Banco de Credito e Inversiones

SGO:BCI

Earnings Call Transcript

[Andrés Atala S., executive]

Good morning, everybody and welcome to our Fourth Quarter 2024 Conference Call. I'm Andres Atala, Head of Investor Relations at Bci. Thank you. Joining me today are Jose Luis Ibaibarriaga, Bci's CFO; Juan Enrique Pino, Head of Credit Risk; Antonio Moncado, Senior Economist and have also been joined remotely by Jose Marina, CNB's CFO.

As you can see in this slide, today's presentation will begin with a strategic review. Next, we will present our macro analysis and forecasts. Following that, we will cover our results for the year in depth and conclude with an update on CNB, along with sharing our guidance for this year. After the presentation, we will open the floor for a Q&A session.

And continue for our presentation, I will pass the mic to Jose Luis, who will review Bci's corporate strategy.

[José Ibaibarriaga Martínez, executive]

Thank you, Andres, and good morning, everyone. I'm pleased to be here with all of you again. 2024 presented significant challenges marked by uncertainty, geographical tensions and a slow economic growth due to the continued high interest rates as the world wrestled with inflation. Despite these headwinds, it's important to highlight that as Bci we stayed and still are fully committed to our common purpose and strategy.

We dare to make a difference in our three strategic initiatives: one, in our customer experience based on continuous effort to improve our relationship banking; two, focusing in growth through diversification and scalability; and three, both are supported by a strong Bci culture positioning our people at the core of our decisions. As you can see in this slide, as of December Bci is the leader in the financial industry regarding loans, deposits and assets, considering our operations abroad.

For us, this is about leveraging the scale of opportunities of our clients, accompanying them and providing solutions behind local barriers. Additionally, we are the 11th largest bank in LatAm, highlighting our position as a relevant player in the region, empowering our clients while creating opportunities for continue to expand. Our strategy is centering in driving value through our diverse product and services.

As a full-service bank we offer various solutions across our subsidiaries, branches and business segment, going further than the necessities of our clients. In 2024, our subsidiaries contribute 31% of our net income. Last year, we implemented our first new branch model, aiming to create a greater and closer experience for our clients that translates in shorter waiting times, on-site resolutions, self-service and first-class assistance.

We are converting the digital experience to our assisted channels, deploying our self-service capability and improving our experience indicators. These spaces are designed and meeting point for entrepreneurs, clients looking for growth in their businesses with our support and individuals seeking space to move their project forward. It is important to note that in the past 10 years, we have been optimizing 50% of our branches while integrating digital capabilities to improve efficiency and client satisfaction.

This new branch model, which combines digital innovation with client-focused services strengthens our competitive position and create long-term value for our customers. We are building Chile's most extensive Digital Ecosystem. A part of this, we are developing a merchant-funded cashback program already partnering with over 14,000 merchants. At wholesale, we aim to be the primary bank for businesses offering agile, personalized services while empowering our bankers with digital tools.

Our models focus on cross-selling and fostering strong client relationships. As example of this is MACHBank, which will be -- go in-depth further in this presentation. Our international strategy aims to generate new revenue stream and diversify risk across new markets. This helps consolidate the regional platform to support the customers better.

City National Bank of Florida, one of the top three largest banks based in Florida; Bci Miami branch offering a comprehensive product portfolio for Latin American customers; Bci Securities, a broker-dealer in Miami, provides access to investment products in U.S. and global markets; and Bci Peru, operating since 2022 with extraordinary results up to now and in full development. Bci consolidated assets abroad now represent 36% of total assets of Bci.

We focus on expanding our international presence, enhancing core banking and developing digital capabilities. A key driver of our strategy is our strong organizational culture and commitment to attracting top talent. With an engagement score exceeding 93%, we demonstrate that our people are fully aligned and committed. Our value-driven culture shapes the future and creates the lasting impact through our exceptional team.

To continue our presentation, I will pass the mic to Antonio, who will explain the macroeconomic figures.

[Antonio Moncado, executive]

Thank you, Jose Luis. I'll do a quick macroeconomic review for the U.S., Peruvian and Chilean economies. Well, starting with the U.S. economy, it has moderated, but continues to demonstrate resilience. In its latest release, the BEA reported that the U.S. economy grew by 2.3% in fourth quarter of the last year, below expectations and driven primarily by personal consumption. The economy is expected to grow around 2.2% in this year and 2% by the next year.

Florida's GDP has outpaced the national average. The labor market remains highly dynamic with the job creation exceeding pre-pandemic levels. The unemployment rate for both the U.S. and Florida is both at low levels and stable with the national average standing at 4.1%. Next slide, please. Total and core inflation remained elevated. Consequently, the Federal Reserve will gradually undertake its flexibilization process, having recently reaffirmed that given the current state of the economy, there are no reasons to hasten the rate cutting process.

Regarding the U.S. yield curve, interest rates have increased significantly compared to the third quarter, especially for longer maturities. This rise is attributed to heightened uncertainty about the monetary policy trajectory for the current year and the potential policies that the new U.S. President Donald Trump might implement it. Please move on the next slide. In Peru, economy activity has shown significant dynamism, underpinned by the strength of its mining sector.

The economy grew 3.8% year-over-year in third quarter of last year, driven by the mining sector. For this year, we expect economic growth around 2.9%, in line with improved business and consumer expectations, inflation in its target range and lower interest rates. The Central Bank of Peru continue its monetary flexibilization cycle with the current policy rate standing at 4.75%. Please move on to the next slide. In Chile, GDP grew 2.3% year-over-year in third quarter of last year, driven by a positive contribution of net exports.

For this year, growth is expected to reach around 2.1% with a more favorable composition supported by both consumption and investment. The labor market has improved with the unemployment rate at 8.1%. However, the unemployment rate and labor force participation show worse figures than before the pandemic. Please move on the next slide. Inflation increased throughout 2024, driven by the unfreezing of electricity tariffs with the last adjustment occurring the last month, alongside a depreciation of exchange rate.

Additionally, labor costs exerted upward pressure due to the implementation of new laws. Our baseline scenario indicates that Total CPI will end this year at 4% year-over-year, and we expect it to reach its target by 2026. In line with higher levels of inflation and higher rates in the U.S., the Chilean yield curve has increased compared to the third quarter. Therefore, the Central Bank will continue with its rate cutting process gradually, expecting the monetary policy rate to stand at 4% and 50% by the end of this year.

Now I will pass the mic to Jose Luis, who will continue with the bank results.

[José Ibaibarriaga Martínez, executive]

Thank you, Antonio. Let's now review our 2024 results and the main drivers behind our performance. I would like to acknowledge that a key leadership transition after 33 years of exceptional direction, Luis Enrique Yarur stepped down as the Chairman of the Board and will continue as Board member, and Ignacio Yarur assumed the role in January 1, 2025. Regarding to our financial 2024 results, it was a strong year marked by a solid financial performance and a significant progress in our strategic initiatives, position us for sustainable growth.

And our income before taxes grew 31.8%, and our net income grew by 17.5% year-over-year, demonstrating the strength of our core business despite a challenging economic environment. We also increased demand deposits by 15%, reducing our cost of funds and reinforcing our robust funding position while successfully repaying the FCIC program. On profitability, our local NIM increased by 28 basis points driven by effective organizational strategic and lower funding costs.

At City National Bank, NIM improved by 54 basis reflecting solid balance sheet. We also repositioned the City National Bank portfolio shifting towards higher yield assets, which result in a positive after-tax impact -- excuse me, a negative after-tax impact around $60 million in the last quarter. We want to highlight our Wholesale business while adding innovation products such as Ordering, which allowed us to provide a solution to our clients once the purchase order is issued for work-related needs.

We have also made significant progress with 360 Connect, our leading platform in the business segment with significant advances in the digitalization of COMEX products. We advanced our digital strategy, optimize our branch distribution and merge our digital ecosystem and retail division, expanding financial solutions to over 6 million customers in Chile. These efforts reflect our commitment to innovation, operational excellence and a superior banking experience.

Our culture remains a core driver of success. It enabled us to manage expenses effectively, maintain operational discipline and improve productivity. These results are the testament of our team's dedication and customer-centric approach. Our positive credit risk management practices also allowed us to maintain a strong asset quality and navigate the market with resilience. From a capital perspective, our CET1 ratio stood at 11.01% at December 2024, exceeding regulatory requirement and reinforcing our capital position.

We capitalized around 70% of our net income, further strengthening our equity base to support the continued development of our initiatives. Additionally, we issued a USD 1 billion AT1 bonds last year enhancing our capital structure and bolstering our competitive position in international markets. Please move to the next slide. This slide presents a snapshot of the key consolidated financial figures. Let's now look deeper at the leading figures of our consolidated operation in 2024.

Bci operating income grew 8.6% year-over-year, primarily driven by higher net interest income, reflecting our effective pricing strategy and commercial activities. Net fees increased by 17%, supported by higher intermediation and insurance administration contributions, which we'll explore in more detail shortly. On the expenses side, consolidated operating expenses rose by 2.6%, well below Chilean inflation, while local expenses saw a slight decline of 0.7%.

As in previous periods, non-recurring events at City National Bank of Florida impacted the results, and we will provide further details in this later. Despite this factor, we maintain a disciplined approach to cost management. Finally, pretax income grew 31.8%, reflecting strong revenue performance and a positive risk management despite the impact of the non-recurring events at City National Bank.

The increase in taxes in 2024 was primarily driven by the investment in City National Bank and the dollar appreciation against the Chilean pesos. This factor lead to a significant raise in our tax burden resulting in a 104% increase in the tax line, as shown in this slide. Lastly, I would like to highlight the 15.5% growth in equity, which amount to nearly USD 1 billion and a total equity of around $7 billion.

Now I will pass the mic to Andres, who will continue with the local banking operations.

[Andrés Atala S., executive]

Thank you, Jose Luis. Moving on to our local loan portfolio; total loans grew by 6.6% year-over-year, reaching $36.8 billion, driven by strong performances in both commercial and mortgage loans. Notably, this growth outpaced the local banking system, which expanded by 4.2% during the year. Commercial loans increased by 6.9%, reflecting our focus on supporting key client segments while maintaining a disciplined risk approach to gaining market share.

We want to highlight the increased market share in commercial loans achieved through close relationships with our clients and offering value-added service such as 360 Connect Platform and COMEX, where we are the leaders in these lines of businesses. On the consumer side, our portfolio expanded by 0.7% year-over-year, a more selective approach compared with the system's 4.6% growth, as you can see. This reflects our strategic focus on improving the portfolio's risk and profile and prioritizing quality over pure volume growth.

Lastly, from our mortgage side, loans grew by 7.6% attributed to inflation and new origination loans in best profiles. Since 2017, MACH has made significant progress in establishing itself as a leading customer experience bank. Our efforts have been recognized through a remarkable 74.1% Net Promoter Score, the NPS that was last quarter, highlighting the value our customers place on our service. We have dedicated ourselves to continuously developing new products and services to address the evolving needs of our users, resulting in growth to over 4.2 million users.

MACH has evolved beyond being just a digital wallet; as a fully digital bank. We provide the same financial products as traditional banks while maintaining the speed and flexibility that FinTechs offer. Recent additions to our portfolio -- product portfolio such as credit card and upcoming consumer loans further enhance our offerings and strengthen our market position. As we aim for financial sustainability, our focus continues on generating revenue through transaction fees, broadening our range of financial products, including credit cards and loans and increasing our user base.

The recent launch of our credit card under the newly rebranded MACHBank by Bci solidifies our status setting and a new standard in the digital banking landscape, leveraging Bci's 85 years of experience while embedding the innovation and agility of a FinTech company. This dual strength position us well for continued success in the digital banking landscape. Moving forward, as highlighted in this slide, I want to emphasize the continued strong performance in both net interest margin and fee income.

NIM increased by 28 basis points year-over-year, reaching 4.16%. Effective volume expansion, a disciplined pricing strategy and a lower cost of funds drove this growth. It reflects our ability to optimize funding sources while strongly focusing on commercial development. At the same time, local fees grew by 10.3% year-over-year, supported by our cross-selling strategies across various product lines. Growth was particularly notable in mutual and investment funds, insurance sales and other financial services, while we maintain flat our fee expenses.

This year, local efficiency improved to levels of 44% representing a 300 basis point reduction compared to the previous year. This positive result was supported by strong operating income and disciplined cost management. Several key factors contributed to this outcome. First, although IT costs saw a slight increase, personnel expenses remained well controlled, reflecting a prudent approach to workforce management while maintaining a specialized talent mix.

Additionally, releasing provisions for eventualities positively impact these results. A key element in achieving these improvements has been our strong culture of cost discipline driven by process optimization and digitalization efforts. We remain committed to reinforcing these initiatives to ensure sustainable long-term efficiency results. We will present key highlights from our liquidity levels and regulatory capital metrics.

As shown in this slide, our total local deposit base grew by 16.3% year-on-year, driven by an increase both in time deposits and in demand deposits, reflecting sustained confidence in our funding strategy. Regarding our regulatory capital levels, our CET1 ratios stood at 11.01% as of December 2024, a decrease of 7 basis points year-over-year. This decline was mainly due to the growth of our loan portfolio and higher regulatory deductions from the capital base.

However, our strong earnings performance partially offset this with cumulative net income increasing by 17.5% during the period as Jose Luis mentioned before. Additionally, we successfully issued two $500 million AT1 bonds in February and September 2024 at competitive rates. These issuances carry out over high issuance volume periods so strong investor demand, underscoring our solid positioning in international markets.

Now we will discuss the asset quality and loan portfolio composition with Juan Enrique Pino.

[Juan Enrique Visinteiner, executive]

Thank you, Andres. Hi, all. My name is Juan Enrique. I'm Head of Credit Risk Management. It's a pleasure to be here once again providing you an update of the status of our loan portfolio. The current slide shows the evolution of our local loan portfolio. As Jose Luis mentioned, we're glad to inform you that the growth in loan volume comes from all three portfolios, but primarily from commercial loans and in the second place by residential mortgage loans.

Regarding the ratio of nonperforming loans to total loans, it remains slightly above pre-pandemic levels, primarily impacted by residential mortgages portfolio. As to total loan loss provisions, we have released over $110 million, mostly during the second half of 2025 -- '24 in voluntary provisions. That's nearly 30% of the stock that we had at the beginning of 2024. And we still hold an important stock of voluntary provisions and a very competitive ratio of total provisions to total loans.

This release in voluntary provisions respond to our belief that the portfolio-specific provisions are now more realistically evidencing the conditions of each portfolio, most of which are already free of many of the market distortions from previous years and also that we are still holding a substantial amount of voluntary provisions for events eventually not captured by our models today. Additionally, the impact of the B1 regulation on the consumer loan provisions has already been resolved among other factors.

Let's go to the next slide. As to commercial loans, we continue to see a good growth momentum in terms of volumes with strong names. This has enabled us to increase our market share in this segment, position us for sustained growth and stability. The increase in NPL ratio in previous quarters was mainly due to one single borrower in the telecom industry, which filed for Chapter 11 with a trend downwards after a peak in September 2024.

As reflected in the black dotted line, there is still a substantial amount of voluntary provisions providing a firm cushion against potential risks. Regarding the residential mortgages portfolio, we're happy to report continued volume growth with a slight increase in market share. However, we continue to closely monitor the increase in past-due obligations, primarily driven by a higher unemployment rate and by the delayed effect of inflation spikes from two years ago.

Factors such as still higher interest rates have also impacted the willingness of borrowers with tighter payment capacity to enter into restructuring agreements that seek to lower the monthly debt payment by extending the loan life. While we have introduced significant improvements to the loan restructuring process, which has resulted in more customers agreeing to restructure, we have also implemented methodological adjustments to our provision models aiming to recognize collateral value drops in certain areas of the country.

With interest rates stabilizing and inflation rate normalizing, we're more recently seeing a stabilization of what comes into our short-term past-due buckets. At the same time, we're noticing increased loan restructuring efforts among early past due borrowers. However, given the inherent dynamics of these portfolios, we expect the NPL ratio to continue rising for some time before it begins to decline.

Our current level of loan loss provisions, including voluntary provisions, adequately reflect the state of this portfolio. This includes a higher level of past due obligations. Still, it is offset by a favorable mix of loan-to-value ratios and loan term profiles, which positively impact the provision expenses. As to consumer loans, our consumer loan portfolio has stabilized in volumes and has recovered a growth path in the last months of the year, while total NPL ratio has maintained its trend downwards towards pre-pandemic levels.

This segment is a key area for potential growth, supported by a strategic shift towards higher income customer segments and a risk appetite aligned with the current macroeconomic environment. Our consumer loans remain well covered by portfolio-specific provisions as well as by voluntary provisions.

Thank you all. Now I will leave you with Jose Marina, City National Bank's CFO.

[Jose Marina, executive]

Thank you, Juan Enrique. Good morning, everyone. My name is Jose Marina, and I'm the CFO of City National Bank. I'm excited to be here with you this morning to discuss our performance during the year. We utilized 2024 as a year to invest in our future by repositioning our investment in BOLI portfolios during the third quarter and focusing on various long-term strategic objectives with the help of a multinational strategy consulting firm, which we will review and discuss towards the end of our presentation.

You will see that our strategic efforts in 2024 have positioned us exceptionally well for 2025 and beyond. With that said, we will cover our 2024 results. You will see that our NIM continued expanding with NIM accelerating in the second half of the year. Our liquidity and capital positions remain strong, and our CRE portfolio continues to perform exceptionally well. First of all, our client deposits increased by $321 million or 2% in 2024.

However, this includes a temporary outflow from a public depositor, which is seasonal in nature. Normalizing for this temporary outflow, deposit growth would have been about $800 million or 5%, outperforming the industry, which grew by about 2%, including the impact of broker deposits. The growth figures referenced for City National Bank solely consists of client deposits, thereby excluding any broker deposit growth.

We maintained approximately $9 billion of available liquidity, representing 34% of total assets and covering 113% of our uninsured and uncollateralized deposits. Our net interest income and margin expanded for the fourth consecutive quarter. NIM expanded 26 basis points quarter-over-quarter and 54 basis points compared to the fourth quarter of 2023. Monthly net interest income and margin as of December are the highest in almost two years.

We continue to enhance our already strong capital profile with $859 million of excess capital in our CET1 ratio, even if we applied our unrealized AFS and HTM losses to capital. We maintained an investment portfolio with minimal credit risk that provides significant annual cash flow and has a reasonable duration of about 4.7 years. Our CRE portfolio continues to perform well with a weighted average LTV of about 49%. Additionally, the economy and CRE market in Florida continued to outperform the rest of the nation.

These results reflect our reputation in the market built over 78 years, our relationship-centric model focusing on diverse business segments, the strong culture fostered among our employees and our remarkable success in executing our key strategic priorities, which we will discuss later. Our client deposits increased by $321 million or 2% in 2024. However, as I indicated earlier, this includes a temporary outflow from one large public depositor.

Normalizing for this, growth would have been closer to about $800 million or 5%, outperforming the banking industry, which grew at a 2% pace. Our strong client deposit growth enabled us to reduce our broker deposits by over $500 million in 2024. Furthermore, our monthly cost of client deposits decreased by 35 basis points compared to December 2023 and 31 basis points compared to September of '24. We achieved this reduction in deposit costs by modestly adjusting deposit costs before the Fed cut rates, adjusting our deposit costs at the time the Fed did cut rates during -- starting in September and by the stabilization we saw in our DDA balances during 2024.

Total noninterest-bearing deposits represent a healthy 21.5% of total deposits. Our assets remain just above $26 billion with a low loan-to-deposit ratio of 87%. We remain very well-capitalized as evidenced by our total risk-based capital ratio and Tier 1 leverage ratio, which were 15.1% and 10.57% as of December 31, respectively. Additionally, the unrealized losses on the investment portfolio decreased in 2024 due to the portfolio repositioning executed in September despite the increase in the 5-year treasury yield.

Core loans, excluding PPP, increased by $286 million quarter-over-quarter and $799 million year-over-year, growing by 4%, as shown on the right-hand side of this slide. We continue to focus on high-quality loans with strong spreads that on average exceeded 325 basis points for commercial loans and loans that bring us solid deposit relationships. Our strong credit culture and low risk appetite led to excellent asset quality.

The NPL ratio, for instance, remained low at 66 basis points of total loans, which is a decrease of 4 basis points over the prior quarter. We also increased our allowance coverage by 3 basis points quarter-over-quarter and about 16 basis points year-over-year. On this slide, we provide details on our CRE portfolio, representing 48% of our overall loan book. Our CRE portfolio has a conservative weighted average LTV of 49%, supported by a strong debt service coverage ratio of 1.7x with full or partial recourse on 63% of the loans.

It is also well diversified across all segments. Our pure-play Florida bank strategy resulted in only 16.7% of CRE loans being outside of Florida, representing only 8% of total loans in the portfolio. The CRE portfolio outside of Florida is also very well-diversified with the largest exposure in growth states in the Southern portion of the country. Additionally, it has a conservative weighted average LTV of 57%, supported by a robust debt service coverage ratio of 1.6x.

Our credit risk management framework is comprehensive and specialized. We underwrite deals with a holistic approach, focusing on our risk appetite, relationship banking and continuous oversight. Our excellent asset quality and a strong Florida economy are important factors in our ACL ratio, which as December '24 is 1.16% for the CRE portfolio. Our results in 2024 included several nonrecurring items, which we are presenting on this slide.

As already explained in the past, we repositioned our BOLI and investment portfolios in the third quarter. Additionally, as part of our 5-year strategic planning process, we accrued $10 million in consulting fees or about $8 million post tax. We have engaged a top consulting firm to partner with us on the implementation of our strategic plan over the next couple of years. Our reported net income in 2024 was $88 million. However, after excluding one-timers, our normalized net income would be about $149 million with an ROA of about 60 basis points and an ROE of about 6%.

This slide shows our full income statement. I want to highlight the upward trend of our net interest income, which increased by $17 million or 13% quarter-over-quarter. This was mainly driven by the NIM expansion earlier discussed, which increased by 26 basis points over the prior quarter to 2.37%. As already mentioned 2024 results were impacted by the onetime loss of the investment and BOLI portfolio repositioning and increased loan loss provisions, which were $62 million year-over-year.

The increase included approximately $34 million of provisions related to the economic outlook within our model. Consequently, our net income after taxes decreased by $75 million over the prior year, primarily due to these one-timers and the additional provisions. On this slide, we demonstrate how both our net interest income and our margin grew for the fourth consecutive quarter. Our net interest income increased quarter-over-quarter by $17 million or 13%, with our NIM expanding by 26 basis points, mainly due to our cost of funds declining by 29 basis points.

Our NIM significantly expanded by 54 basis points in the fourth quarter of '24 compared to the fourth quarter of 2023, mainly due to our cost of funds declining by 36 basis points and our yield on earning assets increasing by 18 basis points. It is important to note that before rate cuts started occurring in September, our NIM had organically expanded as a result of our focus of obtaining strong spreads on new loan originations as well as renewals and our disciplined approach to deposit pricing.

Our commercial spreads on both new and renewed loans surpassed 300 basis points during 2024. Our interest rate risk profile is balanced to slightly liability-sensitive with each 25 basis point cut in Fed funds enhancing our net interest income by approximately $7.5 million or about 3 basis points in margin. In December alone, our NIM reached 2.44%, setting us up for a much stronger start in 2025. This slide presents our quarterly trend in normalized net income after taxes.

You can notice that the earnings are an upward trajectory, which again positions us very well for 2025. Going back on this call one year ago, we shared with all of you our 6 key priorities for 2024. This slide shows that we are able to deliver substantial results for each of these priorities. First, we focused on deposit growth, increasing client deposits by about 5% after normalizing for public deposit or temporary outflow versus 2% for the industry. We remain focused on our commitment to being the best deposit gathering bank in Florida.

Secondly, we deployed several actions to enhance our NIM. As a result, our NIM expanded by 54 basis points in the fourth quarter of '24 versus the fourth quarter of the prior year, with both the net interest income and margin being the highest in the last two years. Third, we continued attracting top talent in our markets, hiring 76 new employees, half of these in sales roles. The positive impact of these hires will be felt in our 2025 results.

Geographic expansion remains a key area of focus, and we opened a new office in Palm Beach and expanded our presence in Tampa by attracting a new sales team in that important market. We also remain focused on loan diversification with our C&I loans increasing by 19% year-over-year, representing 26.6% of our total loan portfolio as of the end of '24 compared to 23.5% as of the end of '23. Finally, we continue to build upon the efficiency and scalability of our platform.

We increased process automation, streamlined our commercial loan closing process, implemented a new consumer loan origination platform and continue to enhance our data analytics to name just a few accomplishments. I know we mentioned it during our last call, but I want to say again that we announced our new partnership with the University of Miami earlier in the third quarter of this year of 2024.

As part of this partnership, we are now the official bank of the University of Miami Athletic teams, including their successful football team. I want to conclude the call by looking ahead into 2025 and sharing more details about our strategic plan, which we currently are implementing in partnership with a top consulting firm.

Our strategic plan is centered around delivering profitable and diversified growth in years to come by focusing on the following: first, capture incremental deposits from our new clients and deposit verticals as we strive to become the best deposit gathering bank in Florida; diversify and increase our client base by focusing on the capture of new sales relationships through disciplined prospecting and calling efforts, drive more C&I lending to further diversify our balance sheet and drive more deposit and fee income growth as well; accelerate geographic expansion beyond Miami-Dade, deepening our presence in other Florida markets such as Broward, Palm Beach, Orlando and Tampa, basically continuing what we've -- the work we started doing in 2024. Continue enhancing our NIM organically by continuing the spread discipline we saw in 2024 and expanding our client and deposit base.

Generate more fees as we expand our fee generation capabilities through existing and new channels such as treasury management, capital markets, wealth management, SBA and our soon-to-be-launched insurance business as well. Continue to improve our operating model to enhance client and employee experience while also increasing efficiency.

As you saw during this morning's presentation, we delivered strong results across our 2024 priorities. Looking ahead, we strongly believe we're in the right bank in the right market at the right time. We are heading into 2025 with great momentum while implementing a strategic plan that will enable our continued success and disciplined growth over the long term.

On that note, I will pass it back to the Bci team. Thank you for participating this morning.

[José Ibaibarriaga Martínez, executive]

Thank you, Jose. Now we will address the guidance 2025. For our local operation, loan growth is expected to be in the middle single digits, and we anticipate a flat NIM, taking into consideration the expected interest rate and inflation macro scenario. We expect our fees to grow around 13%, while core operating expenses should remain aligned with inflation. Our cost of risk is projected to remain flat, aligned with the macro conditions.

Regarding City National Bank, we foresee loan growth in the middle single digits and the NIM within 2.5%, 2.6% range. Overall, we anticipate net income to get back on track, reaching approx $230 million. At the consolidated level, we expect net income to increase around 10% with a return on equity reaching 12.5%, transitioning to the 14% by 2026. We do not want to close this presentation without highlighting the following key points.

First, our results continue to demonstrate the strength of Bci business model. We have achieved solid growth across our operations, driven by our strategic focus on sustainable and long-term value creation. Our local operation remained resilient, effectively mitigated the impact of higher-for-longer rates on City National Bank of Florida net interest margin. We successfully execute a strategic repositioning of City National Bank investment portfolio, shifting from lower yield to higher yield assets, optimizing our return and strengthening our financial position.

For a financial perspective, our net income growth reflects a strong operational performance and disciplined expenses management, where local operating expenses decreased year-over-year. In addition, our market share expanded driven by growth in commercial loans. Our capital position remained robust as well our liquidity and asset quality on the same strong position with capital levels consistently exceeding regulatory requirements.

Beyond financials, we remain deeply committed to talent engagement and culture. Last year, we achieved a 93% Employee Engagement Index and received top employee certification for second consecutive year. We were ranked second in Employer for Youth 2024 and fourth in Merco Talento, further validating our leadership in attracting and retaining top talent in Chile and Latin America. Summarizing 2024, we have a positive year for Bci, defined by solid financial performance, strategic growth and continuous innovation.

This performance marks a significant achievement in the recent past and leaves us in a very strong position to tackle 2025. Finally, we do not want to close this presentation without stopping for a moment to express our gratitude to Luis Enrique Yarur for his over 33 years of an excellent leadership at Bci. His supervision was underscored for the strong values and principles that marked the whole organization.

As a result of this, the company experienced incredible growth, becoming the leading bank in the country by assets and expanding into new international markets. This gave us the confidence to continue building together with a hand of renovated leadership and the core value that have guide Bci through all this history.

Now I will pass back to Andres, who will lead the question-and-answer session. Thank you very much.

[Andrés Atala S., executive]

Thank you all. The first question is Yuri Fernandes from J. P. Morgan.

[Yuri Fernandes, analyst]

Congrats on the year. I have just one question regarding CNB. I think you put in your guidance back on track for $230 million. When I look to the numbers here, it was, I think, $88 million. For sure, there were [indiscernible] and some other moving parts, so it can go up to $150 million. I'm just double checking that the $230 million is really the CNB forecast for 2025. Because if that's the case, the 10% consolidated net income growth for you may look a little bit conservative so two questions here.

Trying to understand if the CNB net income growth for 2025 will really be $230 million moving from a normalized, I would say, $150 million in 2024. And if that's the case, how do you see the Chilean operation? Because if that's the case, that can be conservative. And my second question is regarding this MACH. I know you have been doing a lot of work on MACH, right, trying to integrate with the pharmacies and having remittances.

I'm just trying to understand why this time is different than other times because MACH becoming a bank, I remember the MACH Investor Day back in 2020, and you were saying that MACH would become a bank by 2021. So why now? Why was this a little bit taking more time than expected? If you can talk about the challenges and why this time will be different for MACH, I think I would also appreciate.

[José Ibaibarriaga Martínez, executive]

The first question that you have is, yes, the budget that we have for 2025 for City National Bank is around $230 million. And the guideline for Bci is around what you said. The position in Chile is relatively conservative, as you mentioned. The main reason, as we explained, is that the NIM is going to be a little bit flat in Chile. The main reasons we already explained it, we are going to have less inflation.

We are not going to have a line of credit of the Central Bank of FCIC. And that will be compensated with higher commissions and higher spread. Having said that, as the NIM is going to be relatively flat and expenses is going to be growing below inflation and the risk level is going to be flat, the operation in Chile will not have a significant growth. So the overall is that we are going to be growing around 10% in net income. We are going to be growing significantly in the U.S.

And you have to take in consideration, Yuri that we are going to -- the forecast is a little bit conservative because as you know, we have a 35% of our balance sheet in the U.S. and the exchange has had a lot of volatility. This year or last year, we have a significant impact in taxes, as you already know, regarding that issue. So we have to be careful with the expectation that we sent to the market regarding the net income, basically because of the exchange rate and the NIM effect.

I don't know if you want to go more in detail, but that is basically the 80% of the explanation. And regarding MACH, what is different? The different, Yuri, is that we have been heavily working in MACH. They have made an exceptional job in order to create this fully completely digital bank. The main difference today versus two years ago, three years ago is that today, we have all the products and services that a bank has.

You have deposits, savings, you have loans, you have a checking account, normal checking account. And we are charging -- we have pro checking account where we are charging commissions. So what is different today is that today it is integrated, and we have all the products and services, and it's getting a lot of traction. We have credit card. We have a -- so basically, the main difference, Yuri, is that we have been building this bank step-by-step, as we always said.

And today, we arrived to have the confidence to launch much as a bank with all the product or services of a digital bank, and we are really confident that according to the figures that we have seen in the last semester, that is taking a lot of traction. And now we have a view that the bank is going to be -- is going to have an income in the next 16 months. No, I think that I already answered the question of City National, Andres. That is why if they were growing $230 million and the net income of the bank is not going to grow more.

[Jose Marina, executive]

If you like, Jose Luis, I can add some more perspective on that. If you just look at where we started the NIM in 2024, our NIM started around 1.90%, and we're starting 2025 with a NIM of 2.44%. So our NIM is going to -- our net interest income is going to increase by roughly $140 million between '24 and '25 and drive a significant amount of that year-over-year growth in our normalized net income from about $149 million, as we showed in the presentation, to the roughly $230 million that you see there in the guidance.

[Andrés Atala S., executive]

Next one is coming from Tito Labarta from Goldman Sachs.

[Daer Labarta, analyst]

I have one question on the cost of risk guidance. Just to understand you mentioned they're flat. If I look at cost of risk for the year was around 0.6% of total loans, but you also mentioned you had released about $100 million in provisions. So if we add that back, it could be about 0.8% cost of risk. So when you say cost of risk, do you expect that to be around that 0.8% number, including those provisions that were released throughout 2024? Just to understand how that should evolve.

And I guess related to that, in terms of just your outlook for asset quality, it had been deteriorating lately. We've been seeing some improvements there on the NPLs. It sounds like asset quality is doing okay. Do you expect it to improve further from here or what are your expectations for asset quality for the year?

[José Ibaibarriaga Martínez, executive]

Yes, Tito, on your first question, you're right. When we say that we expect it to remain flat, we're talking about the number free of changes in voluntary provisions. So that means the 0.8% that you just mentioned. And as to loan quality, yeah, we also expect it to be relatively stable on an overall basis. However, that when you go specifically on each of the portfolios, we expect to see some further deterioration in the NPL ratio in the mortgage loans portfolio, probably up to the end of the year, while we expect to continue seeing very good performances in consumer portfolios and commercial portfolios.

[Andrés Atala S., executive]

Okay. Next one is coming from Daniel Mora from CrediCorp.

[Daniel Mora, analyst]

I have three questions, if I may. The first one is very quick related to on the cost of credit cost of risk. If we understand that 0.8% will be the cost of risk in 2025, I would like to understand what will be the normalized figure in the long-term because it seems that it is pretty low compared to historical standards. I understand that the release of provisions and the better performance of NPLs, but I would like to know if the 0.8% will be a normalized figure of the cost of risk. That is my first question.

The second question is regarding loan growth in Chile. It seems that you have been very focused on the commercial segment. I would like to understand if that will be the strategy also in 2025. And if we could think of a consumer portfolio just maintaining the same trend that we have been observing in recent months, that is practically flat, no growth.

And my third question is considering that the guidance for 2025 is ROE on a consolidated basis of 12.5%. And in 2026, it's 14%. What explains the gap? What it's going to improve throughout the 2025 to reach 14% in 2026. What is that 1.5 percent points explaining where is that coming from?

[José Ibaibarriaga Martínez, executive]

Juan Enrique, can you talk about the cost of risk and then I take the other two?

[Juan Enrique Visinteiner, executive]

Sure, Jose Luis. Yeah. As to the normalized cost of credit, you're right that if you go back several years, you would see numbers slightly above that. So I would concur with that without giving you any guidance as to where should that number be. Remember also that there's a portfolio mix. So that also explains why our cost of credit today might be lower. That's because the mortgage loans portfolio and the commercial loan portfolio are larger relative to consumer loans. So in essence, I would agree that the 0.8% would be slightly lower than a normalized number. But I would be hesitant to give guidance as to what the normalized level should be. It all depends on the portfolio mix.

[José Ibaibarriaga Martínez, executive]

Daniel, the loan growth that we have had in Chile is a consequence of some strategy that we have put in place a couple of years ago that basically what we did in the consumer side, and you were right in saying that we have been flat is that we have been focusing in the affluent segment, reducing our position in the lower segment, especially Servicios Financieros and the lower segment of Bci.

We have been changing the re-programmation and refinancing programs [indiscernible] making more strict. So we have been losing market share there. And yes, we are estimating that we have been going through a process of data analytics that will allow us to grow in 2025. Where in the segment that I already told you, basically in affluent and in what kind of products they are in credit card, which we have deployed the most attractive loyalty program in Chile that is the cashback and it is taking a lot of traction.

So we expect that the credit card arena will get some traction. So yes, we are going to grow in the consumer side -- segment, excuse me, marginally because we are going to grow in the affluent segment. Having said that, we continue with the leadership that we have in the consumer and the commercial loan portfolio. We have been leading and today, we lead the growth there. And the way that we have done that is with different innovation and products and services as the ordering that was a great success last year.

In summary, yes, we will continue growing, leveraging in the commercial side, but with -- in the consumer side taking traction. And regarding the return on equity of the 14%, basically, we have three main issues that will arrive us to the 14% consolidated return on equity. One is that if you take just the return on equity of Chile, we have around 17% of return on equity. And the reason for that is that we took the decisions of repositioning some investment portfolio in City National, and you saw the return on equity there was around 6%.

So coming back City National Bank to a return on equity of around 10% this year and 12% next year will help us to increase the 12% to the 14%. The second issue is that we have two investment that we have done, one in Servicios Financieros and the other one on MACH that we have been heavily invested. And now we have been in the process of monetizing those investments. The impact of 2025 on 2026 in those specific assets will significantly improve our return on equity.

And third, the main business, which is the loan portfolio growth in Chile that will be around 5% to 6% with a normalized increase in NIM in 2026, with a control of cost with increase in fees that we are growing over 10% year-over-year and a stable risk level with a stable exchange rate that impact the investment in City National Bank, that is the way that we are going to arrive to the 14%, Daniel. I don't know if I was too fast to explain or did I explain myself. Daniel? It seems that I was clear.

[Daniel Mora, analyst]

Sorry, it was very clear. I was not allowed to unmute myself.

[Andrés Atala S., executive]

Next question is coming from [indiscernible]. David, are you allowed to speak, please?

[Analyst, analyst]

Yes. Can you hear me now?

[Andrés Atala S., executive]

Yes, sir.

[Analyst, analyst]

Okay, great. Congratulations on the very good results for 2024. I wanted to understand a little bit more about the onetime events that affected the results at City National Bank, specifically the repositioning of the investment that lowered the overall income by, I think it was $50 million as well as the loss of a major public depositor. And so the thrust of these questions is to get at the potential exposure at City National Bank to large events of this type and to understand those that occurred.

[Jose Marina, executive]

Sure. So regarding the securities repositioning, that was something that we did in the third quarter. It was about 10% of the portfolio. We sold about $700 million in securities, incurred a pretax loss of a little over $60 million, after tax, about $50 million. That is going to enhance our net interest income by a little over $12 million for the foreseeable future and have an earn-back of a little bit over 4 years. We also did a repositioning of our BOLI holdings where we had over $500 million of BOLI.

So we did a 1031 exchange on over $160 million, and we surrendered over $160 million as well. So between those two transactions, the BOLI, we had a onetime loss there of $5 million. So between those two transactions, we had an after-tax loss of a little bit over $55 million. It's going to benefit our future earnings by about $18 million annually and with an earn-back in the aggregate between those two transactions of about of about three years.

So it's something that a lot of regional banks in the U.S. have executed, very common practice here in the U.S. in order to take some losses, redeploy those funds into higher-yielding assets and help enhance your net interest margin. Our margin was already increasing as a result of the -- as a result of us getting good loan spreads and also reducing our cost of client deposits strategically. Even before the Fed cut, we did cuts in April and in August. So that also helped our margin expansion. Our margin was already expanding.

And then in September, we did these activities with the repositionings that helped accelerate that in addition to the -- some of the Fed rate cuts that occurred during the -- from September to the end of the year that also contributed to our margin expansion. And then in regards to the public depositor, it's a temporary outflow. Those funds will come back during 2025. But even with that, we grew our deposits, as you saw by over $200 million or about 2%, which was in line with the industry, even with that temporary outflow. Does that answer your question, [ David ]?

[Analyst, analyst]

Yes. Thank you.

[Andrés Atala S., executive]

And the last one, but not the least, is Neha Agarwala from HSBC.

[Neha Agarwala, analyst]

My question is a bit broader in the sense. You launched the MACHBank. What I would like to understand is how does that change PCI's key ratios in the next three years? So with MACHBank, should we -- how should we see that play out in terms of loan growth, NIMs profitability? Any -- or cost to income, any targets that you can provide us like, for instance, the cost to income should go from this to this, and it will be driven because of MACHBank or loan growth should go from this to this because of MACHBank. Any numbers that you could give us that helps us understand the impact of MACH in, say, three years' time?

[José Ibaibarriaga Martínez, executive]

Thank you, Neha. First of all, we are going to give a lot of details in the MACH Day where we are going to have the opportunity to go through all the different specific drivers. One of the things that we have been talking with the team is to give much more detail in order that you can be able to value all the improvement that we have done. For this instance, what we can tell you is that we have a breakeven financial statement that we are expecting to have it before the end of 2026, which is a significant improvement of what we have done in the past.

And the way that we are visualizing this thing -- these numbers, excuse me, these numbers is through all the transactions, all the heavy users that are increasing. And today, we have more than 1 million customers using the bank in a heavy way, paying fees, having special accounts, taking the credit card that we launched investing and taking insurance is a completely upgrade that we have been doing year-over-year. The MACH costs are significantly lower than the Bci cost as it has been built in the cloud, 100% with some best-in-class systems, core systems.

And the details, we can go through there, Neha. But the main thing that I would like to leave is that MACH today is a bank, a full digital bank. Two, is taking traction, the heavy users that; three, that we have all the products and services and that we are going to be in net income breakeven before year-end of 2026. Having said that, Neha, for us, MACH is part of the digital ecosystem. And on top of that, MACH has been built from the very beginning as a social contribution for the country. And that is something that has been achieved, and we are really happy with them.

So we are going to be in breakeven. We have been increasing significantly all product services that we already have, and that is why we have this change to MACHBank. And three, never forget that the contribution for the society have -- and the financial inclusion of MACH is really part of our strategy. Having said that, Andres told me that we don't have any additional questions. So I really appreciate all the -- your participation. And there's one more, Andres.

[Andrés Atala S., executive]

Yes, we do have the last one. And I'm sorry for that. Andres Soto from Santander Investment.

[Andres Soto, analyst]

Sorry about that. My question is regarding capital. You closed 2024 at 11% core equity Tier 1. What is your expectation of capital evolving considering the adoption of Basel III standards in Chile this year? And looking over the medium-term, what is your expectation for dividend distributions in terms of payout?

[José Ibaibarriaga Martínez, executive]

Andres, as you know, full implementation of Basel III will be done by December 2025. Our expectation is that we are going to be over -- the internal goal is 11%. The future dividend is something that is a Board and shareholders' decision. But as much as we know, we will continue paying -- capitalizing 70% of the net income unless the Board suggested to the shareholders and then change it. Thank you very much for those that are in this part of the world, have a nice vacation.

[Andrés Atala S., executive]

Now we conclude. Thank you very much, everyone. And as Jose Luis mentioned, for Chilean people at least, have happy holidays, and we will be, of course, available for further questions. Thank you.