It's 11:00 A.M. sharp. Good morning to all of you, and welcome to our Third Quarter 2023 Conference Call. I'm Andrés Atala, Head of Investor Relations, and today I'm joined by José Luis Ibaibarriaga, BCI CFO, Sergio Lehmann, Chief Economist, and Juan Enrique Pino, Head of Credit Risk of BCI. We are also joined by Jose Marina and Cristian Saffie in Miami. Jose Marina, as you know, is our CNB's CFO. As we usually do, at the end of this presentation, we will leave room for questions, where we kindly ask you to raise your hands. Also, in slide number two, as you can see, these presentations will cover the main aspects of the bank for the third quarter, broken down into the topics shown below.
Now, I will leave you with our corporate Chief Economist, Sergio Lehmann, who will take you through the main macroeconomic figures in Chile, Peru, and the U.S.
Thank you, Andrés, and good morning, everybody. Global risks have increased, recognizing persistent inflation pressures in developing economies, tensions in the Chinese real estate market, the already long invasion of Ukraine, and more recently, the Israel-Hamas war. Global growth for 2024 was revised down by the IMF. The U.S. economy is still in good shape, showing to be highly resilient to a very contractionary monetary policy. The Fed rose the federal funds rate to 5.25%- 5.50%, and then it has sustained that level, expecting that this will be enough to ensure a coming economic adjustment and reduce inflation pressures. In Peru, the economic activity has been impacted by the political crisis and natural disasters.
Inflation, on the other hand, is going down as quickly as expected, and then the central bank, following other countries in the region, started an easing cycle. In Chile, the economic activity has been in line with projections and current with an expected GDP contraction of 0.5% in 2023. Inflation, on the other hand, has dropped slightly quicker than expected. The central bank cut the monetary policy rate to 9% in September, last monetary policy meeting, and suspended the international reserve accumulation or recomposition, which is initiated some months ago. The CLP, the Chilean peso, on the other hand, has been facing significant pressures during the last three months, mainly due to external factors.
In its advance estimate release of the Bureau of Economic Analysis indicated that the U.S. economy grew by 4.9% quarter-on-quarter, annualized basis in the third quarter of this year. This result was mainly driven by an increase in personal consumption and inventories. The economy is expected to grow to around 2% in 2023, a significant upward revision compared to last month estimations. There is only data for Florida GDP, but it has been overperforming the national average for several quarters. The labor market has not deteriorated as expected, still continuing to show new employment position with wages increasingly to around 4% annually. The unemployment rate for the U.S. and Florida are at its minimum historical levels. Headline inflation has been diminishing, but following a slower than expected path.
Core inflation, on the other hand, has also continued to decrease, recognizing some impacts on its evolution, given a contractionary monetary policy. It is estimated that inflation will be slightly over 2% annually at the end of this year, and then will diminish very gradually, getting to the 2% target of the Fed just in 2026. The Federal Reserve has increased the federal funds rate to 5.25%-5.50%. It has estimated, given the maintenance of that level during the last two monetary policy meetings, that this very contractionary stance will lead to an appropriate adjustment in the internal demand and contain inflation pressures. We're expecting gradual cuts in the monetary policy rate starting by the third quarter of 2024. Please move to the next slide.
The U.S. interest rates have increased, especially in the long-term, during the third quarter 2023, recognizing positive economic data, better than expected business expectation, and fiscal deficit pressures. We acknowledge the end of a long period of low interest rates. Please move to the next slide. Peru GDP fell by 0.5% year-over-year in second quarter 2023, driven by a contraction in private investment and inventories. This was result from the political crisis which started to end at the end of last year due to disruption in some value chains and the impact of natural disaster. It is expected to grow less than 1% this year. The CPI is falling as expected and is currently around 5% year-over-year in its latest data. The central bank, as a consequence, started to slow easing slightly.
Local interest rate hit by the international upward trend, given a recognized high correlation between them. Please move to the next slide. In Chile, GDP fell by 1.1% year-over-year in the second quarter of this year. This was driven mainly by a fall in domestic demand. We are still expecting a GDP contraction of 0.5% for this year. The labor market, on the other hand, has continued to deteriorate. Unemployment rate has risen to 8.9% in September. Labor force participation rate is stalled, and the number of unemployed workers are increasing. Please move to the next slide. Inflation has dropped quickly since our last conference, mainly due to goods, food, and energy prices. Services are still slowing or showing some resilience.
The CPI will fall to 4.3% year-over-year at the end of this year and would be around the central bank target at mid-2024, midyear 2024. In response, the Chilean Central Bank cut the monetary policy rate by 50 basis points to 9% in the last monetary policy meeting. We expect that the rate will reach 8.50% by the end of this year and will reach the neutral level in beginning 2025. This path is a little bit more gradual than previously expected, given the important depreciation of the Chilean peso in the last month and the potential path through to consumer prices. The CLP has been under pressure in the last three months, falling to its lowest level of the year, mainly due to external factors, especially from the U.S.
The central bank ended its international reserve increase program, and by the end of the year, we're expecting that the CLP, the Chilean peso, will be around 890 pesos per dollar. Now, I will leave you with José Luis, who will continue with the presentation. José Luis?
Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call, in which we will review the main message of last week's roadshow and the third quarter results. Let me share some key highlights of our performance before we go deep dive. Hold on a second, please. Can you hear me?
Yes, sir.
Okay. Sorry for that. Good morning, everyone, and thank you for participating in this conference call, in which we will review the main message of last week's roadshow and the third quarter results. Let me share some key highlights of our performance before we go deep dive into the details. We have successfully ended our capital raise process in order to strengthen the bank's position regarding its financial capabilities while maintaining sound capital ratios. We accomplished the subscription of 94.7% of total share agreed to be issued, and the remaining 5.3% was auctioned on the Santiago Stock Exchange. Thus, we ended with raising more than CLP 617 billion, or 100% of the capital increase.
We are very grateful for the support of the shareholders of the capital increase, especially given the market circumstances in which they occurred, which demonstrates clear support for the strategy we have been developing and the clear possibility of the future value. Regarding our digital strategy, more than 860,000 customers signed up for the BCI Plus cashback loyalty program in the first four months since its launch. Our MACH digital platform exceeded 11 million transactions in September 2023. Our consolidated balance sheet loans increased by 5.08% quarter-over-quarter. Deposits rose 4.35% quarter-over-quarter. We maintain a strong asset quality with a coverage ratio of 204.39% in third quarter 2023.
Overall, this quarter's performance was positive, despite being affected by non-structural factors, which we'll discuss further in this presentation. These factors primarily include increased funding costs due to the high treasury rates impacting City National Bank's NIM, a rise in delinquency rate in financial services due to the reduced market liquidity and higher unemployment in Chile, and higher taxes resulting from an increase in the value of the investment in City National Bank. Please move to the next slide. In this slide, you can see a snapshot of the bank and key figures, the diversification of the business, and the integral services offerings that we have. Also, I want to address that despite the change of the outlooks on sovereign by Standard & Poor's, the outlook for BCI was not downgraded.
Standard & Poor's recognized BCI's well-established brand in the Chilean financial system, and the strategy to expand outside Chile supported its sound competitive position. As you can see, our figures demonstrate that we have been growing impressively, almost tripling our total assets from $36 billion in 2015 to almost $90 billion as of September 2023, increasing our total loans from $25 billion to $56 billion in the same period. This growth has been accompanied with healthy level of profitability as net income reached $0.8 billion at third quarter 2023. This growth has also been accompanied with increased diversification. Over the same period of time, we have expanded our international presence and business diversification by growing our businesses in the U.S., and more recently, launching our operations in Peru. We have also significantly increased our client base.
That is almost six times what it was in 2015. We have tripled our base of active digital client across platform, and we have optimized our operational model by reducing our branches from 361 in 2015 to 189 today. This transformation paved the way to a more efficient business model while allowing us to serve our clients better and faster. As mentioned before, we have experienced an unparalleled increase in our total asset, of which an important part of it were in our operations abroad. Our international operation has increased at an impressive rate of 19% year-over-year since 2015, making us a top ten bank in Latin America in terms of assets. What we have achieved could not have been possible without organic growth and inorganic acquisition.
We have one of the most successful stories of Latin American banks expanding beyond their original market. We have built a strong regional operation from south to north that includes our operation in Chile, a fast-growing emerging bank in Peru, and operations in Florida, U.S., which has been able to quadruple since the original acquisition of City National Bank in 2015. Our internationalization strategy has allowed us to build a regional corridor on which we can provide a holistic service offering to our customers through several type of products that our subsidiaries in Chile, Peru, and Florida provides. Regarding our digital ecosystem development, MACH has been a key enabler strategy. When looking back at the development of MACH, we can summarize it in three main phases as you can see in the slides.
As we look forward, we are entering into a new phase, whose objective is to monetize our customer base by offering high-margin financial services with significant value added. Our strategic roadmap include the launch of credit card and in a platform customer loans, which will allow us to capitalize on what we have built over the years, underpinned by a strong risk culture, internal controls, a significant amount of data gathered after all these years of operations. MACH performance put us in evidence what we are heading to become the primary bank account for our customers. Our client base grew 11% over the last year, while total transaction increased roughly 30%. In addition, the average transaction size surged almost 50%.
Client balance in March is increased around 60% over the course of the year, which is also a key indication of the increasing adoption of MACH as the main account for our clients. It is worth highlighting that in May of this year, we developed our digital checking account, which has presented a notable increase in the number of enrolled clients with that account. It is important to note that all new enrolled clients are enrolled with a MACH checking account. As today, over 2,000 users have signed for the account that are already showing improvement over the key metrics previously mentioned, boosting MACH's path of success. The deployment of this product represent a key development for MACH, as it means an universal acceptance in merchants, something that travel or prepaid card users.
The quick migration to checking account represents a milestone toward the monetization objectives and suggests the commencement of our pre-profitability phase. BCI Plus is instrumental to help merchants grow their businesses. We are helping them to increase their sales by connecting enrolled merchants and our 5 million customers of BCI ecosystem. To date, more than 860,000 customers have enrolled in our program. In addition, more than 200 merchants have already joined, and most of them are active in the platform. Now, let's go through some figures of consolidated operations compared to the results as of third quarter 2023. First, we have experienced increased funding costs from the United States due to the high interest rates on deposits, which have impacted City National Bank net interest margin.
Although provisions and write-offs were slightly lower year-over-year, we have seen a rise in the delinquency rate in financial services, affecting the entire retail financial industry, exceeding our estimates. This is due to the end of the excess of liquidity in the market and a high level of unemployment. Delinquency increased in the retail segment due to the weaker economic scenario. Regarding consolidated operating expenses, decreased by 10.86% year-over-year as part of our efficiency and productivity plan. Finally, the lower tax rate was mainly due to the valuation of the investment in City National Bank of Florida and the monetary correction associated with the change in CPI. In summary, we leave these four points and all structural effect. Overall, we have a strong performance this quarter.
Our NIM decreased by 60 basis points quarter-over-quarter, mainly associated with a decrease in inflation levels. Our margin were exceptionally high during 2022 as a result of the high level of inflation and is returning to normalized levels as inflation converge toward the target. Regarding net fees, the 5.6% decrease is mainly due to the higher fees paid for the license to use debit and credit card brands. Our local operating expenses experienced 0.3% increase year-over-year, which is well below the inflation rate. This growth was achieved by the implementation of our productivity plan, designed to optimize costs while maintaining operational efficiency. One example of this is the successful optimization of the number of branches, and at the same time developing a new branch model.
In the next slide, you can see how the recent capital increase position us with a regulatory capital well, well above the regulatory requirement and our internal rates. As you are all aware, Basel III is currently under implementation, and capital requirement shall be phased in gradually to comply with the necessary capital ratios by 2025, including additional capital buffers for Pillar I, capital conservation, and countercyclical buffers. Currently, our regulatory requirement stand at 6.6% as of September, and we are at 9.8%. With the current capital increase, we reach around an increase of 120 basis points. Looking ahead to 2025, when Basel III is fully implemented, and considering certain assumption, we estimate that requirement will be around 9.25%, while our internal target is 11%, significantly exceeding our regulatory norms.
Now, I will leave you with Juan Enrique Pino, who will continue with this presentation.
Good morning. My name is Juan Enrique Pino. I'm head of BCI's Credit Risk Management team. I'm happy to be here with you once again. Here we can see the performance of the entirety of our loan portfolio. On one side, we're happy to see that there's a stable growth in assets volumes, while non-performing loans ratios seem to be stabilizing at levels similar to pre-pandemic levels and below industry average. With a stock of loan loss provisions, including voluntary provisions that is stronger than pre-pandemic levels. As to the commercial loans portfolio, it continues to be one of the main drivers in loan volumes, with NPL ratios still showing the first signs of stabilization around pre-pandemic level, which is in line with the general trend in the industry.
As to mortgage loans, residential mortgages portfolio has maintained its resilience in the current economic scenario, with volumes stabilized at current levels, given lower demand for new loans. With a non-performing loans ratio gradually trending towards pre-pandemic levels and with significant larger provisions. We remain highly confident as to the high quality of our mortgage lending portfolio. Given our strong loan-to-value ratios, our conservative credit policies, and strong culture of families in owning their homes and staying current in their residential debt. As to the consumer loans portfolio, it remains highly impacted by the effects of the higher inflation and unemployment rates, as José Luis was mentioning before, and in general, by the economic slowdown, which have impacted volumes through lower demand together with a more conservative lending criteria.
As predicted a few quarters back, credit performance indicators have moved fast back towards pre-pandemic levels and beyond. With NPL ratios as well as most risk indicators starting to stabilize at current levels since three to six months ago. I leave you now with José Marina, our CFO for City National Bank of Florida.
Thank you. Thank you, Enrique. Good morning, everyone. My name is Jose Marina, and I'm the CFO of City National Bank. Notwithstanding the challenges experienced in the banking landscape and challenging interest rate market, I am pleased to inform you that we had good results this quarter, especially in terms of liquidity, capital, and asset quality metrics. Before going any further, I want to provide you with a brief summary of the metrics most relevant in the current environment. First of all, the cheap-deposit capture has become increasingly challenging among banks as interest rates have significantly risen, resulting in an overall contraction in deposits within the industry. Despite overall outflows in the system, our client deposits have remained stable, whereas the banking industry experienced deposit attrition of 3% annually through September, even when including broker deposits.
We maintained approximately $11 billion of available committed liquidity, covering 139% of our uninsured and uncollateralized deposits. Our uninsured and uncollateralized deposits represent only 36% of total deposits, improving from 51% at the end of 2022. We continue to enhance our already strong capital profile with $403 million of excess capital in our Common Equity Tier one ratio even if we apply our unrealized AFS and HTM losses to our capital base. We maintain an investment portfolio with minimal credit risk that provides significant annual cash flow and has lowered its duration to 4.9 years. Our CRE portfolio continues to perform well with a very low weighted average loan-to-value of 50% and one in one of the best economic markets in the country.
These results reflect our reputation in the market built over 77 years. Our relationship-centric business model that focuses on diverse business segments and the strong culture we have fostered across our dedicated employees. Deposit capture has become increasingly challenging among banks, with deposits migrating to higher yielding products such as Treasuries and competitive pricing dynamics, resulting in an overall contraction in deposits. Moreover, the industry events in the first quarter resulted in depositors migrating from mid-sized and community banks to major banks. Despite these major challenges, our client deposits have remained stable year to date, with a slight decline of about $105 million through September. Now, looking at overall deposits, including broker deposits, our total deposits increased by $1.2 billion or 6% year to date. As you can see on the left-hand side of the slide.
You can also see that our non-interest-bearing deposits declined by $1.7 billion year to date and represent 22% of our total deposits. This rebalancing of deposits, as rates increase, is adversely impacting net interest margins across the industry, as we will see later in the presentation. On the right-hand side of the slide, you can see that the banking industry as a whole saw deposits contract by $340 billion or 2% year to date. These industry figures include broker deposits. Overall, our client deposits have remained stable despite turmoil in the industry and historic rate increases. This slide summarizes the year-to-date improvement across various liquidity and capital ratios. First, our TCE ratio excluding and including HTM improved by 21 basis points and two basis points respectively and remains strong.
We were able to reduce our uninsured and uncollateralized deposits by 16 percentage points year to date, and our available liquidity covers 139% of those balances. Finally, we have approximately $11 billion of available liquidity sources, representing 41% of total assets, adding $600 million of liquidity compared to December thirty-first of this year. It's also important to mention that our available liquidity covers 139% of our uninsured deposits, a significant increase from the beginning of the year. On this slide, you can see that our assets grew by $821 million or 3% year to date. Our loan-to-deposit ratio remains low at about 81%.
We remain very well capitalized, as evidenced by our total risk capital ratio and our 2:1 leverage ratio, which were 14% and 9.5% as of September 30, respectively. On the right-hand side of the slide, you can see we had moderate loan growth, excluding PPP, of $165 million or 1% in the third quarter. Our core loans, excluding PPP, grew $1 billion or about 6% year-to-date. Non-owner occupied CRE represents 47% of the total portfolio. We have moderated loan production in the current market, focusing on high quality deals in the market with strong spreads and solid deposit relationships. We will discuss the composition of our loan portfolio and dive into the CRE portfolio in the upcoming slides. Our strong credit culture and low risk appetite continue to result in excellent asset quality metrics.
Our NPL ratio, for instance, remained low at 73 basis points of total loans, with minimal past dues representing 27 basis points of total loans. On this slide, we present the details of our commercial real estate portfolio by property type. Overall, our CRE portfolio has a conservative weighted average LTV of 50% and supported by a strong debt service coverage ratio of 1.8 times. Additionally, our discipline and comprehensive credit process has historically resulted in exceptional asset quality, as evidenced by the minimal nonaccruals here in our CRE portfolio of less than 1%. 82% of the portfolio is within Florida, which is a significant differentiating factor given the economic growth that is occurring in the state. This slide shows further detail on our commercial real estate, retail, and office segments by collateral type.
The left-hand side of the slide focuses on retail, our largest commercial real estate segment, demonstrating how well-balanced the portfolio is with anchor and credit tenants, which are the lowest risk profile sectors accounting for 57% of the total exposure. Again, this is a very strong portfolio with sound client selection as evidenced by the low weighted average loan-to-value of 55% and the high debt service coverage ratio of 1.7 times. On the right-hand side of the slide, we highlighted our CRE office tenants. This segment is one that has been drawing attention due to the lingering effects of the pandemic. When you look at our office segment, it is a balanced and conservatively underwritten portfolio focused on class A and B properties.
It is accompanied by great fundamentals with a 55% weighted average loan-to-value and a strong 1x debt service coverage ratio. I would also like to emphasize again the strength of our marketplace, with Florida being the fast-growing state since the pandemic and the comprehensiveness of our credit risk framework, which has resulted in historically better asset quality metrics and lower charge-offs than peers. Moving to our operating results, our net income for the quarter was $42.7 million. This represents an $8 million reduction quarter-over-quarter. The main driver is NIM compression, which is a common theme across the industry given the competition for deposits and the migration of non-interest-bearing deposits that has been taking place. However, our profitability continues to be strong, with an exceptional efficiency ratio of about 51% and an ROE of 9.4%.
On the left-hand side of the 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, we have a quarterly average effective Fed funds 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, sizable DDA migration to interest-bearing products, resulting in overall NIM compression. We will continue to be vigilant in managing our cost of funds, balancing the need to continue growing our deposit base while also optimizing our NIM. I want to conclude today by discussing several strategies we have implemented to navigate the current environment. First, we have increased our minimum spread for new loans, for new commercial loans and renewals to a minimum of 325 basis points.
We're being highly selective on the lending side, not only from a credit risk and spread perspective, but also from a relationship perspective by focusing our lending activities on clients with a more holistic banking relationship that includes a relevant deposit relationship. We're also including such terms as deposit covenants, prepayment penalties, and floors on new loans as needed. Next, we have also executed $2.75 billion of pay fixed interest rate swaps during 2023, projected to generate $21 million in additional NIM in 2023 and about $33 million in 2024 based on the forward curve. These swaps are made in the 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. Deposits are the core of our relationship banking approach.
We have several deposit gathering strategies in place which have been vital to navigate the current environment. I should also mention that in Q3, we optimized our staffing model by approximately 8%, eliminating 85 positions, representing $12 million in annual savings. These eliminations were in specific areas of lower strategic focus, such as the residential business. This has been a common practice for banks across the country and locally given current market conditions. Lastly, we are limiting transactional lending and focus our residential lending efforts on secondary market business to enhance fee income. We face some headwinds in 2023, we continue to deliver significant results. We have fortified our already strong liquidity and capital positions. Our portfolio holds high liquid investments with minimal credit exposure and decreasing duration.
Our commercial real estate portfolio is well diversified with low loan-to-value and strong debt service coverage ratios. Finally, we are, although we are experiencing NIM compression, our efficiency ratio has been better than peers, and we are well positioned for declining interest rates. On that note, I will pass it back to the BCI team for final comments. Thank you for participating this morning.
Thank you, Jose. We would like to continue with the presentation. Before we finish, we would like to pass along the following key messages. The first is that we have significantly transformed our business over the last seven years. Almost tripling the bank's asset, doubling loans and net income, growing and consolidated our international footprint, and developing a unique digital capabilities that are core to our business. The strength that we have developed will allow us to reach a profitability target and deliver attractive risk-adjusted return to our investors while adding additional value through our complete portfolio of tangible value creative initiatives. Our operation in the U.S. market is strong and is performing well.
City National Bank has a sound balance sheet with extensive sources of liquidity and sound capital ratios, as you hear from José. We intend to continue with our local and international growth strategy that has positioned ourselves in BCI as the eighth largest bank in Latin America, and the first one of the banks in Brazil and Mexico. The capital increase was executed recently, will allow us to further strengthen our financial position, aligning our capital ratio with the internal target and with Basel III latest standards. Thank you very much for attending to this conference call, and I will leave you with Andrés to go through question and answer session. Thank you very much.
Please, José, Juan Enrique. The first question is coming from Tito Labarta from Goldman Sachs. Hi, Tito.
Hi. Good morning. Thank you for the call, and taking question . My question is just, I guess, how you think about the profitability of the bank from here. I know you have some longer term targets, but you know, interest rates may stay higher for longer, right? We're seeing some pressure on that in CNB. Also, you know, lower inflation in Chile and pressure on the margin as well. You have the capital increase, you know, loans growing in the mid-single digits. Just to think about what is the right level of ROE? How should it evolve from here? And what could be the drivers to increase it? Thank you.
Thank you, Tito, as always. Yes, you are right. The inflation, as Sergio mentioned, is coming down to the target of the central bank. GDP will grow around 1.5%. That will allow us to grow our loan portfolio in around 5% in Chile, and we are targeting an 8% growth in U.S. plus Peru. With the capital increase that we have just successfully finished, we have a pressure on return on equity. How we are going to do it, as we mentioned in the roadshow, we have some s.
We have some strategic plans, we have some business as usual incremental target, and we have some savings in the cost structure that will help us to the 14% return on equity target that we mentioned in the roadshow for 2026. The way that we are going to achieve that, Tito, is by combining our international strategy, that, as you are aware, the Fed has maintained the interest rate yesterday, and it has been taking longer to start decreasing. Having said that, the message of the Fed yesterday, in some way or another, gives some guidelines that will start generating a decrease by 2024-2026, as Sergio mentioned. Second, in Chile, we have a good growth of 5%.
You have mentioned, and you have here, Juan Enrique Pino, that we have a solid risk ratios. With that component, we are going to aggregate margin enough to do it. The other part that is in this equation is that we are growing our expenses at a pace of inflation +1%. With the growth of the margin of 8% and maintaining the risk level as we estimated and Juan Enrique told us, is the way that we are going to achieve this growth year after year. Obviously, next year, as we have just finished the capital increase, we will have some pressure in the return on equity.
as we said, the trend of the digital ecosystem growth in commission, the business as usual, the international strategy and controlling costs, is the way that we are going to deliver the 14% return on equity for 2026.
Tito, all good? Okay. Let me now, please go.
Great. Thanks. I couldn't unmute myself. Great, though. Thanks, José Luis. That's helpful. Maybe just one quick follow-up, I guess on that, because, you know, if loans are growing 5%, expenses inflation plus 1%, you know, you would need some margin expansion. How dependent is it on interest rates coming down and perhaps inflation picking up in Chile to help the NIM, or is there some other factor that can boost your margins? Thank you.
Tito, as you hear from Sergio, we are not expecting that inflation will catch up in Chile. We expect that inflation will be target of 3%. We do expect that the interest rate in the U.S. start to decrease. When, who knows? As Sergio mentioned, from 2024 to 2026, the interest rate will arrive to the target of the Fed, and that will alleviate in some aspect the cost of fund in City National Bank. Yes, we have a curve associated with our ROA, but the way that we are going to do it, as I told you, is that we are expecting to have a margin growth around 8%, 7%-8%, and expenses growth of around 4%.
That 4% difference when the margin is double the expenses allows us to arrive to the 14%. Well, we can go in detail on that, but that is the way that we are forecasting for the next couple of years in order to reach the level of Basel III requirement. Internally, we have 11%, and for that we need a 14% return on equity to achieve that too, and continue growing and taking the opportunities that we have in Chile, in the U.S., and recently in Peru.
Okay. That, that's clear, thank you. José Luis.
Thank you, Tito. Now we have Yuri Fernandes from J.P. Morgan. Yuri.
Hey, guys. Good morning. I have a question regarding cost of risk and asset quality. I think José Luis Ibaibarriaga already mentioned in the presentation that some figures are improving here. When we looked at the data, your cost of risk was 0.7%, and I think your kind of soft guidance for cost of risk is around 1%-1.1%. And when we look, it's basically coverage consumption, right? You provision below your new NPL formation.
My question in this line is if you can provide a little bit more color on asset quality, how you see asset quality evolving, the level of cost of risk, and if the company will continue to use, you know, the reserves to provision a little bit below, the formation on cost of risk, maybe cost of risk may be, a tailwind, at least for the short term, for ROEs. I can ask a second question. Thank you.
Yuri, on cost of risk, as we were describing below, we believe that the effects of the pandemic, and thereafter the effects of the excess liquidity that affected the cost of risk numbers, I think we're way behind that now. We're confident that the current levels of risk are a fair reflection of what we should be seeing going forward, provided that the economic situation remains within what Sergio mentioned as the outlook. We remain very positive as to the performance of the commercial portfolio. As I mentioned, we have seen a stabilization in the trends in consumer lending.
What we are expecting going forward is now a move back towards pre-pandemic levels, 'cause we have stabilized our cost of risk back way above pandemic level, and that's the target now to start to move that downwards. Residential mortgages, we believe there might be a quarter or two with indicators still going up and then stabilizing. In general, we believe the overall credit portfolio should perform similar to in the next year similar to the current one, with the commercial loan portfolio driving the improvement in quality followed by retail portfolios with a lag of eventually six to nine months.
Yuri, okay with that? Okay. The next question is coming from Daniel Mora from Credicorp Capital. Hi, Daniel.
Hi, good morning, and thank you for the presentation. I have a couple of questions. The first one is regarding the digital strategy. I would like to understand if you can provide more details regarding the monetization of MACH. You mentioned that it should come from credit cards, consumer loans, investment products and else. However, I would like to understand what will be the target of the monetization per year. For example, of the 3.9 million clients that you have, do you expect to reach 30% of these clients by the end of next year, 50% by 2025?
I think that with those numbers it would be very helpful for us to understand what is the base case scenario for you regarding the monetization of MACH and BCI Plus and all the other initiatives that you have in the ecosystem. That would be my first question. Thank you so much.
Daniel, one of the takeaways that we bring from the roadshow is that we have to give more color in the digital strategy. In this moment, we are internally working in order to give that kind of information, not only in MACH, but in BCI Plus, in one stop shop in Spain. I'm not prepared right now to give you that information, but you will hear from us soon, as we understand that we need to give in order that you make your analysis and value our strategy, our digital strategy. Daniel, in this moment, we are working on it, and you will hear from us soon.
Just to complement this, something that we will work with you, Daniel, and all the market in order to know your specific and general and specific questions. You will know about us in this line, as José Luis mentioned. Do you have any more question? Daniel?
Perfect. I wasn't unable to unmute myself. Yes. That is clear. Well, I hope that you can provide that information soon to the market. Just an additional question regarding this matter is the 14% ROE target for 2026.
Yes.
is dependent on the successful implementation of this monetization, right?
No, not only. Not necessarily, Daniel. As we mentioned in the roadshow, basically, the incremental value in order to achieve the 14% will come from three thirds. I'm talking about the incremental. One third of the incremental value will come from the business as usual, meaning the bank in Chile, the bank in U.S., the affiliate that we have in Chile, growing at the pace that I've already mentioned, 5% more or less, 8% in the U.S. The second third of the value will come from a specific strategic plans that we are developing in basically some affiliates and some international growth. Peru, the insurance broker-dealer, the mutual fund, where we are making specific programs that are going to grow much faster than business as usual.
The third of the incremental value will come from. One third is coming from the distribution channel project, where we are going to capture a lot of savings. As I mentioned, we have been closing and changing branches from 361 to less than 190. The third is coming from savings. Another third is coming from the digital ecosystem, and another third is coming from a specific target in the wealth management arena. The answer, Daniel, is that the main part of the incremental value is not coming necessarily from the digital strategy, but it's an important part of it. We have.
I think that we did some, we give some information in the roadshow, and we are more than glad to share with you that information, in order you can make your or adapt your models.
Perfect. Thank you so much, José Luis. Just the last question.
Thank you, Daniel.
As in the last call, you mentioned that you plan to reach the 14% target in 2025. Just to make sure that I hear it well, now you plan to reach it in 2026, right? It will be a transition period the next year, given the capital increase. If the new plan is to reach it in 2026, what changed for you inside the bank to move the long-term target one more year? Now 2024 and 2025 will be transition years for you?
No, I think that 2025, Daniel, we are going to be close. What is changing is that the Fed is taking longer to start decreasing the interest rate, and that is having an impact in the deposits, the cost of deposit/NIM of City National Bank. If the Fed accelerate the normalization of the interest rate, the target of return on equity on 2025 of 14% will be achievable, but we want to be cautious in that sense, because it not necessarily depend on us.
Perfect. Thank you so much. That will be all from my side.
Thank you. Thank you, Daniel.
Thank you, Daniel. Next question is coming from Neha. Neha from HSBC. Hi, Neha.
Hi, everybody. Thank you so much for taking my question. Two questions. First is, continued good cost control. How much more room do we have to improve efficiency and show good cost control? My second question on, I didn't quite get why the effective tax rate was so much higher during this quarter. What should we expect for the coming quarters? If you can give us some sense there. Thank you so much.
Thank you, Neha. Regarding the cost control, we do have an important space of improvement. The main reasons for that are the following: We arrive to a level of investment in order to update our IT architecture, infrastructure. All the safety, the liquidity safety investment in IT, we have updated all the systems, and the investment that we are projecting for next year are an important way below what we are investing now. Basically, around $50 million-$60 million less from the peak that we have last year.
At the same time, all the investment that we did in order to robotize and digitalize all the core systems and BI microservices, et cetera, is generating savings that we need to capture, and we are already capturing in the operational model. The first question, Neha, yes, we do have a space. We will finish an efficiency ratio of around 47%. We need to arrive to 45%. The efficiency are coming from savings and improvements in our operations because of the investment, the investment that we did. The impact of the tax rate is associated to two things. One is that we do have an investment in City National Bank that is reflected in US dollars.
When the dollar or the exchange rate increases, we have a gain in the investment of City National Bank, and that investment has to pay taxes, and that has had a significant impact in the tax rate. The other impact is, as inflation decreases, the monetary correction of the equity decreases, and that is a credit to taxes. As the inflation decreases, the credit to tax decreases. Those are the two main effects in the tax rate, Neha.
I think that we answered the question of Neha. The last one, and we are running out of time, is from Ernesto Gabilondo from Bank of America. Hi, Ernesto.
Hi. Thank you, Andrés. Good morning José Luis and everybody, and thanks for taking my call. My first question is a follow-up on these. Considering the expectations, inflation rate, low rates next year, how should we think about the trend on NIMs? Can you remind us what is your sensitivity to inflation and rates for every change to 100 basis points at a consolidated level, so at BCI level? And my second question is on fees. We're seeing fees are likely to decrease this year. Thinking of next year, do you think this trend would be reversed considering better economic growth, moving from a recession and, well, that we can start to see some accelerated growth in digital channels and MACH products?
My last question is a follow-up on the lead. Given the capital increase, would it be reasonable to expect an ROE between 11%-12% next year? Thank you.
Thank you. Thank you very much. I will try to answer your question a little bit fast because we are running a little bit out of time. Return on equity, yes, we are expecting a return on equity over 11%. For next year, we have not finished our budget process. What we have seen so far is yes, we are going to be over 11%. Regarding fees, we are estimating an increase in fees between 8%-9%. The main sources of that will be an increase in transactions associated with insurance. We are going to increase our loan portfolio, and that meaning loan consumer portfolio, and that means some increase in fees, and we are in.
The third one is in the digital ecosystems, and the fourth one is the credit card arena. It's around 8%. The NIMs just for inflation and interest rate. Inflation one hundred basis point of inflation is around CLP 35 billion, and more or less the same in interest rates. Around CLP 35 billion. That is not consolidated, Ernesto. That is in Chile. The impact in City National Bank, if you wanted, Jose can address it.
Sure. Luis, Ernesto, we position our balance sheet here at City National Bank to be liability sensitive, so it will benefit when rates and short-term rates decline. Decline in rates of about 100 basis points would increase the NIM by about 5%. Once you get to -200, -300, talking 10%-15% respectively there. We're focused. We've executed almost $3 billion of swaps this year, most on the shorter end of the curve between one to 3.5 years, in order to preserve our ability to expand our NIM once rates start to decline.
Excellent. Thank you very much. It seems that the worst for NIMs is behind, and going with capital rates, we can actually have some NIM expansion coming from the wars.
Yeah.
Okay. Thank you very much.
Ernesto, here they correct me because I said CLP 35 billion. It's CLP 35,000 billion. Thank you, Juan Enrique Pino.
Thank you, Jose.
Thank you very much to all of you for participating in this call. As always, we are really interested in hearing from you any additional questions you may have. The investor relation team is open and available to answer all your additional questions. Thank you very much, and have a nice Thursday.
Thank you all.
Thanks. Bye.
Thank you. Bye-bye.
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