Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript 2022-Q4

[Andrés Atala S., executive]

Good morning, and welcome to our 2022 year-end conference call. My name is Andres Atala, Head of Investor Relations. And from here, the Bci corporate building, 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 remotely from Miami by Jorge Gonzalez, CEO of City National Bank and its CFO, Jose Marina.

As we usually do, at the end of this presentation, we will leave room for questions when we will kindly ask you to raise your hands. First, to begin our year-end conference call, I want to invite you to listen to a message from Eugenio Von Chrismar, our CEO, which he wanted to share with all of us.

[Eugenio Von Chrismar Carvajal, executive]

Good morning. I want to thank everyone for joining our conference call, in which we will discuss our 2022 results, some of the progress we have made on our strategy and the coming challenges. 2022 was a special year for Bci as we celebrated our 85th anniversary. We are very proud to have been an important catalyst for our country's growth over the course of the years. We expanded our international presence, and we positioned our organization as the largest bank in Chile and 1 of the 10 largest bank in Latin America. We accomplished all of this while staying true to our culture, principles and values. As a result, we are recognized as a bank that place people at the center of all of our decision.

Regarding last year results, I am pleased to report that we closed the year with a net income of over $959 million, where our subsidiaries represent 41.9%. Moreover, the bank has record solid growth in the last 5 year. We have doubled our operating income while loan increased 1.9x. Today, we are the largest bank in Chile with a 19.2% market share in total assets, including our overseas subsidiaries.

Productivity measured as assets per employee grew 1.7x in 5 years as we held the number of employees constant during this period of tremendous growth. And more importantly, we have incorporated a new skill profile that have allowed us to carry out our Digital Transformation. We continue to drive our strong international expansion further diversifying our assets.

Specifically, we have expanded our presence in the United States while also launching Bci Pguerú in 2022, such that 34% of our assets are now outside of Chile. Also to prepare for the adverse economic cycle, we have booked additional provisional of almost $78 million in 2022, reaching a total of $485 million. We are taking this result within the framework of a technological and cultural transformation plan, which we launched a few years ago. At Bci, we are convinced that technology is a key determinant for competing with traditional bank and the new nonbank players.

To meet this new challenge, we have invested nearly $540 million since 2016 with the support of world-class consultants. This investment has allowed us to implement an agile, modular technology architecture, which provides the necessary capabilities for the client-facing teams to create and develop their customer value proposals tailor to the [indiscernible] world we live in today. Our strategy is based on the development of 3 winning move, namely the digital ecosystem, our distribution and service model, and our new wealth management.

First, let's start with some highlight of the digital ecosystem we are building. We launched the MACH digital accounts, which transform the local digital account markets and has had a positive impact on the life of over 3.5 million people by giving them access to the bid of financial products. We are positioning MACH Pay as the simplest, fastest and safest way to make person-to-person transfers and merchant payments.

This year, we made solid progress on developing our loyalty programs, Bci PLUS, which allows any merchant to offer it for more than 5 million customer, a number that we estimate will increase to 10 million over the next 2 years. We're developing the first one-stop shop in Chile, a platform where SMEs can solve all their needs in one place, easy access to these services, we help companies grow their business and simplify their business management.

Second, to strengthen customer interactions we are developing a new distribution and service model. We are implementing a physical [indiscernible] that redefine the branch model with a light, efficient and highly digitalized operating system called Next-Gen-Ops, which will be implemented in the coming months.

Third, we have successfully launched an investment model that make us competitive with a leading grower player integrated the local and international vehicles such as the bank Bci Corredor de Bolsa, Bci Asset Management, City National Bank of Florida, Bci Miami and Bci Securities.

This new approach has been reflected in the significant growth of both customer and assets under management, as you can see in the slide. To ensure the success of our strategic priorities, we have invested strongly in the talent necessary for developing new skills in areas like data analytics, cloud architecture, our micro service platform, the [indiscernible] portal, digital channel, and [indiscernible]. As a result, in the past 5 year, we have shortened the development time for new future by 80%. We have also made significant progress on analytics capabilities with one of the best development teams in the market.

And with an investment of nearly $60 million, we implemented 2 world-class platforms, Salesforce and 360 Connect, through which we can deploy our full capabilities to our clients and create value in realtimes. We have also invested and strongly protected our customers, employees and suppliers by allocating over $80 million to cybersecurity in the last years.

In our International division, I first want to recognize City National Bank of Florida, which is now the third-largest bank headquartered in the state of Florida in the U.S.A. CNB's net income have increased nearly 6x since that was issued, growing from $40 million to over $270 million. The bank have quotable in terms of assets to $25 billion. I would like to highlight Bci Miami branch for its outstanding strong growth in the number of clients and assets under management, earning over $40 million in bottom line in 2022.

Originally, in 2022, we complete the opening of BCI Peru. This position our bank as a financial solution platform in 3 countries with a focus on corporate and large business clients in both Chile and Peru. In Asia too, the transformation mentioned earlier our executive management team and our Board of Directors is highly committed to be a leader in sustainability. As such, we're actually implementing complete actions in the areas of financial inclusion, sustainable finance and support for SMEs.

Bci stand out from numerous initiatives. The market continues to recognize our bank for the progress we have made on our strategic pillars related to innovation, customer experience and corporate loans. Best corporate reputation in Chile, an award we have received for 8 consecutive years, most responsible company and best corporate governance in Chile, Bank of the Year of Chile for 2022, a leading bank in customer satisfaction among others, as you can see in the slide.

This gives you a brief summary of our main achievement in 2022, focusing on our local and international strategy. In particular, we have made significant investment to further advance our technological capabilities and provide our client-facing personnel with the tools, training and capabilities needed to ensure our continued success. Through our partnership with the main market players in the digital ecosystem, we aspire to reach 10 million customer. Our goal is to increase and diversify our sources of revenue and increase our efficiency, preparing the company to compete with the new financial and nonfinancial actors.

Finally, I believe we will face an adverse economic scenario in 2023. So I want to use this opportunity to reinforce the sense that has been a strength at Bci throughout the past 85 years. It is about being a driver of growth for the country and continuing to support our employees, customer, supplier fully and the communities in which we operate because we know that this will allow us to successfully face new challenges together with our great teams of professional, our solid values and our business culture that set us apart. Thank you very much.

[Andrés Atala S., executive]

Thank you, Eugenio. And to continue with the presentation, Sergio will go through the Chilean macroeconomic figures.

[Sergio Lehmann, executive]

Thank you, Andrés. Now I bring you an economic summary of recent developments in U.S. and Chile. World inflation still lingers but started to ease. Main central banks have risen the monetary policy rate in an unprecedented scale in recent decades and would finish at second quarter '23. China show a better performance at the last part of 2022 after gave up its zero COVID policy, introducing more flexibility to the economy.

In U.S., the Federal Reserve have conducted a contractionary monetary policy with several hikes in the fed fund rate. Inflation is lowering, but there is persistency in some components, such as services and shelter. Labor market remains tight, and GDP will grow around 1% in 2023. In Florida, unemployment rate have been rapidly lowering, and GDP growth is one of the largest among U.S. states.

In Chile, the economy is in an adjustment process and would show negative figures for several quarters. We are forecasting a minus 1.7% GDP growth in 2023, mainly explained by lower internal demand. Inflation is going down at a slowly pace so the central bank would keep its rate at 11.25% until the CPI eased up more rapidly and certainly. We expect that the easing cycle will start at the second quarter.

Short-term nominal interest rates have fallen significantly at the end of last year and have kept that level in the first month of 2023. The volatility of the CLP remains high after the sudden CLP depreciation in third quarter '22 and less strong dollar worldwide, and spike in copper prices since November has helped the CLP to gain value.

Let's move to the next slide. We present main economic figures in U.S. and Florida. U.S. GDP grew by 2.9% analyzed quarter-on-quarter in fourth quarter '22 but a deceleration is expected in coming quarters. And according to various service, the probability of the economy falling into recession is close to 60%. Labor market remains tight, but wages have shown some slowdown trend. National and Florida unemployment rates are near historical lows.

Inflation continues to be the main concern. It ended 2022 at 6.5% year-on-year, and core inflation without food and energy at 5.7%. Services prices are still adding persistency, which indicates risk that inflation will remain over 2% target for 2023.

In response to this, the Federal Reserve has increased interest rate sharply to 4.5% to 4.75% with prospects of one or more heights in the first quarter '23 to control inflation. Then it's expected to keep that level until fourth quarter '23. This is putting pressure on economic activity and on the labor market.

Please move to the next slide. Short-term interest rates increased sharply in the fourth quarter '22 due to fed fund raise expectation. The U.S. dollar in nominal and real terms reached maximum levels on October due to economic expectation. But since November started to ease.

On the next slide, we see Chile main GDP and labor figures. The economy grew by 0.3% year-on-year in the third quarter, somewhat more than anticipated but confirming the prospect of an important economic slowdown. As it was mentioned, we're expecting negative figure for the coming quarters, establishing that the economy could face a recession. The labor market is stagnant. There is a low pace of job creation, and the labor force participation rate remains contained. The unemployment rate was 7.9% in the figure of December, and formal labor is losing ground in the latest. Additionally, contract termination due to company needs have been increasing.

Please move to the next slide. Inflation ended at 12.8% year-on-year in 2022, a small decrease from its peak at August. We forecast that CPI will show a strong easing in the second quarter '23, but underlying inflation has started to fall, but there is still price increases in services. Food and energy prices started to show some weakening. We forecast that total inflation would end at 4.4% year-on-year on 2023. The Chile Central Bank has conducted a highly contractionary monetary policy to maintain inflation expectation and increased interest rates to 11.25%, the highest level in recent history. We projected that the central bank would keep that level until May or June, all subject to the rate of the drop of inflation and good end at 6.5% at the end of this year, still a contracted level.

Finally, on the next slide, we see recent financial market developments. During fourth quarter '22, the Chilean yield curve decreased strongly, especially in the mid and long term of the curve, due to the finish of the tightening cycle and the possibility of an easing cycle in 2023. After the strong depreciation of the CLP suffered at the third quarter '22 and thanks to the fall of the U.S. dollar despite of copper price and some reduction in potential uncertainty, the Chilean peso has shown a significant appreciation. Even more important than other comparable currency, CLP volatility, however, remains high compared to historical levels.

Now I will give you with Jose Luis, who will continue with the presentation.

[José Ibaibarriaga Martínez, executive]

Good morning, everyone, and thank you for participating in this conference call. We are glad to be here with you this morning to discuss our year-end results for 2022 after a sound performance and a significant accomplishment in our strategic priorities, as Eugenio recently addressed.

On this slide, we can see the main figures for our consolidated operations. Operating revenues surged 25.1%, driven by loan growth, a positive price management and a higher inflation, highlighting the sound performance of our subsidiaries that grew at the same levels. Provisions and writeoffs, excluding the recovery accounts, increased by 23.4%, in line with the nonperforming loans ratio trending upwards, considering that during 2020 and 2021 were supported by a strong liquidity. Operational expenses increased by 25%, and we will address this effect further in this presentation. In term of tax, there was a significant effect mainly after adjusting the year-end exchange rates, which affected the value of City National Bank of Florida's investment.

Please move to the next slide. Moving on to our loan portfolio, the 9.5% year-on-year increase was mainly driven by the growth of commercial and mortgages loans as you can see in this slide. Commercial loan growth considered the following effect this year the Wholesale division has had strong growth as corporate clients are switching for loans funding due to the lower liquidity of the bond market. Dollar evolution is considering that 26% of the local commercial portfolio is in this currency. Mortgages loans continue to have double-digit growth of 15.1%, and a significant part of this growth was from the last years combined with higher inflation.

In real terms, we continue to see a slowdown in production due to the higher interest rate, inflation and commercial conditions. Lastly, consumer loans increased by 3.1% year-over-year, mainly driven by the credit card businesses in Bci global operation. The local increase in NIM of 2 -- 110 basis points year-over-year was mainly driven by the growth of loans and higher inflation which generated higher income from interest and indexation, partly offset by greater funding cost. On the other hand, net fees increased by 5.4% year-on-year. This growth has been mainly driven by the result both in the retail and wholesale division.

Please move to the next slide. The local OpEx increased by 23.1% this year with a strong growth in the last quarter mainly explained by several nonrequiring factors. For this quarter, the main effect are related to the following: 1/3 is explained by the deterioration of goodwill of financial services, and the other 2/3 is related to our new branch model compensation for years of services, software, and writeoffs in administrative expenses, all as one times that we expect will not be repeated in the future.

Today, the expenses related to our transformation process represent nearly 22% of the total operating spending increasing significantly from the 14% we had in 2019. At the same time, as you can see in the chart today, we have managed to control the requiring expenses of the operation, which this year grew well below inflation accounting to 9% in this period.

As Eugenio mentioned, I would like to highlight the deep technological and cultural transformation driven in these last few years, which has enabled us to adapt to the new challenges, implementing our new organization of the future will be the basis for executing the strategy and of achieving market leadership with a clear digital and international focus. This means significant investment in talent and technology with a digital ecosystem, well management, developing products such as MACH, Bci PLUS, our one-stop shop, Bci full digital account, 360 Connect, and our sales platform among others. Please move to the next slide.

As usual, on the left side of this slide, we show the evolution of our funding mix. Our total local deposit base grew 10.1% year-on-year. This year, we have seen a strong shift from demand to time deposit in line with the 2022 rate evolution. As you can see in this slide, this was reflected by local noninterest-bearing deposits decreasing by 21% while time deposits increased by 48.6% year-on-year.

Regarding our capital ratios, this year-end CET1 ratio was affected by the following effects: solid growth of City National Bank of Florida, which Jorge Gonzalez will go in detail about later in this presentation; evolution of City National Banks available for-sale portfolio affected by the higher U.S. rate; evolution of inflation and local swap rates; the incorporation of new discounts to the capital base of December 2022 associated with implementing Basel III intangible asset, deferred taxes, and accounting hedge. It is worth mentioning that the local growth of risk-weighted asset has had limited effects given our strategy of return on assets, which offset these placements. For the medium term, we expect to return to previous levels, both for the contribution of businesses and the normalization of rates in the United States as Sergio recently mentioned.

Now we will discuss our asset quality and loan portfolio composition. In 2022, we witnessed the nonperforming ratio trending upwards, still at very moderate levels and below prepandemic levels but showing a trend that we are likely to continue to see in the oncoming quarters. As most trade portfolios during 2022 and 2021 were supported by a strong liquidity injected by the government into the economy in various forms, Bci built up significant voluntary loan provisions, as Eugenio mentioned. That reflected in the black dotted line in the chart, which represents the total loan loss provisions ratio, including voluntary reserves equivalent to 1.54x the traditional ratio, which exclude voluntary provisions and 1.36x the prepandemic value at the ratio.

Please move to the next slide. Commercial loans continued to be one of the drivers of growth of Bci's loan book with amount for new good quality loans recovering since last -- middle last year, more than offsetting the scaled amortization of the government guaranteed loans granted mostly due to 2020 and the first half of 2022. The ratio of total loan loss provisions to total commercial loans remained high and flat during most of 2022 because despite an increase in the PDOs mostly coming from the SMEs segment where there is a high degree of the portfolio supported with government warranties of highly collateralized. So far, the residential mortgages portfolio has maintained its resilience in the current scenario with the portfolio growing in size, and its nonperforming loan ratio is still performing below prepandemic levels. Nevertheless, the higher inflation rates prevailing during most of 2022 is behind much of the nonperforming loans growth as it directly affects the payment capacity of families.

As a portfolio size, Bci has been especially cautious during 2022 in prioritizing portfolio quality over growth. As for the nonperforming loans ratio, after reaching its lowest point in the end of 2021, we are now seeing a trend upwards mostly to the impact of higher inflation and higher market interest rates and to the elimination of most of the government aid programs.

In the case of Servicio Financieros, is where this trend is more visible, given its higher concentration of exposure in the lower-income customers. As in all other portfolios voluntary provisions, we have proactively built and remain as one of the main tools to absorb future credit costs coming from this segment.

Now I will leave you with Jorge Gonzalez, City National Bank's CEO as well as Jose Marina, City National Bank CFO.

[Jorge Gonzalez, executive]

Good morning, everyone. My name is Jorge Gonzales, and I am the CEO of City National Bank. Jose and I are excited to be here with you this morning to discuss our year-end results for 2022, especially after such strong performance. We started '22 with substantial momentum and closed the year with outstanding results and overall significant accomplishments for the bank.

Our total assets increased by $3.3 billion or 15% during the year, enabling us to surpass the $25 billion asset mark with just over $1 billion of that growth occurring in the fourth quarter. The combination of our historically consistent organic growth engine with the solid macroeconomic conditions in Florida resulted in new loan commitments of $7.3 billion throughout the year, which is the high watermark in our history and is 40% higher than '21. This resulted in $3.9 billion or 31% of loan growth, excluding PPP for '22.

Important to note, we accomplished this while continuing to improve upon our already strong asset quality, as you will see shortly. We continue to focus on core deposit operation, which has become increasingly difficult in this challenging environment in the United States as interest rates have continued to rise. In fact, the U.S. banking industry as a whole has seen deposits decline during the second half of the year when interest rates and U.S. treasury rates started to increase at a quicker pace. As a result, you will note that our deposits slightly contracted quarter-over-quarter and year-over-year.

Notwithstanding the increased deposit competition, our significant growth translated into excellent results. In fact, for the fourth quarter, our core net interest income, which excluded the impact of PPP and MSLP fees, was $30 million or 24% higher compared to the same quarter in 2021. Overall, net income for the year was $273 million, which was $30 million or 12.4% higher than the prior year.

We will conclude our presentation this morning by discussing the fundamentals that are in place that will allow us to navigate the fluid environment, capitalize on the opportunities and maintain us well positioned to continue our growth and profitability trajectory. But before we get into our results, I think it's important to note that Florida remains one of the most attractive markets in the United States.

This is just a compilation of a few headlines reflecting this reality today. Our business-friendly client -- climate continues to attract new businesses, serve as a driver of population growth, resulting in the state having the lowest unemployment rate among the larger states in the nation. In addition, Miami serves as a gateway to Latin America, and we're also increasingly becoming an essential tech hub and the home to many well-known private equity firms. In short, Miami is increasingly one of the most important cities in America and is well positioned to withstand any potential economic slowdown.

Now I'm going to go ahead and turn it over to Jose Marina, our CFO, who's going to review our fourth quarter and our full year financial achievements, results with you. Please turn to the next slide.

[Jose Marina, executive]

Thank you, Jorge, and good morning, everyone. On this slide, you can see that our assets increased by $3.3 billion or 15% year-over-year and $1 billion or 4.3% quarter-over-quarter, reaching $25.2 billion in total assets as of the end of the year. Our asset growth was purely organic as we have not closed any acquisitions for 2 years. Our loan-to-deposit ratio remains low at 82% despite our significant loan growth in 2022. We remain very well capitalized as evidenced by our strong capital ratios, and our investment portfolio still represents around 27% of our total assets.

Our investment yield increased 52 basis points quarter-over-quarter and 113 basis points year-over-year as new purchases have come at higher coupons due to the increase in overall market rates. The combination of our long-proven loan production capabilities, combined with the strength of the Florida market, resulted in $722 million of loan growth, excluding PPP, in the fourth quarter and $3.9 billion of growth for the entire year. This represents a 31% year-over-year growth rate. Below the loan growth trend, you can see that our asset quality is extremely strong with an NPL ratio of 28 basis points and a pass-through ratio of only 9 basis points.

On the right-hand side of the slide, you can see that our outstanding loan portfolio is very well diversified with only 45% of our portfolio classified as commercial real estate. It is also important to note that the weighted average LTV of our outstanding real estate secured loans is a very conservative 54%. As Jorge shared with you earlier, Florida and Miami in particular are well positioned to withstand a national economic slowdown, and we feel really good about our loan portfolio heading into 2023.

During the past 2 months, deposit capture has become increasingly challenging among banks as interest rates started to increase, resulting in an overall contraction in deposits within the banking industry. In the fourth quarter of '22, client deposits decreased by 2%. This decrease is a result of the overall migration to higher-yielding products such as treasuries and competitive pricing dynamics. As you can see, we utilized broker deposits to help fill this temporary funding gap. We continue to focus on cross-selling deposits on all of our new loans as well as during the loan renewal process, and we're equally focused on attracting deposit-only clients to the bank. We will talk further about our deposit generation efforts shortly.

Our spot cost of client deposits increased 66 basis points quarter-over-quarter and remains relatively low at 133 basis points, especially considering that, as of December 31, the Federal Reserve had raised the target fed funds rate from 25 basis points in early -- in the first part of the year to 4.5%. We will discuss more about our deposit betas later in the presentation.

Also contributing to our low cost of client deposits is our substantial share of noninterest-bearing deposits, representing 33% of our total deposits. On the right-hand side of the slide, total deposits in the banking industry posted a decrease of $153 billion or 3.4% quarter-over-quarter and $185 billion or 1% year-over-year. It is also important to note that the banking industry figures include broker deposits, while the City National Bank deposit bars on the left-hand slide exclude broker deposits. Our deposits actually increased quarter-over-quarter and year-over-year when including the impact of brokered funds. Once again, we are focused on attracting new depositors to the bank on multiple fronts during 2023, which we will expand upon a little bit later.

Moving to our results. Our net income totaled $67 million in the fourth quarter, which is in line with the prior quarter. For 2022, our net income totaled $273.3 million, representing an increase of $30.2 million or 12% over the prior year. This improvement was mainly driven by increasing our core net interest income, excluding PPP, as you will see in the next slide. We have also increased our noninterest income by $17.2 million or about 22% over the prior year as we will also detail a little bit later.

Additionally, our expenses have increased by around 11.5% year-over-year as we continue to invest in top talent and expand our digital and operational capabilities while reducing our efficiency ratio year-over-year by 3 percentage points. You can see in the table at the bottom that our ROA and ROE for the year are both outstanding at 1.18% and 13.1%, respectively. ROA is virtually flat year-over-year, and ROE is 167 basis points greater. Our efficiency ratio is also exceptional at 42.8% and declined year-over-year, as I just indicated. In summary, we generated remarkable results in 2022.

On this slide, you can see the year-over-year evolution of our pretax preprovision earnings, which increased by $81 million or 27% year-over-year. The main driver of the improvement was the $126 million increase in our core net interest income, which excludes PPP and MSLP fees. This increase reflects the impact of our loan growth over the last year. In addition, noninterest income increased by $17 million over the prior year due to our cross-sell efforts while noninterest expenses increased by $32 million over the prior year as we continue to attract new talent and invest in technology.

On the left side of this slide, you can see the evolution of our net interest income compared to the most recent quarter and the fourth quarter of 2021. The dark green part of the bar represents our net interest income, excluding the impact of PPP and MSLP fees. You can note that our core net interest income increased by $30 million or 24% over the same quarter of 2021. Our significant growth in earning assets has driven our core net interest income growth. Net interest income declined slightly over the linked quarter due to the impact of deposit outflows and increasing deposit costs.

On the right-hand side of the slide, you can see our net interest margin evolution. Our core NIM, excluding PPP and MSLP increased by 9 basis points over the same quarter of 2021 to 2.69%. This is 19 basis points lower compared to the previous quarter, however, as the initial lag on deposit repricing benefited our third quarter margin. The need to reprice deposits in the fourth quarter and the migration of noninterest-bearing deposit balances to interest-bearing products drove our cost of funds higher, thereby reducing our margin. Our overall NIM for the quarter was 2.7%, including the impact of PPP and MSLP fees, which increased our NIM by only 1 basis point.

Competition for deposits is building among U.S. banks as pricing starts to catch up with the aggressive series of Federal Reserve interest rate hikes that is underway. The sharply rising rates have put additional pressure on deposit growth. Despite these market dynamics, we have been very disciplined with our deposit repricing approach. As a result, our cost of client interest-bearing deposits and overall cost of funds have increased by a reasonable 47% and 38%, respectively versus the increase in effective Fed funds.

In conclusion, our net interest income and margin have increased year-over-year despite the rising rates putting additional pressure on deposit costs.

Now I will pass it back to Jorge Gonzales, who will discuss our strategic priorities with you.

[Jorge Gonzalez, executive]

Thank you, Jose. I'd like to conclude -- I want to conclude the call this morning by looking forward into '23. As you saw during this morning's presentation, we had a very strong '22 posting our high net income -- highest net income in our 76-year history, and we feel we're well positioned for a strong '23. Our plan is to really continue to be growth focused in '23 with special attention to the following 6 key priorities.

First and foremost, maintaining our high standard of regulatory excellence is always our #1 priority. Secondly, given market conditions, deposit growth is certainly an area of significant attention and will probably continue to be so for years to come. In order to maximize our success, we're executing on various deposit-gathering initiatives, including continuing to improve our relationship-focused business model by enhancing the quality of the data and technology we provide our bankers that will allow them to even be more effective in capturing significant client wallet share outside of City National Bank.

We're also relaunching our enhanced digital bank. We're stepping up our focus on international clients given the opportunities that exist in South Florida. And we're also deploying more resources in expansion markets [indiscernible] Central Florida markets where we have less than 1% market share.

Our third priority is really about productivity and efficiency. We continue to be a growth company that has invested in attracting and retaining the right talent while also augmenting our infrastructure with digital capabilities necessary to succeed in today's environment. Our focus in '23 will be to extract more efficiency from our talent and infrastructure and minimize our noninterest expense growth for the year.

Fourth, we plan on being -- continuing our price discipline on both loans and deposits in order to contain and protect our margin. Fifth, as a growth company, we typically have multiple initiatives in process and running in parallel. We will be focused in '23 in really the most impactful priorities in order to make sure we have the most successful execution. And lastly, we'll continue to expand on the trajectory of our fee income generation and continue to expand on the growth going into '23.

In conclusion, our growth trajectory has consistently outpaced our peers and has produced consistent strong earnings. Our high-quality loan growth continues to be a core competency and exceeds that of the banking industry. Our asset quality metrics, which are already strong, continue to improve, and we have a safe and sound loan portfolio that's well positioned for a potential economic downturn. Despite some moderate recent deposit contractions, we have strong liquidity and are really well positioned to continue our growth.

As we face some uncertainties in '23, we also see an opportunity because we feel we're uniquely positioned to take advantage of potential dislocations in the marketplace due to our strong balance sheet, which is fortified with strong capital and our liquidity position. Our balance sheet is complemented with top-notch talent and robust digital capabilities. And due to our consistent growth overall performance and really commitment to improving employee and client experience, our brand continues to attract talent and high-quality clients.

Lastly, we have strong economic conditions and momentum in Florida, which we believe is one of the best markets in the United States and places us in an enviable position to excel in '23 and beyond. So with that, I'm going to turn it back over to the Bci team for some final thoughts and a wrap-up.

[José Ibaibarriaga Martínez, executive]

Thank you, Jorge. Thank you, Jose. Finally, I would like to wrap up this presentation by addressing our 2023 guidelines for Bci's main figures. Considering the macro variables forecasted by Bci and that Sergio share early in this presentation, as you can see in this slide, local loan growth will be in the middle single digit while NIMs should decrease due to the macroeconomic conditions.

In the case of OpEx, it will grow above inflation in the 7% range. In the case of City National Bank of Florida, we should have a low double-digit growth, about 10% to 12%, while 2022 net income should be relatively flat. Considering this scenario, our consolidated net income should decrease around 10% year-over-year with 2023.

Thank you again for your time, your participation and let's get back to Andrés for the Q&A session.

[Andrés Atala S., executive]

Thank you very much, Jose Luis, and thank you all for the presentations. We have first, Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

Guys, can you hear me? I have a first one regarding expenses outlook for 2023. It was very clear during the explanation that you had some one-offs and just acquired the rights of impairments on financial services, some extraordinary remuneration. So what is the outlook for the next year [indiscernible] a clear basis for 2022. I mean if you -- like you should grow in line with inflation, should we adjust 2022, so you grow in a lower base or no? Should we still see some inflation kind of growth from this new base? I just would like to understand a little bit more how you can save money in this year that I think will be a challenging year, right, for revenues, for growth, for margins. So any color on expenses, it's highly appreciated.

[José Ibaibarriaga Martínez, executive]

Thank you, Yuri. Regarding 2023 expenses, first, we would like to reinforce that we have not loss sign in the long term by investing to become leaders in the key initiatives that Eugenio mentioned in this presentation as the new digital ecosystem, where we are creating a lot of tools in order to lead this arena.

Answering your direct question, the expectation is that in City National Bank, as you hear Jorge, productivity and efficiency is one of their first priority, and they are going to growth in line with what we have seen there, which has been a lower one-digital growth.

And in Chile, which are the main growth in the expenses in the last couple of years, we have -- we mentioned 2 things, Yuri. One, we have controlled the business as usual type of expenses, and we are investing in this confirmation. If you add all together, the expectation that we have for 2023 is that we are going to grow around 7%, which is lower growth if you take in consideration that we are not stopping all the investment in this construction of the new digital ecosystem that we are building.

[Andrés Atala S., executive]

Yuri, did this answer your question? Are you there?

[Yuri Fernandes, analyst]

I was, but I was muted. And I couldn't unmute myself. I understand you have this digital system all these investments, but given this will be a very challenging years, it's a personal take here. It would be very important to see some savings on expenses, right, because you cannot keep growing double teens given the outlook we see for our revenues, but it is very clear, understood.

[José Ibaibarriaga Martínez, executive]

We don't hear you very well. So can you repeat the question slower, please.

[Yuri Fernandes, analyst]

I was muted here. No, it is clear. It was very clear. I understood you have some investments to do in the digital [indiscernible] for us.

[Andrés Atala S., executive]

The next question is coming from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

A couple questions, if I may. First, on asset quality. Just -- how are you thinking about the asset quality for this year? We've seen some deterioration, particularly in the consumer portfolio. If you can maybe give a little bit more color for how 2023 should look, particularly given potential recession in Chile and the risk of recession in the U.S.? I know Florida probably in a better position than that. But if you can help us think about your asset quality and what that should mean for provisions.

And then I also have a second question in terms of your capital. If you look at your core Tier 1, you're at 9.4% today. How should we think about that? What's the optimal level of capital? What could that mean for your dividend payout?

[José Ibaibarriaga Martínez, executive]

Andrés, Juan Enrique will go through the asset quality, and I can answer the capital ratio.

[Juan Enrique Visinteiner, executive]

So on the first question, Tito, on asset quality, as we have said in previous calls, we believe that the guidance should be that most indicators should go back to prepandemic levels and even slightly worse given the current recession in which we're entering into. So in terms of provisions, that should be reflected in our cost of credit level, relatively equivalent to last year, slightly above it. And the question would be then when? If and when to offset that increase in provisions with decrease in voluntary provisions, that's something that we're not yet prepared to say today. But it's going to depend on how the macroeconomic indicators evolve.

And as to the consumer business, you're right in pointing out that that's the portfolio that is evidencing or manifesting itself more clearly. It's part of the strategy of the bank to be -- to have some level of concentration in lower-income segments. That's a generous business. It's a profitable business, but in downturns, it's more volatile. And it's something that at the size of the portfolio that the bank has, it's willing to tolerate and to accept and to continue having. So we believe that's the portfolio that is everything in the deterioration today. We should see that happening for the next 4 months or so, and then we hope to see some stabilization and then some reversal.

[Daer Labarta, analyst]

If I can just a quick follow-up on the asset quality because on the consumer NPLs in particular, you're already above prepandemic levels. Sounded like a few more quarters of deterioration potentially. How worried are you about that consumer portfolio? Or do you think once you get through sort of the recession potential, that begins to stabilize and also the [ indication ] for your cost risk for this year?

[Juan Enrique Visinteiner, executive]

Yes. When I was referring to the prepandemic levels was at the level of total portfolio. And you're right. Specifically, the consumer portfolio is already above a prepandemic level. It's not that we're not worried, but we think we have it totally under control. As you have seen, the level of provisions, both specific and voluntary, are very generous. We do see some stabilization, as I was mentioning in my answer below, in the upcoming 4 to 5 months. And then we should start to see some reversal in the trend of those indicators. We have responded also to the request for the government to provide support to individuals and to [indiscernible] and we have started to provide some aid to customers that are either past due, or we've had propensity to become in past due. So that's going to support the viability of those customers going forward.

[Daer Labarta, analyst]

And then I guess on the capital.

[José Ibaibarriaga Martínez, executive]

Yes, Tito, as we mentioned in the presentation, in 2022, we have had some transitory pressure in this indicator, mainly explained by the growth that we did have that was significant, the effect on capital accounts due to higher Chilean and U.S. rates, greater expectation of inflation and a strong profitability growth observed during the first part of the years.

For the medium term, and according to Basel III, we expect return to previous level both for the contribution of businesses and the normalization of rates in the United States, as Sergio mentioned. We feel comfortable. We believe that we have a strong capital that is growing. And according to Basel III, we will have or will come back to previous level in the medium term.

[Andrés Atala S., executive]

The next one is coming from Eric Ito from Bradesco.

[Eric Ito, analyst]

Guys, can you hear me?

[Andrés Atala S., executive]

Yes.

[Eric Ito, analyst]

My question is regarding our sustainable ROE because, this year, 2022, we had many impacts from high inflation. You guys were booking not only you, but also the industry. We're looking at additional provisions. We have additional investments in -- especially in the fourth quarter and then 2022, as you guys said, we should also grow operating expenses above inflation. So what do you think should be a sustainable ROE for the bank, maybe not only for 2023, but what do you think for maybe a longer-term ROE for the bank, especially as you guys just mentioned after maybe 4 quarters, we should start to see some reversal in provisions, which are already at a very high level of coverage ratio compared to your historical levels. So maybe I call on what you guys expect as a sustainable ROE for the bank?

[José Ibaibarriaga Martínez, executive]

We will answer in 2 phases. Jose or Jorge, can you help me to explain with this -- what is a sustainable return on equity in City National Bank. And then I explained the consolidated view that we have for the next couple of years.

[Jose Marina, executive]

Yes. Of course, Jose Luis. So in terms of the -- our ROE for this year and the outlook, we're looking at about similar to what we had in 2022, which is about 13%, and we think that is sustainable for the foreseeable future.

[José Ibaibarriaga Martínez, executive]

And from a consolidated basis, the estimation that we do have for the next couple of years is in the range of 14.5% in average for the next couple of years when inflation come to normality or not to normality, to a level that the central bank is expecting.

[Andrés Atala S., executive]

Next one is coming from Daniel Mora from CrediCorp.

[Daniel Mora, analyst]

Good morning, everyone. Thank you for the presentation. I have a couple of follow-on questions. And then just one particular question. The first two is, you were mentioning that you expect NPLs ratio to deteriorate in the coming 2 to 5 months and then see some improvement. This improvement in asset quality indicators is coming from higher writeouts or higher loan growth? Or do you expect indeed an improvement in the payment behavior of clients?

My second follow-up question is regarding capital. You said that you expect to return to previous levels. What is that level that you expect to reach in 2023 or maybe in the coming years above 10%, 10.5%? What will be the ratio that you expect to reach. And the third one is regarding NIM in U.S.A. at CMB because, in the guidance, you said that you expect a flat net income, but we already start seeing the contraction or the quarterly contraction in margins. So what will be the outlook for the NIM in the United States considering the pressure in deposits and the cost of funds?

Thank you so much.

[Juan Enrique Visinteiner, executive]

Your first question as to what would be the reasons behind our belief that, in about 4 to 5 months, we should see the consumer risk indicators moving down, that's, I would say, 4 reasons. One, the trend in inflation rate and in interest rates is going down and is predicted to go down. Of course, that can change, but we're basing our comments on our belief that interest rates and inflation rates are going down. And as you know, for families, that's one of the main component or the main reason that has caused higher deterioration in the portfolio.

The second one is that, based on our analytics, the size or the percentage of the portfolio that has higher propensity to have -- face difficulties in staying current is already decreasing, so that tells us what should be the level of customers becoming past due going forward.

And third one, we have a big -- an interesting set of tools for customers that are past due or with high propensity to become past due in which, with a combination of extended tenor and lower interest rates, we intend to offer to them a restructure that should reduce by at least 30% the payments that they have to do on a monthly basis. So the combination of those reasons and actions are the ones that make us believe what we just said.

[José Ibaibarriaga Martínez, executive]

Jose, can you take the question of NIM in City National Bank please?

[Jose Marina, executive]

Of course, José Luis. So Daniel, yes, the guidance for next year is flat net income. As you also saw, we're going to be growing our loan portfolio by low double digits in that 10% to 12% range as José Luis indicated. That will offset some impact of the new compression you just saw. It's also important to note that, this year in '23, we're going to have reduced PPP fees. So the reduction in PPP fees is $20 million. That's going to result in, let's say, a flat NIM -- net flat NIM [indiscernible] for the year after taking into account that decline in PPP income. Now when you look at -- we're going to continue to increase our noninterest income. As you just saw, we increased by $17 million. We're going to increase it by another -- we anticipate increasing it by another 10% this year. And we're also -- even though, as Jorge indicated, we're a growth company, we are taking a close look at expenses. We've made strong investments in people and technology the last several years. We've grown our expenses in the low double digits in recent years, and we're going to be growing our expenses this year but at a much reduced rate in the low to mid-double-digit range. So when you put that all together, we're going to end up pretty much flat net income-wise. If you extract the impact of the PPP fees, we would be up slightly year-over-year. Does that answer your question, Daniel?

[Andrés Atala S., executive]

Daniel, are you still there? Okay.

[José Ibaibarriaga Martínez, executive]

Regarding the question about capital, Daniel, when we talk that we are coming back to previous levels, we are targeting around 10%. And we are looking to increase that internal target for the next couple of years in order to achieve levels over 11% as based in 3 fully implemented by 2025. That is the answer.

[Daniel Mora, analyst]

Okay. Perfect.

[Andrés Atala S., executive]

[indiscernible] has to go in detail.

[Daniel Mora, analyst]

No, that's perfect. Thank you so much. Sorry that the call was not allowing me to unmute myself.

[Andrés Atala S., executive]

And now is coming Nicolas Riva from Bank of America.

[Nicolas Riva, analyst]

I'm going to ask a few questions about funding needs. So you have the maturity this month of a $500 million bond in the global market. I wanted to ask about the plans to finance or refinance that maturity. And then also, you spoke about capital. Your target has been for quite some time the 10% Tier 1. You're essentially, I believe, at the target, I saw a 9.4% CET1 in the press release, IDMC Tier 1 ratio, but I would assume you're basically at the 10% target. And I wanted to ask you there because, Luis, you mentioned Basel III implementation in Chile for 2025.

In the past, I have asked many times about potential AT1 issuance. And it seems to be that you don't need to issue -- to raise AT1 capital, but that if market conditions continue to improve, maybe you're interested in doing that this year. But if you can give us your thoughts regarding potential senior issuance to finance the maturity this month for $1 million and then also potential Tier 1 or Tier 2 issuance.

[José Ibaibarriaga Martínez, executive]

Thank you, Nico. The -- for capital issue. Yes, there is some instrument that, to-date, the market is not there. Demand for perpetual bonds are not there yet, and as part of the implementation on Basel III, we expect that it will be there. The only bond that was issued in that condition was from a competitor, a bank in here, and the bond was bought by the headquarter of that bank. So there is no market yet to do that.

Our expectation is, yes, we have our plan on implementation of Basel III for the next couple of years to have those kind of bonds. And regarding the maturity of the bonds that we have of the $100 million, we have been very successful in issuing those kind of bonds. We have just finished a couple of issues that has been with a lot of demand. So we are not -- or we feel comfortable that we are not going to have any problems in that sense. And I don't know if I answered all your question, Nicolas, regarding capital, or you want to go more in detail of those kind of instruments that I'm talking about.

[Nicolas Riva, analyst]

Yes. Essentially, no needs or no plans really to issue either Tier 1 capital or even a senior bond in the short term.

[José Ibaibarriaga Martínez, executive]

Okay. Nico, the market is not there. We are looking always at opportunities. Window of opportunity if the market can open to this kind of instrument, but there's no demand today.

[Nicolas Riva, analyst]

Yes. I mean, we have seen, of course, an improvement in market conditions since early November, but understood -- absolutely understand your point.

[Andrés Atala S., executive]

Next one is coming from Carlos Gomez-Lopez from HSBC.

[Carlos Gomez-Lopez, analyst]

Now with the background, given that is very hot down there. A couple of questions. The first one is you have since started your operations in Peru. Can you comment on whether the current situation is more of a risk or an opportunity for you. Maybe there are people who are departing there, and you have the opportunity to pick up business?

The second goes back to Florida. Again, you've done a very good job there over the years. But again, does it make strategic sense in the long run to have 2 businesses with such different dynamics in Florida and in Chile, or could you perhaps at some point contemplate separating them?

And finally, would you contemplate at some point to do an ADR listing in Europe, not an offering but just a list.

[José Ibaibarriaga Martínez, executive]

Carlos. Regarding Peru, what we have seen in Peru is a country that has been growing significantly over the last decade. We have more than 20 years in Peru. And basically, our value proposition is mainly to help and go with [ TM ] customers that operate in Peru. In that sense, we see a platform that we have in Chile, in Peru and United States. And with that competitive advantage over the entities that are operating in Peru, we believe that we have the best instrument to do that thing.

In the stability of Peru is something that everyone is leaving today. But if you see in the long term, we still believe that this bank of second floor type of bank just focus in corporate companies, we don't see that we have a special risk on what is going today in the market as we have a long-term view.

Regarding ADRs, we have seen that possibility, but it's really costly to have an ADR, the amount of transactional cost to maintain those ADR alive is very expensive with Sarbanes-Oxley and those kind of things.

And regarding Florida, so far, we feel comfortable with the situation of having a bank as City National Bank of Florida that you have seen all the success that Jorge and his team has bring to Bci in the last couple of years, and you saw Eugenio's presentation where the bank has multiplied by 6x over the time that we have been there, and we still believe that they have a strong value proposition for the customers. And basically, the Miami branch is focused in customers basically from Chile that want to have like a branch abroad where they can make the business. So -- so far, Carlos, we feel comfortable with the structure that we have today with the 2 -- with the branch and City National separate.

[Andrés Atala S., executive]

And lastly, we have the last question from [ Maria Jesus Azocar from Fitch Ratings ].

[Unknown Analyst]

Well, I think my question is -- the nature of my question is very pretty obvious. I would like you to comment regarding on your funding strategy during 2023. And in a broader aspect, this is a broader question, not just for capital funding. Can you comment on your funding needs due to your amortization schedule for this year? And where do you see opportunities in the international markets or the national market? And if you're looking the markets in the U.S. or Switzerland or Japan, can you give us a little bit of color about that?

[José Ibaibarriaga Martínez, executive]

Yes, Maria, I think that this is a very -- could be very simple or could be a very long answer. We do have actually funding capabilities that Bci has one of the biggest top 10 largest bank in Latin America, we have access to a very competitive and sustainable sources fund. I think that we can give you more information with Andres later in this presentation. But if you see the kind of funding that we do have both in Chile, in U.S., and then all the bonds that we have issue in Europe and in Asia. We have a lot of -- we have all the open -- all the markets open, and we have been very successful.

Actually, last week, we obtained the award of the best funding bond of last year or something like that. I don't know how to say it in English, but we really are very active and actually was the best issue of large issue of last year.

[Andrés Atala S., executive]

As mentioned, all the markets open in all the currencies terms and, of course, in abroad.

With this, we finish the presentation. We want to thank you all for your attention and your interest in Bci. And as Jose Luis always mentioned, the IR team is always available to go further with any questions that you could have. So thank you very much, and have a good day.

[José Ibaibarriaga Martínez, executive]

Thank you very much, and thank you for all the questions and your participation. Bye-bye.