Good morning, and welcome to our second quarter 2023 conference call. My name is Cristian Saffie, Investor Relations Officer. Today, I'm joined by José Luis Irigoyen, Bci CFO, Ignacio Yarur, Corporate Head of Digital Ecosystem, Sergio Lehmann, Chief Economist, and Juan Enrique Pino, Head of Credit Risk of Bci. Also, as you can see, we're joined by Jose Marina, CNB CFO, and Gary Fitzgerald, who heads our Real Estate Banking Division. At the end of this presentation, we will leave room for questions, where we will kindly ask you to raise your hand. Claudia, please move to our next slide. Today's presentation will be divided in three sections. First, the macro scenario. As we mentioned, Ignacio Yarur will address the digital ecosystem. Then we will have an overview of City National Bank. To start this presentation, we will leave you with Sergio Lehmann, our Chief Economist.
Sergio, the mic is all yours.
Thank you, Cristian. As Cristian said, I will do a quick macroeconomic review of the U.S., Peruvian and Chilean economies. Global risks remain high. In addition to greater inflation persistence, geopolitical risks are rising again. Besides the war in Ukraine, the complex relationship between China and the United States takes the spotlight again. The U.S. economy is still not making enough adjustment, and core inflation is still dropping slowly. Due to this, the Fed raised the Fed funds rate by 25 basis points last week. Market expectations point to end of the cycle. However, the monetary policy normalization starting next year would be more gradual. In Peru, the political crisis had a bigger than expected impact on the economic activity in the first quarter 2023. Prices started to ease quickly and leave room for the central bank to start an easing cycle in third quarter 2023.
In Chile, the economic activity has been in line with our projection of a decrease of 0.5% of the GDP for this year. Inflation has dropped quicker than expected, so the central bank cut the monetary policy rate by 100 basis points in July to 10.25%, starting an easing cycle. The Chilean peso volatility has continued to decrease, but is still above its historical levels. Please move to the next slide. In its preliminary estimation release, Bureau of Economic Analysis informed that the U.S. economy grew by 2.4% quarter-on-quarter, annualized, in the second quarter 2023. It was driven by an increase in personal consumption, mainly associated to service sector and fixed investment, and partially offset by net export.
There are still expectations for a mild recession in the first half of the next year. The economy is expected to grow by 1.4% in 2023. Florida GDP has been overperforming the national average for several quarters. The labor market has not deteriorated as expected, still continue to create jobs, and although it's decreasing, the unemployment rate for the U.S. and Florida remain at their minimum historical level. Please move to the next slide. Headline inflation has been dropping faster in the latest data, mainly due to energy prices. Core inflation, on the other hand, has been at a lower rate than expected. Service prices are still not dropping as anticipated and have been more persistent. It is estimated that inflation will be around 2% annually at the end of this year.
The Fed has resolved to increase the fed funds rate to 5.25%-5.50% range last week. This should be the end of the tightening cycle, and now they should have paused until second quarter 2024. The U.S. yield curve increased, especially in the short term during the second quarter 2023, after better economic data and fed funds rate increases expectation. Please move to the next slide. Peru GDP fell by 0.4% year-on-year in the first quarter 2023, driven by a fall in private investment, government consumption and exports, barely offset by private consumption. This wasn't the result of the political crisis, which started at the end of the last year due to disruption in some budget changes. The GDP is expected to grow less than 2% this year.
Due to the disruption caused by the social crisis, the CPI didn't fall as expected. On average between January and May, it was even above 8% year-on-year. June data showed an impressive fall, and this slowing down trend should continue during this year, given the space for the central bank to start an easing cycle in the third quarter of this year. Please move to the next slide. In Chile, GDP fell by 0.6% year-on-year in the first quarter, driven by a fall in household consumption and fixed investment. We are still expecting a GDP contraction of 0.5% for this year.
The labor market has continued to deteriorate, unemployment rate has risen, and it's at today, I mean in June data, at 8.5%, and may increase to 8.8% at the end of this year. Labor force participation rate has fallen again after an increase in the, at the beginning of this year. Nonetheless, real wages are rising in the last three months. Please move to the next slide. Inflation has dropped quickly since our last conference, mainly due to food and energy prices. Service and good prices are starting to show a significant deceleration. Total CPI will fall to 3.8% year-on-year at the end of this year, and would be around the central bank target from the second quarter next year.
In response, the central bank started an easing cycle in July by cutting the monetary policy rate by 100 basis points to 10.25%. We estimate that the rate will finish this year at 7.5%, and it will be its neutral level at 4% in mid-2024. Please move to the next slide. The Chilean peso volatility has been falling down since September of last year. It has helped by less political uncertainty and higher copper prices. In the last couple of weeks, the exchange rate has been under pressure, given a higher than expected cut of the monetary policy rate and a stronger global dollar. By the end of this year, we are expecting the exchange rate to be around CLP 820 per dollar.
Now we will leave you with José Luis, who will continue with this presentation. Please, José Luis.
Thank you. Good morning, everyone. Thank you, Sergio. Good morning, everyone, and thank you for participating in this conference call in which we will discuss our second quarter results, some of the progress we have made on the strategy, and the coming challenges. Let me share some key highlights of our performance before we go deep dive into the details. Our digital strategy has made significant progress due to our constant push for transformation and innovation, as Ignacio will go further in detail later in this presentation. Our operations in Chile continue to perform strongly, although in an environment of decreasing financial margins because of lower inflation levels in the economy. Likewise, our U.S. operations had a robust first half. City National Bank is very well established as a leading operator in the Florida market.
As we all know, the recent events of March has pressured the cost of deposits for regional banks in the US. However, City National Bank team has demonstrated once again the strength and resilience of our organization, which counts on extensive sources of liquidity and a solid capital base. Also, last July, a capital increase of CLP 600 billion was approved. The proposed capital increase will further strengthen the bank's position, providing additional financial capability to support our business plan and maintain sound capital ratios, well above Basel III requirements. We will address in detail in the following slides of this presentation. Finally, our commitment to sustainability by the fact that we are the first Chilean private bank to join the Net Zero Banking Alliance.
Now, I will leave you with Ignacio Yarur, Corporate Head of our digital ecosystem, who will address the progress we have made in developing our digital ecosystem.
Thank you, José Luis. It's a pleasure being here. Thank you everyone for coming. Next slide, Claudia, please. This is very important for us, and as José Luis was saying, digital ecosystem, it's a main driver of our strategy. This is because our clients have changed both in the way they do banking with us, and also in regard to the expectations they have when it comes to being served by a financial institution. This is also important because the boundaries of the banking industry have also blurred through the years. New competitors have come to play also on an arena that was traditionally controlled by incumbents.
Bci is a bank that wants to aspires to lead the way we do business in every single business we play. We took the challenge two years ago of building a new digital ecosystem based in four pillars that are shown on the slide you have in your screen. First of all, we decided to unify all the different platforms we have on our different vehicles. I'm saying MACH, Líder Bci Servicios Financieros, which is the credit corporation we run through a partnership with Walmart and Bci, in one single P2P, P2M payment platform. We add to that the acceptance network we have been building with Bci Pagos in alliance with Global Payments.
Once we have done that, we are also building the first open loyalty program in Chile to engage merchants and individuals, and we will discuss that later. On the right side of your screen, you will see that for all of these merchants, we are also building a one-stop-shop platform that will deliver them not only traditional banking products, but also value-added services that will enhance both the way we service them and the way they do business with their respective clients. All of this, with our strong data analytics capabilities in the middle, will make our individual customers and merchants transact more. There's only one way to earn money in this business.
If you want your customers to bank with you have to be present in their daily life through transactions and through payments. Next slide, please. What have we done so far? As I was saying, we unified our different payment platforms that had little overlap, as you can see in the slide. We have enhanced the experience we deliver to such customers through several partnerships. As you can see here, all these partnerships have a couple of characteristics that are common to them. All of them are leaders in their respective industries in Chile. All of them have significant scale. All of them are very present in our customers' daily life.
PedidosYa, which is the main last mile delivery company in Chile, or it's a Chilean subsidiary of Delivery Hero. Then you have Colo-Colo, which is the main soccer club. Salcobrand, which is the main drugstore chain company in Chile. Parque Arauco, which is a leader on commercial centers. All of them have entered into significant alliances with us, and all of them are already part of the value proposition we deliver to our clients. Next slide, please. In this regard, when it comes to our digital ecosystem, MACH is a major player behind that. MACH has given us scale, which was something very important if you wanna be a leading Chilean ecosystem.
It has given us a scale, and it has given us engagement with our clients through helping them to solve their needs. What has been MACH's strategy so far? Five years ago, when we started this, we launched a prepaid debit card, mainly a virtual one, without any physical card. We did that because that was the easiest way to achieve critical scale, without putting too much friction on the onboarding process. Five years ago, we started with that. It was basically peer-to-peer QR payment for P2M services and some other added services. Couple of months ago, once we have achieved that scale, we launched our checking account, which is basically a checking account with all the services that a usual, a common checking account have, but with a MACH experience.
It also comes with a savings account. You can do remittances, which is an increasing business here in Chile. You can do mutual funds. You can have a savings account. You can do Buy Now, Pay Later. You can do a lot of things there. Now, we are starting to move all of these critical mass of clients that don't have the frictions that they used to have when they had the prepaid credit card, into a massive loyalty program that we are gonna explain later on during this presentation. This strategy, it's shown in this timeline, right? We started five years ago with a very simple value proposition, and now we have moved.
Once we saw the product had market fit, we start growing significantly. We have strengthened not only our value proposition, but also our core operation. We're moving to a cloud service core provided by Mambu, and we added more financial products, BciPlus+ already in-app checking account, and payroll services for companies. This has shown significant success. We launched the checking account without making too much noise, and this is gonna be launched massively by the end of this month through a very intense marketing campaign. This checking account solves all the major frictions that our clients used to have. The product has gained traction significantly.
We already have more than 80,000 checking accounts sold, which is more than the amount of checking accounts that any Chilean bank sells within a whole year. We have also seen a significant change of our customer behavior. Their balance has increased significantly. The number of monthly transactions has increased significantly. The purchases they make through MACH app has also increased significantly. We are seeing lot of more engagement with our customers, which is right on path to our strategy.
We can, with these transactions, have the aim of monetize them later, the way I'm gonna show you in the next slide. Now we have 3.8 million customers already in our platform. Of those, this is a question some of you have asked before, more than 30% are active customers. When I say active customers, they are not only customers that log in to see their account balance, but customers that already do something with their money. They buy something. They pay something. They buy a product through Bci Pagos. Anything that any feature that it's within the MACH app. We're the best NPS in the Chilean banking services.
Recently, as I was saying, we have seen an increase in transactions through the launch of the checking account. Also the features on the platform that are part of our digital ecosystems is also working. More than 300,000 have already paid with P2M during the last months. More than 28,000 clients have an active line on MACH buy now pay later credit line, which is something where we took a lot of time and experience, because it's very easy to burn your hands here. We already found which is the right model, the right segment, and the right offer to make this product make money.
More than 130,000 clients already have a savings account in MACH. Second pillar, as I was saying, is BciPlus+. BciPlus+ is the first cashback-based loyalty programs for individuals in Chile. Loyalty programs in Chile have quite a bad rep because of their small print. I mean, it's very difficult to get your money back. It's very difficult to get the products you've been promised to have, et cetera, et cetera. Here, anyone can join. It's cashback based, and your cashback is directly received either on your Bci or your MACH account.
You can have personalized benefits depending on the behavior you have shown in the past, right? This is also helping us to serve the merchants that are part of this program in a much better way. We are helping them to sell more because we are making them able to be part of a 6 million market, which is, it wouldn't have been possible without BciPlus+ for any of these merchants. We are helping them to sell better. How? By providing them CRM as a service products. You do have Bci Pagos as an acquiring platform. You are also part of BciPlus+ as a market for you as a merchant.
We are helping you to sell on a much more targeted way and to provide benefits to the customers you really need to benefit. Now on, since its launch, that happened four weeks ago through a very high-profile marketing campaign, more than 700,000 clients have already enrolled in BciPlus+ , making this a outstanding success. More than 80,000 have already used Bci Plus+ to buy stuff. Since we start pilotting this, and that was late March, we have seen significant growth in our active base. Not only that, more than 200 merchants have already joined this program. More, most of them are already active in the platform.
When I say active, it's that they have already sold products or services as part of the program. By having discussed all these pillars, especially MACH and BciPlus+, now you can see how our business model works. On the left side of the screen, you see a mass market of 10 million individuals. That's where we wanna reach. Now we have 6 million, but through alliances, we're getting more and more clients. Individuals that are serving that are getting much valuable value proposition that are unified through one single platform that are receiving extraordinary experience through MACH.
On the other side, you have merchants that are being able to access a huge market, a massive market, and where we are getting all the information to sell them better, to bank them better, and to make their business much more profitable. Where's the money? I'm not gonna discuss the potential that a market of this size has, especially when you have customers that are much more engaged because of the way they do their daily needs with us. It's of common knowledge that once you transact, the more you transact, the more your willingness to do business with your bank. Other revenue streams are getting here too.
First of all, MACH is expanding its value proposition, so you'll soon see credit cards, you'll soon see payroll services for companies. You'll soon see many products that are taking advantage of the increasing traffic we are experiencing here. You see fees that are paid by the merchants that are part of our program. Every time any merchant sells a product through Bci Pagos, pays also a fee to Bci. Among that, it's not only the way we are increasing our customer base but also the way we are enhancing all this value proposition with our main partners. Having said that, I think the floor is José Luis.
Yes. Thank you, Ignacio. Now we will review the financial results of this quarter. Let's go through the main figures of our consolidated operations compared to the results as of second quarter 2023. Bci's operating income decreased 8.31% year-over-year due to lower inflation margins and fees caused by lower inflation and increase in interest rates. Although provisions and write-offs are slightly lower year-over-year, delinquency increased in the retail segment due to a weaker economic scenario. Regarding consolidated operating expenses, we have maintained a growth rate below inflation. Finally, a lower tax rate was mainly due to the valuation of the investment in City National Bank of Florida and the monetary correction associated with changes in CPI. As a result of the above factors, our net income decreased 19.7% year-over-year.
Moving to our local loan portfolio, the 1.9% year-over-year increase was mainly driven by our mortgage loans, as you can see on this slide. Regarding commercial loans, we have slightly increased the volume of loans, highlighting our pricing strategy and the increase of a market share in this segment. This quarter, we continue with great traction in 360 Connect, which is reflected in increasing levels of online credits. The consumer loans portfolio decreased by 11.2% year-over-year, mainly because of a drop in installment and credit card loans, driven by higher interest rates and market conditions as Sergio recently addressed. Our NIM decreased by 81 basis points year-over-year, mainly associated with a decrease in inflation levels.
Our margin was exceptionally high during 2022 as a result of the high level of inflation and is returning to normalized levels as inflation converges toward the target. Regarding net fees, the 5.6% decrease is mainly due to higher fees paid for credit cards operation and greater expenses of our client loyalty programs. Our operating expenses increased 7.7% year- over- year, which is 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, resulting in a reduction of 7% in the last year, and at the same time, developing a new branch model. Now, we will present some key highlights from our liquidity levels and regulatory capital metrics.
As shown in this slide, our total local deposit base demonstrated a growth of 3.3% year-over-year. We have observed a trend similar to previous years, with a shift from demand deposits to time deposits, in line with increased interest rate scenario. This is evident from a decrease in local non-interest-bearing deposits by 20.3%, and a corresponding increase in time deposit by 24.4% year-over-year. Now, moving on to our regulatory capital levels. As you can see in the upper right chart, CET1 capital has seen an increase of 8.51 basis points compared to the same period last year. Additionally, there was a 34 basis point increase compared to previous quarter. The main contributing factor to the growth during this semester was the increase in equity.
This was primarily driven by higher net income and reduced losses in capital account. Additionally, the correction to inflation expectation to the downside positively impacted our hedge accounting account. This effect were particularly mitigated by incorporating discount associated with Basel III, especially related to the hedge accounting, intangible assets, and deferred assets. Now, I want to refer to our recent capital increase announcement and its rationale. As you can see on this slide, we have been able to almost triplicate our asset base since 2015. While the financial system assets grew at 9% year-over-year, Bci has achieved a remarkable 15% growth year-over-year since 2015. Significantly outpacing the industry. This was allowed us to increase our industry share from 14% to 20%.
We have done this through both organic growth and strategic acquisition, such as City National Bank of Florida in 2015, TotalBank in 2018, and Executive National Bank in 2020. Additionally, last year, as part of our diversification efforts, we established a bank in Peru. The increase in the size of our balance sheet has come hand in hand with sustainable profitability, as we have been able to grow our net income by 14% year-over-year in the same period, rising from CLP 330 billion in 2015 to nearly CLP 800 billion in 2020. On this slide, you can see how the intended capital increase will position us with our regulatory capital levels well above the regulatory requirements and our internal targets.
Basel III is currently under implementation, and capital requirement shall be phased in gradually in order to comply with the necessary capital ratio by 2025, including additional capital buffers for Pillar 1, systemic conservation, and countercyclical buffer. Moreover, we have set upper limits with additional management buffers well above the regulatory standards. Currently, our regulatory requirements stand at 6.6%, and as of June, we are at 9.8%. With the proposed capital increase, we will reach 10.77%. Looking ahead to 2025, when Basel III is fully implemented, and considering certain assumptions, we estimate that the requirements to be 9.25%, with our target of 11% significantly exceeding the regulatory norms. The capital increase will allow us to fulfill these two targets without the need for additional capital.
In summary, the proposed capital increase will further strengthen the bank's position within the region and provide additional financial capability to support the execution of the company's business plan. Additionally, as we implement Basel III regulations and adhere to more rigorous capital requirements, we will allow us to grow and maintain solid capital ratios. Now, we will discuss our asset quality and loan portfolio composition with Juan Enrique Pino.
Thank you, José Luis. Hi, everyone. I'm happy to be here with you once again to give you more details of our loan portfolio. Our local loan portfolio, as you can see in the left side of the chart, remains pretty well diversified by customer segments, lines of business, and economic sectors. As to economic sectors, our exposure to the most impacted sectors in the years of the pandemic, such as entertainment, hotels, health and restaurants, stands below 5%, and around 80% of these loans are highly collateralized or government guaranteed. As to the next slide, you can see that the NPL ratio remains trending upwards towards pre-pandemic levels, which is in line with the general trend of the industry.
It should be noted, however, that we maintain a very high level of voluntary provisions in our loan book and in each and every relevant portfolio. As to commercial loans, commercial loans have continued to drive the growth of Bci's loan book together with mortgage loans, as José Luis was mentioning before. The demand for new good quality loans has been recovering since mid last year, more than offsetting the scheduled amortization of the government guaranteed loans granted during the pandemic years. Additionally, we see the positive impact of the various government guaranteed loan programs and liquidity injection initiatives into the economy from previous years, reflected in the positive credit performance of some of the most impacted segments during the pandemic, particularly small and medium enterprises, SMEs.
Lastly, our wholesale lending portfolio has been quite resilient to both the effects of the pandemic as well as to the current economic slowdown. At the same time, certain more affected sectors were either not meaningful in our portfolio or were highly secured with enough cushion to allow us for taking more flexible credit terms to help them out of the crisis. As to mortgage loans, the residential mortgage loan portfolio has maintained its resilience to this current scenario with its size growing and its NPL ratio trending to more normal levels but still standing below pre-pandemic levels. The higher inflation rate of last year took a toll on segments of borrowers with higher leverage ratios. While we're doing all in our hands to help them, the customers reduce their debt burden and go back to being current, our level of PDOS is absolutely within normal levels.
We remain highly confident that the high quality of our mortgage lending portfolio will remain resilient on the back of our strong loan to value ratios, our conservative credit policies, and strong culture of families in owning their homes and in staying current in the residential mortgage debt. Finally, it is worth noting that the home prices have remained stable or growing, so in general terms, the equities families have in their homes is higher than their down payment plus what they have already amortized in debt. As to the consumer loans, consumer lending portfolio remains impacted by the effects of the higher inflation rate and unemployment rates, and in general, by the economic slowdown. As predicted, credit performance indicators have moved fast back to pre-pandemic levels and slightly beyond that.
However, we can see that during these last quarters of the year, the slope of PDOs and NPL curves has started to stabilize and have remained in line or better than industry levels. These results have come from several actions taken in previous months and even a year back to moderate credit terms to certain groups, given the tighter prevailing market conditions, which affected particularly lower income segments and families more prone to higher leverage ratio, which are more sensitive to the impact of higher inflation and higher interest rates. It's still too soon to categorically tell whether we have reached the ceiling, but we're confident that if we're not, we're very close to getting there. The upward trend in NPL ratio is more visible in the affiliate Servicios Financieros, which is significantly more concentrated in lower income segments.
This is a very attractive segment for Bci in the long run, even though it is more volatile under macroeconomic stress. It is worth noting that this portfolio represents less than 2% of the bank's assets. Lastly, it is essential to note that the bank has established more than CLP 400 billion in additional voluntary provisions in all segments to face a more challenging macroeconomic scenario. Now let me leave you with Jose Marina, City National Bank of Florida’s CFO, and with Gary Fitzgerald, who heads the Real Estate Banking Division at City National Bank of Florida.
Thank you, Juan Enrique. Good morning, everyone. My name is Jose Marina, and I am the CFO of City National Bank. I'm accompanied this morning by Gary Fitzgerald, who's Head of our Real Estate Banking Division. I'm excited to be here with you this morning to discuss our performance during the second quarter. Notwithstanding the challenges experienced in the banking industry and current interest rate environment, I am pleased to inform you that we had strong results this quarter, especially in terms of liquidity, capital, and asset quality metrics. Before we go any further, I'd like to provide you with a brief summary of the metrics most relevant in the current environment. First of all, we increased our client deposits in the first half of the year by $387 million, a 4% annualized growth rate.
While the banking industry as a whole experienced deposit attrition of 4%, even when including broker deposits. We maintain approximately $11 billion of available liquidity and committed sources covering 143% of our uninsured and uncollateralized deposits. Our uninsured and uncollateralized deposits represent only 35% of total deposits, improving from 41% at the end of the first quarter and 51% at the end of 2022. We continue to enhance our already strong capital profile. We maintain an investment portfolio with minimal credit risk that provides significant annual cash flow and has lowered duration to 4.7 years. Our CRE portfolio continues to perform well with a very low weighted average LTV of about 52% in the best economic market 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 1,000 dedicated employees. During the past few months, deposit capture has become increasingly challenging among banks as interest rates started to increase, resulting in an overall contraction in deposits within the banking industry. Moreover, the industry events in the first quarter resulted in depositors migrating from midsize and community banks to major banks. Despite these challenges, we were able to increase our client deposits by $387 million in the first semester of the year. Now, looking at overall deposits, including broker deposits, we were able to increase our total deposits by $1.7 billion or 9%, as you can see in the left-hand side of the slide.
This includes the already mentioned $387 million client deposit growth. On the other hand, you can see that the banking industry as a whole saw deposits contract by $383 billion or 2% year to date. These industry figures include broker deposits. You can also see that our non-interest-bearing deposits declined by $1.1 billion in the first half of the year, declining from $6.6 billion to $5.5 billion. The non-interest-bearing deposits represent 25% of our total deposit base. This rebalancing of deposits as rates increase is adversely impacting our net interest margins across the industry as well as you'll see later in the presentation. Overall, our client deposits increased while deposits in the overall US banking industry are declining.
This slide shows the improvement quarter-over-quarter and year-to-date in the percentage of insured and collateralized deposits, which improved to 65% as of June 30th from 49% at the end of 2022. This migration is a result of our success in enrolling clients in the ICS program, which offers full FDIC insurance for larger depositors and organic insured deposit growth. As you can also see in the bottom of this slide, we have ample sources of liquidity available to us. As of June 30th, the bank had $11.2 billion of committed and collateralized available liquidity sources, representing 42% of our assets and covering 143% of our uninsured and uncollateralized deposits. In conclusion, we have ample sources of liquidity available to us, and we have meaningfully reduced our uninsured and uncollateralized deposits.
On this slide, we can see the evolution of the unrealized losses in the investment portfolio for both available for sale and held to maturity portfolios, as well as our swap hedges. As you can see, the aggregate net losses improved by $62 million year to date pre-tax or $30 million after tax. The OCI components, which include the available for sale portfolio and swaps, improved by $46 million pre-tax. Our OCIs improved year to date despite the five-year U.S. Treasury rate increasing since December 31st as a result of the bank reducing the portfolio duration to 4.66 years. It is also important to mention that 98% of our investment portfolio consists of highly liquid U.S. government and agency securities that provide about $800 million of cash flow annually.
This slide shows that our assets grew marginally in the most recent quarter. Our loan to deposit ratio remains low at about 79%. We remain very well capitalized as evidenced by our total risk-based capital ratio and our 2:1 leverage ratio, which were 13.9% and 9.3% as of June 30th, respectively. On the right-hand side of the slide, you can see we had moderate loan growth in the quarter of $420 million, about 2.5%. Our core loans, excluding PPP, have grown by $836 million or about 5% year-to-date. We have moderated loan production in the current market, focusing on high quality deals in our 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, remains low at 62 basis points of total loans, with minimal past dues representing only 8 basis points of total loans. Now, Gary Fitzgerald, Head of our Real Estate Banking Division, will discuss our CRE portfolio in more depth.
Thanks, Jose. Good morning, everybody. I'm pleased to be here with you to provide more insight into our commercial real estate portfolio. On this slide, we present the detail of our CRE portfolio by property type. Overall, all CRE categories have a strong loan-to-value of 57% or lower, with a low weighted average of 52% and supported by strong debt service coverage ratio of 1.9 x. Additionally, our disciplined and comprehensive credit process has historically resulted in exceptional asset quality, as evidenced by the minimal amount of NPLs in our CRE portfolio of less than 1%. 17% of the portfolio is outside of Florida as a result of us financing transactions for our very best clients outside of the state. This slide shows further details on our CRE retail and office segments by collateral type.
The left-hand side of the slide focuses on retail, our largest CRE segment, demonstrating how well-balanced the portfolio is when anchored in credit tenants, which are the lowest risk profile sectors, accounting for 54% of the total portfolio. Again, this is a very strong portfolio with sound client selection, as evidenced by the low weighted average loan-to-value of 56% and high debt service coverage ratio of 1.66 x. On the right side of the slide, we highlighted our CRE office segment. This segment has been the one that's been garnering attention due to lingering effects of the COVID 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 56% weighted average loan-to-value and a strong 1.7 x debt service coverage ratio.
The weighted average loan-to-value of the class C segment is even lower at 52%. As we wrap up the commercial real estate discussion, I'd like to make a couple of additional points. First, we only have about 12% of the CRE portfolio maturing through the end of 2024, and we've recently stress tested the debt service coverage ratios of those loans with positive results. I'd also like to point out that our underwriting criteria over the years has consistently required us to underwrite loans to higher rate environments, which has enabled the portfolio to perform well through this cycle. Our sound credit approach is accompanied by the fact that we are located in the best real estate market in the U.S., Florida.
On the left-hand side of the slide, we present an analysis done by CoStar on the 12-month rental growth rate of office spaces throughout the U.S. for the top 80 office markets. You will notice that seven of the ten top 10 major office markets with the strongest rent growth are in Florida, including Miami ranked number one, Palm Beach at number two, and Fort Lauderdale at number seven. On the bottom, you can see how other largest office markets outside Florida rank towards the bottom in terms of rental rate increases. Florida's economy continues to outpace the rest of the U.S. On the right side of the slide is a compilation of a few headlines reflecting this reality. Our business-friendly climate continues to attract new businesses and is a preferred destination for wealthy individuals as well.
In addition to Miami serving as the gateway to Latin America, we are also increasingly becoming a business hub and home to many private equity firms. In short, Miami is emerging as what is one of the most important cities in America. In 2022, Florida was the state with the most gained population. Affluent individuals and sizable businesses are relocating from the Northeast, the West Coast, and other parts of the U.S. to Florida. Florida received more than 1,200 people per day, fueling our strong economy. The labor market is also strong in the state. On the right-hand side of the slide, you can see that Miami and Florida's unemployment rates of 1.4% and 2.6% respectively, are lower than the national rate of 3.4%.
We also show here how Florida has more jobs for the first time than New York with over 9.5 million employees in 2022. I believe these last couple of slides clearly demonstrate how Florida's economy is differentiated from the rest of the country and allows us to feel very comfortable with our CRE portfolio. On that note, I'm going to pass it back to Jose, who will continue reviewing our results for the quarter.
Thanks, Gary. Moving to our results, our net income for the quarter was $50.8 million. This represents a $7.9 million reduction quarter-over-quarter. The main driver is NIM compression, which is a common theme across the industry as rates have significantly risen. Our profitability continues to be strong with an exceptional year-to-date core efficiency ratio of 49%, ROE of 10.3%, and an ROA of 85 basis points. On this slide, you can see the evolution of our net interest income and net interest margin compared to the most recent quarter in the fourth quarter of 2022. The blue part of the margin represents our net interest income and margin excluding the impact of PPP fees.
You can note that our core net interest income decreased by $16.5 million or 11.5% over the previous quarter, resulting in our core NIM declining by 36 basis points to 2.07%. This is a consequence of increasing deposit costs, which has been a consistent theme in the banking industry during the first half of the year, given reductions in non-interest-bearing deposit balance and the impact of increased deposit pricing given the rate environment and competitive market dynamics. Finally, you can see that our betas for both cost of funds and cost of funding interest-bearing deposits are at 62% and 64% respectively. Deposit betas are increasing across the industry given the market dynamics just discussed.
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 net interest margin. As you can see in this slide, our interest rate risk position is balanced. While our net interest income is expected to modestly decline with continued modest rate increases, our net interest income is expected to expand when rates start to decline. We actively manage the balance sheet and opportunistically executed $2.75 billion of basis swaps during the first semester of the year, including $500 million in the most recent quarter.
In order to protect against higher short-term rates for a longer period of time, the swaps we executed are in turn between one year and 3.5 years in order to provide some near-term protection to higher short-term rates, while also maintaining our position to benefit once short-term rates start declining. Based on the forward curve, these swaps will add around $31 million of additional net interest income during 2023. We continue to protect our NIM in the current rate environment while positioning our balance sheet to benefit from the anticipated rate increases in 2024. As we approach the end of this presentation, we want to summarize the year-to-date improvement we saw in various liquidity and capital-related ratios, many of which we have already addressed.
First, our TCE ratio, excluding and including HTM, improved by 33 basis points and 39 basis points respectively and remains strong. Second, we were able to reduce our uninsured and uncollateralized deposits by 16%, by 16 percentage points year-to-date, and our available liquidity covered 143% of these balances. Additionally, we pledged a more significant amount of our investment securities as public deposit in order to be ready to draw on liquidity. Our loan to deposit ratio remains low at 79%. Finally, we increased client deposits at an annualized rate of about 4%. I want to conclude our comments by recapping some of the main conclusions from our presentation today and briefly touching on our progress this year.
As you have seen today, we have fortified our already strong liquidity and capital positions and increased our deposit base in a banking environment where deposits are declining. Our investment portfolio holds highly liquid investments with minimal credit exposure, and decreasing duration. Additionally, our commercial real estate portfolio is well diversified with low LTVs and strong debt service coverage ratios. We have robust credit risk management practices coupled with a very strong Florida economy. Finally, although we are experiencing NIM compression, we are well positioned for declining interest rates. While our first half of the year speaks for itself, we will continue to be vigilant in monitoring our deposit base, and we'll continue to effectively manage our loan portfolio. We are committed to our relationship banking approach, our prudent risk management, and strategic vision, which has set us apart through the years.
On that note, I will pass it back to the Bci team for final comments. Thank you all for participating this morning.
Thank you, Jose and Gary. We want to conclude the call by emphasizing that the market continues to recognize the progress we have made on our strategic pillars related to innovation, customer experience, and corporate governance. Our employees recognize us as the happiest company to work in the Building Happiness 2023 ranking. In the same line, we were recognized as one of the preferred companies among young technology professionals to work in Chile. Related to ESG, Bci is the first private bank in Chile to join the Net Zero Banking Alliance, an organization whose objective is to mobilize the transition to a low carbon economy, encouraging the best practices of its customers, individuals, suppliers, SMEs, and large companies. We were the most responsible company and the best corporate governance in Chile.
Lastly, I would like to share the updated guidelines considering the last macro conditions discussed in this presentation. We are adjusting the forecast of a net income decline year-over-year from 10% to 10%-15% compared to the 2023 results. This is mainly explained by a lower NIM in Chile due to the decreasing inflation levels and in City National Bank associated with higher funding costs, as Jose explained earlier in this presentation. Lastly, and to finalize the presentation, we would like to pass along the following key messages. We continue developing our leading digital ecosystem, including key functionalities such as BciPlus+. Our operations 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.
We intend to continue with a local and international growth strategy that has positioned us as the eighth largest bank in Latin America. The capital increase we are executing will allow us further to strengthen our financial position, align our capital ratio with our internal target, and with Basel III latest standards. We expect to execute the intended capital increase during the fourth quarter of 2023. Thank you for your time, and let's go back to Cristian for questions and answer session.
Thank you, José Luis and the Bci team. We have a couple of question. Our first question is from Ernesto Gabilondo from Bank of America. Ernesto, I would kindly ask if you can go ahead.
Thank you, Cristian. Hi, good morning, José Luis, Ignacio, Jose, and all your team, and thanks for the opportunity to ask questions. My first question is on your consolidated NIM sensitivity from lower rates and lower inflation levels. For every change of 100 basis points in rates and inflation, can you remind us what would be the impact on your consolidated NIM, and how should we think about Bci's NIMs next year? My second question is on your approved stockholders' capital increase of CLP 600 billion. As you pointed out, it will help to increase the Common Equity Tier 1 ratio close to 11%. However, the issuing of 28 million new shares will imply an earnings per share dilution of roughly 12%.
How do you see the trend for Bci's earnings per share growth and the ROE next year to compensate the dilution? My final question will be in operating expenses and MACH. How should we expect OpEx growth next year considering all these digital investments? We notice MACH is obtaining a good number of deposits and is very interesting, your new checking deposits. But when do you expect to start the digital lending, which I think at the end will be the way to monetize the clients? And when do you see MACH to become profitable? Thank you.
Thank you, Ernesto. I will try to go in order to answer your question. First, NIM, we have a consolidated NIM that is going to decrease in Chile regarding inflation. Basically, the sensitivity that we have is that unexpected 100 basis point and interest rate is around CLP 38 billion, and unexpected inflation is around CLP 39 billion because the gap has been open. Obviously, Ernesto, as you are very well aware, this is unexpected because if the market expect that or the impact at much less. What we're expecting in NIM this year in Chile, we're expecting a decrease of around 80 basis point, and in City National Bank, as Jose explained, around 100 basis point.
Next year, as the interest rate in the U.S. is going to start decreasing, as Sergio mentioned earlier in this presentation, we expect that this gap is going to start closing. Regarding CapEx, that is a very good question. We're expecting that all the investment that we have done, both in the business as usual business, as creating the digital capability, as Ignacio explained in detail, is going to bring us incremental revenues in the next couple of years. Our forecast for the next two, three years, and the expectation that we have is to have a 14% return on equity, including this capital increase that we are going to make at the end of this year.
The 12% dilution that you are explaining, we have already considered it, and we expect to have a 14% return on equity 2025, 2026. Regarding operating expenses, we continue to invest in this digital ecosystem. Having said that, for the next couple of years we are expecting to grow revenues at double-digit growth and expenses on inflation +2%. Efficiency ratio will start improving, and we have a target that we are going to be in 45% efficiency ratio by 2025. I think that I answered your three questions, Ernesto. I don't know if you want us to go deeper in any of those questions.
Thank you. Thank you, José Luis. Very helpful. Just a follow-up in terms of MACH now. When do you expect to start the digital lending, and when do you expect to be profitable?
Regarding MACH, as Ignacio mentioned, we already have Buy Now, Pay Later, and he mentioned that we have been very careful with expenses that we have seen in other parts of the world. But more, MACH is part of a whole ecosystem that includes all the assets that Ignacio explained. The overall monetization of this investment will start early at the end of this year and it's going to pick up in 2024, 2025 and 2026. The incremental revenue that we're expecting for the next couple of years come significantly from these digital ecosystems. So, it's not that much as itself, but it's more as part of a whole ecosystem. Ignacio,
Yes. Ernesto, good question. In regard of the financial services, as José Luis was saying, we already start lending. In my presentation, I showed there are almost 30,000 clients with an existing credit line for Buy Now, Pay Later. We expect to launch our new credit card, which is gonna be part of the loyalty program that I was mentioning like 30 minutes ago, by the second quarter of the next year.
In terms of profitability, we expect the first month to be on the blue line, I mean, break even, somewhere during mid-2025 for MACH only as a standalone business, regardless of the sources of income it's generating for the rest of the ecosystem.
Perfect. Now thank you very much, Ignacio and José Luis.
Thank you.
Thank you, Ernesto.
Thanks a lot, Ernesto. Our next question, and I please ask that you can please put your cameras on, is from Daniel Mora from Credicorp. Daniel, the mic is all yours.
Hi, good morning, and thank you for the presentation. I have a couple of questions. The first one is also related to the digital strategy. Considering the strong investment in the initiatives such as BciPlus+ and MACH, what will be the key milestones that we need to pay attention until 2026 to know if the strategy is going in the right direction? Because at the end, the increase in clients and transactions should translate into higher profitability. If we consider that we are going to maintain an ROE around 14% for Bci, even after the capital increase, I'm wondering what will be the marginal increase in ROE coming from all these digital strategy.
That's why I would like to know what will be the milestones in these years, and what will be the key channels to see the increase in profitability coming from the digital strategy.
Ignacio, can you answer the question, please?
Yes. In terms of milestones, you'll see more and more partners joining the ecosystem. You'll see more and more clients engage with Bci's ecosystem during their daily life. One metric you should put your attention on, it's number of active clients. When I say active clients, it's, as I already said, not just the clients that log in to see their account balance, but clients that actually transact within Bci's ecosystem. Second, I will put strong attention on the net margin that is generated on the retail and merchant from the retail and merchant clients, because they are the ones where most of the income's gonna come from.
Either from the traditional sources of revenue or from the new revenue streams we are generating, such as MACH expanded value proposition, fees from merchants that are part of the program and value-added services we're gonna start marketing. We already start marketing to the merchants that are part of this program. Another key metric you should maybe pay attention to would be ARPU, average revenue per user, which is also part of what we are monitoring from now.
Thank you, Ignacio.
Thanks a lot, Ignacio. Daniel?
Perfect. Thank you so much. The second question will be related to what will be the effect or the impact on Bci coming from the expiration of the FCIC, the liquidity line provided by the central bank, in the first half of the next year. Thank you so much.
Well, as you know, Daniel, the line we will start repaying it. The impact of the different cost of fund that this line will have in Bci is around $10 million, is an important amount, but it's basically very material. Remember that we are going to be repricing for the other side too. Well, that is it. It's around $10 million, the incremental cost.
Perfect, José Luis. Just to know what will be like the marginal pressures on margin coming from this expiration? Do you expect any? Because you already mentioned $10 million in the cost of funds. This will translate into more expensive funding sources.
Yes.
Pressure on margins at the beginning of the next year.
What we are seeing, Daniel, is that the pressure that we are having in prices with decreased inflation and this kind of fund is in some way or another reflected in the prices that you are charging or investment that you are making. The net effect regarding repricing and cost of funds that we calculated, just isolating these FCIC facilities is around $10 million. Remember that this is part of a total way of funding the operations, and it's very important, but it's very marginal. This is not a significant amount of money. The impact is not immaterial, but it's just $1 million.
Perfect. Thank you so much. That will be all my questions. Thank you.
Thank you, Daniel.
Thanks a lot, Daniel. Our next question is from Yuri Fernandes. Yuri, the mic is all yours.
Thank you, Cristian. Hello, José Luis and everybody. I have a question regarding asset quality. I guess in the previous call, you mentioned that you would be approaching the NPL peak. Now, in the presentation you mentioned that it may be too early to call for the peak, but NPLs are somewhat more stable. My question is: How do you see the cost of risk here? Should we continue to see cost of risk around 1%? And I guess more importantly, how do you see your coverage ratio behaving on this? Like, you still have a, I would say, an above historical average on coverage ratio. I think it's 220%, 225%. I was checking 2017, 2018, 2019, this was running around 130%-150%.
My question is: How do you see asset quality? Assuming NPLs continue to deteriorate at the margin, if the company will continue to move the coverage ratio down. I can ask a second question after this. Thank you.
Super. Yuri, nice to see you again. Juan Enrique, can you answer the question, please?
Sure. Thank you, Yuri, for your follow-up question. Yeah, on the risk indicators on the consumer portfolio, I think they're in line with what we outlined a quarter ago. All major indicators such as NPL and all type of PDOs have already reached a stabilization, which I was prudent to mention was that we do not know the future, but we are highly confident that we are there. We have reached the ceiling, and that we shouldn't be expecting any major surprise in terms of the performance of the consumer portfolio. Okay.
I think we're pretty happy with the results of all the measures that we have taken in all the last quarters and since at least a year ago. As to the coverage of provisions to losses, yeah, you're right with the level, and we should see that going downwards and approaching pre-pandemic levels as well. That's if you see the specific provisions built in the portfolios. Now, if you add to that the voluntary provisions, you can imagine that we're very conservatively provisioned, and it's a discussion that we always have as to whether it's time to start releasing or not.
It's not something that we have yet decided.
Thank you. José Luis, can you hear? Just a follow-up on that, like, should we see cost of risk remaining around 1.1%? Like, what is the sort of guidance? Regarding the additional provisions, just a regulatory update, I think it's part of this CMF agenda to have the consumer risk model. If you have any color on that, like do you expect this to happen or not? Like, just an update on what should we expect on that topic also.
Yes, sure. Yeah, you should expect the cost of credit ratio to stay where it is today. As to the regulatory initiative, we gave guidance a couple of quarters ago, you may remember. It was in line with what was published by the media. We know that the regulator has taken longer in analyzing that regulation. Of course, we believe that it's gonna represent anyway some build up in individual provisions that can be more than offset with a reduction in voluntary provisions that account for two or three times the amount that could be built up in the individual provisions of the consumer portfolio.
Thanks a lot. We have three more question. Since our conference call was scheduled until 12:30 local time, if we cannot go through all the calls, we will arrange one-on-one meetings with the managers that are in this call. The next question is from Tito Labarta from Goldman Sachs. Tito, the mic is all yours.
Hi, everyone. Thank you for taking my question. Just as a follow-up, you mentioned potential ROE next year of 14%. Just wanna understand how you would get there, right? 'Cause you mentioned some potential pressure on margins as inflation comes down. You know, you had a relatively low tax rate this quarter. With a more normalized tax rate, you'd be around that 14%, but then you also have a capital increase, which, you know, could impact ROE about 100 bps . Just with some of the headwinds that you could face going into next year, how do you get to the 14% ROE? Like, what should be the main driver to get there?
Thank you, Tito. Give me the possibility to clarify what I said. I said that the 14% of return on equity was a target for 2025, 2026. Next year, for sure, as inflation is still here, the NIM compression that we will start, we will continue having in City National Bank, we are not targeting a 14% next year. We're expecting that next year is going to be around 12.5%-13%, as we are going to have recently the capital increase. The 14% target is going to be in 2025, 2026. Thank you very much, Tito, for giving me the possibility to clarify. Maybe I was not clear in my answer before in the guidelines.
Okay. No, that's helpful. Thank you, José Luis. I guess, you know, same question though. To get then to in 2025 and 2026, what would be the driver? Would it be, you know, inflation picking up, you know, boosting margins?
Okay.
You know, yeah, what would be the driver to get there?
Yeah. We are expecting to grow in the loan portfolio around, in Chile, around 5%-6%. In City National Bank, around 8%. We are expecting to have an increase in NIM as interest rates between asset and liability is going to kind of normalize. We are going to expand expenses at a much lower rate than in the revenue side of inflation plus 2%. We are expecting that risk level is going to maintain what we are going to have this year. And then we are going to have incremental revenues that are coming not from business as usual, and it's going to come from the ecosystem that Ignacio explained in detail a couple of minutes ago.
That is the way that we are building our financial projections numbers.
Okay. Perfect. No, that's clear. Thanks a lot, José Luis.
Thank you, Tito.
Thanks a lot, Tito. Our last question is from Nicolas Riva from Bank of America. Nicolas, the mic is all yours.
Thanks very much, Cristian, José Luis, Ignacio, for the chance to ask questions. I'm gonna follow up on the capital increase. You said as of now, you expect it to launch in the fourth quarter this year. I want to confirm that the controlling family, the Yarur family, the expectation is they will contribute with their pro rata share with about 63% of the CLP 600 million. Jose Luis, in your projections for capital by 2025, I see that you are just including all of your capital will be Common Equity Tier 1. You're not including any AT1 or Tier 2s.
I wanted to then ask you if the expectation then would be, given this capital increase, you are not expecting to raise any AT1, at least for the foreseeable future. Also, you know, kind of the question, why then you wouldn't make use of AT1 or Tier 2, given that the cost of raising that kind of capital is lower than the cost of raising equity. Thanks very much.
Super. Thank you, Nicolas. First, regarding the controlling group, they have publicly announced that they are going to go for higher participation. They made a public announcement, so we did it, and we said it in the extraordinary shareholder meetings. Second, yes, we are considering to have AT1s in order to achieve Basel III on 2025. We have not taken consideration this year as the issue of Credit Suisse created a lot of noise in this market, and today prices or spread are really high.
We are seeing some AT1 in issuers in Mexico and so we are starting to see some coming back of this market, and we are expecting to issue AT1 bonds on 2024 and 2025 to achieve Basel III ratios as you well mentioned in your question.
In that case, José Luis, just to confirm, by 2025, the expectation would be you would have 11% Common Equity Tier 1, plus potentially this AT1 bucket that you could raise, for example, next year.
Yes.
Okay. Thanks very much, José Luis.
Thank you, Nico.
Thanks a lot,
Oh, yeah. Thank you.
No, no.
Okay.
I pass the call back to José Luis for closing this call.
No, thank you very much to all of you. As you can see, we have a strong first year, a strong operations in U.S. Ignacio had the opportunity to explain to you in detail how profound and how deep is our digital strategy and building that ecosystem. Any additional question that you may have, the Investor Relations team is always available for you. Thank you very much for participating in this call. Bye-bye.
Thank you. Thank you, guys.
Thank you. Bye.