Okay. Good morning to all of you. Welcome to our third quarter 2024 conference call.
Recording in progress.
Thank you. Head of Investor Relations at Bci. With me today are José Luis Ibaibarriaga, Bci CFO, Mr. Sergio Lehmann, Chief Economist, and Juan Enrique Pino, Head of Credit Risk at Bci. As usual, we also have been joined remotely by José Marina, CNB CFO, and Cristian Saffie from IR team. Today, we will present our results for the third quarter of this year, highlighting the ROA 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.
Thank you, Andrés. 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 risks remain elevated. The U.S. economy has been steadily moderating, yet it continued 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 expectation 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 have reappeared, given the political scenario in the U.S. and expectation about Trump administration key definitions. We expect it to slow at that growth trend in coming months. Please move to the next slide. In its latest release, the 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 slow, showing some resilience, but anyway, at the end, has been showing some significant deceleration. The unemployment 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's 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 Federal Funds rate to a range of 4.75%-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 rates are rising 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 and grow 2.6% in line with improved business and consumer expectations. 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 states that Chile will grow at a pace of 2.2% for this year. The labor market has shown a notable deterioration in some components over the recent months. In particular, the participation rate has been declining while the unemployment rate is rising to 8.7%. Please move to the next slide. Even though inflation has eased, it remains somewhat elevated due to the increase of electricity tariff after a five-year freeze. Our baseline 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 to its easing cycle, as I said, at a slightly higher pace than expected, with a forecast that the monetary policy rate will be at 5% by the end of this year, in 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 is still under pressure by external factor, and we expect that it's gonna 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 José Luis, who will continue with bank quarterly results. José Luis, the floor is yours.
Thank you, Sergio, for joining us for your review today. I am pleased to greet you all and share the positive results we achieved, primarily driven by solid performance in our local operations. These results 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 José 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 turn to regain track in this line while we continue with this 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. 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 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 this third quarter of 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 rise attributed to higher fees from intermediation and insurance administration, which we'll focus further in this presentation.
Turning to expenses, consolidated operating expenses is increased by 7.4%, while local expenses increased by only 0.4%. It is worth noting that there were non-recurring 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 a strong operating income despite non-recurring effect at City National Bank of Florida. Moving to our local loan portfolio, the 4.3% year-on-year increase, reaching $39.2 billion, was mainly driven by mortgage loans, as shown in this slide. Mortgage loans grew 8% quarter-over-quarter, reaching $12.3 billion.
In contrast, the consumer loan portfolio decreased by 0.8% year-over-year, primarily due to a decline in installment loans and reduced credit card usage, driven by higher interest rate and challenging macroeconomic conditions. This slide provides an overview of March, highlighting key enhancements and performance metrics. Here's an update of March progress towards monetization, powered by a strong customer engagement and performance in key areas. Starting with a credit card launch, we began our friend and family phase in October, and we are on 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, APV accounts, and savings accounts, reflecting both growth and customer trust.
Payments on Visa have reached $87 million in gross merchandise value, reflecting a 44% increase compared to last year, with growth further underscored by a strong 37% quarter-over-quarter gain, demonstrating the continued momentum 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 business, volume management, and the robustness of local business. Optimizing our loan portfolio and maintaining 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 managing 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 maintain 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 reflect various factors, including the main following two: Personnel, which contains a salary adjustment of CPI in March and September. The fact that even though we have some staffing decline, there's 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 optimization, the footprint of our branches, and leveraging efficiencies derived from digitalization in our 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 CET1 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 accounts related to available for sale portfolio, and a positive impact from hedge accounting cash flow derivatives. Additionally, we successfully issue 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.
Thank you, José Luis. 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 timelines we have provided have proven sufficient in aiding our borrowers deal with the effects of the sector's contraction. We finance 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 domestic loan portfolio. Loan volumes persist in a healthy growth trajectory, primarily driven by our commercial and particularly housing mortgage segments, as José Luis just mentioned. You can also see non-performing 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 NPL ratio evident from the graph is largely negatively influenced by one 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 impact our NP-
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This will impact our NPLs 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're seeing a healthy volume growth, as José Luis just mentioned, while also facing and managing an increased level of past dues. This scenario is a confluence of an unusually high unemployment rate and the lagging effect of increased inflation from the two years prior. Additional factors that prevented past due borrowers from agreeing 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 a 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 this portfolio, including a high level of past due obligations and a good advantageous mix of loan-to-value ratios and long-term profiles.
As to consumer loans, in this final slide concerning credit 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 a 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 José Marina, City National Bank of Florida's CFO.
Thank you. Good morning, everyone. My name is José 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 remained strong, and our CRE portfolio continues to perform exceptionally well. As you can see here, our client deposits increased by $393 million through 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 maintain approximately $9 billion of available liquidity sources, representing about 35% of our total assets and 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 $970 million of excess capital in our CET1 ratio, even if we applied our unrealized AFS and HTM losses to capital.
We maintain an investment portfolio with minimal credit risk that provides significant annual cash flow and have lowered the duration of portfolio to about 4.6 years. Our CRE portfolio continues to perform well with a weighted average LTV of about 49%. The economy and the CRE market in Florida continue to perform significantly better than the U.S. as a whole. These results reflect the reputation the 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 would 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 funds outflows that I already mentioned. Our strong client deposit growth enabled us to reduce our broker 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 proactively adjusting client deposit rates and more stabilization of DDA balances.
Total non-interest-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 30th, respectively. Additionally, the unrealized losses on the investment portfolio have been reduced in the third quarter due to the recent decrease in the five-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 this slide.
We continue to focus on high-quality deals with strong spreads 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 exceptional asset quality. The NPL ratio, for instance, remains low at 30 basis points of total loans. Past dues are minimal, only 27 basis points of total 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 a conservative weighted average LTV of 49%, supported by a strong debt service coverage ratio of 1.9 x, 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 of Florida is well diversified, with the largest exposure in growth states in the southern portion of the country. Additionally, they have conservative weighted average LTVs of 56%, supported by a robust debt service coverage of 1.6 x. In September, we performed a strategic repositioning of our balance sheet by restructuring 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 ones while having an aggregate earn back period of just over three years. Additionally, 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 mid-sized 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 higher yielding 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 non-recurring 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 and 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 five-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. Normalizing 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 mainly driven by NIM expansion, with our net interest incomes growing by $13 million or 11% quarter-over-quarter. This slide presents 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 newly implemented qualitative factors and $13 million due to 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 practice of 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% 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 points cut in Fed Funds would enhance 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 and staff members, 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, 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.
Thank you, José. Regarding our last guidelines for the year, as shown in this slide, we are adjusting our estimate to increase the forecast net income by a range of 13%-15% compared to 2023. This improvement is driven primarily by a higher 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 our mid-term 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-for-longer rate and non-recurring event 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 continue 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 maintain sound liquidity and capital ratios, along with strong asset quality. Our financial position remains robust, with liquidity and capital level 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 enables 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 engaged, motivated workforce that support our strategy goals and strengthens our customer relationships. In conclusion, we have had an excellent 2024 performance despite the non-recurring event we discussed earlier. The strong result achieved in our local operations give us confidence that we will exceed this year initial budget as outlined in our updated guidelines for the consolidated net income. Now, I will pass the call back to Andrés, who will lead the question- and- answer session. Thank you.
Thank you, José Luis and gents. The first question from this session is coming from Ernesto Gabilondo from Bank of America. Hi, Ernesto.
Thank you, Andrés, and good morning, José Luis, and good morning to all your team. Thanks for the opportunity to ask questions. 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, could this translate into a slower growth for the country and indirectly impacting Chile. 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. 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 two ones.
Hi, 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. As you know, the main focus of U.S. next government, the Trump administration, is gonna be the local economy. In that sense, we're expecting short-term impulse in the economy. Well, part of that has been reflected in the stock market, in the U.S. stock market. In that view, probably the scenario for CNB is gonna be even as a possibility, even better than the base scenario is today suggesting.
In that sense, even though we're expecting higher interest rates, given probably more persistent inflation in the U.S., the short-term impact on the U.S. economy probably is gonna be positive, given, as I said, that Trump administration is gonna be focused on domestic economy. From Chile side, there is a risk, there is no doubt, that especially reflected in commodity prices, we're gonna 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 Chilean economy has the possibility to redirect, in some way, trade in order to basically confront this potential impact of low growth in the world economy. We are expecting that the Central Bank continue to reduce the monetary policy rate, so in that sense, we're gonna see some positive impact in domestic demand. As you mentioned, probably the external impulse is gonna be lower in the coming future, given this possibility of a lower growth rate in the world economy. Probably, there is today some incentive to move faster in some reforms that Chilean economy require, especially in order to increase investment rate in the coming years.
Well, we wanna see what is gonna be the final definition in political issues on that particular area. Anyway, in my view, the Chilean economy has the instrument in order to confront probably a more turbulent world in the coming years.
Excellent. No, super helpful. My two 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%-15%. I think you are raising it. You were expecting before 6%-8%, so congrats on that. Thinking about next year, should we continue to expect double-digit net income growth, and what will be the key drivers behind it? My last question will be on the digital banks competition. You know Tenpo, the Credicorp's fintech in Chile, just received the first digital banking license in the country.
Just wondering what will be the difference against MACH structure and if maybe at some point you will be also trying to go for a digital bank structure. Thank you.
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. We are in the middle of all the process and the meetings that you know happens. We have not closed it yet. Our schedule is to finalize a budget and be approved by the board on December. The guidelines for next year, I think that we will give you in the next conference call. Regarding digital bank, what we try to mention in the segment that I talk about MACH is that we are 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 product and services to become a digital bank, meaning current account, deposits, savings, credit cards. 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. 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.
Thank you very much. Just to follow up on this, José Luis.
Yes.
You were saying that MACH already has all different products, very good service.
I just wanted to understand, MACH is inside Bci, but it's not in a digital banking structure. Do you think at some point you will need that or you don't need that because it's already there? I just wanted to understand what is the advantage of being independent?
Yeah.
On your structure.
Ernesto, the service quality of MACH has an NPS of over 74%, so it's excellent, the service level. The second question that you make is 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's 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 we are not thinking on separating in the near future as we are operating in the banking licenses of Bci, as I told you. In the day-to-day, it works like a complete full digital bank with all the culture. The cost of serving a customer in MACH is comparable with the digital banks that you have or you study around the world.
No, excellent. Super helpful, José Luis. Thank you.
Thank you. Thank you, Ernesto, as always, for being interesting and making questions.
Thank you, Ernesto. Next question is coming from Jorge Vélez, from Itaú. Jorge, how are you?
Hi, Andrés. Hi, José Luis . Thank you very much for the time for making question. I have two from my side. The first one is in the net income guidance for this year. You have just mentioned that it was 13%-15% income growth, so that imply a significant deceleration in the fourth quarter. Doing a quick math, that means in the fourth quarter we should expect a net income between CLP 150 billion-CLP 160 billion. What will be the main issue in the quarter? Inflation will continue to be supportive, CNB will not have the one-off that we saw in the third quarter. Just 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. The second one will be, how do you see the NIM evolving in CNB in 2025? Thank you.
Thank you, Jorge. No, what we are expecting is basically to maintain NIM. 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 positive 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 the two customers that we have mentioned over the year.
In the commercial and in consumer side, we are not seeing any special situation. Remember that 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. 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. We are not seeing any cost of risk special in this quarter as you mentioned. I think that we will maintain with excellent cost of risk. Regarding NIM of City National Bank, I think that José can answer that question, please.
Absolutely, José Luis. You know, Jorge, we've seen our NIM increase quarter-over-quarter first three quarters of 2024 as I saw earlier in your presentation, and that was before interest rates, the Fed started reducing rates that we saw in the middle of September. We saw that our NIM increased by 16 basis points last quarter, and I also mentioned that our NIM for the month of September was 2.20%.
We're starting off the fourth quarter and even, you know, looking to improve NIM significantly for the fourth quarter. We do expect that NIM improvement to continue organically through getting very solid spreads. As we talked about earlier, continued deposit growth, including as we look into 2025, non-interest-bearing deposit growth as well. We continue NIM to improve. You know, as you saw, we're around 2.11% last quarter, starting September 2.20%, and expect in 2025, we'll be in the mid-200 basis point range in NIM. You also saw that we are also slightly liability sensitive, with every 25 basis point cut, approximately, increasing NIM by about 3 basis points.
As the Fed takes action, continues to take action in 2025, that will also help our NIM.
Perfect. Very clear. Just a follow-up on the guidance again for this year. According to what you say, José Luis, cost of risk will be fine, NIM, okay. The 13%-15% net income could be at the least? I mean, could be above that, or you see that as highly unlikely?
No, Jorge, I think they will be between 13%-15%. We have to be careful with the guidelines. We are seeing such a strong movement in interest rates, exchange rates. As I think that and Neto mentioned, 37% of our operations today is in the U.S. and have some impact. It's going to be in that range. We have always been very serious in our guidelines and if you think about 1% more or less is immaterial. That is going to
Yeah.
It's a reasonable range.
Okay.
According to us.
Perfect. Thank you very much.
Thank you.
Thank you, Jorge. Next is coming from Clemente Sué from Cuprum Pension Fund. Hi, Clemente.
Hi, CNB and Bci team. First, thanks for the presentation. It was really good presentation and congrats for the results. I have three questions. The first one is really quick one, and the two 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? The second one is the administrative expenses. They were really controlled the first two quarters, and then for this quarter, they grew from CLP 125 billion- CLP 140 billion. If you want, if you could give us more color about this. The third one is about the loan growth. You're expecting 5% loan growth, 4%-5% for the whole bank.
We have seen that by now we are 4% year-over-year growth. This quarter and the previous quarter-over-quarter, we have seen a decrease. If you wanna reach the 4%-5% growth for the whole year, you have to grow around 1.5% for this fourth quarter. How have you seen the appetite or the interest for getting new loans? Because we have seen two quarters of decrease and now we have to see a growth to reach this level. Those are my questions. Thank you.
Clemente, thank you. I will try to answer very short. Regarding the loan growth, yes, we are expecting some recovery or 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 our loan portfolio up. At the same time, the relative relevance of the mortgage loan portfolio with a higher inflation will increase as well. The administrative expenses, the main difference is related to inflation and exchange rate. Inflation is affecting the salaries, which represent around 50% of our cost structure. We have a policy that we adapt the salaries with inflation two times a year, May and September.
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 U.S. dollars, and the exchange rate has been higher than what had been expected. The net fee exactly net fee from March, honestly, I don't know the answer. Anyone knows the answer of that? Andrés, you 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.
Anyway, it's a lower.
No, it's a lower fee, but we can answer it, see we have the number. Thank you very much, Clemente.
No, no, thank you very much to you. It was very clear. Thank you, José.
Thank you, Clemente. The next one is coming from Daniel Mora from Credicorp. Daniel, I appreciate if it could be just one question, if you don't mind.
Hi, good morning, and thank you for the presentation. Don't worry, it will be just one 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. What will be the conversation going forward between the cost of risk and NPLs? Even though we understand that cost of risk is expected credit losses, we can imply that the deterioration that we are seeing right now, it's already reflected in the cost of risk. Can we expect a normalization given that it will take time to see the turning point in NPLs in commercial and mortgage segment especially? Thank you so much.
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. It's basically 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.
By that we mean 0.4% of NPL or around that level.
Perfect. Thank you so much.
Sure. No pressure.
Thank you, Daniel. The last one is coming from Tito Labarta from Goldman Sachs. Tito, go ahead, please.
Hi. Good morning. Thank you for the call and taking my question. Sorry if you covered this. I joined a little bit late. Just to get some on the outlook for expense growth, I think you said kind of maybe growing in line with inflation, you know, has slowed down over the last two years. Just yeah, I guess first, typically we see quite a bit of seasonality in 4Q. You know, if you look at the fourth quarters over the last two, three years, we typically see a jump in expenses. Just when should we expect that in 4Q?
In terms of getting expense growth, you know, to be in line with inflation, you know, what do you think is the main drivers of that in terms of cost control to keep, you know, costs in line with inflation? Thank you.
Thank you, Tito. Yes, basically, what we have been putting in place is a cost control that is impacting several areas of the bank. It's not just one, but just to mention a couple of those, we have a zero growth headcount, which has been very helpful, even though we have been replacing collaborators that works in branches or in operation with collaborators that are more expensive, ones that work in the IT arena, data scientists. So that has put upward 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% in the last couple of years.
We are decreasing significantly the back office transaction. The goal is to have zero back office staff. In the origination, we have everything automated and digitized, so we have no back office kind of expenses. We have been working with artificial intelligence in programming. Basically, we have had an important improvement in that arena, even though our expectation is that we will have significant savings in the near future. I can continue, Tito. We have put in place full control in all our investment and expenses. We have committees for FTEs, committee for investment, committee for expense with the aim of controlling them.
At the same time, and this is something that we always mention in Bci, we always take decisions with a long-term view. All the investment that we are doing is to allow us to compete in the next couple of 10 years. Yes, we are aligned with inflation in Chile. We expect that we are going to deliver that. We are in good shape for that. We are not expecting an increase. You are right, December always has some increase in expenses, but we believe that we have put in place some processes that will allow us not to have it this year. We are pretty comfortable with what we have done.
We are pretty comfortable with the increase in margin and controlling costs. That allowed us a gap that is positive and help 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 on good track to deliver that.
Okay, that's clear. Thank you, José Luis.
Right now is the last one. It's coming from Andres Soto from Santander Investment. How are you, Andres?
Hi, Andrés. Hi, José Luis. Thank you for the presentation. My question is quickly on capital. I understand the CMF has produced some initial proposal for the Pillar II 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.
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 capital minimum regulations. Today, we are over our target of 11%. We are in 11.6%. The December Basel III implementation and December of 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 profits, and we have a capitalization ratios. We have implemented $1 billion in AT1s.
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.
Thank you, José Luis. What capital level will make you comfortable next year?
Our internal goal is to have a CET1 ratio of 11%.
That's very clear. Thank you.
Thank you. Thank you very much, Andres.
Okay. With the last question from Andres, we're done. Thank you very much to everyone to stay here, to stay tuned. Don't forget, if you have any additional question, contact us, and we have the presentation, also the management commentary on our website. With all of this, thank you, gentlemen. Thank you, everyone, and see you next time.