slightly above pre-pandemic levels, yet remain comfortably within industry standards. Despite these challenges, our loan loss provision ratio stands firm due in large part to the proactive voluntary provisions we established several years ago.

Regarding our commercial loan portfolio, the increase in the LPN ratio evident from the graph is largely negatively influenced by 1 specific client in the telecom industry who filed for Chapter 11 a few months ago and that we have mentioned in previous calls. This will -- this will impact our NPL until the case is resolved. Setting that case aside from the analysis, our overall commercial portfolio appears to be stabilizing at approximately 2%. As evidenced by the black dotted line, this portfolio is strongly supported by a considerable amount of voluntary provisions.

Regarding the residential mortgage portfolio, we are seeing a healthy volume growth, as Jose Luis just mentioned, while also facing and managing an increased level of past dues. This scenario is the confluence of an unusually high unemployment rate and the lagging effect of increased inflation from the 2 years prior. Additional factors that prevented past-due borrowers from a green to loan restructuring include increased interest rates and lengthy documentation procedures that are being handled. In the context of more stabilized interest rates and now lower inflation, we are already observing a stabilization in our short-term past-due buckets.

Concurrently, we are seeing an increased rate of loan restructuring and past due -- from past-due borrowers. This uptick can be attributed partially to the stabilization in loan rates and partially to our recently streamlined restructuring process made in Bci, which has effectively cut by half the loan restructuring cycle time. This development will lead to lower monthly payments in line with borrowers' revised loan payment capacity. Nonetheless, due to the inherent dynamics of these portfolios, we envision our NPL rate still growing for some time before starting to decline.

In the interim, our existing level of loan loss provisions, inclusive of voluntary provisions, reflect the current state of the portfolio, including a high level of past-due obligations and good advantages, mix of loan-to-value ratios and loan term profiles. As to consumer loans in this final slide concerning trade portfolio trend and quality, our consumer loan portfolio has demonstrated good momentum in quality terms, with the NPL ratio already stabilizing at around 2.9%, only slightly above pre-pandemic levels. Bci views this segment as a highly attractive one for driving growth, complemented by strategic rebalancing towards more resilient customer segments and a risk appetite that aligns with the still challenging macroeconomic environment. We have our customer loans well covered and see sufficient provision level for write-offs. Now I will leave you with Jose Marina, City National Bank's CFO.

[Jose Marina, executive]

Thank you. Good morning, everyone. My name is Jose Marina, and I am the CFO of City National Bank. It is my pleasure to be here with you this morning to discuss our performance during the third quarter. This quarter, we had strong core results and also executed some strategic actions to further strengthen our balance sheet and accelerate earnings growth. I will elaborate on this later.

In the third quarter, our NIM continued expanding. Our liquidity and capital position remains strong, and our CRE portfolio continues to perform exceptionally well. So as you can see here, our client deposits increased by $393 million from September so far this year. However, this includes $377 million of temporary outflows during the third quarter from public depositors, which are seasonal in nature. Those funds are expected to return in the fourth quarter. Normalizing for this, year-to-date growth would be 4.4%, or about 6% annualized.

We maintained approximately $9 billion of available liquidity sources, representing about 35% of our total assets in covering about 116% of our uninsured and uncollateralized deposits. Our net interest margin expanded for the third consecutive quarter, growing 16 basis points quarter-over-quarter and expanding 28 basis points when comparing to the fourth quarter of 2023. Both the net interest income and margin for the month of September are the highest in the last 18 months as well.

We continue to enhance our already strong capital profile with $979 million of excess capital in our CET1 ratio even if we applied our unrealized AFS and HTM losses to capital . We maintained an investment portfolio with minimal credit risk that provides significant annual cash flow and have lowered the duration of the portfolio to about 4.6 years. Our CRE portfolio continues to perform well with a weighted average LTV of about 49%. The economy and CRE market in Florida continued to perform significantly better than the U.S. as a whole. These results reflect the reputation of market built over 78 years, our relationship centered model focusing on diverse business segments, the strong culture fostered among our employees and our remarkable success in executing our strategic vision.

Despite all industry headwinds, our client deposits increased by $293 million or about 2.2% through September. However, as already mentioned, this quarter included $377 million of temporary outflows from public depositors expected to return in the fourth quarter. Normalizing for this temporary outflow, the annualized growth rate will be about 6%, outperforming the banking industry as a whole, which slightly increased by about 3% on an annualized basis, including the impact of broker deposits.

For the quarter, our client deposits decreased $200 million. However, this is primarily related to the temporary public fund outflows that I already mentioned. Our strong client deposit growth enabled us to reduce our brokered deposits by about $724 million year-to-date. Furthermore, our cost of client deposits decreased by 19 basis points when comparing June to September due to our pricing strategy aimed at for actively addressing client deposit rates and more stabilization of DDA balances. Total noninterest-bearing deposits represent about 22% of our total deposits.

Our assets remain at just above $26 billion with a low loan-to-value ratio of 86%. We remain very well capitalized, as evidenced by our total risk based capital ratio and Tier 1 leverage ratio, which were 15.1% and 10.3% as of September 30, respectively. Additionally, the unrealized losses on the investment portfolio have been reduced in the third quarter due to the recent decrease in the 5-year treasury and the portfolio repositioning executed in September, which we will cover in detail later in this presentation.

Core loans, excluding PPP, increased by $364 million quarter-over-quarter, as shown on the right-hand side of the slide. We continue to focus on high-quality deals with strong spread that, on average, exceed 330 basis points for commercial loans this year and solid deposit relationships. Our strong credit culture and low-risk appetite continues to result in external asset quality. The NPL ratio, for instance, remained low at 70 basis points of total loans. Past dues are minimal, only 27 basis points of loans, decreasing by 9 basis points over the prior quarter. We also increased our allowance coverage by 10 basis points quarter-over-quarter.

On this slide, we provide details on our CRE portfolio, which represents 48% of our overall loan book. Our CRE portfolio has an conservative weighted average LTV of 49%, supported by a strong debt service coverage ratio of 1.9x with full or partial recourse on 63% of the loans in the portfolio. It is also very well diversified across all segments. Our pure-play Florida bank strategy resulted in only 16.4% of CRE loans outside of the state of Florida, representing only 8% of all loans in our portfolio. The CRE portfolio outside Florida is well diversified with the largest exposure in growth stakes in the southern portion of the country. Additionally, they have conservative weighted average LTVs of 56%, supported by a robust debt service coverage of 1.6x.

In September, we performed a strategic repositioning of our balance sheet by restructured portions of our investment in BOLI portfolios. This was done to enhance the yields of both portfolios and accelerate earnings growth. With this strategy, we replaced lower-yielding assets with higher-yielding funds, while having an aggregate earn-back period of just over 3 years. Traditionally, CNB received a capital infusion of $50 million from Bci to replenish the bank's capital and maintain capital ratios above peer averages. This transaction places us in an even stronger position from a safety and soundness perspective. Similar strategies have been executed by several midsized and regional peer banks over the past year.

This slide shows further details on our strategic reposition. Regarding BOLI, we restructured $334 million out of the $532 million portfolio through the execution of 1035 exchanges on active policies and surrenders on inactive policies. This is projected to improve our NIM by 3 basis points and generate $6.3 million of additional recurring net income post tax. In the investment repositioning. We sold $694 million of securities, or about 10% of the portfolio, with a 1.73% yield and reinvested in a higher yield of securities with a 4.3% yield. This is projected to improve our NIM by about 7 basis points and generate about $11.5 million of additional recurring net income post tax. The combined actions will optimize future results by improving our NIM by about 10 basis points, ROA by about -- I'm sorry, ROE by about 70 basis points and generate about $18 million of additional recurring net income post tax.

This slide shows the nonrecurring items affecting our third quarter results, which led to the $24 million reported loss for the quarter. Besides the already referenced losses from the BOLI investment portfolios, we also incurred an additional $14 million of loan loss provisions related to new qualitative factors implemented during this quarter. I will provide more details on this later in the presentation.

Additionally, as part of our 5-year strategic planning process, we accrued approximately $9 million in consulting fees this quarter. We have engaged a top consulting firm to partner with us in the implementation of our strategic plan over the next couple of years. Normalized for these items, our net income for the quarter would have been $47 million, increasing $15 million, or 49% quarter-over-quarter.

This slide shows our full income statement. I want to highlight the upward trend of our operating income, which increased $18 million or 13% quarter-over-quarter. This was basically driven by NIM expansion with our net interest income growing by $13 million or 11% quarter-over-quarter.

This slide represents the different drivers of change in the ACL quarter-over-quarter. Our ACL ratio increased by 10 basis points from 87 basis points to 97 basis points in this most recent quarter. We booked $29 million of additional provisions in Q3, which was primarily driven by $14 million of nearly implemented qualitative factors and $13 million through the changes in the Moody's economic scenario. Overall, our asset quality continues to be exceptional with low NPLs and past dues driven by our sound underwriting as we previously discussed.

On this slide, we demonstrate how both our net interest income and margin grew for the third consecutive quarter. Our net interest income increased quarter-over-quarter by $13 million or 11% percent as our NIM expanded by 16 basis points, mainly due to our cost of funds declining by 8 basis points and higher yield on earning assets of 8 basis points. Our quarterly NIM expanded 28 basis points when comparing to the fourth quarter of 2023. Both the balance sheet repositioning and the 50 basis point Fed funds cut in September had a minimal impact on the NIM for the quarter since they both occurred in September. Hence, we should expect this positive impact to be fully reflected in our fourth quarter results.

For the month of September alone, our NIM reached 2.2%, so we're heading into the fourth quarter with strong momentum. Our interest rate risk profile is slightly liability sensitive, and therefore, this slide shows that each 25 basis point cut in Fed funds would have enhanced our net interest income by approximately $7.5 million or about 3 basis points in NIM. Our balance sheet is well positioned to benefit from a declining rate cycle and beyond.

Lastly, in September, we announced our new partnership with the University of Miami, which is one of the best universities in the country with nearly a century of existence. Both City National Bank and the University of Miami share deep roots in South Florida and have an unwavering commitment to this community. As part of this partnership, we are now the official bank of the University of Miami athletic teams, including their top ranked football team. This partnership will also deliver a host of benefits and exclusive banking products to students, alumni and faculty staff numbers, including plans for a new banking center and ATMs on the university's main Coral Gables campus and possibly other locations in the future. Overall, the partnership strengthens both the bank's position in the market, but more importantly, solidifies our commitment to improving our community for future generations.

As we close, our position as the largest pure-play Florida bank located in what we think is the best market in the country positions us well for success in 2025 and beyond. On that note, I will pass it back to the Bci team. Thank you.

[José Ibaibarriaga Martínez, executive]

Thank you, Jose. Regarding our last guidance for the year, as shown in this slide, we are adjusting our estimate to increase the forecast net income by a range of 13% to 15% compared to 2023. This improvement is driven primarily by a high operating margin in Chile and a robust net interest margin, with local loan growth expected to be around 5%.

A key element I want to highlight is a focus in our productivity plan, a crucial driver for a midterm goal. We remain committed to ensure that local expenses grow at inflation levels. In terms of NIM, we expect it to remain stable compared to last year. While the new portfolio and higher loan for longer rate and nonrecurring events impact City National Bank's operating results, the strength of our local operation and sound financial strategies will more than offset these effects.

We do not want to close this presentation without pointing out the following points. First, our results reflect the strength of Bci's business model. We have achieved robust growth across our operations, driven by a strategy focused on sustainable long-term value creation. Our local operations continued to deliver solid results, effectively mitigating the impact of the higher for longer rates on City National Bank's net interest margin. In both Chile and City National Bank, we maintained sound liquidity and capital ratios, along with a strong asset quality. Our financial position remains robust with the liquidity and capital levels consistently exceeding regulatory requirements.

Our net income also reflects a strong performance, with a 25.8% year-over-year increase. Additionally, our digital ecosystem remains a key pillar of our strategy. MACH has strengthened its position with a customer base of over 6 million customers, adding new functionalities to enhance monetization. This platform supports our digital growth ambitions and aligns with our commitment to innovation.

Our recent success in strengthening our capital position and optimizing our investment portfolio is in line with our ongoing effort to create a more resilient, high-performing financial institution. This foundation enabled us to pursue growth while maintaining a disciplined approach to risk management. Equally important, our focus on building a positive workplace culture remains central to our long-term strategy. Being recognized as Chile's happiest company for the second consecutive year underscore our commitment to our team and highlights the value we place on the engaged, motivated workforce that support our strategic goals and strengthens our customer relationships.

In conclusion, we have had an excellent 2024 performance despite the nonrecurring event we discussed earlier. The strong result achieved in our local operations give us confidence that we will exceed this year's initial budget, as outlined in our updated guidance for the consolidated net income. Now I will pass the call back to Andres, who will lead the question-and-answer session. Thank you.

[Andrés Atala S., executive]

Thank you, Jose Luis [indiscernible]. The first question from this session is coming from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

The first question will be on what could be the potential impact after the U.S. election? If at some point, there are strong tariffs against China, would this translate into a slower growth for the country and indirectly impacting Chile? And on the other hand, we have seen an important rally across the U.S. banks. We have not seen that for Bci, even though you have roughly 30% of the assets in the U.S. So can you remind us how can Bank of Florida benefit under Trump administration? That will be my first question, and then I can do the next 2 ones.

[Sergio Lehmann, executive]

Ernesto, well, first of all, as you know, focus on the U.S. economy. The U.S. economy has shown or has been characterized by a lot of flexibility, adaptability. And as you know, the main focus of U.S. next government, the Trump administration is going to be the local economy. So in that sense, we are expecting short-term impulse in the economy. Well, part of that has been reflected in the stock market, in the U.S. stock market. So in that view, probably the scenario for CNB is going to be, even as a possibility, even better than the base scenario is today suggesting. So in that sense, even though we are expecting higher interest rates, given probably more persistent inflation in the U.S., the short-term impact on the U.S. economy probably is going to be positive given, as I said, that Trump administration is going to be focused on domestic economy.

From Chile side, well, there is a risk, there is no doubt, that especially reflected in commodity prices, we're going to see a lower price of copper, given the possibility of a new tariff. And given that less dynamic Chinese economy. Even though Chile has trade agreements with almost all its trade partners. So in that sense, in our view, the Chinese government has the possibility to reconduct in some way, trade in order to basically confirm this potential impact of low growth in the world economy. We are expecting that the Central Bank economy continued to reduce the monetary policy rate. So in that sense, we're going to see some positive impact in domestic demand. But as you mentioned, probably the external impulse is going to be lower in the coming future given this possibility of a lower growth rate in the world economy.

Probably, we have today some incentive to move faster in some reforms that Chilean economy require, especially in order to increase investment rate in the coming years. But, well, we're going to see what is going to be the final definition in political issues on that particular area. But anyway, in my view, the Chilean economy has the instrument in order to confront probably a more turbulent world in the coming years.

[Ernesto María Gabilondo Márquez, analyst]

Excellent. No, super helpful. And then my 2 other questions. The second one is on your net income growth for next year. You have already mentioned that you're expecting this year to be between 13% to 15%. I think you are raising it. You were expecting before, 6% to 8%. So congrats on that. But thinking about next year, should we continue to expect double-digit net income growth? And what will be the key drivers behind it?

And my last question will be on the digital bank's competition. Tenpo, the CrediCorp's fintech in Chile, just received the first digital banking license in the country. So just wondering what will be the difference against MACH structure? And maybe at some point, you will be also trying to go for a digital bank structure?

[José Ibaibarriaga Martínez, executive]

Thank you, Ernesto. Regarding the next year net income growth, we are in the middle of the process of finalizing the budget for next year. So we have -- we are in the middle of all the process and the meetings that you know that happens. We have not closed it yet. Our schedule is to finalize budget and approved -- and be approved by the Board on December. So the guidelines for next year, I think that we will give you in the next conference call.

Regarding digital bank, what we tried to mention in the segment that I talked about MACH is that we're moving really fast on having a full digital bank in Chile. While MACH started as a wallet and a prepaid wallet, today, we are having a full range of products and services to become a digital bank, meaning current accounts, deposits, savings, credit cards. So we feel that we are really well positioned to deliver a service to our customers that will give us the possibility to be a really strong competitor in this arena. So we understand that Tenpo and CrediCorp will enter to this segment. We strongly believe that competition is good for the economy. It's good for the customers, and we feel that we are in a really good shape to compete in that segment.

[Ernesto María Gabilondo Márquez, analyst]

Just a follow-up on this, Jose Luis. So you were saying that MACH already has all different products, very good service. But I just wanted to understand, MACH is inside Bci, but it's not in a digital bank structure. Do you think at some point, you will need that or you don't need that because it's already there? And I just wanted to understand what is the advantage of being independent on your structure?

[José Ibaibarriaga Martínez, executive]

Ernesto, the service quality of MACH has an NPS of over 74%. So it's excellent in the service level. The second question that you make is how MACH -- how MACH is independent from Bci? And I will tell you that it's completely independent. We have a Board of directors, the kind of system that we have are all digital, on cloud, are completely different from Bci. Even though we are in the same banking license, it is a unit that is completely separate and work in a separate way. Meaning culture, it work much more like a fintech company, like instead of Bci. And no -- we are not thinking on separated in the near future as we are operating in the banking license of Bci, as I told you. But in the day-to-day, it works like a complete full digital bank with all the culture and cost. The cost of serving a customer in MACH is comparable with the digital banks that you have or you study around the world.

[Ernesto María Gabilondo Márquez, analyst]

No, excellent. Super helpful, Jose Luis.

[Andrés Atala S., executive]

And our next question is coming from Jorge Perez, coming from Itau.

[Jorge Pérez Araya, analyst]

So I have 2 from my side. So the first one is in the net income guidance for this year. So you have just mentioned that it was 13%, 15% income growth. So that implies a significant deceleration in the fourth quarter because doing a quick math, that means in the fourth quarter, we should expect a net income between CLP 150 million to CLP 160 billion. So what will be the main issue in the quarter? Because inflation will continue to be supportive. CNB will not have the one-off that we saw in the third quarter. So just to understand the reasons to expect this quarter. Maybe it's a full normalization of the cost of risk? I don't know. That is my first question. And the second one will be, how do you see the NIM evolving in CNB in 2025?

[José Ibaibarriaga Martínez, executive]

Thank you, Jorge. No, what we are expecting is basically to maintain NIM. But having said that, October has a lot of unexpected interest rate move and exchange rate move that will have some impact. Inflation, as you said, is higher than expected or higher than what we have in our projections. So that is going to affect positively. And it will, in some part, mitigate what I told you about the interest rate increase in October.

Cost of risk, we are not seeing any normalization or something special at all, as Juan Enrique detailed in his presentation. We are seeing a really good trend in the commercial loan portfolio with 2 customers that we have mentioned over the year. In the commercial and consumer side, we are not seeing any special situation. Remember that we have -- we can anticipate the mortgages. And some part of the commercial models that -- we will do that, but it's not going to impact significantly.

So the long answer short, Jorge, is that we are expecting the NIM to be maintained, having impact on October, and we are going to be recovered in November. And we are not seeing any cost of risk special as you -- in this quarter, as you mentioned. I think that we will maintain with excellent cost of risk. And regarding the NIM of City National Bank, I think that Jose, can you answer that question, please?

[Jose Marina, executive]

Absolutely. So Jorge, we've seen our NIM increase quarter-over-quarter, first 3 quarters of 2024, as you saw early in the presentation. And that was before interest rates -- the Fed started reducing rates that we saw in the middle of September. You saw that our NIM increased by 16 basis points last quarter. And I also mentioned that our NIM for the month of September was 220. So we're starting off the fourth quarter and even looking to improve NIM significantly for the fourth quarter. So we do expect that NIM improvement to continue organically through the -- getting very solid spreads. As we've talked about earlier, continued deposit growth, including, as we look in 2025, noninterest-bearing deposit growth as well. So we continue to improve. And as we saw, we're in around 211 last quarter, starting December 220, and expect in 2025, we'll be in the mid-200 basis point range in NIM. And we also saw that we are also slightly liability sensitive with every 25 basis point cut, approximately increasing NIM by about 3 basis points. So as those -- as the Fed takes action -- continues to take action in 2025, that will also help our NIM.

[Jorge Pérez Araya, analyst]

Perfect. Very clear. Just a follow-up on the guidance again for this year. According to what you said, Jose Luis, cost of risk will be fine, NIM okay. So the 13%, 15% net income could be at the least -- I mean, could be above that? Or do you see that is highly unlikely?

[José Ibaibarriaga Martínez, executive]

No, Jorge, I think they were between 13%, 15%. We have to be careful with the guidelines. We are seeing such a strong movement in interest rates -- exchange rate. And as I think that -- not to mention, 37% of our operations today is in the U.S. and so have some impact. So it's going to be in that range. We have always been very, very serious in our guidelines. And if you think about 1% more or less, is immaterial. So that is going to -- is a reasonable range according to us.

[Andrés Atala S., executive]

Next is coming from [ Clemente Swett ] from [indiscernible] Pension Funds.

[Unknown Analyst]

And congrats for the results. I have 3 questions. The first one is really a quick one, and the 2 of them are a bit more elaborated. The first one is how much of the net fee income came from MACH? And how much are you expecting for the midterm? And the second one is the administrative expenses, they were really consolidated in the first 2 quarters. And then this quarter, they grew from CLP 125 billion to CLP 140 million. If you could give us more color about this?

And the third one is about the loan growth. So you're expecting 5% loan growth, 4% to 5% for the whole bank. And we have seen that by now, we are 4% year-on-year growth, but the -- this quarter and the previous quarter, quarter-on-quarter, we have seen a decrease. So if you want to reach the 4% to 5% growth for the whole year, you have to grow around 1.5% for this fourth quarter. And so how much is -- how have you seen the appetite or the interest for getting new loans? Because we have seen 2 quarters of decrease. And now we have to see a growth to reach this level. Those are my questions. Thank you.

[José Ibaibarriaga Martínez, executive]

I will try to answer very, very short. Regarding the loan growth, yes, we are expecting some recovery of loan growth in the last quarter in City National as well as in the commercial loan in Chile. We have some pipelines that will take us our loan portfolio up. And at the same time, the relevance -- the relative relevance of the mortgages loan portfolio with a higher inflation will increase as well.

The administrative expenses, the main difference is regarded to inflation and exchange rate. Inflation is affecting the salaries, which represent around 50% of our cost structure. And we have a policy that we adapt the salaries with inflation 2 times a year, May and September. And the other thing that is affected is the other significant part of our expenses are related to technology, meaning Salesforce and Microsoft and Google and those kind of vendors or partners that are in dollars, and the exchange rate has been higher than what had been expected.

And the net fee, exactly net fee from MACH, honestly, I don't know the answer. Anyone knows the answer on that? Andres, can we come back with the answer? Clemente, we will come back with the answer. But honestly, I have a rough number in my mind, but I prefer to come back with you. No, it's a [indiscernible], but we can answer. See, we have the number. So thank you very much, Clemente.

[Andrés Atala S., executive]

The next one is going from Daniel Mora from CrediCorp. Daniel, I appreciate it could be just 1 question, if you don't mind.

[Daniel Mora, analyst]

Don't worry, it will be just 1 question. It's regarding risk metrics. We are seeing cost of risk below the long-term target of the company or the normal levels, but we are seeing NPLs, especially for the commercial and mortgage segments going up. So what will be the conversation going forward between the cost of risk and NPLs? Because even though we understand that cost of risk is expected credit losses, we can imply the deterioration that we are seeing right now. It's already reflected in the cost of risk. Or can we expect a normalization given that it would take time to see the turning point in NPLs in commercial and mortgage segment, especially? Thank you so much.

[Juan Enrique Visinteiner, executive]

Sure, Daniel. I think that in the commercial portfolio, we have said that we believe we have already reached the level of NPL that we will see going forward. The -- it's basically in the housing mortgage loan portfolio, where we believe we will continue to see the NPL ratio moving up for some time before it starts to decline. Now as you can see, between the provisions that we have built both individually in the portfolio as well as the voluntary provisions, the coverage ratio of provisions to NPL is strong. It has declined together with the industry, but it remains strong, and we will make sure that it remains strong going forward. And by that, we mean 0.4% of NPL or around that level.

[Andrés Atala S., executive]

Thank you, Daniel. And the last one is coming from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

Sorry if you covered this, I joined a little bit late. But just to get some on the outlook for expense growth, I think you said kind of maybe growing in line with inflation has slowed down over the last 2 years. But just I guess, first, typically, we see quite a bit of seasonality in 4Q. If you look at the fourth quarters over the last 2, 3 years, we typically see a jump in expenses. Just -- when should we expect that in 4Q? And then in terms of getting expense growth to be in line with inflation, what do you think is the main drivers of that in terms of cost control to keep costs in line with inflation?

[José Ibaibarriaga Martínez, executive]

Thank you, Tito. Yes, we -- basically, what we have been putting in place is a cost control that is impacting several areas of the bank. It's not just 1. But just to mention a couple of those, we have a 0 growth headcount, which has been very helpful. Even though we have been replacing collaborators that works in branches, on an operation with collaborators that are more expensive, one that works in the IT arena, data scientific. So that has put a pressure.

But having said that, we have decreased expenses there and frozen. We have been working significantly in reducing our footprint of branches. We have decreased almost 50% over the last couple of years. We are decreasing the -- significantly the back-office transaction, trying to -- and the goal is to have 0 back-office staff. The idea is that in the origination, we have everything automatized and digitalized. So we have not back office kind of expenses. We have been working on being -- with artificial intelligence in programming. Basically, we have had an important improve in that arena, even though our expectation is that we will have significant savings in the near future.

And I can continue, Tito, we have put in place a full control in all our investment and expenses. We have committees for -- FTEs committed for -- investment committee for expenses with the aim of controlling them. At the same time -- and this is -- it's something that we always mentioned in Bci. We always take decisions with a long-term view. So all the investment that we are doing is to allow us to compete in the next couple of -- 10 years.

So yes, we are aligned with inflation in Chile. And we expect that we are going to deliver that. We are in good shape to that. We are not expecting an increase. And you are right, in the -- December always has some increase in expenses, but we believe that we are -- we have put in place some processes that we will allow not to have it this year. We are pretty comfortable with we have done. We are pretty comfortable with the increasing margin and controlling costs, so that allowed us a gap that is positive and helped us to decrease our efficiency ratio. In the long term, the 42% guidelines that we have done for the 2026, I think that we are in good track to deliver that.

[Andrés Atala S., executive]

And right now, the last one is coming from Andres Soto from Santander Investment.

[Andres Soto, analyst]

My question is quickly on capital. I understand the CMF has produced some initial proposal for the Pillar 2 on the path to Basel III adoption. I would like to understand if you have any preliminary assessment of this? And in light of that, if you have any target for your capital levels for next year?

[José Ibaibarriaga Martínez, executive]

Andres, yes, we do have some assumptions, but we have not had a clear view from the CMF. So far, we have been increasing significantly our capital ratio. What we have said in the previous conference calls regarding capital is that we have had a solid capital base. We are much higher than the capital minimum regulations. We have -- today, we are over our budget of 11%. We are 11.6%. The December Basel III implementation and December 2025, we have already in our models, and we are not seeing any risk of delivering what we have planned. And we have enough growth in our profit, and we have a capitalization ratios. We have implemented $1 billion in AT1s. So Andres, we are in a very good shape to have enough capital, not only to deliver Basel III capital ratios, but to continue with our growth, both in Chile and in Peru and in the U.S.

[Andres Soto, analyst]

Thank you, Jose Luis. What capital level will make you comfortable next year?

[José Ibaibarriaga Martínez, executive]

We -- our internal goal is to have a CET1 ratio of 11%.

[Andrés Atala S., executive]

Okay. With the last question from Andres, we're done. Thank you very much to everyone to stay here, to stay tuned. And don't forget if you have any additional questions, contact us, and we have the presentation, also the management commentary on our website. So with all of this, thank you, gentlemen. Thank you, everyone. And see you next.