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Edited Transcript of BCI.SN earnings conference call or presentation 5-Nov-19 2:00pm GMT

Q3 2019 Banco de Credito e Inversiones Earnings Call

Santiago Nov 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco de Credito e Inversiones earnings conference call or presentation Tuesday, November 5, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Andrés Atala S.

Banco de Crédito e Inversiones - Head of IR

* Francisca Pérez;Senior Economist

* José Luis Ibaibarriaga Martínez

Banco de Crédito e Inversiones - CFO & Controller

* Jose Marina;City National Bank of Florida;CFO

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Conference Call Participants

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* Brian Flores

Citigroup Inc, Research Division - Senior Associate

* Daniel Mora

CrediCorp Capital, Research Division - Analyst

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Neha Agarwala

HSBC, Research Division - Analyst, LatAm Financials

* Yuri R. Fernandes

JP Morgan Chase & Co, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, everyone, and welcome to Bci's Third Quarter 2019 Results Conference Call. (Operator Instructions) Please note today's call is being recorded.

Before we begin, I would like to remind you that this call is being recorded and that the information discussed today may include forward-looking statements regarding the company's financial and operating performance.

We undertake no obligation to update and maintain any such forward-looking statements after the date of this conference call. All projections are subject to risks uncertainties, other factors that could cause actual results to differ materially from our current expectations. Furthermore, please refer to the detailed note in the company's presentation disclaimer regarding forward-looking statements.

I will now turn the call over to Mr. Andrés Atala, Bci's Head of Investor Relations. Please go ahead.

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Andrés Atala S., Banco de Crédito e Inversiones - Head of IR [2]

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Thank you, [Chad]. Good morning to all of you, and welcome to our third quarter 2019 conference call. I am Andrés Atala, Head of Investor Relations, and today I'm joined by Francisca Pérez, Bci's Principal Economist; José Luis Ibaibarriaga, Bci's CFO; and Mr. Jose Marina, CFO of City National Bank of Florida.

The figures in this presentation were prepared based on Bci's consolidated financial statements in accordance with the International Financial Reporting Standards methodology and the regulations of Chile's Financial Market Commission, the CMF.

Now I leave you with our CFO -- our Corporate CFO, Mr. José Luis Ibaibarriaga, who will access the current situation in our country.

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [3]

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Thank you, Andrés, and good morning to all of you. Before starting our conference call, we would like to briefly refer to the social scenario that Chile has been experiencing during the past few weeks where much of the events that have already taken place are of public knowledge. In this context, we would like to comment the following.

Today, we are faced with a new social context, which have led us to unit more than ever as one Bci. And, therefore, it seems vitally important to highlight the value that -- and principles that move us -- respect, integrity and excellence. This has remained reflected from the very first moment with no hesitation and good deeds, such as flexibility, solidarity and mutual support towards our clients, employees and suppliers.

Related to our customers and in line with our culture of long term relationships, we have been in contact with them to assess their situation and give them the necessary support at this time.

As for customer service, we have maintained a 100% operative through our digital channels, web, apps and social media. Today, we have 99% of our branches in operation and almost 90% of our ATMs available.

Regarding our employees, we have taken measures from the beginning in order to ensure and put them safe as a first and main concern. After this, we have reinforced alternatives to perform them home office initiatives, supporting them with flexible time or deliver them transport options from their homes, among other actions.

As for our suppliers, we are ensuring the continuity of our relationship being in permanent contact with them and support them -- supporting especially the SME suppliers. As Bci, we have experienced complex situations in the past and we have all managed to get ahead and right now it will not be different.

Thanks to the commitment and effort of all our employees and suppliers, we can point out that we have given continuity to the business. We want to emphasize that our efforts and commitment will carry on with our customers, employees and suppliers, and with them, we expect to contribute to be to build a better country.

Now I will leave you with our Principal Economist, Mrs. Francisca Pérez who will take you through the main macroeconomic figures.

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Francisca Pérez;Senior Economist, [4]

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Thank you, José Luis. The Chilean economy grew 2% in the first half of this year, less than the potential estimation of 3.2% due to the complex global scenario. The trade war between the U.S. and China has been going on for more than a year with global impacts worldwide, especially on the manufacturing sector and international trade. This has led to a decrease in the global GDP for this year and in the growth forecast for next year. Nonetheless, Chilean risk premiums remain at record low levels based on the strong economic fundamentals and high liquidity in international markets.

In the last few weeks, there has been social unrest leading to a change in the government's agenda. Because of this, the government of Chile announced an important package of measures aimed at improving people's social well-being and with a particular focus on the middle class and vulnerable sectors. This will lead to a higher social government spending of around $1.2 billion in finance and increase in pensions, plus to cut health on medication expense, the creation of a guaranteed minimum wage of CLP 350,000 around $480 and electric price stability mechanism among others.

To save our fiscal responsibility, $414 million will come from budgetary segments and $160 million from an increase in the tax of people with high -- higher income. Around $500 million will go on pensions and $350 million to guarantee the minimum wage. For the former, the government will use the pension reserve fund.

This means that the 2020 budget is going to have an increase of area of 3.8% instead of 3% previously announced. The fiscal deficit next year will also increase from 2% of the GDP originally envisaged to 2.3% of the GDP with fiscal convergence to the target that might be slower than anticipated.

It is important to highlight that the greater expenditure committed would lead to a higher fiscal spending by 2020 of around 1 -- 0.1 of growth. It should be noted that the different Chilean sovereign and corporate risk premiums indicators have only increased slightly, revealing a robust fiscal plan in Chile. These events in the last few weeks will lift our GDP growth of 2.1% for this year, less than that 2.5% previously forecast. Household consumption has decreased and investment stalled.

Looking ahead to 2020, lower external growth will lead to a less dynamic export sector, mainly related to the mining and manufacturing sectors. We expect personal consumption and investment to continue to be the main driver of the economy in the next quarter, growing both 2.8% on average during that year. The bulk of this investment will come from the mining sector, which at the international level is gearing up to address the arrival of electric transportation.

Consumer spending will continue to grow moderately with no great increase due to a labor market that will remain weak and wages growing at below their historic level, only due to the imminent approval of reducing the working week to 40 hours. On the other hand, higher fiscal expenditure will make a positive contribution. We estimate GDP growth in 2020 will be 2.6%.

This is a large change in the prospect for this our next year the inflation perspective have dropped sharply, partly from decreased demand pressures and also from lower electricity rates. I thereby forecast that inflation will end this year at 2.7% and be around 2.8% in December of 2020. In this scenario the Chilean Central Bank most probably will cut interest rate once again in December and March to 1.25%, maintaining this rate up to at least the first quarter of 2021.

The U.S. economy will grow around 2.3% this year. It's still above the estimated potential growth and in light with convergence to a more sustainable growth rate. The U.S. economy grew 1.9% in the third quarter within estimates and reflecting lower risk of a hard landing of the economy. Private consumption has continued to be the main driver in our growth. Thanks to a strong labor market, although growth in private investment slowed sharply in the last 2 quarters.

The Feds has scooped the fed fund rates to 2.5%, 1.75% range as a preventive measure from the uncertainty that has hit the growth forecasts, both in international area over the trade war and domestically because of the presidential election next year and a possible impeachment. Although there are a still risks, we did not accept any further cuts in the fed funds rates.

The State of Florida grew 3.5% last year, above the average GDP in the United States and putting it in 5th place nationwide. Finally, the growth figure for the first quarter is currently available, which was 2.9% and somewhat below the U.S. average. The service sector is still the main driver of the economy with the highlight being healthcare and real estate. And their retail and wholesale sector also recovered strongly. The construction sector has not changed in the previous quarter after a decrease in the last quarter of last year. Private consumption has been the main driver and will continue to be so due to the robust unconsolidated labor market with an employment rate below the national level.

We expect the construction sector to carry on recovery and along with financial and business services and real estate to be the most dynamic sector in this year. GDP for 2019 will be then higher than the national average at around 2.5% to 2.7%.

Now I leave you with José Luis who will continue with the presentation.

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [5]

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Thank you, Francisca. We will now go over Bci's third quarter highlights. We have been able to improve efficiency ratio by more than 300 basis points since December last year, both in BCA and City National Bank of Florida. In July, new regulatory requirements for the standard model group lending become effective.

Enhancing the internationalization strategy we announced this quarter an agreement to buy 100% of Executive National Bank through City National Bank of Florida. And second, we will enter the Peruvian market with a new banking company, Banco Bci Peru. This subsidiary will focus on corporate clients and large companies for Peruvian and Chilean customers.

Finally, we are proud that Bci was once again was listed in the most important World Sustainability Index, the Dow Jones Sustainability Index.

As of September 2019, Bci had assets of nearly $65 billion. As you can see in this chart, our loans abroad account for 28% of Bci's total portfolio, where City National Bank of Florida represents 25%. Our low market share is 17.17%, including City National Bank of Florida and 13.91% in the domestic market. These 9 months of the year Bci has a consolidated bottom line of $443 million were this quarter accounts for $125 million. As part of our strategy, we aim to be leaders in the omnichannel experience and expand boundaries, generating deeper relationships with clients.

Please move on to the next slide. Resulting from this strategy, we would like to mention the outstanding traction of MACH. We exceeded 1.6 million total users by the end of September and more than 1.2 million MACH prepaid credit cards, this account for over 50% of the numbers of international credit card operations.

Also, we are testing our new physical local credit card, which we are expecting to launch next quarter. In addition, a new payment solution for businesses called MACH pay began operating in both e-commerce and some physical stores. Currently, we have a presence in more than 6,000 online stores and this number is expected to grow fast in the coming months.

We will now go through the main figures in our domestic market operations. This quarter, operating revenues increased to 23.7%, mainly due to the incorporation of Financial Services. In the domestic market, our loans grew 10.9%, including Financial Services operation. In the Commercial segment, we have managed to accelerate our growth after a slower than unexpected second quarter 2019 [helped] by commercial loans growth of 5.6%. In the Consumer segment, we have grown 7% year-over-year and 31% year-over-year when adding the Financial Services portfolio. And lastly, mortgages loans grew 13.5% year-over-year in the domestic market.

Regarding the Financial Services operation, we would like to mention a consumer loan book has a sound 23% growth since last year. This growth is a reflection of the implementation of commercial initiatives, which has enabled us to improve campaigns and customers targeting. Regarding non-performing loans, as you can see in the chart, this year have remained below 4% where we continue to implement new digital tool in the collection process.

Please move to the next slide. In the domestic market, the net interest margin has a positive evolution compared to the same period last year, reaching 3.76%, although slightly below the previous quarter, partially explained by lower inflation. The growth of the consumer loan book after the recuperation of Financial Services has positively impacted the bank's margins.

This spread of new loans in the Commercial and Consumer segments increased this quarter due to the implementation of a corporate profitability plan, impacting NIM positively. The fee income ratio accounted for 25.27%, where we want to highlight the contribution of Financial Services operation and our cross-selling strategy through our subsidiaries.

Let's continue with the provision expenses. In terms of risk, this quarter, our provision expenses were $156 million. This increase in provisions responds mainly to the following factors. First, the implementation of new regulatory requirements for standard models, the provision effect of the new regulations was offset by the release of additional provisions, which include those made this year of $31 million as part of the anticipation of the impact of a standard model. As a result of the foregoing, the effect in July provision expenses was $11.8 million. Second, additional provisions of $33 million after the recuperation of the Financial Services operations.

Non-performing loans were 1.99% this quarter, an increase of 14 basis comparing the third quarter of last year. In the Consumer segment, this ratio reached 2.33% and 1.98% when excluding City National Bank and Financial Services.

This increase can be attributed to the following effects; the incorporation of Financial Services, which is a business with higher profitability. Also, as we mentioned in our last call, this year we have integrated the former Bci Nova customers. During this transition period, we have seen an impact on sales and non-performing loans. The reason for the increase is mainly explained by adjustment in the collection models towards a centralized process.

In the commercial loans, there is an increase in non-performing loans, aligned with the lower than expected economy growth. In this case, we have seen a greater deterioration in SMEs, which are included in the commercial portfolio. The aforementioned is in line with macroeconomic indicators where we have seen a slowdown in the economy. Despite of these increase, the bank has already taken the necessary measures in the origination, administration and collection processes to manage this portfolio with the specific models.

Third quarter operating expenses were $268 million, growing 18.1%, excluding City National Bank of Florida. Regarding this increase, it's important to mention that $30 million correspond to Financial Services operation. In addition, it should be noted that this first half of the year Bci has managed to keep control operating expenses, growing 4.8% year-over-year, excluding Financial Services and City National Bank.

In terms of efficiency in our Chilean operations, we were able to improve this ratio to 47.8%, which is in line with our commitment to reduced efficiency ratio by 200 basis points by the year -- by the end of this year.

Net income amounted in this quarter $87 million for operations in Chile. Despite the 23.7% increase in operating revenues this quarter, net income was affected mainly by greater expenses in provision as we told, and greater tax expenses as a consequence also of a deterioration of the Chilean pesos.

Our return on average assets and return on average equities reached levels of 0.97% and 12% respectively. Regarding the return on average equity, we have to take in account higher equity levels after our capital increase last December and some particular effect that have affected our bottom line this quarter.

Regarding the implementation of the new general bank law, as you may be a aware, it was approved by the President in January of this year and seeks to align capital requirements in Chile with Basel III guidelines. At this time the regulation regarding systemic banks were expecting to have an extra 1.25% to 1.75% capital requirement as we are one of the systemic banks in Chile. And the provisional risk weighted assets are currently published for inquires.

It should be mentioned that September lower Tier 1 ratio this quarter is mainly explained by the decrease in the value of the accounting hedge that composed the bank's capital. The value of this hedge, which corresponds mainly to U.S. swap, has been affected by interest rates that are at their historical low and which due to their accounting criteria must be recognized as market value in equity.

However, there are benefits associated with this same hedge that are not reflected at market value, but following an accrual logic. The foregoing generates an accounting asymmetry because the losses are recognized immediately, while the benefits that mitigate this impact will be recognized in the short and medium-term. Nevertheless, and considering our current capital ratio, we believe that we are in good position to comply with the new requirements of Basel III.

Now I will leave you with Jose Marina, CFO of City National Bank of Florida.

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Jose Marina;City National Bank of Florida;CFO, [6]

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Right. Thank you again, José Luis for the opportunity to join you on this quarterly earnings call and review City National Bank's performance over the past quarter.

Good morning, everyone. My name is Jose Marina and I am the CFO for City National Bank. I am pleased to join José Luis, Andrés, Francisca and the rest of the Bci team on this call.

Bci acquired City National Bank back in 2015 in order to grow and diversify outside of Chile and we're fortunate to have such a supportive and dedicated parent company. Their commitment to the U.S. growth and diversification strategy was empathized in 2018 when we acquired TotalBank and again, just last month when we announced the acquisition of Executive National Bank in Miami, which we'll talk further about towards the end of this presentation.

I'm eager to discuss our 2019 results with you as they clearly demonstrate our ability to serve as a consolidator in one of the best markets in the United States. So let's move on to the next slide.

The third quarter was another strong quarter with strong balance sheet result that translated to strong earnings as well. Allow me to point out some of the financial highlights for the most recent quarter.

Looking at the balance sheet, Loans & Leases increased by $98 million in the quarter and by $709 million year-over-year. Loan growth is moderating consistent with expectations.

We had an outstanding quarter generating non-interest demand deposits, which is the continuing area of focus for the bank. For the quarter, we increased DDAs by $71 million, representing an 8% annualized growth rate and have increased by $166 million year-over-year.

In fact, customer deposit growth of $1.1 billion significantly exceeds loan and lease growth of $709 million year-over-year. So we are further enhancing the bank's overall liquidity position.

Net income totaled $42 million in the quarter, a 65% increase over the third quarter 2018 and a healthy 9% increase over the linked quarter.

Our year-to-date net income of $120 million represent a 53% improvement year-over-year, while Core earnings have improved by 57%. Core earnings is improving at a brisker pace than overall net income since our Core earnings does not consider the impact of the $6 million of quarterly intangible amortization expense related from the TotalBank transaction.

Net interest income increased 20% year-over-year and was effectively flat over the linked quarter despite the challenging rate environment. We have proactively been reducing the cost of our deposits and restructure our wholesale funding in order to minimize the impact of the challenging rate environment.

Looking at the key metrics, you will see that capital remains a strength, asset quality is strong and all of our profitability ratios demonstrate a favorable trend.

Let's move to Slide 25. Here we can see that 75% of our revenue is generated by our loan and lease portfolio. In particular, CRE loans, which comprised 42% of generated revenue. This is followed by commercial loans at 16% and residential loans generating 14% of revenue. Our investment portfolio is also a strong contributor to our revenues generating 13% of our revenue as well.

Fee revenue continues to be an area of opportunity. As we move forward, we launched our wealth management unit earlier this year, and we continue looking for opportunities in the secondary loan market to generate fee income.

Moving to the balance sheet, loans comprised 70% of our assets as of September 30. On the liability side of the balance sheet, deposits are a primary source of funding at 76%. Other borrowings are 11% and are primarily comprised of Federal Home Loan Bank funding.

Turning to composition of our credit portfolio, 73% of our loans have real estate collateral, while the commercial and industrial portion represents 19% of the portfolio, is substantially secured by other company assets. The real estate portion is well diversified and the commercial real estate segment is further diversified by property type, with no one property type representing more than 20% of the commercial real estate segment.

Customer deposits constitute 83% of our funding liabilities and DDAs continue to be one of the largest component comprising 32% of customer deposits and 30% of overall deposits, including brokered deposits. Money market accounts have become the largest segment of customer deposits at the present time. Deposit generation continues to be a priority for us and we are focused on initiatives to maintain deposit growth as one of the bank's strengths, moving forward.

As we move to Slide 26, you can see that our Loan & Leases portfolio increased by $98 million in the quarter. While our loan and lease growth is moderating from a higher rate of growth in prior years, our year-over-year loan growth of $709 million still represent the healthy growth rate of 6.5%. Our loan growth continues to be driven by organic loan production by all of our lines of business under our consistently prudent credit standards.

Our investment portfolio was flat quarter-over-quarter, but increased by $222 million or 8% year-over-year, consistent with the 9% overall asset growth rate year-over-year. The increase in the portfolio year-over-year was funded through increases in Federal Home Loan Bank advances.

Our primary focus is on generating non-interest bearing and low cost deposits in order to fund our loan growth. We have been successful over the past quarter and over the past year in this initiative. Looking at the most recent quarter, our $98 million of net loan and lease growth were substantially funded by $71 million of non-interest bearing deposit growth in the quarter. While our $1.1 billion of year-over-year customer deposit growth far exceeds the $709 million of loan growth we've generated year-over-year.

In fact, our year-over-year client deposit growth rate exceeds 10%. Our primary focus continues to be on creating value through the ongoing generation of non-interest bearing deposits and low cost customer deposits.

Let's move onto Slide 27, here you can see the City National Bank has growing its loan and lease base consistently over the past 4 years. The loan and deposit growth rates for the past are 26% and 27% respectively.

Tier 1 capital has grown as a result of the bank's earnings and was supplemented in 2018 with Bci's $570 million capital contribution to facilitate the TotalBank acquisition and ensure the bank has sufficient capital to meet its organic needs -- base organic growth needs in the short and medium term.

Net income growth has also consistently increased year-over-year as indicated by the 32% compounded annual growth rate over the past 4 years.

Moving onto the next slide, you can see our next income for the quarter totaled $42.8 million, bringing our total for the year to $120 million, a 53% increase over the prior year. Our Core earnings improved by a higher percentage of 57%, again since a $6 million of quarterly intangible amortization, resulting from the TotalBank transaction, inclusive of goodwill amortization are not included in Core earnings.

You can see that net interest income has increased by 20% year-over-year and is effectively flat over the linked quarter, despite the challenging rate environment. We have actively been reducing our deposit costs and have restructured our wholesale funding in order to minimize the adverse impact of the macroeconomic conditions on our net interest margin.

Non-interest income increased by $17 million year-over-year and $5.2 million over the linked quarter, due to the TotalBank transaction and residential loan sales that transpired in the third quarter. Non-interest income continues to be an area of focus for the bank.

On Slide 29, you can see the ROA, ROE and the efficiency ratio all demonstrate improving trend. The normalization of the 2019 ratios is substantially due to the impact of the TotalBank intangibles, which again is primarily due to the amortization of goodwill, which most banks do not amortize.

Our NIM of 2.93% is 12 basis points below that of 2018 as a result of declining rate environment and its impact on the premium amortization in the investment portfolio as well as lower level of accretion on purchased loans. As previously mentioned, we have taken several actions in the third quarter to reverse the trend.

Specifically, we're actively reducing our deposit costs and we we've restructured a significant portion of our Federal Home Loan Bank advances. As a result, our NIM for the month of September was higher than the prior 4 months.

Moving to Slide 30, and before we touched on the Executive National Bank acquisition, allow us to give you a summary of CNB's performance during the previous years. As you can see from these figures, we have consistently produced strong results over the last 6 years and we're focused on further improving our results.

While we have discussed the many of the metrics already, please focus on asset quality ratios on this slide. Our NPLs are at significantly low levels comprising only 33 basis points of our total loans. Our normalized ROA and normalized efficiency ratios also demonstrate a continually improving trend. In fact, it is important to note that our ROA and efficiency ratio for the third quarter of the year are better than our year-to-date ratios, so we continue to trend favorably.

Let's move to Slide 31. As you know, we announced an acquisition of Executive National Bank on September 25. Executive National Bank has $460 million in assets as of September 30 and one of the best low cost deposit portfolios in the nation that has been methodically cultivated over its 40 years of serving the community.

We're looking forward to welcoming Executive National Bank's clients, employees to City National Bank when the transaction closes, which is expected to take place in the first half of 2020 after all customary regulatory approvals are obtained.

As you can see on this slide, Executive National Bank has a strong NIM, excellent asset quality and reasonable profitability. Executive National Bank solely operates in our primary market of Miami, so the opportunity for cost synergies is significance. Furthermore, Executive National has a special focus on serving community associations and professionals, both of which are areas of strategic focus for City National Bank. We're excited about this acquisition, given the cultural, financial and strategic fit for the organization.

Let me conclude by commenting on what we expect for the remainder of 2019 and key priorities going into 2020. First, continued focus on regulatory excellence and asset quality. This is fundamental to our business. We will continue invest in risk management.

Next, enhanced focus on sales effectiveness in order to continue to generate consistent low cost deposit growth that will enhance our NIM and drives the income.

Next, planning the Executive National Bank integration and successfully executing the plan upon closing, in order to maximize the transaction value. Additionally, diversification along business lines and geographic lines will continue to be a key part of our strategy.

Specifically, we want to continue to generate newer business opportunities such as we did in leasing and wealth management and we want to continue to consolidate our position in Tampa and Orlando, which are also areas that we're devoting resources to.

The management team remains focused and we are confident that City National Bank we will continue to produce favorable results for Bci as we transform our teams and our business.

In closing, City National Bank continues to be well positioned as we focus on building the iconic Florida Banking Institution. We thank all of you for your time today and we look forward to the next time we join you on an earnings call.

And now let's turn the call over to the Bci team for final thoughts and wrap up.

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [7]

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Thank you very much again Jose and all City National Bank team.

Please move on Slide 32. This quarter, we continue to carry out programs and initiatives to enhance culture in 4 aspects; Collaboration, innovation, agility and empowerment. All this effort is supported by a change management plan, since we understand this plan is a key driver for the massive transformation that we are going through.

We have strengthened our employee value proposition to attract and retain talent all across the bank and in areas that are critical to the digital transformation, aligning all programs and processes with the objectives of this strategic plan.

We recently launched Our Specialist Development Program that seeks to expand the possibilities of professional growth and career development for our employees, the open and directed training programs that respond to skills necessary to respond to the digital transformation.

We would like to highlight Bci is once again listed in the most important World Sustainability Index in line with our firm commitment to sustainability development for the -- for more around 80 years.

And finally, we would like to reinforce our commitment to do all that is in our hands to support our clients, employees and suppliers in order to contribute to building a better country.

Thank you very much for your participation and if you have any questions we will be glad to answer them.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question will come from Gabriel Nóbrega with Citi.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [2]

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I noticed that in the beginning of your very thorough presentation you actually talked about the impacts from the recent protests on the macro level. However, I would like to maybe further understand how we should see your cost being pressured. I noticed that some of your branches have been affected. And also if there are any impacts on the asset equality going into the fourth quarter and also going on to the next year? And have a second question afterwards.

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [3]

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Thank you, Gabriel. Regarding branches, as I mentioned in the opening part of the conference call, our main focus at the very beginning was to ensure our customer service experience, our employees and suppliers situation. We do have 98% of our branches open and we have, like 90% of our ATMs available. So from a operational point of view, we are up and running our business as usual. Regarding the asset quality that you mentioned, it's too early to tell. I think that we have to follow next couple of weeks and month in order to give you a good answer to your question. So next quarter I will be more than glad to address your question with more information.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [4]

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And as from a second question, we saw during the quarter that you booked additional provisions of around CPL 20 billion. This was the same amount that you booked in the second quarter of this year as well. So these provisions they you relate to your consumer finance business. So here I just want to understand if you still believe that you have to make additional CPL 20 billion in provisions for your consumer finance over the upcoming quarters? Or have you already adjusted your risk models for the incorporation of the consumer finance business?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [5]

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See, as we mentioned in the conference call in the past and this one, this year the consumer provision has been affected by the incorporation of the Financial Services business as well the business as usual that we do the [made up] the bank in the consumer area. The $20 million in business that you mentioned is business as usual. So, you should expect $20 million in financial service and in Bci in the next quarter.

If your question is, we are seeing a deterioration -- if your question is, if we are seen a deterioration in the consumer loan portfolio, the answer is no, we have not seen until 3 weeks ago a deterioration of the consumer loan portfolio.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [6]

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If you just allow me a follow up here. I understand that these CLP 20 billion should be recurrent over the upcoming quarters due to the consumer finance business. So, how should we look at your cost of risk going into 2019 and then next year as well?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [7]

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We are in the middle of the budget, Gabriel, for next year and we are not anticipating a deterioration of the consumer loan portfolio. My answer is, subject to what we have seen as of today. And, again, I think that on December, I can reinforce that acceleration or we can change it according to the -- how the economy will develop in the next 2 months.

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Operator [8]

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The next question comes from Yuri Fernandes with JP Morgan.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [9]

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I had a question on the potential reduction on the weekly hours to 40 hours or actually, I think 37.5 due to the net off lunch hours. How that should impact you? Like, how much of your employee base should be affected by that? And if you have any estimates on the cost? So that's number one.

And my second question is regarding loans origination. I totally know it's too early to excel those impacts from the protest. But in the last 2 weeks, how new loan origination has been behaving with so many Walmart supermarkets closed, some branches closed, how your new origination has behaved versus the past? Did you see a big drop? Or how is that behaving?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [10]

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Yuri, regarding your first question about the impact of the 40 hours labor law. In the case of Bci, I think that it's important to mention that we have been working in order to reduce working hours in order to consolidate work and family and personal life. In this sense, we have encouraged work stability among which is in -- one with reduced working hours where we have been working in the last couple of years. Today, in Bci, we have an hour of -- 43 hours a week. We have flexibility on hours that you can arrive and leave. We have flexibility in working at home. Just, for example, the strategic planning and controlling area, which I lead, 40% of our employees have some kind of flexibility working hours. So this is -- this 43 hours, I think, that is more a country issue than a Bci issue.

And regarding the originations, obviously, we have a slowdown in the origination loans, especially the first week where the country and the people, companies were focused in other things. And the Walmart mention that you did obviously affect the origination of Walmart -- financial services company.

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Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [11]

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But in the last week are things kind of back to normal? Like in the last weeks they are more normalized as you see on -- when you compare the origination last week versus 2 weeks before, are you see some more normalized trends?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [12]

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Yes, what we are doing, Yuri, is that, as I mentioned in the very beginning of this conference call, we strongly believe in long term relationships. What we have been doing in the last couple of weeks is getting contact with our clients in order to see what are their needs. And in that aspect, we have been renegotiating, helping with some loans.

I think that we are coming back to normality. As I mentioned, we have 98% of our branches open. So, we believe that the way on helping the country to normality is to make our day-to-day business as good as we can. If you need a specific numbers, I don't have it here today. But what we have seen is a coming back to normality day after day.

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Operator [13]

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The next question comes from Neha Agarwala with HSBC.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [14]

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My first question is in terms of loan growth. Bci has -- Bci aims to grow faster than the system. And you mentioned previously that you would like to slow down the growth in the U.S. business because the peak of the cycle has -- is already done, so you want to be cautious there. So in that scenario should we see more small acquisitions like we saw with the Executive National Bank to propel growth? And what is your expectation for the next year?

And my second question is more a medium-term outlook. You've worked a lot and you've improved significantly the profitability of the U.S. business. Where do you see the medium-term ROE for the U.S. business, or the Chilean business and consolidated level?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [15]

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Neha, your first question in the loan growth of City National Bank, as you are aware, since Bci did the acquisition of City National Bank the performance of City National Bank has been outstanding, growing over 20% year-over-year and delivering increasing return on equity and profitability.

In this year, as we have been growing at that pace, the City National senior management team with the Board of Directors decide to slow down that growth having or being in the last part of a very long and positive economic cycle in the U.S. and we didn't want to be growing at that pace at the end of a economic cycle. So from a strategic point of view, I'm taking care of our loan portfolio. As Jose mentioned, that is one of the most important value drivers in City National Bank. We slow down that growth.

In that sense that decision of Executive National Bank goes in that direction in order to buy an asset, we have an excellent quality on the loan portfolios and deposits. If we are looking for another acquisitions or not obviously, we will see -- we see different opportunities and if any opportunities that we want to go through, it will be communicated to the public as soon as we know. But today we don't have nothing in our hands.

And regarding the return on equity, in City National Bank you have seen an increase year-over-year in return on equity. A few adjustments we are around 10% there. And the expectation is that the return on equity of City National Bank will continue growing, to which extent we expect to be between 11% in the next couple of years.

And in Chile, the expectation is that we will go to a return on equity of around 14%, 14.5% return on equity in the next couple of years.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [16]

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So is it fair to say that on a consolidated basis it would be close to about 13%?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [17]

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No, in a consolidated basis, the expectation is that we will be between 14% and 14.5%. That means that in Chile we'll be a little bit higher. Sorry, I [took up].

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Operator [18]

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The next question will come from Daniel Mora with Credicorp Capital.

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Daniel Mora, CrediCorp Capital, Research Division - Analyst [19]

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I have 2 questions. The first one is related to the mortgage loan refinancing applications. The question is, there was any negative impact on the net interest income related to this process?

And the second question is related to this. We saw that last week the lower house approved the financial portability law in Chile. There is any impact that you see on Bci or there could be an impact on the top line?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [20]

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Thank you, Daniel. Regarding the portability law that is going the Congress, we believe in Bci that any law that can improve the market competition is good. At the end of the day, competition makes everyone better. So we believe that it's a good situation.

And regarding the mortgage loan, we are starting to see an important number of customers that has been coming to renegotiate their loan mortgages. We have around -- we believe that we will have around 20% of the loan portfolio renegotiated by the end of this year. That said, the net effect it means will depend both in the realization of these loans and in the structure of the liabilities, which this year we have placed bonds historical minimum.

So at the end of the day, we are just starting to see this thing in the last month. So we are in the middle of this renegotiation process. And the estimation will be a net effect between the repricing of these mortgages with the loans that we do have.

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Operator [21]

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Our next question will come from Brian Flores with Citibank.

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Brian Flores, Citigroup Inc, Research Division - Senior Associate [22]

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Just a quick follow up on where do you see regarding your core equity capital ratio, regarding the requirements from the regulator and how far or how close do you think you are into this implementation?

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [23]

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Well, Brian, as you know the authority has to deliver their regulations in order to start implementing the Basel III. As of today, the only regulation that has appeared is the systemic bank, which they put at 1.25% to 1.75%, it's not completely clear. And the second part is -- and the other Basel III implementation is not delivered yet.

Having said that, we have made different scenarios taking into consideration what is basically done in Europe. And Bci is in a good solvency position that enables it to face the next regulatory requirements in an adequate way. Employees, good system and capital processes currently undergoing and implementing improvement plan is capital management process. We are anticipating regulatory requirements and in line with the best market practices. We have been working like a couple of years or so on. So we believe that we will not have difficulties to go with Basel III requirements.

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Operator [24]

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Ladies and gentlemen, this concludes our question and answer section. At this time, I'd like to turn the floor back to management for any closing remarks.

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José Luis Ibaibarriaga Martínez, Banco de Crédito e Inversiones - CFO & Controller [25]

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Thank you a lot of -- all of you for participating in this conference call. As always, we are open to any additional questions that you may have. We have our team available for you and we hope to see you in the next conference call in next quarter. Thank you very much.

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Operator [26]

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And thank you. This concludes today's presentation. You may disconnect your line at this time and have a nice a day. Take care.