使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主
Operator
Good day everyone and welcome to the Credicorp Second Quarter 2009 Earnings Release Conference. As a reminder, today's conference is being recorded.
At this time, I'd like to turn the conference over to Walter Bayly, Chief Operating Officer. Please go ahead, sir.
Walter Bayly - COO
Thank you, Audrey. Good morning and welcome to Credicorp's second quarter '09 conference call. Despite the fact that the effects of the uncertainties in the world markets continued during the second quarter, Credicorp has had a good quarter with improved operating results.
We have been able so far to compensate for the sharp slowdown in loan and provisioning pressures on net earnings through quick adjustments to our businesses and timely identification of market opportunities. Therefore, the operating bottom and bottom-line results of our corporation for the second quarter '09 show an important improvement despite the negative news as we will see further on.
Furthermore, a turning point is today evidently behind us as we experience a recovery of growth and economic activity.
Looking forward, the government's anti-crisis spending program as well as the reduction in the Central Bank's reference rate will only start to become effective in the next months, supporting the shift in direction in the recent months. Therefore, given the positive expectation about Peru's economy, we remain optimistic about the probabilities of resumed growth though at moderate rates.
Nevertheless, the developments around the world present many challenges for the Peruvian economy, and therefore, our businesses, which we need to address in a cautious but creative way to identify opportunities if we want to achieve future sustainable growth.
Next page, please. As briefly indicated, Credicorp's result for the second quarter '09 show an improvement of its operating performance, with operating income up 7.3% quarter-over-quarter reaching $172.2 million for the quarter, and an also stronger bottom-line which reached a total of $115.2 million, 4.2% higher than the $110.6 million net earnings for the previous quarter.
Main drivers of this improvement are the recovered margins, which coupled with moderate loan expulsion mainly in the retail sector and reduced funding costs resulted in a 13.4% stronger net interest income. Extraordinarily high income from the sale of securities mainly dollar denominated government bonds also contributed to maintain a strong non-financial income.
In addition, a loss in the evaluation of our stock appreciation rights program, which affected our operating expense in the first quarter, was rather a small gain in the second quarter, as the stock price recovered reducing the overall operating costs. This event helped compensate for a higher provisional requirements of the quarter and the higher effective tax rate, 26% versus 22 in the first quarter related to a significant increase in income taxes at BCP as we will explain later on.
This performance led to a higher earnings per share of $1.44, however, even though income was stronger, return on average equity dropped slightly from 26.3 to 25.6%, following an increase in our equity position as our capital was reinforced by higher income and significant growth in unrealized gains, which lead to a capital ratio of 13.5%.
But to explain in more detail the operating performance, let me go the individual subsidiaries in the next slide. Page four, please. The loan book of our banking business at BCP is finally recovered with clear turnaround point behind us. The chart you are seeing are specially clear to show that both, the quarter-end balance, which are the red dots, and the average daily balances, blue dots and the continuous line, are recovering and resuming growth.
Even though average daily balances for our total loan dropped from the first quarter to the second quarter, the turnaround in trend is evident and the quarter-end balance improved.
Domestic loans on the other hand -- domestic currency loans on the other hand maintained a positive trend throughout the whole crisis period.
Overall, the top chart for the total loans show clear signs of recovery of growth, which however, also incorporate the effect of the revaluation of the local currency, which helped boost reported growth expressed in U.S. dollar to 4.8% for the quarter.
Next page please. The loan portfolio growth continues to be particularly strong in our Soles retail business, which grew at an overall rate of 4.9% for the quarter. As can be seen in the chart, the growth in mortgage portfolio was very robust reaching a 7.4% quarter-over-quarter. Also, the wholesale business in Soles shows a 2.6% increase for the quarter.
In foreign currency, the drop in average balances is also smaller in the retail sector compared to the wholesale loan book, revealing again the stronger performance of the retail sector.
However, despite these lower average daily balances for the quarter as shown in this chart the trend reveled in the previous chart indicate a turnaround given the quarter-end balances are in fact higher even in U.S. denominated retail [loans].
Next page please. With regards to interest income, the structure of interest earning assets changed again driven by the declining yields that could be achieved for our liquidity position, helping the U.S. dollar and the normalization of international market, which made holding large liquidity positions less necessary.
This also explains a slight contraction quarter-over-quarter in total assets of 1.8%. Furthermore, the slight recovery in lending activity also helped change the asset structure in favorable better yielding assets. This is reflected in the chart you are seeing where loans make up for a larger portion, mainly 63.5% of interest earning assets.
Page seven, please. As mentioned before, the reduced need of holding large liquidity positions allowed for the reduction of the most expensive funding in our funding mix; that is, international bank lines, which dropped the participation of its funding structure to 5% from 9% in the previous quarter. Well, this does not seem material, it does contribute significantly to reduce our cost of funds.
Lower cost of funds is also supported by the reductions of the reference rate of our domestic currency, which translates into lower funding costs for the interest paid on Soles denominated time deposits, which make up for 35% of all time deposits or 9% -- 9.8% of total funding.
Page eight, please. Following several quarters of negative pressure on net interest margins from our liquidity position, which is mainly U.S. dollar denominated, the reduction of this position plus the described evolution in lending activity added to the higher lending spreads that BCP was able to achieve, resulted in 4.1% higher interest income quarter-over-quarter.
On the other hand, a 9.3% lower interest expense was a result of the described change in funding structure and lower reference rate of our domestic currency. This evolution allowed for the improvement in total margins from 4.45% to 5.07, which includes the further improvement in lending margins from 7.5% to 7.76% as can be seen in the chart on page eight.
Page nine, please. The explained evolution of average outstanding loan volumes and of net interest income is reflected in this summary of key figures for BCP, which reflect a 12.5% net interest increase quarter-over-quarter. This improved performance helped compensate for higher provisions for the quarter, which increased this quarter as expected and resulted in net provisions of $54 million. The increase in provisions is being carried out as delinquencies involved within our expectations, which incorporate a slowdown in economic activity.
Non-interest income grew only slightly 1.6% quarter-over-quarter maintaining the high level of previous quarter, boosted by the gains on the sale of securities, mainly U.S. dollar denominated bonds from the Peruvian and Colombian governments. The core of non-financial income contributor, fee income, was also up by 13% as a result of recovered economic activity, while gains on foreign exchange transactions did drop 3.1% as the currency remained stable and strong.
Operating expenses were on the other hand lower in the second quarter. Main operating costs were actually [less] from the levels of last quarter, so the lower costs, [are in fact] explained by the recovery of a stock price since the last -- and stock value during the last quarter resulted in a loss in the first quarter, which inflated operating costs and this turned into a small gain in the second quarter. However, no real operating cost savings are [in fact evident] whereas significant emphasis is being given today to the efficiency projects, mainly for our branches and processing capabilities.
Given the improved income generation and lower costs, which together compensated for a higher provision in requirements, total operating results are 7.6% higher at a $144.4 million for the quarter.
Despite this excellent operating results, bottom-line results for BCP are depressed by higher effective tax rate of 29% versus 20% in the first quarter, resulting from the non-tax deductible losses generated by some currency index tax exempt government bonds and a translation loss of $12.3 million related to the dividends to Credicorp declared in March and paid later when domestic currencies have revalued. These two events led to a negative net earnings -- led -- these two events led to net earnings of $88 million for the second quarter '09.
The latter is, however, on an accounting shift of earnings from BCP to Credicorp, which [stated] out in the consolidation process, and therefore, eventually neutral for the corporation.
Excluding this effect, BCP's net earnings reached a $100 million for the quarter reflecting the real contribution to Credicorp and a relatively flat results compared to the first quarter.
Page 10 please. Looking more carefully at loan portfolio quality, there is a deteriorating trend resultant from a sharper slowdown in economic activity than originally expected and job losses in certain sectors of the economy.
Despite this trend, delinquencies have increased only moderately by $29 million from $117 million to a $146 million in this second quarter. But given the slow loan growth, the ratio of past due loans to total loans reach 1.39% up from 1.16 in the first quarter. The delinquency indicator for the retail segment are also still very low, but at the same time reveal a deterioration from the levels reported in previous quarters.
Nevertheless, the increase in delinquencies is inline with the economic slowdown and though we view and monitor these numbers with some concern we are still comfortable with the existing levels of delinquencies.
Provisions for loan losses were inline with projections and represent an increasing part of net interest income as we can see in the chart, which in today 28.5% of net interest income and 2.3% of total loans. These provisions were enough to maintain coverage at a high 93% -- 193%.
Furthermore and as a reminder, personal and corporate debt levels are still relatively low in the Peruvian market, while credit information is widespread and efficient. This coupled with conservative credit regulations and risk policies contributes to monitor carefully the evolution of our delinquencies portfolio and to manage our risks.
Next page please. Our network expansion completed in the first months of 2009 has not continued and we have today 336 branches in operation, 950 ATMs and 2,262 Agentes. Though no significant increase in branches is planned for the year, we are convinced of the need of further expansion and the contribution it will bring to business growth in the coming years. Furthermore expansion of our Agentes will continue given the low cost in implementation and extensive potential.
However, business growth for the coming years should have significantly less impact on the cost as the efficiency of our distribution model is being evaluated and will most likely lead to less personnel, more automated tellers and more sales functions for each office.
Please turn to page 12. Turning now to Atlantic. After the very difficult year end for Atlantic, which carried the bulk of the effects from the financial crisis on Credicorp, results of the private banking activity at Atlantic are gradually recovering normal levels. Today, Atlantic's income levels still reflect the contraction in portfolio values of the asset management business and reduced investment activity.
In fact, the drop in investment volumes responds not only to a drop in market values, but also shift towards more conservative bank deposits. This move has had an impact on fees since clients have less appetite for more sophisticated investment structures, which generate better fee income. Nevertheless, results are satisfactory with contribution to Credicorp increasing 13% to $3.4 million versus $3 million in the first quarter and $5.2 million a year ago. But more importantly, the strategy developed for a coordinated and improved asset management business is setting the stage for future growth.
Page 13, the insurance business of Pacifico reported further improved results boosted by strong financial income. The changes in the business model, we have been reporting, which aim at a combination of improved risk management capabilities and a reduction of the risk retention levels in our books for the property and casualty corporate business are proving effective and enable Pacifico to significantly reduce the retained share of casualties.
Though this strategy does not focus on premium growth, but rather on growing technical results, net premiums have improved quarter-over-quarter by 3.5%, Following such strategy, and more importantly, technical results have grown 11% quarter-over-quarter reaching $14.9 million for the second quarter, up from $13.4 million in the first quarter, $3.9 million in the fourth quarter and a technical result of $0.4 million in the third quarter of '08, revealing an impressive trend as shown in the chart.
The same trend is also reflected by the net earned loss ratio, which reached 69% for the second quarter '09 versus 69.2% for the first quarter, 78.6% for the fourth quarter and 82% for the third quarter and even 94% in the second quarter of '08. Furthermore, the combined ratio, which excludes Pacifico Vida shows an important improvement, were helped by the above-mentioned financial income, which -- and extremely low 72.8%. Consequently, total contribution to Credicorp reached this second quarter $9.7 million, a significant improvement from first quarter contribution of $5.2 million and in real recovery from the losses in the fourth quarter of $7.4 million.
Page 14, finally Prima's business results are showing significant improvements. Prima's fee income was up 13.4% from last year, reaching $18.7 million in the second quarter following the successful implementation of the fee increase announced last year.
While operating costs were lower year-over-year by 8.4%, leading to a significantly improved operating margin. It is important to remember that when compared to the first quarter '09 we have to remember that Prima has one month's extra collections in [January]. So adjusting for that second quarter net contribution is very much inline with first quarter results and reached $4.8 million. Furthermore, Prima maintains its dominant position in the market, capturing important market shares, 30.4% of assets under management and 31.8% of collections.
Page 15, please. The summary of Credicorp's results, which is reflected in the contributions chart you're seeing reveal the importance for Credicorp of the return to profitability of all its subsidiaries, expect for BCP Bolivia, a subsidiary of BCP, which reports again in drop in earnings of 20%. All other Credicorp's subsidiaries, including BCP itself, have had improved operating results and contributions after the adjustment described above -- before.
In fact, the drop reported by BCP turns into a flat result when adjusting for the $12.3 million translation loss dividends to Creditcorp, which disappears in the consolidation process and appears when looking at individual corporations as in the chart, as a reduction in earnings of BCP, and again at Creditcorp Limited.
Further the drop in Prima is not real drop when adjusting for the additional month's worth of income in the first and third quarters of the year. These results are encouraging and even more so given the recent signals in the market of our gradual though normalization of activity.
Page 16. The positive results achieved in the second quarter '09 are also reflected in our performance ratios. Return on average equity reached 25.6%, which is significantly higher than the ratios registered in the previous periods, but slightly lower than the outstanding 26.4% reported in the first quarter.
The recent quarter, the drop in profitability is related to the significantly increased capital position following the market recovery and resulting in unrealized gains for marked down portfolios. In any of it, we have reached and expect to be able to sustain our target return on equity of 25%.
Return on average assets has remained at the levels of the last quarter. On the efficiency ratio, we have experimented a significant improvement reaching a cost to income ratio of 40.7%. Furthermore and more importantly, we expect to continue growing as we operate in what is expected to remain the fastest growing economy in the region and in the fastest growing financial market, given the low financial penetration and dynamic development of such markets.
Our stock performance -- sorry page 17-- our stock performance reflects today the recovery in international markets and the increase in investor's [optimism]. We continue to believe that Peru has solid macroeconomic foundations, and therefore, will be able to continue growing probably the highest rate in the region and that we are best positioned to continue benefiting from that scenario.
Our fundamental strategy has not changed with this crisis, but was rather reinforced given a stronger focus on different strategies for bank penetration and resulting growth; two, profitability through improved efficiency; three, modern and more sophisticated systems; and four, equalized -- equally modern and improved risk management techniques. We believe, with this approach we're working on the right fronts to achieve sustainable growth.
Thank you very much and we're ready now to go into the question-and-answer period.
Operator
(Operator Instructions). And our first question will come from Tito Labarta with Deutsche Bank.
Tito Labarta - Analyst
Hi, good morning, Walter. Thanks for the (inaudible). I'd like to get some more color in terms of asset quality and what do you expect going forward? Do you think you sort of [peaked] now? Do you see more deterioration and how much market would deteriorate? And then following up on that in terms of your provision level, I know we did expect some increase but [they kind of doubled] from the first quarter, so what do you see the sustainable level of provision is going forward, inline with this quarter or more inline with the first quarter? Thanks
Walter Bayly - COO
Sure. When we started the year, I think we started the year with about 0.8 past due loans to total loans. And my gut feeling was that we would end doubling that, reaching about 1.6 past due loans to total loans.
Today, my gut feeling is that we probably would not even reach that. We could probably stay marginally below that. What we have seen in the last month actually or last two months is that on the retail side, on the credit cards, on the consumer portfolio, on the mortgages, what could be seen as a changing trend, we have seen no deterioration. Nevertheless, important to note that July is quite a typical period, because in Peru people received two salaries that month. Thus, there is a certain amount of extra money going in, which is always utilized to pay down debt.
But my gut feeling is that, we have seen on the retail side consumer, credit cards and mortgages the worst behind us and I expect to stabilize around the levels we are in about July. On the lending -- on the micro-finance side, we have continued seeing a little more deterioration but at a very much slower pace, and there is always a bit of a lack there. Micro-finance response to economic activity, economic activity will start to pick up. We've probably seen the worst. So I expect to see stabilization in the levels of the micro-finance portfolio around say August-September. And in the corporate side, we have not seen anything very dramatic. So all in all, I think we are at the bottom or very, very near at the bottom or maybe started to recover. It is very difficult to pinpoint the exact, but my gut feeling is that we will not reach that 1.6, which I had originally estimated. We could be slowly below that.
In terms of provisioning, we have tried to stay ahead of the curve, meaning that we are always provisioning a little bit extra and not being aggressive in provisioning in case things continue to deteriorate. But as we sense that the worst is over, you should start to see provisioning return a little bit more somewhere between the levels we had in the first quarter and the second quarter or the third quarter and maybe stabilizing or coming slightly down. Does that answer the question, Tito?
Tito Labarta - Analyst
Yes. Very helpful. Thank you very much.
Walter Bayly - COO
Okay.
Operator
And our next question will come from Daniel Abut with Citi.
Daniel Abut - Analyst
Walter, you said [your capital] in your presentation on the lending front also believe that the turning point has reached and (inaudible) to the areas really latter part of the year. Given your expectation for a gradual improvement in growth in economy which will come back to growth but tomorrow more (inaudible) levels than we thought, what levels of loan growth looking at regularly when you carry to 2010, which hopefully will be able to get more normalized?
Walter Bayly - COO
Sure. Good question, Daniel. If you look at what actually had happened in the first half of the year, actually has remained flat. If you look at the numbers in terms of dollars, there has been a growth, but that growth is exclusively related to the revaluation of the local currency. If you take the chart where we breakdown the growth in local currency and in foreign currency, in local currency the growth was 4.2% and in the dollar currency portfolio was minus 2.7%. If you do the weighted average calculation of both of those, basically flat December from now.
The number which we stick to is that the portfolios of the banking system in Peru should grow between 3 and 3.5 times GDP growth. So if we go back, what is the number of GDP growth that we expect year-over-year for Peru for 2009? All the analysts today are somewhere between 1.8% and 2%. So that number then 3, 3.5 is what we expect to grow. So, it's anywhere between 5% and 7% growth portfolio year-over-year for at least 2009. And we maintained a 3.5 times growth in GDP, multiply that GDP for 2010. So if 2010, we're talking about a growth of about 5%, we should expect growth anywhere between 15% would be a good number for next year.
Daniel Abut - Analyst
Thank you, Walter.
Walter Bayly - COO
You're welcome, Daniel.
Operator
And our next question will come from Jordan Hymowitz with Philadelphia Financial.
Jordan Hymowitz - Analyst
Hey, guys, congratulations on the results. Very good quarter especially in the insurance [period]. Hello?
Walter Bayly - COO
Yes. Excellent. Thank you very much. We are very satisfied financing, doing a lot of hard work to turnaround the Company. We are very happy with that. Thank you.
Jordan Hymowitz - Analyst
I just want to get some specific numbers in other interest income, the gains on derivative, what was that number?
Walter Bayly - COO
It wasn't derivatives. At the beginning of around say October-November last year, we saw that the values of fixed income, Peruvian government and Colombian government papers were really at all-time lows as spends were extremely high and we felt they were selected more the liquidity and the crisis and the aversion of risk in the foreign markets more than the fundamental values of those papers. So we took a huge relatively large possession, which were liquidated about half of it in the first quarter and half of it in the second quarter. So, that's the bulk of the other -- of the numbers you're mentioning.
On top of that, we have started doing swaps to fix the interest rate on some liabilities that we have long-term dollar liabilities. We think that the U.S. dollar rates can only go upwards. We don't see anything very dramatic happening, but nevertheless we think that they are at all-time lows and we have slowly started to fix the interest rate in our long-term U.S. dollar floating rate liabilities.
Jordan Hymowitz - Analyst
So of the $16.3 million, how much dollar or (inaudible) was the gain?
Walter Bayly - COO
I will have to get into a lot of details, which I don't have in front of me and I will definitely give you a call.
Jordan Hymowitz - Analyst
Okay.
Walter Bayly - COO
This is the line for other income BCP or Credicorp, what are you looking at?
Jordan Hymowitz - Analyst
No, the other interest income that was 16.3 million, how much --
Walter Bayly - COO
Other interest income, okay, excellent.
Jordan Hymowitz - Analyst
How much was the gain on the [stock] on -- and the Colombian currency?
Walter Bayly - COO
Excellent. We will break down the information and send it over to you.
Jordan Hymowitz - Analyst
Perfect. And also other operating expenses, how much was the SAR stock options gains?
Walter Bayly - COO
Excellent. We'll breakdown the details and send them over.
Jordan Hymowitz - Analyst
Okay, thank you.
Walter Bayly - COO
You're welcome.
Operator
(Operator Instructions). We'll now hear from Saul Martinez with JPMorgan.
Saul Martinez - Analyst
Hi, good morning, everybody. A couple of questions. Just kind of follow-up on Jordan's question a little bit. I mean you've obviously in the first half of the year -- in the second quarter posted very strong bottom-line; you did have quite a bit in terms of trading gains in the quarter from selling the Peruvian and Colombian securities; you also at same time had some pressure on provisioning. As you look forward into the second half of the year, how do you think about as trading gains start to come down a more normalized levels given your expectations for credit provisioning, what kind of run rate levels of earnings and profitability you can sustain in a more normalized trading environment?
Walter Bayly - COO
The dynamics I see going into the second half of the year, my expectation is that we will basically -- BCP's earnings overall will remain flat quarter-over-quarter and a combination of things will most likely start to happen. We will see some volume growth undoubtedly in the retail side. We have seen an interesting pickup in the mortgage in the past couple of months and in the other products related to retail.
We will see a little pressure on margins because domestic reference rate has dropped further and the truth is that we have very limited capabilities to lowering the rate on our liabilities, which are very close to zero and the asset interest rate particularly in the corporate loans will come down, so we will see a little pressure on margins going forward on the domestic currency portfolio, but again so growth and a little pressure on margins, I expect lower provisioning levels. Clearly, I think that that will be an important element in sustaining the current levels of profitability. No cost pressures at all, marginal or slower trading gains, and hopefully a more normalized tax situation. So I think all of this will end up -- washing up one against the other and we expect these earnings to remain relatively flat for the rest of the year.
Saul Martinez - Analyst
Okay. When you say you are at 100 -- you really using a 100 million for BCP, not -- obviously not the 88 million, more or less a 100. Okay, what is the normalized tax rate [relative] that that we should be thinking about because you've had --obviously had some volatility in the last couple quarters.
Walter Bayly - COO
Yeah, yeah. We were on the 20% tax rate for BCP, but that was extremely low because we have that year very high level of Central Bank CDs, which produced non-taxable income. That -- the overall level of the bulk of the CDs has come down, and we have had this -- the dollar denominated portion of those CDs, the loss was not deductible. The bulk -- I would -- long story, but at the end of the day given a 25% and that would be a good number.
Saul Martinez - Analyst
Okay. That's helpful and then just one final question, another follow-up on provisioning, I think in the past you mentioned about 150 million was sort of the thinking in terms of annual provisions for 2009, are you still -- I mean it sounds like you still feel pretty comfortable with that level given your expectation that provision should be -- you know NPL should stabilize and that provisioning level should be somewhere between the first and second quarter, is that fair -- is that fair assessment?
Walter Bayly - COO
Yes it is sold and it's probably you guys who remember everything I say, but yes I would stick to that number.
Saul Martinez - Analyst
Yes, we wouldn't be analysts if we didn't remember what is said. All right, thanks a lot.
Walter Bayly - COO
Okay.
Operator
We will here from Jason Mollin with Goldman Sachs.
Jason Mollin - Analyst
Hello everyone. Maybe if you could address a little bit of the strategy for next year, given an economic recovery looking at as what segments of the book you're looking to grow, and particularly if you were -- you've been talking about moving down markets to the more of the lower income segment, what kind of strategic initiatives are you looking to take if any?
Walter Bayly - COO
Sure, there are a couple of things, yet indeed the overall strategy is that we want to achieve leadership and all of the segments of the retail side, and that includes credit cards, consumer finance and lending to micro finance. We do have the leadership in mortgage.
And in order to do that clearly, we need to go down market. We are the leaders for instance in micro finance, but at the high-end of micro finance, we are the best card bank but at the high end of the card market. In order to do that, we need to do a couple of things, some of them are related to the commercial model, but some of them are related to our capabilities regarding management of risk and management of collection process, where right now benchmarking ourselves against these practices and what we have in terms of techniques to handle risk at the retail side, building up our models and -- and making them more solid and reinforcing our collection process.
Indeed if collection and credit granting is one and the same, is very important when you go down market. So, we're in the process of building up our capabilities on those two sides. But that is not enough. We probably will need to do -- our commercial approach will have to be different, and there are several good practices around the world. It appears that working with retailers is their way to go if you want to scale and increase the volume of card holders that you have down market and we are reviewing what we have there. And in the micro finance sector, it appears that the distribution through a branch -- a bank branch network is not necessarily the best way to go. So, there are commercial things that we need to do and there are internal capabilities which we need to build on. This is a three-four year program, which we expect to -- you know, by the year 2012 to have fully -- you know that is our target date for where we want to achieve leadership in the described markets.
Jason Mollin - Analyst
Thank you very much.
Walter Bayly - COO
You're welcome.
Operator
(Operator Instructions). We have a follow-up from Jordan Hymowitz.
Jordan Hymowitz - Analyst
I am just wondering, I'm just looking to your progression in NPLs in Bolivia is 230% and in Peru it's a 193%. But in Bolivia the credit is somewhat stable and in Peru it's deteriorating a little bit, I'm just wondering what the thought process is on the variance in the provisions NPL.
Walter Bayly - COO
Yes. We struggle with that issue and there is no hard answer to be frank, because at -- basically, our main driver for provisions, which we then review and adjust is what the local superintendency requires us to do. And in Bolivia the same. So at the end of that day, the drivers are different set of regulations, which we then try to make consistent with International Financial Reporting Standards.
So we don't have one driver that says Bolivia should be 200, Peru less or more. What we have in mind is that definitely we want to be way above the 150 on both, but no specific target. And there has been changes in provisional requirements in the Bolivian environment where generic provisions have been required by the superintendency and all of us backed, and we have complied with those and thus we have increased the provision so. It's more perfection of domestic regulations which we then try to [compatible if] you were to make consistent with International Financial Reporting Standards in a specific target of coverage of non-performing loans.
Jordan Hymowitz - Analyst
Thank you very much you answered these -- this figure.
Walter Bayly - COO
Okay.
Operator
And now we have a follow up from Daniel Abut.
Daniel Abut - Analyst
Walter, we could have questions on expectation for monetary policy. You did mention in your remarks that as far as having your margins have been improving because of the lowering of interest rates (inaudible) specific higher risk but on the monitory policy front (inaudible) expectations from futures like action and spend it on that (inaudible)?
Walter Bayly - COO
No, no I think the negative impact, if -- you're -- when I heard it was not a fluent communication, so I think I understood your question. Let me try to answer it. What I think, what is going to affect us in the second half, it's not the competitive pressure on margins. It is the fact that the domestic reference rate has dropped quite significantly. The Central Bank lowered the short term reference rate by 75 basis points in the last board meeting of the Central Bank. And that has almost an immediate effect overnight in short term funding amongst banks and that translates almost immediately to the wholesale portfolio.
But, so we expect lower interest income from the wholesale portfolio. On the other hand, the bulk of our funding is related to retail savings and time deposits where we pay rates which are below 1%, and thus we cannot offset the 75 basis points reduction on the liability side. So that is the element that I think will compress a bit our margins going forward. On the risk margins that we have managed to increase, we expect those to continue. Did I answer your question Daniel?
Daniel Abut - Analyst
Yes, yes, so you're having expectation that is kind of next year that (inaudible) rates again?
Walter Bayly - COO
I'm sorry. The communication is a lousy one. I would expect the margin to be anywhere between what we had in the first quarter and in the second quarter.
Daniel Abut - Analyst
Okay, thank you.
Walter Bayly - COO
I'm sorry the communication was very poor Daniel
Daniel Abut - Analyst
I understood. Thank you.
Walter Bayly - COO
Okay.
Operator
And there are no additional questions at this time.
Walter Bayly - COO
Okay. Thank you all very much for joining us in this second quarter conference call. What I have tried to communicate is we have initial indications that a turning point both in the economy is happening or has happened and it is very clear that BCP's portfolio is directly correlated with GDP. Because of the nature and the size of our market share, it is absolutely impossible for BCP's portfolio to improve if the economy is not improving and it is impossible for BCP's portfolio not to deteriorate if the economy is deteriorate, so there is a very direct correlation. So what we have to monitor very closely is GDP growth. And going forward, growth in our portfolio clearly will also be straight, very well correlated with GDP's growth. And that is the nature of BCP's participation in the Peruvian economy.
I think we are gaining a lot of momentum in capturing more market share in the [setlines] of products where we have lower than what we call our natural market share and I have interesting expectations on what we can achieve next year in term of cost efficiencies. So overall, we are working very hard to create a sustainable momentum of growth so that Credicorp's role, its business is going to capture what we expect to be a couple of solid, though not incredibly strong, but very solid growth in the Peruvian economy in the next couple of years. Thank you all very much again for joining us and we will be with you for the third quarter conference call three months from now. Good bye.
Operator
Thank you. That does conclude today's conference call. Thank you all for your participation.