Okay. Good morning, and welcome to our second quarter 2024 conference call from Santiago de Chile in this beautiful day. We had rain from tonight, so we are enjoying the beautiful day. I'm Andrés Atala, the Head of Investor Relations of BCI. Today, with me are José Luis Ibaibarriaga, BCI CFO, Sergio Lehmann, Chief Economist, and Juan Enrique Pino, Head of Credit Risk at BCI.
We also have been joined remotely by José Marina, CNB's CFO, and Cristián García-Huidobro. Today, we will present our sound results which manifest the growth and transformation strategy implemented over the past few years, despite the highly competitive and complex industry. After reviewing our performance, we will leave room for the Q&A session as usual. Please hold your questions and raise your hands at the end. To begin with this presentation, Sergio will contextualize explaining the macroeconomic figures.
Thank you, Andrés. I will give you a quick macroeconomic review about the U.S., Peruvian, and Chilean economies. The global economy has been moderating its dynamics as a response to contractionary interest rates. Some developed economies, led by the Eurozone, initiated a gradual monetary policy easing process, recognizing lower inflation pressures. Global risks remain high, however, given the possibility of more persistent inflation, especially from services side, higher international tension, and geopolitical factors.
The U.S. economy has continued showing a gradual deceleration. Inflation, as a consequence, has been decreasing even more rapidly than was anticipated, moving market expectations, which now anticipate three Fed funds rate cuts before the end of the year. The yield curve has moved downward during the last month. In Peru, the activity shows an acceleration in the first half of the year, while inflation has been decreasing, actually inside the inflation tolerance range.
The central bank, however, has slowed in its interest rate cutting process. In Chile, the economic activity is showing a gradual recovery, responding to monetary policy normalization, which was initiated a year ago. The Chilean peso is still under pressure due to mainly external factors. Please move to the next slide.
In its advanced estimate release, the Bureau of Economic Analysis indicated that U.S. economy grew by 2.8% quarter-on-quarter, annualized in the second quarter of this year, above the expectation. It was driven by an increase in personal consumption, mostly durable goods and investment, particularly equipment and inventories. The economy is expected to grow around 2.4% in 2024, and Florida GDP has continued to outperform the national average. The labor market has been recently deteriorated.
The unemployment rate and the U.S. economy and Florida, however, are at low levels, although the national average has been slowly rising during the year. Please move to the next slide. Headline and core inflation continue to gradually decrease. It's estimated the inflation will be below 3% annually at the end of this year, closer to the Fed target.
The Fed funds, on the other hand, has remained at 5.25%-5.50% range since July 25, 2023. A very contractionary stance. In line with Fed signals provided in the last monetary policy meeting, market expectation incorporate a first cut of 25 basis points next September, and then another two additional cuts before the end of the year. Please move to the next slide.
As a consequence, the U.S. yield curve moved downward last month, given indications of a more rapid decrease in inflation rate and clear signals of economic adjustment. Peru GDP grew by 1.4% year-on-year in the first quarter 2024, driven by a recovery in the domestic demand. We expect a growth rate of 2.4% this year, mainly explained by better consumer expectation due to a well-controlled inflation and lower interest rates.
The central bank initiated an easing monetary policy cycle in September 2023, accumulating since then 150 basis point cuts in the monetary policy rate. The local interest rates in the long term have been moving according to external trends. Please move to the next slide.
In Chile, GDP grew by 2.3% year-on-year in the first quarter of 2024, driven by a recovery in household consumption and export, mainly in the mining sector. Increase in mining production at the end has been especially important due to investment projects initiated some years ago. We expect GDP growth at 2.3% this year.
The labor market has improved slightly, particularly due to the contribution from the commerce side. Unemployment rate has fallen, and the labor participation rate is close to pre-pandemic levels. Please move to the next slide. Inflation has been reducing as a response to a contractive monetary policy. The latest data show some new pressures associated to electricity prices increases after this being fixed by the authorities in the pandemic.
Total CPI will end the year at 4.5% annual basis and will reach the central target, inflation target at the beginning of 2026. In response, the Central Bank of Chile has cut the monetary policy rate to 5.75%, sustaining that level in the last policy meeting.
We estimate that we'll reach 5.25% at the end of this year and four point twenty-five percent, which is the neutral level, finishing 2025. Please move to the next slide. The Chilean curve has shown mixed movement since March, induced by changes in expectation about the velocity of policy rate reduction and external trends. In the last three months, the Chilean peso has continued to be under pressure.
In the first semester, high copper prices contributed to contain its depreciation. However, more recently, we have seen significant reversion of this factor. Current rate with respect to other LatAm, Latin currency has been a key variable, given significant interest rate differentials between Chile and the rest of the countries in the region.
By the end of this year, we're expecting an exchange rate below 900 Chilean pesos per dollar based on a more synchronized monetary policy with respect to U.S. and other economies in the region. Now, I will greet you with José Luis, who will continue with this presentation. Please, José Luis, the floor is yours.
Super. Thank you, Sergio. Thank you very much and welcome, everyone to this conference call. I am pleased to share with you the strong and positive results we achieved this quarter, primarily driven by our local operations. These results underscore our strategic focus and commitment to sustainable growth.
Our operating income grew by 17% in the first six months, highlighting the sound performance of our local operations with lower risk compared to last year. First and foremost, our local loans have grown by 11.1% year-over-year, driven primarily by commercial and mortgage loans, bolstered by FX effect and inflation. This growth is a testament to our ability to meet the evolving needs of our clients and support their financial aspirations.
Additionally, our local NIM increased by 41 basis points to 4.23%, while City National Bank NIM rose by eight basis points in June, surpassing the 2% market mark. Fees increased by 16.1% when comparing second quarter of 2023 to the second quarter of 2024, reflecting our ability to enhance revenue streams and deliver value to our stakeholders.
We have also seen a positive transition in local deposits, shifting from time deposits to demand deposits, resulting in a 9.8% increase. This shift has positively impacted our cost of funds, further strengthening our liability strategy. Our capital position remained robust, with a CET1 capital increase by 130 basis points year-over-year to reach 11.12% as of June 2024.
This improvement reflects our prudent capital management and resilience in a dynamic market environment. In terms of digital account traction, both at BCI and MACH, we have significantly increased our current account customer by more than 600,000 customers. This growth highlights our success in leveraging digital platforms to enhance customer engagement and accessibility. Turning to our international operation, I would like to highlight two key elements.
First, our presence in Florida has been consolidated, making BCI the largest Latin American bank in the U.S. This quarter, we celebrate the 25th anniversary of our Miami branch, marking a significant milestone in our international expansion. Simultaneously, in Peru, we successfully issued our first public bond, achieving demand that exceeded 2.1 times the offer. This strong market confidence underscores our credibility and the robust performance of operations in the region.
Lastly, in line with our sustainability goals, we have launched the BCI Global Sustainable Debt Mutual Fund, which invest in debt instruments with ESG criteria. This fund promotes sustainability through responsible investment strategies aligned with our commitment to environmental, social, and governance priorities. In this slide, we present a snapshot of the key financial figures. Now, let's review the key figures of our consolidated operations in the first quarter of 2024.
BCI's operating income recorded a 9.1% year-over-year increase, primarily driven by our increase in net interest income explained by our effective pricing strategy. Furthermore, net fees experienced a substantial year-over-year increase due to higher fees from intermediation and insurance administration, which we will address further in this presentation. Turning to our expenses, consolidated operating expenses increased by 14.3%.
It is worth noting that we had a non-recurring event that we'll explain later in this presentation. Nevertheless, we reinforce our commitment to keep local expenses in line with inflation, as we will address further. Lastly, I want to highlight that our net income has climbed by 5.7%.
This increase was partially offset by higher taxes due to the monetary correction of capital given the appreciation of the US dollars against the Chilean pesos, which affect the operation of City National Bank. Moving to our local loan portfolio. The 7% year-over-year increase was mainly driven by the commercial loans, as we can see in this slide. This quarter's growth is primarily attributed to the increase in volume of commercial loans by 9%, highlighting our pricing strategy and the market share gain in this segment.
Moreover, this is worth mentioning that the growth in commercial loan is also influenced by the appreciation of the dollar, which impact the growth of these loans. Regarding mortgages loans, the slowdown we have seen in the last couple of years is mainly explained by macroeconomic and commercial conditions that Sergio explained.
On the other hand, the consumer loan portfolio decreased by 2.1% year-on-year, mainly due a decline in installment loans and credit card usage, driven by higher interest rate and challenging macroeconomic conditions. Please move to the next slide. This slide provides an overview of MACH, highlighting key enhancements and performance metrics. In Q2, MACH premium plan was launched. This slide outline the new benefits offered by the plan, which can be accessed through the monthly fees.
This benefit includes improved encashing options with credit cards, additional interest in Cuenta Futuro, which is our savings accounts, enhanced cash back through BCI Plus, and preferential customer service. Furthermore, in terms of transaction growth, we saw a 4% increase quarter-over-quarter, totaling 12.2 million transactions, with 40% attributed to purchases and over 30% to cash-ins.
Additionally, the slide showcases a 30% growth in gross merchandise value on our payment platform, which now accounts for more than 70% of the domestic transactions, along with the successful expansion of international e-commerce capabilities. An example of this is the launch of on-us payment of Shopify store this quarter. 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 41%...
A 41 basis point increase year over year. This growth is mainly attributed to effective business volume management and the robustness of our local businesses. Optimizing our loan portfolio and maintaining a strong treasury management strategy has been key to drive for this growth. Regarding fees, the increase was primarily due to higher commissions earned from the mutual fund administration and insurance brokerage.
Meanwhile, commissions and credit card services decreased during this period. This quarter, local efficiency reached 46.81%, supported by a robust growth in operating revenues by nearly 7%. Despite an increase in consolidated expenses of 13.6%, we achieved a moderate growth in local operating expenses by 4.5% when adjusted for currency fluctuation and non-recurring effects.
First, the 35% growth in consolidated operating expenses is attributed to activities in the United States, mainly driven by the operation of City National Bank and the strengthening of the dollar against the Chilean peso. Second, in May, we experienced a non-recurring effect related to the accounting of provisions for the strategic initiatives that we are developing during this month.
Adjusting for this currency effect and the other one-time items, local operating expenses increased by 4.5% quarter-over-quarter. The main drivers of the increase in operating expenses are related to personnel expenses. Our local operations personnel expenses grew 4.7%. This growth is primarily due to salaries being indexed to the consumer price index and salary adjustment implemented in March.
We have observed positive results from a cost control and efficiency program, which is primarily due to the discipline measures and efficiency gains from branch optimization and process digitalization. Now we will present some key highlights from our liquidity levels and regulatory capital metrics. As shown in this slide, our total local deposit base has exceeded a 1.5% growth year-over-year.
This growth is underlined by an increase in local non-interest bearing deposit by 9.8% and a decrease in demand deposits by 3.3% year-over-year. Regarding our regulatory capital levels, as shown in the upper right chart, our common equity Tier 1 capital has seen an increase of three basis points compared to the same period last year.
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 on hedge accounting cash flow derivatives. Additionally, last February, we issued a Tier 1 bond amounting to $500 million, which strengthened our capital base in line with the implementation of Basel III. Now we will discuss our asset quality and loan portfolio composition with Juan Enrique Pino.
Thank you, José Luis. Hi, everyone. My name is Juan Enrique Pino. I'm the head of Credit Risk Management, and I'm happy to be here with you once again to give you some more details about our loan portfolio status. In this slide, we can see the performance of the entirety of our local loan portfolio. As you can see, loan volumes remain with a growth momentum, as José Luis was just mentioning before.
As to NPLs, they remain with an upward trend, but at levels still below industry levels. This trend is observed in different degrees in all business segments, and we will see afterwards, as a reaction to slower economic growth, still high interest rates, and by the residual effect of the former higher inflation rate.
Our loan loss provisions ratio is strong, thanks to the voluntary provisions proactively built a few years back. As to commercial loans, they remain, as José Luis Ibaibarriaga was mentioning, one of the main volume growth drivers, while the NPL ratio shows signs of stabilization at around 1.8%, only distorted these last months by an exposure to a customer in the telecom industry for around $75 million, which filed for Chapter 11.
We expect this case to be restructured in the coming months. As to the residential mortgages portfolio, we continue observing a growth in volumes, however, a very soft one, as demand is still contracted. In the same line of thought, NPLs remain with an upward trend, but very well within industry levels.
This is mostly explained by still higher interest rates, by the current 8.3% unemployment rate, and by the high inflation rate accumulated from previous years as most loans have the rates indexed to inflation. The combination of strong LTV ratios and average tenor reflecting a mature portfolio gives us confidence that with interest rates gradually trending downwards.
There's a window open for restructuring past due obligations in terms that will be way more accessible to borrowers than in previous months. As to the consumer loan portfolio, it has started to regain traction in terms of volume growth and quality, with NPL ratio stabilizing in the neighborhood of 2.9%, only slightly above pre-pandemic levels.
BCI sees this as a very attractive segment to boost growth, along with a rebalancing towards more resilient customer segments and with a risk appetite more commensurate with a still challenged macroeconomic environment. Let me leave you now with José Marina, City National Bank of Florida's CFO.
Thank you, Juan Enrique Pino. Good morning, everyone. My name is José Marina, and I'm the CFO of City National Bank of Florida. It is my pleasure to be here with you this morning to discuss our performance during the second quarter. I am pleased to inform you that we had strong results this quarter. We have expanded our NIM, our liquidity and capital positions remain strong, and our CRA portfolio continues to perform exceptionally well.
First of all, banks are finding it increasingly difficult to capture deposits nowadays, given the historic increase in rates. However, our client deposits increased by $593 million in the first half of the year, growing at an impressive annualized rate of 6.7%, surpassing the banking industry's annual growth rate of 2%, which includes broker deposits.
We maintained approximately $10 billion of available liquidity, representing 37% of total assets, and covering 123% of our uninsured and uncollateralized deposits. Our net interest margin expanded for the second consecutive quarter, growing six basis points quarter-over-quarter. For the month of June, NIM surpassed the 2% mark and has expanded 23 basis points since the month of October.
Our net interest income in June reached its highest level in over a year. We continued to enhance our already strong capital profile with about $750 million of excess capital in our common equity Tier 1 ratio, even if we applied our unrealized AFS and unrealized HTM losses to capital. We maintained an investment portfolio with minimal credit risk that provides significant annual cash flow and has lowered its duration to about 4.5 years.
Our CRE portfolio continues to perform well with a weighted average LTV of about 50%. Florida continues to perform significantly better than the rest of the U.S. as a whole. These results reflect our reputation in the market built over 78 years. Our relationship-centric model focusing on diverse business segments, the strong culture fostered among our employees, and our remarkable success in executing our strategic vision.
The U.S. banking system has changed rapidly over the last year with considerable migration of non-interest-bearing deposits to higher yielding products and increasing betas on the cost of funds. Moreover, the industry events in the first half of last year led to depositors migrating from mid-sized community banks to major banks. Despite all these headwinds, our client deposits significantly increased by $590 million or 3.4% in the first half of the year.
For the quarter, our client deposits decreased by about CLP 600 million. However, this is primarily related to an unexpected outflow from a client having a temporary inflow earlier in the first quarter of the year, as we previously communicated in the first quarter results. Our strong client deposit growth enabled us to reduce our broker deposits by $665 million year to date.
Furthermore, our cost of client deposits decreased by three basis points quarter-over-quarter due to the cost of funds flattening out and our more stabilization of DDA balances. Total non-interest-bearing deposits represent about 22% of total deposits. On the right-hand side, we can see the banking industry as a whole saw deposits modestly increase by about $171 billion or about 1% year to date.
However, these industry figures include broker deposits for all figures on while our figures on the left exclude broker deposits. This slide shows that our assets remained flat quarter-over-quarter with just a slight increase of about $77 million. Our loan to deposit ratio remains low at about 84%. We remain very well capitalized as evidenced by our total risk capital ratio and Tier 1 leverage ratio, which were 14.9% and 10.3% as of June 30 respectively.
Additionally, the unrealized losses in the investment portfolio remained virtually flat in the second quarter despite the increase in the five-year treasury rate we saw during the quarter. Core loans, excluding PPP, increased by $232 million quarter-over-quarter, as shown on the right-hand side of the slide.
We continue to focus on high quality deals with strong spreads and solid deposit relationships. Our strong credit culture and low risk appetite continues to result in excellent asset quality. The m-NPL ratio, for instance, remained low at only 67 basis points of total loans. Past dues were also minimal, only 36 basis points of loans, decreasing by 9 basis points quarter-over-quarter.
We also increased our allowance coverage by 7 basis points quarter-over-quarter. On this slide, we provide detail on our CRE portfolio, which represents 49% of the overall loan book. Our CRE portfolio has a conservative weighted average LTV of 50%, supported by a strong debt service coverage ratio of 1.8 times with full or partial recourse on 63% of the loans. It is also very well diversified across all segments.
Our pure-play Florida banking strategy resulted in only 17% of CRE loans located outside of Florida, representing only 8% of our total loan 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 a conservative weighted average LTV at 59%, supported by a robust debt service coverage ratio of about 1.6 times.
Our sound credit approach is complemented by the best CRE market in the nation, Florida. Our business-friendly climate continues to attract new businesses and is a preferred destination for wealthy individuals. As analysis done by CoStar shows, lower vacancy rates and higher rent growth for the South Florida office market, outperforming most major U.S. cities, as you can see on the left-hand side of the slide.
Additionally, eight of the 10 office markets with the strongest office rent growth are in the state of Florida, with Miami ranked number one. This is in sharp contrast to the other large office markets that have experienced declines in rents and office property valuations over the past few years.
A similar story is shown on the retail market on the right-hand side of the slide, with South Florida markets outperforming the rest of the country with lower vacancies and higher rent growth. Florida's economy consistently outperforming the rest of the U.S., provides a secure foundation for our comprehensive credit risk framework.
Our historical minimal losses are a testament to that, with a cumulative CRE net charge-offs of only $1.1 million since 2016 and effectively no charge-offs over the past five years. This slide shows that our pre-tax, pre-provision normalized net income increased by $3 million or 6% quarter-over-quarter, primarily due to higher net interest income of $2 million as our NIM expanded by six basis points in the second quarter.
Also, non-interest expenses decreased by $3 million as compared to the prior quarter. Moving to our operating results. Our net income for the quarter was $31.6 million. Core earnings increased quarter-over-quarter by $2.7 million or 4% due to higher net interest income and lower expenses.
We proactively provisioned nearly $16 million of loan losses, primarily related to the impact of the updated Moody's economic forecast and a recalibration of our loan loss models. Asset quality ratios remain strong, as previously discussed. Our profitability continues to be strong with NIM expanding quarter-over-quarter by six basis points to 1.96 for the quarter and by 12 basis points compared to the fourth quarter of 2023.
Also, our efficiency ratio improved to 55%. On this slide, we demonstrate our net interest income increased quarter-over-quarter by $1.6 million as our NIM expanded by six basis points, mainly due to lower cost of funds by three basis points and higher yield on loans, also three basis points. In June alone, both our net interest income and margin were the highest in over a year since May 2023.
Our NIM expanded by eight basis points in the month of June as compared to May, surpassing the 2% mark. In conclusion, the deposit pricing pressure has reduced, allowing the pricing on the loan portfolio to drive NIM expansion. We continue to expand our NIM even as rates have stayed higher for longer, while positioning our balance sheet to benefit from any potential rate cuts in the near future.
I want to conclude by mentioning several strategies implemented to navigate the current environment. First, we executed $3.75 billion of pay fixed interest rate swaps during 2023. These swaps are made at a shorter to medium end of the curve to protect against rates staying higher for longer, while also preserving our ability to expand our net interest margin once rates start to decline.
Next, we have increased our minimum spread for new commercial loans and renewals to 325 basis points. Through June, our weighted average spread for new commercial originations is 340 basis points. We're being highly selective on new on the lending side, not only from a credit risk and spread perspective, but also from a relationship perspective by focusing our lending activities and clients with a more holistic banking relationship that includes a relevant deposit relationship.
We're also including such items as deposit covenants, prepayment penalties, and floors on new loans as needed. Deposits are at the core of our relationship banking approach. We have several deposit gathering strategies in place which have been vital to navigating the current rate environment.
At the end of 2023, we executed the sale of $108 million of corporate bonds at a loss, replacing them with floating rate securities, increasing our NIM by about two basis points. The strategy aims to enhance profitability and balance sheet repositioning moving forward. We are also prioritizing residential lending in the secondary market to increase fee income.
As we mentioned last quarter, we also sold the BCI Capital platform to align our strategic priorities with that prioritizing relationship banking over transactional lending. As we navigate the landscape of rates staying higher for longer, we have initiated a pricing strategy aimed at selectively adjusting certain client deposit rates. The initiative results in a reduction of 10 basis points on over $3 billion of selected deposit accounts with rates above 3.5%, reducing our interest expense by about $3 million annually.
We are also currently working on repositioning our BOLI investment into higher yielding contracts. The BOLI restructure will improve NIM, liquidity, and overall profitability in the coming months, enhancing our results by about $7 million on a recurring after-tax basis. We continue to invest in our human capital to drive organic growth.
We are pleased to share that we have added a new commercial team led by a market president to spearhead our expansion in the Tampa market. This new team of six seasoned professionals complements our already existing commercial team in the market and will be solely focused on expanding our presence and deposit share in this key market. Additionally, we have launched a new capital markets team focused on originations of loan syndications, capital placement, and specialty capital.
This new team of approximately 10 professionals will allow us to originate loan syndications as a leading bank, work with CR prospects and existing clients in placement of third-party debt and equity, et cetera. We have also hired new directors of our wealth management and residential lending units. Both are seasoned and well-respected leaders who will lead our strategy to increase client portfolio penetration and fee generation.
In conclusion, we are focused on continually augmenting our talent base with the best talent in the markets that we serve, while also offering a work environment and culture that maximizes employee retention. Our results are a direct reflection of our people. We're excited not only about delivering strong results in the first half of the year, but also in the years to come. On that note, I would like to pass it back to the BCI team for final comments. Thank you for participating in the call this morning.
Thank you, José. Regarding our guidelines, as you can see in the slide, we are adjusting our expectation and increasing the forecasted net income by approximately 10% compared to last year. This is driven primarily by a higher operating margin in Chile and a sound net interest margin considering a local loan growth by 5%-7%. A key element that I want to address is our focus and effort on our productivity plan, which is a key catalyst of our midterm goals.
With this, we reiterate our commitment to ensuring that local expenses growth will be below inflation rate. In terms of NIM, we expect it to remain flat compared to last year. While the higher for longer rate scenario is expected to impact City National Bank of Florida's operational result, the strength of our local operation and sound financial strategies will more than compensate for these effects.
As we conclude this conference call, I would like to highlight several key points. Our local operations level delivered solid results, effectively mitigate the impact of higher for longer rates in City National Bank net interest margin. As BCI, we maintain sound liquidity and capital ratios, along with a strong asset quality in both Chile and City National Bank.
Our operations have consistently demonstrate the robustness and stability reflected in our strong financial position, liquidity, and capital ratios that exceed regulatory requirements. Additionally, our digital ecosystem remains integral to our strategy, with MACH solidifying in its position and introducing new functionalities to enhance monetization reflected in our customer base of more than six million customers.
In conclusion, we have an excellent first half of 2024, despite the higher for longer rates scenario, and sound results we have achieved in our local operations make us confident that we will exceed this year initial budget, as we already mentioned in the update guidance for the consolidated net income. Now, I will pass you to Andrés, who will lead the Q&A session. Thank you very much.
Thank you, José Luis. From Goldman Sachs, we have Tito Labarta with the first question. Tito, how are you?
Hi. Good afternoon, everyone. Thank you for the call and taking my question. You know, thanks for the updates and the updated guidance. I guess one question on, in terms of, your margin, because we did have your margin coming down this quarter, even though inflation was higher in Chile, and you're guiding for, you know, basically stable margin, for the full year.
Want to just clarify a little bit, you know, why did the margin overall fall even though inflation was higher in Chile? And then in terms of if you think it's just kind of the quarterly inflation, did you expect it to remain sort of stable-ish at these levels, or do you expect any movements in the second half of the year? Thank you.
Thank you, Tito. The margin went marginally down because the line of the Central Bank of Chile called FCIC that was issued during the pandemic was canceled, and that was with an interest rate of 0.5%, and that was the reason. In July, it was fully paid. For the second semester, we expect margin to be flat in a consolidated basis.
Okay. Perfect. No, thanks for clarifying that. One other follow-up, if I can. Just on your cost of risk, that was also a bit lower this quarter, even though we did see NPLs pick up a little bit. Just to understand why, you know, why provision is declining with NPLs going up, and how you expect that to evolve from here. Thank you.
Super. Juan Enrique, can you take that one?
Sure, Tito. Much of the NPL upward trend is represented by our residential loans portfolio, which is highly secured, and therefore, it does not impact in provisions. In the SME side of the commercial loans, which are benefited by strong government guarantees, we have been very highly effective in collecting when needed. That would be the reason.
Is this level of cost of risk that we saw this quarter, do you think that's sort of a sustainable, like 0.6% or?
Yeah, I would say so. Yeah.
Okay. Perfect. Great. Thank you so much.
Sure.
Tito, the first question is coming from Daniel Mora from Credicorp. Hi, Daniel.
Hi, good morning, and thank you for the presentation. I have two questions. The first one is regarding loan growth strategies. In the report, you mentioned about increasing market share in foreign trade loans, and also we observe contraction of the consumer portfolio.
I would like to understand if this strategy is the one that we will see in the coming quarters and also maybe in 2025, in which we are going to see stable rates and more controlled inflation and probably better economic activity. That will be my first question, and then I will ask my second one. Thank you.
Daniel, thank you for participating. The loan growth that we are estimating in Chile is basically in the commercial side. As Sergio mentioned, we have a lot of opportunities there. In the consumer side, even though the economy is recovering, we have taken a lot of strategic decisions a couple of years ago, where we have focused our growth in this segment in the higher level segment, and which has decreased our risk levels.
That is something that it will continue. We have an expectation that we will grow in the consumer side, both in BCI as in Servicios Financieros. Having said that, our growth will be in the better segment of both companies. Did I answer your question, Daniel?
Yeah. Perfect. José Luis, it was very clear. My second question will be regarding fees. During this quarter, we observed a very relevant increase in fees, but mainly related to a decrease in expenses, in fee expenses. Can you provide more color on what we observed that performance and if the growing fees will continue to be explained by lower expenses?
Yes, Daniel, as you know, the interchange rates changes and therefore the balance between incoming and outgoing payment changes. What we are seeing is that we will face something similar to what we have today, but increasing the incoming fees.
The other thing that you have seen is that we have a significant increase in fees during this quarter compared to the same quarter of last year or this semester compared to the first. That is basically because the ecosystem that we have invested is giving a lot of benefits. We are increasing the fees on the mutual fund arena. We are increasing fees in the insurance arena.
As I told, as in the conference call, we have launched an account in March that has some charges, where we have the aim of monetizing all that area. In summary, what you should see in net between payment commissions and revenue commissions is a positive trend in the second quarter, in the second semester.
Perfect. Thank you so much. That was very clear. Thank you.
Thank you, Daniel.
Next one is coming from Ernesto Gabilondo from Bank of America. Hi, Ernesto.
Thank you, Andrés. Hi, good morning, José Luis. Good morning to all your team. My first question will be on your net income growth guidance. You're expecting around 10% growth for this year. I think before you were expecting around 6%-8%. Can you elaborate on what are the key differences in your assumptions for having this higher earnings growth?
For my second question will be a follow-up in the asset quality. I think I heard there was a deterioration in a specific corporate in the telecoms sector. Was this one of the reasons behind the NPL deterioration on a quarter-over-quarter? On a consolidated basis, wouldn't it be reasonable to expect a cost of risk around 1%?
Finally, my last question will be in terms of your ROE guidance for the year. Just because you're increasing your net income, wondering where you seeing the ROE for the year. Also if you can again remind us your medium-term target for the ROE. Thank you.
Okay. Enrique, I will answer the net income and the ROE, and you go with the risk. Ernesto, what we are seeing and why we increase our guidelines for net income of this year is that the strategy that we have been following in the commercial side.
Increasing the loan portfolio of the commercial segment in our best customer rates with a price strategy that we have held in the allocation of capital, has been very successful this year. We grew in that segment significantly in the last period of last year and the initial month of this year. We are generating and a lot of interest that we didn't have in the forecast that we gave you before.
At the same time that we are overperforming in the commercial side, the control of expenses has been very successful, even though you are not seeing it because we have had one time effect that we have shown in the financial statement, but the projection that we have is that we are going to be below inflation. The better behavior of the risk of the consumer segment that is performing much better than our budget. The combination of the three things allowed us to have a net income that is better than what we thought.
Even though that we said that our budget estimates some full interest rate decreases in the U.S. and that have not happened so far, even though that will be over our net income last year, around 10%. It's the combination of the three. Return on equity, we have not give guidelines of return on equity, but as you have the our equity and you have the forecast that we are giving you, it's very easy to calculate it. We are not giving it.
It goes to 12, right?
No, for 2020-2026 remains at 14% on consolidated basis. That means in Chile around 15.5%, and the U.S. is going to be around 12%.
Okay.
We are on track, and we are in line with that guidelines. Juan Enrique, can you answer the question, please?
Sure. Ernesto, I guess your question was how much of the NPL ratio has been impacted by that telecom case. It represents 50 basis points of the NPL ratio of the commercial loan portfolio and 19 basis points of the overall local loan portfolio. If and when we structured those, that would be the reversals in the NPL ratio.
In terms of a consolidated basis, how should we think about a cost of risk?
We're confident that the cost of risk for the remainder of the year should not change radically from what you have been observing in the first two quarters. I don't know if you refer particularly to this case or to the overall portfolio. My answer refers to the overall portfolio, Ernesto.
Okay. No, perfect. Thank you very much.
Sure. You're welcome.
Thank you, Ernesto. Jorge Pérez from Itaú with the next question. Hi, Jorge.
Hi, Andrés Atala. Hi, José Luis Ibaibarriaga. Hi, teams. Thank you very much for the opportunity. I have two questions from my side. The first one is on OpEx. When we see on consolidated basis, OpEx is growing above 10%. Just to understand what is happening, in this quarter, we saw a large increase in other operating expenses.
To have more colors on that point, and what should we expect on efficiency ratio for this year or for 2025? My second question is on the CMB. I just want to understand the evolution for the margins, how sensitive the bank is to the Fed rates. Those are my questions. Thank you.
Okay. José, can you take the Fed rate? I will go through the OpEx.
Of course.
Regarding OpEx, what's going on, Jorge, this is important to mention it because sometimes we forget. We have been investing more than $500 million in transforming the bank in the last six years, seven years. The bank has grown three times from what we were in 2015, and we have changed significantly our IT infrastructure, the operations in the back. All operations where we have automated and robotized a lot of things. Expenses went up in a period of time.
Today we have more than 25% of our employees in the IT arena, which they earn like two to three times the normal people that work in branches. We closed around 50% of the branches. After, well, we closed 50% of branches. Having said that, we are right at the moment that we are seeing an improvement in the OpEx. What happened this semester specifically, basically three things.
One is that last year when Silicon Valley Bank failed, the authority in the U.S. came out to support all the depositors, the deposits in the U.S. Then before the end, as we were finishing, we have to pay back to that entity around $20 million.
That was something, a percentage of the uninsured deposit over $5 billion. Each bank that have that amount multiplied by 0.5, and you have to pay that in order to have the money again, that entity, if something happened. Well, this year, at the very end, beginning of this year, they told us that they made a miscalculation, and we have to pay $5 million more. One effect is that we have to pay $5 million that was not in the budget.
The second thing is that the exchange rate of all the expenses in the U.S. when we consolidated in Chile, you have to translate it to Chilean pesos, and the exchange rate has been higher during the whole period of this semester than what we thought it was going to be, and it was what was last year.
The third thing is that we are going through several strategic initiatives that we did a provision in May, a significant provision that increase our expenses. That is going to be mitigated in the second semester. If you take out that or if you take that, we are growing in Chile 4.6%.
Having said that, the expectation, taking into consideration what I told you, in Chile, with the provision that we did in May, we are going to finish in Chilean pesos at the end of the year below inflation. The only deviation that we can have is regarding the exchange rate of the expenses that we have in City National Bank, which honestly, we don't know.
Today, with the numbers that appear in the U.S., my expectation was that exchange rate was going to go down today, and you can see that it didn't. It's difficult to tell you, but that is basically the explanation, Jorge. José, can you go through the impact of the Fed rate in the US, please?
Of course, Luis. Jorge, we positioned our balance sheet to be slightly liability sensitive so that when rates come down, we will benefit. As I indicated in the conference call, we have done, in 2023, about $3.75 billion of swaps to protect against rates staying higher for longer, but all in the short to medium term, between 1-3.5 years. Those swaps are starting to roll off. For every 100-200 basis point shock in rates coming down, our NIM will expand into 3%-5% range. Call it 6-10 basis points, roughly.
You also saw, as I mentioned in the presentation, that we have already proactively reduced the rate on about $3 billion of client deposits by an average of about 10-11 basis points. We've already done that. When rates start to come down on the short end, we're gonna be very proactive in reducing our rates and that will help our NIM.
Thank you, José. Jorge, are you done?
Yeah. I have a follow-up on OpEx. Just on the FX impact of the CNB when you translate to CLP. Thinking on the efficiency ratio, that should be neutral, right? Because also you are changing the US dollar to a higher Chilean pesos, right? Just understanding in terms of efficiency ratio, what should be-
No, you are right.
Yeah.
Well, sorry. Go ahead, José.
No. What should be the level in terms of efficiency ratio on a consolidated basis for BCI, thinking for this year, for example?
For this year, I will give you some range because we are not because the exchange will affect, and I will explain you why it's not mitigated. We are going to be around 45-46 in a consolidated basis. And let me explain you why it's not straightforward.
The efficiency ratio in this year particularly in City National Bank, it has been affected because we have the Fed rate that José just explained. As the exchange rate didn't increase, the efficiency ratio in City National this year particularly went a little bit high. We believe that taking consideration that effect plus what I told you before, we should be between 45-46% this year.
Consolidated basis, and the target that we have for 2026 is to be in 42.
Perfect, got it. Thank you very much.
No, thank you, Jorge Pérez.
Yeah. Thank you, Jorge. Next one is coming from Andrés Soto from Santander. Andrés, we have time for one question, if you don't mind.
Thank you, Andrés, and good morning to everybody connected to this call. My question is related to MACH. You guys have shown some impressive numbers in terms of increase of transactions of 40%, balances at over 60%. I would like to understand what is the economic contribution that MACH is making, be that in terms of profit or be that in terms of transactional income, and when do you guys expect this to be profitable or at least reach break-even point?
Sure, Andrés. Thank you very much for the question. MACH is. I want to give you a broader answer because it's not direct. The direct answer is we are going to be in break-even point at the end of 2026. I think that it's important to understand how much contribute in the overall strategy of BCI.
We are building a retail ecosystem where MACH and the BCI Plus program with MACH. We are the only one with a loyalty program that give cashback and with the BCI Pagos and with our alliance that we have with Walmart and with Salcobrand, and we have, like, 10 companies.
We are trying to be in the day-to-day transactions of our customers more and give more benefit to all of them, taking the opportunity to connect all our customers that we have with all our merchants that we have all together. What is MACH? MACH started with an aim to generate a lot of inclusion of customers that were out of the financial system.
We did it. A significant number of transactions came from people that didn't have the possibility to pay Uber or Netflix or because they were transacting in dollars. Today, what we are doing is we create a digital account where we are charging and that is creating a lot of frictions in transactions and in the income statement.
We are in the trend to monetize that investment, which we never have to forget that part of the MACH intention is to create financial inclusion to a segment that they didn't have before. Long answer, Andrés, but I think that it's important sometimes to give a little bit of context of what is the role of MACH in all of this ecosystem.
Of course. Thank you very much, José Luis.
Thank you, Andres. The last one is coming from Yuri Fernandes from J.P. Morgan. Hi, Yuri.
Hello, guys. Sorry, I was having a hard time unmuting myself. Hi, José Luis.
Hi.
Also on those strategic discussions, can you give a quick color on BCI Pagos? I know there was EVO, Global Payments. Now we have Banco de Chile also launching. If you can spend some few minutes discussing the payments strategy. Just a quick follow-up on asset quality, on cost of risk, it was not super clear for me, the 0.6% cost of risk.
You're not giving a guidance, but you are implying that they should not change a lot from where they are. I'm asking this because of the coverage, right? You have been using the coverage, and part of the lower cost of risk is not necessarily new NPL formation improving, but coverage decreasing. Where should the coverage be? Or maybe you can do more recoveries, maybe it's the mix on commercial loans. I'm just trying to get more confidence on the 0.6% around 0.6% cost of risk level. Thank you, guys.
Super. Yuri, if we go to the financial system and the role that plays the wholesale businesses and the treasury and the consumer side, that is basically what we have seen during many years now adapting to the customer needs and value proposition.
Where it really is changing and where you have a lot of companies and fintechs trying to enter is in the payment arena. What value proposition you have in order that in the moment of the payment, a customer choose your company. For that reason, you are seeing a lot of movement in the Chilean market. It's a small market, it's a very competitive and sophisticated market.
You see, Santander's Getnet that made a first move that was great. We did it with BCI Pagos, and in the first partner we have a lot of issues because we're entering, and they didn't have the software and a lot of it then was bought by another company, and we are gaining traction significantly. Banco de Chile is moving, everyone is moving. The main reason of all of these attackers or followers is because the real change in the financial system is how to be relevant in the moment of the payment.
The statistic says that if you are relevant in that moment, and you are the principal, you have all the other cross-selling and you can monetize better to that customer. That is the main reason, Yuri Fernandes, why you are seeing all this movement. Regarding cost of risk, Juan Enrique, can you give some color on that, please?
Sure, Yuri Fernandes. The reason why we're saying that cost of credit is expected to remain relatively flat, of course we cannot be sure about it, is because on the consumer side, we have already reached kind of stabilization. In the commercial side as well, with the exception of that one case.
In the mortgage side, we continue seeing an increase in NPLs, but as you know, it's a highly secured exposure. I think we mentioned that loan to value ratios are very, very conservative, and it's a mature portfolio. There's a very big opportunity now that interest rates are going down to restructure those customers that are past due.
On the commercial side, on the SME side, much of the exposure that is past due is almost fully guaranteed by government programs that have proven to be extremely successful in the collection side. So that's the rationale behind our expectation to cost of credit remaining relatively in the same levels that we have seen in the last six months.
Andrés?
Thank you, Juan Enrique Pino. With all of this, we can conclude this conference call. José Luis Ibaibarriaga, final thoughts and wrap up.
Yeah. Thank you very much to all of you. Thank you for all the questions. I think that you saw and you hear José Marina telling how well-positioned and superb result that we have there. We are very solid in the fundamentals in Chile, in the right direction, increasing revenue, controlling costs, both expenses and risk. We feel that we are in very good shape and we expect for the next semester.
Thank you very much for your always good interest to participate in this call. As I always mention, please feel free to contact Investor Relations team any additional requests that you may have. We are always available to answer it. Thank you very much, and have a nice weekend.