Good morning, and welcome to our year-end conference call for 2023. I'm Andrés Atala, Head of Investor Relations, and I'm here with José Luis Ibaibarriaga, our Corporate CFO, Mr. Sergio Lehmann, our Chief Economist, and Juan Enrique Pino, here on my left, Head of Credit Risk at Bci. We are also joined remotely by Jorge Gonzalez, CEO of City National Bank, and its CFO, Mr. José Marina, from Miami. As usual, we will have a Q&A session at the end of the presentation. When we get to this part, please, we kindly ask you to raise your hand to ask your questions. To start, I would like to share a message from our CEO, Mr. Eugenio von Chrismar, with all of us.
Good morning. Thank you everyone for joining our annual conference call. We present our 2023 results and discuss the progress and challenges of our strategy. 2023 was a year full of uncertainty, geopolitical conflict and a slower economic growth. Given the unprecedented increase in interest rates, as we deal with high inflation globally. However, we are very satisfied that we successfully faced these headwinds. We remain true to our strategy, which was centered around relationship banking, diversification, and scalability, supported by our robust technological and digital capabilities and of course, thanks to the strength of our teams, culture, and values. We closed the year with a profit of over $778 million, in line with the estimation provided in our last conference call.
I want to highlight our operational productivity and efficiency, which allowed us to contain expenses and grow slightly by 0.8%, well below inflation. We maintain first place in the Chilean banking industry with a share of about 19.7% in total loans and around 14.7% without considering City National Bank, implying a growth of 50 basis points compared to the previous year. As for the investment abroad, City National Bank exceed $2.3 billion in capital in 2023, with a CET1 of 13% and assets over $26 billion, representing 30% of Bci total loans, total assets. We have reached a significant size in Florida, the second-largest bank based in this state.
For this reason, to face the challenges and take advantage of the opportunities that the coming years will bring, we are strengthening our strategy with the advice of McKinsey, focusing on sustainable, diversified, and profitable growth. As you know, the financial industry in the U.S. experienced a significant crisis of confidence at the beginning of the year, impacting liquidity and higher funding costs. City National Bank successfully navigated this time thanks to its solvency, liquidity, and proximity to our clients. Related to this overall, at the end of its first year of operation, reached a loan portfolio equivalent to $1 billion. Our international platform now has over $35 billion in assets outside of Chile, representing 35% of Bci consolidated assets.
In the last seven years, our total assets, including City National Bank, have increased from $32.8 billion to $90.4 billion, making us the eighth-largest bank in Latin America. In line with the ABAB in 2023, we completed a capital increase of $700 million to support our local and international growth strategy and ensure a smooth transition to Basel III. As for our digital ecosystem, I want to highlight that in March, we reached 3.9 million customers, making us the digital financial platform with the highest number of users in the market. More than 790,000 users already have digital checking accounts. During 2023, we decidedly advanced in the development of BciPlus+, whose goal is to have the best loyalty system in the country for business and individual.
In just the program's first seven months, associated businesses has multiplied their sales on average by 10. For acquiring strategy, we continue to work with our partner, Global Payments, to strengthen Bci Pagos. We are working to incorporate new products and services to serve all customer segments and become a relevant player in the industry, achieving a significant market share. In retail area, we continue to work on new client capture by leveraging our new onboarding capabilities, D&A, and digital channels. We plan to grow significantly in loans in affluent segment, being more focused on those where we will achieve greater engagement through investment, insurance, and payment products. This will allows us to increase our commission.
At the same time, we implemented the new distribution and service model, allowing us to provide customers with all the digital capabilities we have been developing in the recent year, offering a digital-first service model focusing on resolution, simplicity, and closeness to our customers. Therefore, we are transforming the experience in our physical channel by implementing new branch experience which transform physical space, roles, and processes within our office. In line with this, last December, we announced the unification of the digital ecosystem and retail banking areas under retail ecosystem with three objectives.
First, to integrate new and traditional business into a winning value proposition for individual and SMEs. Second, to unify the customer vision with the consequent acceleration of decision-making and value delivery, and third, to give consistency to the customer experience across Bci group products. Another strategic pillar for us is data, knowledge, and the potential of GenAI, which is already a reality in the current business. In this context, the D&A area will become part of the management committee reporting to the CEO. In wealth management, the challenge is to grow significantly in asset under management by 2023 across all the segments, delivering the best customer experience and leverage the development of the best investment platform in Latin America, connecting Chile, the USA, and Peru.
In wholesale banking, we aim to continue promoting company's sustainability and maintaining leadership in business volume with the service model of the relationship banker with a 360 degrees and a long-term vision. We want to continue leading our clients' everyday banking through significant investment in developing the 360 Connect platform, which Global Finance recognized as the best digital bank for businesses. Also, we want to support our corporate clients in their internationalization plans in Perú and Miami, doubling our financing for Chilean companies in one year. For our international platform, which has ambitious plans in Bci Perú, we aim to reach $3 billion in corporate loans by 2026, with an estimated return of equity between 12% and 13%.
For CNB Miami, our challenge is to increase customer engagement and efficiently execute the technological transformation plan, with which will require an investment of $24 million over the next three years. As we scale our balance sheet size and advancing our internationalization, we work on investment around $540 million in the last five years to transform the bank. We have evolved from a traditional analog bank to a physical-digital bank. We have profoundly transformed our business model, technological capabilities, and working methods. We envisioned that technology, data, and digitalization would play a fundamental role in our physical-digital omnichannel strategy to deliver a consistent and seamless experience at all touch points, leveraging the intensive use of cloud services and data analytics.
We transformed our technological architecture will now allow us to capture the benefit of process automation, robotic implementation, and robust corporate cybersecurity programs. We have had a permanent and sustained investment enabling us to analyze, prevent, and detect potential cyber crime. Today, we have a modular and decoupled system architecture with reusable components throughout the corporation, improving the speed and delivery of solution to our customer. This investment enable us to be more efficient in software development processes, supported by generative artificial intelligence, improving the development cycle times by four. At the same time, we have in-house capabilities to safeguard the stability and resilience of platform, network, and system, reducing customer impact by more than 12x and preparing Bci to manage an exponential increase in transaction and meet customer expectation. This transformation has been supported by the profound cultural changes.
We have remained true to our essence and the purpose of Bci to make a difference in the life of our customer, employees, and the community. This explains why Bci is recognized as a bank that puts people at the core of its decisions, elevating our commitment to sustainability to the highest level of the corporation. Promoting a strategy focuses such as environmental care, financial inclusion, sustainable investment, and the construction of an inclusive and equitable society, driving financial and data empowerment. I would like to emphasize that we have a dedicated team of bankers and specialists focused on sustainability. We are a leader in the local market in sustainable financing with a stock of $1 billion. As a Net-Zero Banking Alliance member, our bank aims to achieve zero greenhouse gas emissions.
In line with our financial inclusion strategy, we have strengthened our Valor Pyme platform, Chile's largest open and collaborative community. Today, there are already 260,000 SMEs operating in it. We have significant partnership with leading companies such as Microsoft, Universidad Católica, and Multigremial Nacional de Emprendedores of the main SMEs network in Chile. I would also like to highlight the several recognitions we have received in sustainability, customer experience, innovation, and those associated with the distinctive way we work according to the Merco Empresas and Merco Responsabilidad y Gobierno Corporativo ESG ranking, the bank has the best corporate reputation and is the most responsible company in the country. I want to finish by highlighting our substantial investment in transforming the bank to incorporate data capabilities and new talents, representing about 25% of our employee base.
We have enhanced vital competencies such as collaboration, empowerment, and innovation in more diverse and flexible work environment. This aims to boost our technological capabilities, putting us in an excellent position to accelerate our growth while always maintaining the sense and culture that have characterized us in our more than 85 years of history. Thank you again to all of you for your presence, and now I will pass the call to the team who will continue with the presentation.
Thank you, Eugenio. Good morning, everyone, and thank you for participating in this conference call in which we will discuss our 2023 financial results, some of the progress we have made on our strategy and the coming challenges as Eugenio already mentioned. I would like to start this presentation by sharing some key highlights of our performance and the main figures of our consolidated operation as of fourth quarter, 2023. As you can see in this slide, Bci's operating revenue decreased 6.6% year-over-year due to lower financial margins and fees caused by lower inflation and increase in interest rates.
Regarding our international operations, it is important to mention that last year, we experienced increased funding costs from the United States due to higher interest rate on deposits, which have impacted City National Bank's net interest margin, and José will address this further in his presentation. Regarding provision expenses, the increase is mainly due to an increase in delinquency rate on the retail financial industry. This has affected both Bci local operation as well as Bci Financial Services. Consolidated operating expenses increased only 0.8% in line with our efficiency and productivity plan, as mentioned by Eugenio. Finally, the higher tax rate was mainly due to the revaluation of the investment in City National Bank of Florida and the monetary correction associated with changes in CPI. In summary, we believe these four points are not a structural effect on the bank's soundness.
Overall, we have a strong performance last year. Moving to our local loan portfolio, the 4.7% year-over-year increase was mainly driven by commercial and mortgages loans, as you can see on this slide. Regarding commercial loans, we have slightly increased 7.1% volume of loans, highlighting our pricing strategy and increasing market share in this segment. Also, this quarter, we continue with great traction in 360 Connect, which is reflected in increasing levels of online credits. The consumer loan portfolio decreased by 10.4% year-over-year, mainly because of a drop in loans and installments due to higher interest rate and market conditions. To continue this presentation, we will be addressing key metric of MACH, the cornerstone of our digital ecosystem.
Currently, our platform has nearly four million users with nearly one million monthly active users, where more than half of them are heavy users, meaning that they make more than six transactions per month. Last year, we launched several new products with the new checking account being the most relevant, reaching nearly 400,000 users by the end of the year and providing our client the opportunity to ask for a physical debit card that is accepted in all businesses. In addition, Cuenta Futuro, our savings account, reached more than 170,000 users. All of this contribute to a 77% increase in total balance. Over the past 12 months, more than 570,000 clients have successfully completed transactions using P2M, showcasing the platform's efficacy.
Additionally, around 49,000 clients are actively utilizing the MACH buy now, pay later credit line. This particular product has undergone meticulous refinement, and we have successfully identified the right model, segment, and offer to ensure profitability. As you can see in the left side chart of our local net interest margin for 2023 was 3.93%. The NIM experienced a year-on-year decrease of fifty-five basis points, primarily attributed to the reduction in inflation levels. The exceptionally high margin observed in 2022 was driven by macro conditions, considering mainly inflation, which is now returning to more normalized levels. Regarding net fees, the 5.8% decrease is mainly due to the higher fees paid mainly to our credit card transaction margin.
That was driven by our digital transformation and financial services expansion objective to position us in innovation and digital banking, building the largest digital banking ecosystem in Chile, merging bases of Bci, MACH, and Líder Bci Servicios Financieros. Our local operating decreased by 0.6% year-over-year, which is below the inflation rate. Likewise, the accumulated efficiency ratio increased from 49.41% to 50.57%. Although the accumulated expenses climbed slightly, the variation is mainly explained by a lower gross operating margin. The latter was hit by a drop in the net interest and indexation margin and the lower net fee margin. As we look forward, we expect efficiency for our operations to trend toward 45% by 2026, driven by lower growth of our operating expenses and increased transactional revenues.
On this slide, you can see how the recent capital increase positions us with a regulatory capital level well above the regulatory requirement and our internal targets. As you are all well aware, Basel III is currently under implementation and capital requirements shall be phased in gradually to comply with the necessary capital ratio by 2025, including additional capital buffers for Pillar 1, capital conservation, and countercyclical buffers. As you can see in this slide, CET1 was 11.08% in this quarter and was steadily increased in recent quarter, stemming from bank's profitability and the recent capital increase. In this slide, we can see the performance of the entirety of our local loan portfolio.
On one side, we are happy to report that there is a stable growth in asset volume, while the non-performing loans ratio seems to be stabilizing at level similar to the pre-pandemic level and below the industry level average. With a stock of loans provisions, including voluntary provision that is significantly stronger than pre-pandemic levels. As for commercial loans, they remain one of the volume drivers, while the ratio of non-performing loans shows signs of stabilization at the pre-pandemic level in line with the overall industry trend. It's worth mentioning that this quarter we released voluntary provision amounting to CLP 50 billion in the commercial portfolio. As our countercyclical model combined with expert analysis indicated that the latest risk that justified the constitution of the additional provision in this portfolio was not manifested and is not anticipated to be manifested.
The residential mortgages portfolio has maintained its resilience in the current scenario, with volumes stabilized at current levels, given lower demand for new loans. As you can see in this slide, we have seen an increase in non-performing loan ratio in line with the current economic scenario. Borrowers are facing pressure on their financial burdens explained by higher inflation, higher rates on other financial products, and increased the unemployment rate or decreased income due to deterioration in the labor market, increasing delinquency indicators. These conditions have also reduced the demand for new loans as well as their eligibility under our lending policies, slowing down new loan placements in this portfolio. When looking at our portfolio, there is an increase in the level of non-performing loans that already exceed the pre-pandemic period, explained by customers facing greater difficulties in making payment.
However, Bci remains with non-performing loan ratios below the average for the local banking system and with a growth of non-performing loans rate that is already being contained. We maintain great confidence in the high quality of our mortgage loan portfolio, given our solid loan-to-value ratios, conservative credit policies, and the strong cultural inclination of families to own their homes and stay current on their residential debts. The consumer loan portfolio has started to regain traction in volume growth and in stabilization and a slight decrease in non-performing loans ratios, which slightly exceeds the pre-pandemic level due to higher inflation rate, higher unemployment rate, and in general economic deceleration, impacting volumes due to lower demands along with more conservative loan criteria.
As we forecasted a few quarters ago, trade performance indicators have rapidly moved toward pre-pandemic levels and beyond, with delinquency ratio and most risk indicator have begun to stabilize at the current levels over the past three-six months. Now, I will leave you with Jorge Gonzalez, City National Bank CEO, as well as José Marina, the bank's CFO.
Thank you, José. Good morning, everyone. My name is Jorge Gonzalez, and I'm the Vice Chair and CEO of City National Bank. I'm also accompanied here this morning by José Marina, our CFO. I'm excited to be here with you this morning to discuss our performance for last year. Notwithstanding the challenges experienced in the banking industry during the year, I am pleased to inform you that we had strong results this quarter, especially in those metrics that are in greater focus today. First of all, deposit capture has been increasingly challenging among banks as interest rates have risen at a historic pace and magnitude, resulting in deposit contraction within the industry. Despite overall outflows in the system, our client deposits remained stable in 2023, whereas the banking industry experienced deposit attrition of 2% during the year, even when including broker deposits.
We maintained approximately $11 billion of available liquidity, covering 137% our uninsured and uncollateralized deposits. Our uninsured and uncollateralized deposits represents only 37% of our total deposits, improving from 51% at the end of 2022. We continue to enhance our already strong capital profile with $738 million of excess capital in our CET1 ratio after the application of unrealized AFS and HTM losses to capital. We maintain the investment portfolio with minimal credit risk that provides significant annual cash flow and has lowered its duration to 4.5 years. Our CRE portfolio continues to perform well with a weighted average loan-to-value of 50% in one of the best markets in the United States.
These results reflect our reputation in the marketplace, which has been built over 77 years, our relationship-centric model focusing on diverse business segmentation, and a strong culture fostered among our employees. Now, I'm going to turn it over to José Marina, our CFO. He's going to review in more detail our fourth quarter and full year results with you. José.
Thank you, Jorge, and good morning, everyone. The US banking system has changed rapidly, facing a shrinking deposit base, significant migration of non-interest-bearing deposits to higher-yielding products, and increasing betas on cost of funds. Moreover, the industry events in the first half of 2023 resulted in depositors migrating from mid-sized and community banks to major banks. Despite this, our client deposits increased $92 million quarter-over-quarter and overall remained stable compared to 2022 year-end levels. Our total deposits, including brokered, increased by $788 million or 4% year-over-year, as you can see on the left-hand side of the slide. You can also see that our non-interest-bearing deposits declined by about $1.9 billion in 2023 and represent 23% of our total deposits.
This rebalancing of deposits has adversely impacted our NIM and is a common theme across the industry given increasing rates. On the right-hand side of the slide, you can see that the banking industry as a whole saw deposits contract by $204 billion or 2% in 2023. These industry figures include broker deposits. Overall, our client deposits remained stable in 2023 despite turmoil in the industry and historic rate increases. This slide shows that our assets grew by $910 billion or 3% in 2023. Our loan to deposit ratio remains low at about 83%. We remain very well capitalized, as evidenced by our total risk-based capital ratio and Tier 1 leverage ratio, which were 14.7% and 9.9% as of December 31, respectively.
You can also see that our capital ratios increased quarter-over-quarter as a result of the $100 million capital contribution that we received in November. Additionally, the unrealized losses in the investment portfolio have decreased, with the OCI improving year-over-year by $67 million after tax. On the right-hand side of the slide, you can see that our core loans, excluding PPP, grew by $952 million or 6% in 2023. Our loan production in the year focused on high quality transactions with strong spreads and solid deposit relationships. Non-owner-occupied CRE represents 48% of the total loan portfolio. We will discuss the composition of our loan portfolio and dive into the CRE portfolio in the upcoming slides. Our strong credit culture and lower risk appetite continue to result in excellent asset quality.
The NPL ratio, for instance, remained low at 46 basis points of total loans, 27 basis points lower as compared to the prior quarter. Past dues were also minimal, representing 32 basis points of loans. On this slide, we segregate a commercial real estate portfolio by property type. Overall, our CRE portfolio has a conservative weighted average LTV of 50% and is supported by a strong debt service coverage ratio of 1.8 times. It is also very well diversified across segments. Additionally, our disciplined and comprehensive credit process has historically resulted in exceptional asset quality, as evidenced by the minimal non-accruals in our CRE portfolio of only 0.3%. I would also like to emphasize again the strength of our marketplace within Florida being the fastest growing state since the pandemic.
The bottom of this slide specifically demonstrates how the CRE office market in Florida is in a much better position versus the rest of the country. Out of the top 10 office markets with the strongest 12-month rent growth, seven are situated in Florida, with Miami ranked number one, Palm Beach ranked number three, and Fort Lauderdale coming in fourth, as well as Tampa in number five. Conversely, the largest markets outside of Florida, such as San Francisco, Los Angeles, New York, etc., rank towards the bottom of the top 80 office markets in terms of rental rate growth. Moving to our income statement, our operating income for the year was $592 million. This represents an 18% reduction year over year. Our net income after taxes was $154 million, which is 40% lower.
The main driver is net compression given historic rate increases leading to deposit repricing and historic migration of non-interest-bearing deposits and interest-bearing deposits. Additionally, there were some non-recurring items as we will explain shortly. This slide details the non-recurring items affecting our fourth quarter results. During the quarter, we incurred a $20 million one-time expense related to an FDIC special assessment to replenish FDIC insurance fund following the impact of losses to the fund from the three significant bank failures that took place during the first half of 2023. We also incurred an additional $15 million of loan loss provisions during the quarter related to increased perceived risk in the Moody's ACL model, primarily related to the office sector, as well as proactive provisioning on specific non-CRE related loans.
Finally, we realized a $5 million loss on the sale of $100 million of corporate bonds as part of a balance sheet strategy to enhance net interest margin. Normalizing for these non items, our net interest income for the quarter would be in line with the prior quarter. On the left-hand side of this slide, we present the evolution of our net interest margin and our core NIM since the beginning of the current rate cycle. On the right-hand side of the slide, we have the quarterly average effective Fed funds rate versus our cost of funds. The current rate cycle is historic given the velocity and magnitude of the rate increases. This has led to significant deposit repricing and sizable non-DDA migration to interest-bearing deposits, resulting in overall NIM compression within the U.S. banking system.
However, you can observe our NIM remained unchanged effectively quarter-over-quarter. This is a sign of stabilization heading into 2024 as assets continue to reprice following the higher velocity of deposit repricing after the bank failures earlier this year. We continue to protect our net interest margin against rates staying higher for longer in the current rate environment while positioning our balance sheet to benefit from the anticipated rate decreases in 2024. Now, I will pass it back to Jorge, who will discuss some of the actions we took during 2023 and also address our 2024 priorities.
Thanks, José. I want to conclude by mentioning several strategies implemented in 2023 to navigate the current environment and discussing our priorities for this coming year. First, we implemented a minimum pricing threshold for all commercial loans beginning at the beginning of the year. We're being very highly selective in our credit risk and pricing process. We're also focusing on opportunities with a relevant deposit component. We're also including deposit covenants, prepayments, penalties and floors on the majority of our commercial lending. Next, we have also executed $3.75 billion of pay-fixed-rate interest rate swaps during 2023, which generated $32 million in additional net interest income for the year.
These swaps were focused on the shorter to medium end of the curve to protect against rates staying higher for longer, while also preserving our ability to expand our NIM once rates start declining based on a more liability-sensitive and balanced position. At the end of 2023, we executed the sale of $108 million of corporate bonds at a slight loss, replacing them with floating-rate securities, increasing our NIM by two basis points. The strategy aims to enhance our profitability and our balance sheet positioning moving forward. Deposits are at the core of our relationship banking approach, and we have several deposit gathering strategies in place which have been really vital to navigate the current volatile environment.
I should also mention that in 2023, we optimized our staffing model by 8%, eliminating about 85 positions in September, which represented about $12 million in annual savings. These eliminations were in specific areas of low strategic focus, and we know this has been a commonplace for banks, both nationally and locally, given the current conditions. Lastly, we're limiting transactional lending and focusing our residential lending efforts on secondary market business to enhance our fee income. As we face some of the market headwinds in 2023, we continue to deliver significant results. We have fortified our strong liquidity and capital positions. Our commercial real estate portfolio is well diversified with low LTVs and strong debt service coverage ratios. Finally, although we experienced NIM compression, our efficiency ratio is better than our peers, and we're well positioned for declining interest rates.
Our position as the largest pure-play Florida bank located in one of the best markets in the country positions us well for success in 2024 and beyond. As demonstrated earlier, the economic conditions in Florida continue to be strong. We believe that we have the best talent in the marketplace, complemented with robust digital capabilities. We have a proven track record of organic growth, and we have also successfully integrated banks that we've acquired. As we look forward to 2024, we will stay focused on six key strategic pillars. First of all, we will continue to focus deposit growth as we strive to become the best deposit gathering bank in the state. Next, we will continue to deploy strategies designed to enhance our NIM.
Continue to attract top talent will be a continuous effort in 2024 to make sure that we continue the momentum of our deposit gathering capabilities and support our geographic expansion in Florida and beyond. Next, diversifying the loan book by originating more commercial and industrial loans will continue to be a significant priority for the institution. We will also continue to build upon our efficiency and scalability of our platform. To ensure that we continue capitalizing our unique position in the marketplace, we've embarked on a five-year strategic planning process with the assistance of a respected consulting firm. We've assembled a plan that will enable our continued success over the long haul as the organization continues to mature.
The plan is simply a recalibration of our strategic direction in order to ensure that we maximize the opportunities in the market given the evolving economic Florida landscape. I look forward to discussing the plan with you in the future as we continue to implement the majority of the initiatives that have already been outlined. On that note, I'm going to go ahead and pass it back to the Bci team for final comments. We thank you all for participating with us this morning.
Thank you, Jorge and José. To conclude, I would like to summarize our 2024 guidelines for Bci's key figures, taking into account the macro variables forecasted by our chief economist, Sergio Lehmann. As depicted on the slide, local loan growth is expected to be in the high single digits%, primarily driven by the commercial and consumer segments. Net interest margin is projected to remain relatively flat, factoring in the lower inflation partially offset by reduced funding costs. Our forecasts indicate that operating expenses for this year will be growing below inflation, underscoring our continued emphasis on our productivity and efficiency plan. Regarding City National Bank, as Jorge said, we predict that loans should grow in the high single digits%, while NIM should increase due to expectations of falling interest rates and therefore lower cost of funds.
Considering this scenario, we forecast our consolidated net income to increase 5%-8% year-over-year in 2024. I cannot finish without telling you that yesterday we finished a roadshow, and we closed the first private AT1 of Chile for $500 million. The final close will be done on Thursday of next week at a very good interest rate. We are really proud to say that with that, we will continue strengthening our capital ratios. With that, thank you very much for participating. Now we can go to the Q&A session.
Thank you, José Luis, and thank you all for the presentation. We have the first question from Ernesto Gabilondo from Bank of America. Ernesto, are you there?
Yes. Thank you, Andrés, and thank you. Good morning, José Luis, and good morning to all your team. My question is on the NIM. You already provided some details, but can you elaborate a little bit more on what should we expect for the NIM at a consolidated level this year? For the case of the NIM Chile, given that the bank will have to pay the credit line to the central bank, how should we think about the NIM evolving throughout the year? How should we think before paying it in the first half, and how should we think after we pay the credit loan in the second half? My second question will be on asset quality.
Just wondering how you see your credit appetite for the second half of the year once we start to see lower rates and consumers no longer having this excess of liquidity. How would you describe the ongoing consumer lending activity to be translated into the faster pace? My last question is on your recent debt issuance. I don't know if you can provide you know details on the cost of the transaction. What was the objective? It was to strengthen capital or to boost lending activity in the future. How should we think about the registration of these AT1 through their P&L or in their balance sheet? Thank you.
Okay, Ernesto Gabilondo, thank you for your question. The first one on NIM. As we mentioned, we are projecting a relatively stable NIM for this year. As you mentioned, yes, we have several impacts that are going in different ways. We are going to have lower inflation. We are going to pay the FCIC line to the central bank, which will impact us from a negative way. At the same time, we are seeing a positive NIM impact as the central bank is decreasing the interest rate and the cost of fund is going to increase.
The same thing we are expecting by the middle of this year, in City National Bank, which will expect that the repricing between assets and liabilities will push our NIM forward. Overall, if you put all these things in the balance, we are expecting and projecting a NIM that is relatively flat. I think that you mentioned how it's going to be seen between the first and the second half of the year. Obviously, as we enter the year with a negative inflation, that will pressure the NIM higher in the first semester, and we are expecting our NIM increasing in the second semester of this year.
According to your second question of asset quality, if you want me to give you the vision, in Chile, we are going to be growing between 6%-7% in the loan portfolio, pushing in the commercial and in the consumer side. If you want to talk about quality of that, Juan Enrique is here and can give us more color. In respect of City National Bank, Jorge already mentioned what the target is in the mid-high around 8%-9%. Again, if you want more detail, Jorge or José can give us more details.
Let me finish with the third question and I pass to you if you want more detail about quality or more information in City National Bank. Regarding the AT1 objective of this really successful allocation that we did yesterday, and I say allocation because formally this will be settled on Thursday of next week. We have a significant participant. I cannot give details. This is a legal issue, but we have a significant demand. The book was oversubscribed many times. The interest rate was excellent at 8.75%. The objective is that as we are implementing Basel III, there are some capital that count as capital that will not count in the full implementation of Basel III.
At the same time, going through this instrument, this is a perpetual bond that counts as capital. Obviously it is the way to maximize the capital ratio with this, the cost of the AT1 is lower than the cost of capital of the bank. It is a very interesting way to maximize our profitability. Ernesto, I think that I did a short answer to this third to your three questions. Do you want us to go deeper in any one of the three ones?
Thank you. Thank you very much, José Luis. Just the one in terms of the asset quality, how should we think about cost of risk if you are starting to get more credit appetite in both loan in wholesale, especially in the consumer lending activity?
Juan Enrique Pino, can you address that, please?
Sure, as José Luis was mentioning, we are prepared to grow significantly, both wholesale and consumer exposures. Our guidance in terms of cost of credit is gonna be around 1.15% for the year in our local books. The wholesale portfolio, as you have seen, has behaved very stable. The consumer portfolio has evidenced all the impact of the pandemic, and then the excess liquidity and the contraction of the economy. You have seen that in the last six months, we have not only reached stabilization, but have moved delinquency ratios back, and we expect that trend is gonna continue. Of course, there are forces such as growth in unemployment rate. On the other side, there's a decrease in inflation rate.
From our experience, inflation rate was the one that hit the portfolio most, mostly. We continue optimistic about our chances to start regrowing our consumer portfolio with credit indicators that should continue behaving better than the ones that we have already seen in the last six months. Our risk appetite on those two segments, wholesale and consumer, remains high in wholesale and has reopened in consumer.
Excellent. Thank you very much, Juan Enrique.
My pleasure.
Thank you, Ernesto. The next question is coming from Tito Labarta from Goldman Sachs. Tito, please go ahead.
Hi. Hi, good morning, everyone. Thank you for the call and for taking my question. A couple questions also, if I can. I guess first on the guidance, you mentioned, I guess, you know, mid-single digits or, mid-to-high single digit earnings growth, for next year. Just to understand sort of how you get to that number, right? You have stable NIM, loans growing high single digits, and expenses below inflation. I guess more would depend on the cost of risk a little bit. You know, it was 0.8% in 2023. I think, Enrique, you just mentioned maybe you go to 1.15 locally. Not sure what you expect for the US, but, you know, historically, your cost of risk has been closer to 1%.
That could eat a little bit into their earnings growth. I guess then would also depend on what type of tax rate, right? The tax rate has been sort of below historical levels as well, in, you know, high teens% last year. Do you expect the tax rate to remain there, or does that normalize back to the 20%+ level? Just to try to reconcile some of the guidance you've given with the bottom line guidance. My second question, just to follow up on the AT1 issuance from yesterday. You know, surprised a little bit just 'cause you had recently done the capital increase, of $700 million as well. Just do you expect to have to do any more capital increases in the coming years, just to understand the outlook for that?
Do you think this is the last one?
Okay.
Juan Enrique Pino, can you go to the first one? AT1? The guidelines and the appetites?
I can do it, if you want. The average ratio of appetite for growth, Tito , in Chile, in the mid single digit of around 6%-7%, is basically driven by the commercial side, who has been leading, and we have been earning market share in the last couple of years, as you're aware of. In the consumer side, we took the decision in the last two years to slow down the growth, basically because we found that the commercial and the country conditions were not very good.
We believe that both the improvement that the country's doing this year and the consumer, as Sergio can mention, is starting to get traction. With that, we believe that we are going to start recovering traction too in the consumer side. Those are going to be the two drivers of the loan portfolio growth in Chile. We are expecting GDP growth of around 1.8% with an inflation of 3%. You're right, to around 5%. Basically what we are saying is that we are going to be aligned with the country growth in a nominal terms.
In terms of City National Bank, or Jorge, you can answer or José, but basically I think that the main driver there is. No. José, can you answer it better?
Sure. In terms of our expectations this year for loan growth, we're looking in the high single digits. We think there's significant opportunity here in our local market, given the strength in the economy. As Jorge indicated, we're also placing greater focus this year on C&I lending as well, and bringing new C&I relationships to the bank as we continue to diversify our loan portfolio.
We're gonna be adding additional staffing to the markets north of South Florida for you know Palm Beach, Orlando, and Tampa. We expect that those new additions and talent will also be accretive to our loan growth as well. Obviously we're keeping an eye on the economy and being very disciplined in how we deploy capital over the foreseeable future as things continue to be you know somewhat uncertain.
Within that, I'll also address, you know, the results of this continued growth and, you know, some of the repricing that we expect on the balance sheet. We do expect to see some NIM expansion in 2024. You saw during the presentation that our NIM was effectively flat between the Q3 and Q4, so that compression has leveled off. In fact, if you look at just the fourth quarter month by month, our lowest month in NIM was October, and we saw roughly about eight basis points of increase in our NIM between October and December as we saw, you know, month-over-month increases in NIM in November and in December.
Obviously, the U.S. banking system, with the events earlier this year, a lot of the liabilities reprice immediately. The assets side just needs an opportunity to continue to reprice. We do see NIM continuing to improve, and we do expect to have you know slightly higher NIM in 2024 as compared to 2023. We are very well positioned also for you know declining rates. We have placed, as Jorge indicated, about $3.7 billion of swaps on the books during 2023. All focused on the shorter end of the curve in order to preserve our ability to expand our margin once rates do start to decline.
Hi, sorry to interrupt. Just wanna clarify. I'm not sure if my question was clear. I was asking more about the net income guidance and just trying to reconcile the net income guidance with sort of the other lines that you've given, right? I understand sort of loan growth, high single digits, NIM flat in Chile, going up in Florida. But I guess sort of to get to the 5%-8% sort of net income growth, the cost of risk, Enrique, you mentioned 1.15. I think that's just Chile, so I'm not sure the US. But if the cost of risk normalizes to historical levels around 1%, could be difficult to get to that 5%-8% increase in net income, unless I'm missing something.
The tax rate could also be a variable, right? Maybe if you give some color on the expected tax rate.
There are two things that you didn't mention, Tito, in your equation. There are expenses, and expenses are going to grow slightly over 0% and below inflation. We are talking about between 0%-3%. That increasing margin as we mentioned of around loan portfolio 6%-7%, you have it, you have a significant impact. The other thing that is happening is that last year we did have impacts on the tax effect, basically, for two reasons. One was the exchange rate and the investment in City National Bank has a huge impact in the tax arena of around $45 billion.
The other thing was the increase in inflation was affecting us in a marginal way, and we are not expecting it for this year. If you take into consideration what is maintaining our cost structure in real terms flat and too decreasing the expenses on the tax, you will arrive there. I'm more than happy to go with you with the model, Tito, outside this meeting to share with you, as always has been. More than glad to continue with that conversation. Regarding AT1, Tito, this is the way Basel III is implemented. As you understand, Basel III has different risk different implementation. Basically, all of us has to have a internal goal that in our case is 11%.
The way you create that 11% allows you to generate this AT1. That is why the authorities was actively developing the regulatory issues in order to give it the possibility to different banks to do it. Our expectation is that all banks are going to go through the AT1 structure. Otherwise, they are going to have to use just capital, which is more expensive. Everything was in our plan. As you know, we have to deliver on a yearly basis to the CMF what is our view and our plan, and it was always planned to have 1.5% of our capital ratios through AT1. With this $500 million, we are right at 13.6, so we are really close to our internal goal.
Nothing there is a surprise. It was always planned when we did the model for capital. It was planned when we did the capital increase. Now we are really proud to be the first private bank in Chile to issue this AT1 outside, and hopefully it opens the window for other institutions in Chile to go in this direction.
Okay. No, that's very helpful. Thank you, José Luis. It's clear. Just one last clarification. Just on the tax rate, I think you mentioned you expect now the tax rate to be stable around this 16%-17% that we saw in 2023. That's more or less what we should expect in 2024?
Yeah. The tax rate is going to be between 16%-20%. That is our target.
Okay, perfect. No, that's very helpful. Thank you, José Luis.
No. Thank you.
Thank you, Tito. Moving forward, the next question is from Eric Ito from Bradesco. Eric, how are you?
Hi, Andrés. Hi, José Luis. Thanks for taking my question. I have two questions as well. The first one, I think José Luis mentioned during the presentation that you guys expect the efficiency ratio to reach around 45% by 2026. I just want to get your sense on what you guys are expecting for 2024, what's implied in the, in the guidance. And with that question as well, what's the implied, fee income growth for this year? My second question is, I guess in the previous guidances, you guys mentioned had a mid to long term ROE of 14%-15%. Just want to get, your view if that is the that view continues, and what should be the timeline for that, ROE to reach 14%-16%.
Thank you very much.
I think that the three topics that you mentioned, Eric, are directly connected one with the other. The return on equity forecast that we're expecting for 2026 is 14%. In order to do that, we have to arrive to a 45% efficiency ratio. In order to do that, we need to grow the margin in around 6%-8% year-over-year and maintain the expenses flat. That is the plan. In 2023, we did it. We maintained the expenses almost flat. It grew 0.8% in a nominal basis.
What happened is that last year, inflation dropped dramatically, and at the same time, as you hear, Jorge and José, we did have a completely unusual situation in the financial system in the U.S., starting with the Silicon Valley Bank. We have a track plan that we have been delivering, except for this. That is why I started saying that we have some impact that was not in the fundamentals of the bank, was a one-time effect. We believe that we have a really strong balance sheet and profit and loss that we are going to allow us to achieve the goals that basically we always have done in the past, and we don't see why we are not going to do it in the future.
We are confident to that, but all the things are all together, Eric, all in all related, and we are working in all of them.
That's perfect. Just one follow-up here, just to get your color on the 2024 expectations for fee income and the efficiency ratio.
Do we give that, Andrés?
Yeah, why not?
We are going to be in the efficiency ratio. We are going to be in the 48% range. In the fee income, we are, the expectation is that we are going to grow 15%. 15% that could look higher. We have a strategic plan to recover what we have lost in the last couple of years. It's related to the consumer loan portfolio where we took the decision to increase our appetite to grow there, and obviously, that loan portfolio comes with insurance and all other commissions.
The other thing, the construction of the payment ecosystem, we have just finished during 2023, and we are starting to see traction, as I mentioned, in several data that I gave you during the presentation. Fees are going to come back. Seems high, but you have to see from where we start, and we start in a lower level than what was an usual fee and commissions.
Okay. Thank you. That's very clear, José Luis and Andrés and team. Thank you.
Thank-
Sure, Eric.
Thank you, Eric.
Yeah. Next question is coming from Nicolas Riva from Bank of America. Hi, Nicolas.
Hi, Andrés and José Luis, thanks for the chance to ask questions. I have two questions. The first one is kind of a follow-up on what Tito asked before. The fact that you raised $700 million of equity fourth quarter last year. Now you did this AT1 for another $500 million. The question was, whether you would perhaps need to raise additional capital this year or next year. The way I'm thinking about it is, you're guiding this year for an ROE of about 13%, which has been the ROE last year as well. Long-term ROE guidance is about 14%. Assuming you pay a dividend payout of 30% the minimum, that gets you to your equity base growing roughly between 9% and 10% a year.
Your guidance for loan growth is 7%-9%. It appears to me you are not generating much capital organically during the year. Do you agree with that or not? My second question about the AT1 issue. For the coupon, I wanted to ask you about the coupon cancellation that's triggered by what are called the distributable items not being enough to make the coupon payment on the AT1. My question is, if you report a net loss in a year, if that would trigger the cancellation of the coupon payment on the new bond, or if you have a reserve created for the coupon payment, and if you discuss, in that case, the amount of that reserve created for the coupon payment. Thanks.
Yeah. Tito Labarta, I will try to reanswer the capital issue. In Basel III, there are some items that today count as capital that are going to be deducted. That is around $500 million, and it's related to the intangible assets. When we create the goal of achieving Basel III, in the law was the possibility to use AT1 to arrive to that goal. What we start doing 18 months ago was working with the instrument that was not available in the Chile market in order to arrive to the 11% goal that we have. It was planned.
When we did the capital increase, we always knew that. Well, we always have in the plan to issue the AT1 of around 1.5% in order to deliver all our internal goal. It's not that this is something new. This is something that we have been working with the authority eighteen months ago, since they started with the Basel III implementation. When you make your math how we are going to growth in capital, you have to take in consideration too that is some capital are going to decrease. 2023 was 15%. 2022 was 15% of that asset, so 30% at December 31, 2023. The deduction of 2024 will be 65%, and 2025 will be 100%.
That is why this is something that you have to put all together and match it. I don't know if that is clear, because it's important to you all guys to know that this AT1 is a really good story. It was completely planned. It was communicated to the authorities and is an excellent way to maximize our capital. Regarding the coupon payment, this AT1 do not have a discretionary payment of coupons. This is completely. We don't have the right to use this discretionary. We have to pay coupon unless we enter to a very specific situation, either if we have less than 3% of return on asset as a risk-weighted asset or 2% of net assets.
No, I will start again the answer. I'm getting complicated. Nicolas, this is a bond that does not have a discretionary way of payment. The money to pay this bonds are in equity. This year, in 2023, we are going to create a reserve that was explicitized to the CMF and all the investors that at least the net income of 2023 is going to go to that reserve. That is basically around three or four years of this interest coupon. What will happen if the shareholders meeting approve is that 100% of the reserve of net income of 2023 will go there.
We will have reserves for payment this coupon for almost 10 years. What if you have a loss in one semester, as you said, we are going to have the money in the reserve, so there is no issue, unless something completely unexpected can happen in order to achieve that. We went through all the details with all the investors in the last three days. Nicolas, I can send you all the roadshow presentation, where it goes in detail how and when things happen. It seems that the market really appreciated the instrument and the Bci risk because the book was oversubscribed big times. I don't know why, but I cannot say because it's a legal issue here.
José Luis, sorry to interrupt, but to summarize, even if you report a net loss in 2024, the money to make the coupon payment is gonna come from this reserve, which is gonna have all your net profits from 2023, net of the minimum 30% dividend payment. It's gonna have over $500 million in this reserve, which is more than 10 years of coupon payments on the AT1. That's basically it.
Yes. What I did say, Nico, is that what we will do. Having said that, the guarantee that we did to the CMF and to the investors, that was that at least 20% of the net income will go to the reserve, at least. The most probable thing that will happen if the shareholder meeting approval is that it will go with 100% of the remaining 70% after paying dividend.
Okay. Understood. Thank you very much, José Luis.
Thank you, Nicolas.
Thank you, Nicolas. We are a little bit running out of time.
Yes. If anyone wants to see anything about AT1 bond, more than glad to share with you, even though it's public.
Sure. Thank you, José Luis. Next one, Daniel Mora from Credicorp Capital. Hi, Daniel.
Hi. Good morning, everyone, and thank you for the presentation. Just a couple of questions real fast. The first one is regarding ROE. I would like to understand what will be the ROE in Chile standalone and also at CNB in 2024 and 2025 to reach that long-term target between 14% and 16%, if you can help me with those figures. The second one is related to the deterioration of commercial real estate in the United States. Even though at CNB you showed that risk metrics have been performing quite well, I would like to understand if we observe an increase in provision expenses related to that topic, if you feel comfortable with the coverage, if you feel comfortable with the performance.
We understand that Florida is a totally different performance compared to the overall state of economy in the United States. Thank you so much.
More than glad, Daniel. The ROE in Chile for this year will be around 14%, and the U.S. will be around 11%, in the range, Daniel, because you understand that the exchange rate changed a lot, these numbers. José, can you give more color about the quality of the CRE? I think that you did it, but.
Go for it.
Give more information, please.
José Luis, I'll start, I'm gonna turn it over to the rest of my team here. You know, all indicators as of right now for the state of Florida continues to outperform the rest of the country. Given the migration of population, the investment in capital, and the continuous visibility of the entire Florida market and really South Florida, we're really not seeing any indicators of any asset quality stress in our asset classes within CRE, which as we have said on many calls before, we've always taken a very disciplined approach relative to diversification and how we deploy capital relative to asset class geographies, sponsors, you name them. We understand this is a business that has to be, you know, well-disciplined relative to how you allocate and when you allocate.
A very small percentage of our real estate portfolio is outside the state of Florida. I believe it's only about 16%-17%.
Yeah.
Even the percentage of real estate that's outside the state of Florida in the sectors that are most right now causing most of the anxiety and most of the headlines, which is office, only 1.2% of our office exposure is outside the state of Florida. Even the office exposure outside the state of Florida is broken down in probably 25-30 different geographies with not a heavy concentration in any one of those. From a macro standpoint, the economic dynamics and metrics for the state of Florida and CRE continue to perform well. Vacancies are stable. Our rents are either flat or growing. There continues to be a lot of investment activity across all asset classes in our footprint.
I'm not sure if Gary or Hugo, you guys wanna add anything to that?
No, I'll just add that. Hello, my name is Hugo Loynaz, chief credit officer for City National. We do an intense focus on CRE on an annual basis. We review the portfolio continuously for performance, and really the trends have been very stable and actually performing very well, especially as George mentioned, as it relates to other markets. The fact that we are a Florida-based bank with, you know, clients that are based here in Florida with properties that are well-stabilized, and we're benefiting from the migration that's coming from other parts of the country, I think we're positioned very well.
Yeah, the only thing that, again, I'm Gary Fitzgerald. I run the real estate banking team for City National Bank. I think as Jorge pointed out, I think a really important point is that, you know, 84% of our collateral assets are in Florida. We've talked about how Florida is outperforming the market. The office sector tends to get the most attention. Our office portfolio is concentrated in the higher quality, A and B, C+ , A+, B+ . In Miami-Dade County, our exposure is 49% of our total office assets are in Miami-Dade and 68% in South Florida. Markets that continue to have positive absorption and steady occupancies and stable rents.
You know, at this point in time, we're not really seeing any indications of issues in the portfolio.
Even the small very small percentage of office space outside of Florida, which as I said is 1.2%, about 60% or 70% of that is medical office space, which has consistently outperformed.
Yeah.
The more corporate type of office space across most geographies and certainly in Florida as well. Just another little side note on that.
Thank you so much. That was very clear.
Yeah. Thank you, Daniel. The last one is coming from Neha Agarwala from HSBC. Hi, Neha.
Hi, everyone. Thank you so much for the presentation. Very detailed. Just a very quick one. I believe you touched upon it previously. In the Chilean business, any concerns about asset quality, especially in the SME space? Are you seeing any worsening or in the mortgages? Any comments there quickly? Thank you so much.
Neha, the SME segment, as you know, was seriously impacted by the pandemic and then by the economic crisis following the excess liquidity. That was very strongly supported by the government with several programs that, as you know, included significant guarantees that allowed banks to extend new credit and to extend the tenor of existing credit. So that facilitated their navigation through this crisis. Regardless of that, of course, they continue showing a deterioration, and that deterioration in terms of NPL and all credit metrics has achieved levels that are slightly above the pre-pandemic ones. Similarly to the mortgage loan portfolio are the two portfolios that have not yet reached stabilization and have not yet begun moving downwards.
In terms of cost of credit, that's very strongly protected by real guarantees, but more importantly by government guarantees that have been in place and operating very efficiently. Yes, it has been a sector that has been impacted. We continue selectively growing there, and the government support has been extraordinary.
Okay. Neha, does that respond to your question?
Yes.
Okay.
Thank you so much. Any comments on the mortgage book?
The mortgage book, loan book.
Yeah. The mortgage portfolio, well, as you know, we have probably one of the best credit indicators of the industry. Regardless of that, those indicators are showing an increase in delinquency. We believe we have three or four more months until we reach stabilization and start moving them back. The reason for that portfolio to not have reacted more rapidly on the benign side is that to help borrowers get back into on-time payment, you needed an interest rate environment that was helpful. You know that with the high inflation and the high interest rates of the last 12 months, it was not the best moment for helping borrowers to restructure the loan facilities. Now it's the time for that to happen.
What we did was to help them with the consumer side of their loans, and probably now is a good time to help them with the restructuring of the long-term loans, the mortgage portfolio loans. Anyway, they're highly secured. It's a very strong portfolio. We see it with a lot of optimism. When demand comes back, we're sure that we're gonna be back on track on growing that portfolio.
Super helpful. Thank you so much. Would love to have that presentation on the AT1 if you can share that. Would be very interesting. Thank you so much for the detailed comments.
Sure. Thank you, Neha.
Well, I'm glad, Neha.
I just want to say thank you to all right here, to the teams, also to the people from CNB Miami. Of course, thank you all for being here in this conference call. Have a nice day. I don't know if you want us to close with some words.
Thank you very much.
Thank you.
I'm more than happy to share with you the AT1 roadshow.
Sure.
It was extremely well received by the market, and we are really proud to be the first bank in Chile to issue this instrument and open the opportunity to other banks to be able to issue in the future.
All right. Thank you very much. Bye.
Sure.
Recording stop.