Credicorp Ltd (BAP) 2021 Q2 法說會逐字稿

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd.'s Second Quarter 2021 Conference Call. We now have all of our speakers in conference. (Operator Instructions)

With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Cesar Rios, Chief Financial Officer; Mr. Reynaldo Llosa, Chief Risk Officer; and Mrs. Milagros Ciguenas, Investor Relations Officer.

And now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

Thank you very much. Good morning, and welcome to Credicorp's conference call on our earnings results for the second quarter of 2021. I hope you and your families are healthy.

Official data indicates that the economy grew around 20% in the first half of 2021 and came close to hitting pre-pandemic levels. It is noteworthy that the construction sector grew 15% with respect to the first half of 2019. In addition, the statistical rebound recovery in the past few months has been boosted by a favorable external environment, where copper prices remain high and our main trending partners have resumed growth. Regarding the sanitary situation, mortality rates has fallen considerably after reaching a peak at the beginning of the second quarter of 2021. This improvement has been driven by a noteworthy uptick in the vaccination rate in June and July, currently around 37% of the adult population has received at least the first dose, although this rate lags behind that registered by some peers in the region, the government's goal is that all others and children from 12 to 18 years will be vaccinated by year-end. All in all, we still expect that Peru GDP to rebound around 9% in 2021 due to strong commodity prices and expansive monetary policy and fiscal policies.

Political uncertainty in Peru has generated a negative impact on financial indicators. The exchange rate has depreciated more than 12% year-to-date and the dollar has reached a record high despite the Central Bank's move to sell almost $6 billion year-to-date in 2021. An active intervention in FX market via multiple instruments. Furthermore, sovereign trades in domestic currency as exhibited at the table has also climbed to levels above the peak registered in 2020. Despite the pandemic and political shocks, Peru continues to outperform peers in the region in terms of macroeconomic indicators. Our net international reserves currently represent 35% of GDP, our annual inflation rate stands at 3.8% and our public debt, which represents 37% of GDP is among the lowest in the region. Additionally, our banking system maintains high liquidity.

Current political instability is fruited in decisions taken by the new government. Beginning with the move to appoint a highly controversial cabinet with limited technical jobs, questions regarding the direction that monetary policy will take as well as who will lead the sector continues to loom. Announcements have been made indicated that higher levels of state intervention are on the horizon via new public credit facilities, fee regulations, increased regulation for private health insurance and structural changes in the private pension system. The executive's ability to implement this radical agenda may meet with significant obstacles and resistance.

First, Peru Libre has only 37 seats of 130 in Congress. (inaudible) allied can contribute only 5 more votes. Second, it is worth noting that in the first round of elections, Pedro Castillo secured only 19% of valid votes, which represents 10% of registered voters and in the second round, won by an extremely narrow margin of 44,000 votes, less than 0.2%. Additionally, a recent data survey conducted between the 2nd and the 4th of this month, indicates that Castillo's approval rating at 39%, one week into his term, one of the lowest initial ratings registered by a Latin American President in recent history. In the same survey, only 5% of those poll indicated that the constitutional assembly should be the government's top priority. In fact, the assembly is ranked 6 among 7 priorities on the list, where the reactivation of economy, improvements in the health system and improvements in the quality of education were ranked first, second and third, respectively.

Going onto Credicorp results, let me highlight our quarter-over-quarter evolution. The loan portfolio rose 4.4% in the quarter in balances, driven primarily by an uptick in structural loans in the wholesale banking and SME business segments. Net interest income grew 8.7%, driven by an increase in structured loans, a drop from funding expenses and the fact that a one-off expense was reported last quarter for the liability management operation. In this context, NIM resumed growth and it stood at 4.01%.

Provision expenses fell after client behavior registered positive performance across segments, which led the cost of risk and the structural cost of risk to situate at 1.02% and 1.23%, respectively, this quarter. Core nonfinancial income, which is composed of fees and FX transactions, grew 8.4% due to a considerable uptick in transactions. This evolution was offset by a contraction in noncore nonfinancial income, driven mainly by BCP, which sold long-term bonds at a loss to reduce the interest rate sensibility of the available wholesale portfolio.

Insurance underwriting results continue to be impacted by COVID-19 related claims and [improved] but not reported provisions in the life business from April onwards; however, the trend has improved. The efficiency ratio improved 30 basis points, boosted by income recovery.

Net income at Credicorp totaled PEN 699 million in the second quarter of 2021, which represents an increase of 5.9% quarter-over-quarter. Our return on equity continued its upward trend and situated at 11.3% at quarter end. In the first half of the year, ROE stood at 10.9%, within our guidance range. Our balance sheet remains strong with ample liquidity and adequate capital ratios.

I will briefly describe the results of the lines of business (inaudible) provide further detail in the section of consolidated performance. Universal banking drives our recovery. BCP stand-alone contributed PEN 726 million in earnings, registering a return on equity of 18.1%. Core income registered notable growth at 8% quarter-over-quarter, which was mainly driven by an uptick in structural loans, a contraction in the funding cost and growth in transactions. BCP sold available wholesale long-term bonds that allow us to reduce interest rate sensibility and partially offset the negative impact to our U.S. dollar loan position. This strategy's result partially offset core nonfinancial income growth. The main driver of an uptick in profitability this quarter was the 83% quarter-over-quarter contraction in provision expenses, which reflected an improvement in client payment levels.

Efficiency deteriorated 10 basis points quarter-over-quarter, mainly driven by higher digital marketing and Millas fidelity program expenses, in line with growth in digital sales and debit and credit card usage. BCP Bolivia's ROE stood at 8.2%, which reflects a decrease in the appetite for risk and relative stability in the loan portfolio in a context marked by the largest scale government-mandated loan reprogram. Results were impacted by provision results are due to the inclusion of guarantees in the consumer portfolio, which was partially offset by new provisions to cover delinquency. The provisions level were equivalent to 4.72% of the total loan portfolio.

Mibanco registered clear recovery this quarter. Net interest income rose due to an uptick in origination of lower-risk structural loans, a drop in the funding cost and a reverse of interest income provisions made previously for reprogram portfolios. This positive evolution was partially offset by regulatory restriction on fees. Loan provisioning normalized in the context of an improvement in payment performance and growth in transactions. However, we are closely monitoring the 12% of the structural portfolio that is still within grace periods or past due. Colombia's results improved due to an uptick in disbursement, although origination volume has slowed due to social tensions. The focus is currently on maintaining adequate risk management, workforce productivity and efficiency at the commercial level.

Regarding insurance and pensions. This quarter, Pacifico's contribution continued to be impacted by higher COVID-19 related and IBNR provisions in the life business. Losses in this business have negatively affected a return to profitability at the group level. It is important to note that as quarter-end claims and IBNR provisions began to fall in line with a drop in COVID-19 mortality.

In property and casualty, growth in net premiums was offset by an increase in claims after mobility restrictions were lifted and activity levels rose. The corporate health insurance and medical services were affected by higher claims quarter-over-quarter due to an increasing healthcare demand as the economy reopens.

A 3-month assets under management contracted 2.2% quarter-over-quarter, which reflects fund withdrawals for a total of PEN 1.8 billion as of June under government-mandated facilities in May. This represents 15% of total funds that are available for withdrawal. We expect assets under management to continue to contract in the short-term given that the ASP withdrawals can be made through the year. Despite this, fees has remained stable due to growth in contribution from our fee.

In investment banking and wealth management, the quarterly evolution indicates assets under management contracted minus 0.5%, which was primarily attributable to Peruvian-based fund outflows from the asset management business due to political uncertainty. In wealth management, assets under management remained basically stable after local funds migrated abroad and to an offshore platform. The contraction in asset management was accumulated by a devaluation in local currency. Income contribution expanded 15.8%, driven primarily by positive results in capital markets and wealth management. The gains at peak was fueled mainly by growth in the sales of securities and upfront fees from entering third-party funds to international platforms.

It is worth noting that the investment banking and wealth management line of business continues to consolidate its regional presence and 76% of its assets under management are held outside Peru. The recent migration of funds to offshore platforms represents an opportunity to broaden investment option for clients.

Now I will discuss Credicorp's consolidated performance. Quarter-over-quarter, loan portfolio growth was 4.4% in ending balances and 2.2% in average daily balances. This evolution was driven primarily by an uptick in structural origination and wholesale banking through campaigns in the fishing and agricultural sectors. Expansion was also (inaudible) albeit to a lesser extent by growth in SME business, mortgage and consumer loans and by the evolution of the exchange rate. The mix of interest-earning assets improved marked by 7.8% quarter-over-quarter construction in the investment portfolio after BCP sold sovereign bonds and reduced its exposure to long-term interest rate risk.

The deposit mix improved and reflected an uptick in low-cost demand and saving deposits in foreign currency that was partially offset by withdrawals of time and severance indemnity deposits. Additionally, the funding mix in foreign currency grew to low interest borrowing and through the execution of the remaining make-whole redemption from a liability management operation. A consequent funding structure, coupled with lower interest rates, led the funding cost to fall and stand at 1.18%. Both spending behavior and the structural portfolio profile evolved favorable this quarter. In retail banking, on-time payments on loans due stood at 95% in June, driven by an uptick in the SME-Pyme segment. Quarter-over-quarter, the high uncertainty portfolio, which is composed of reprogram loans that are still within grace period and overdue loans increased slightly and represented 10% of the structural loss. It is important to note that this increase was driven by loans that were less than 15 days delinquent, which are considered the most recordable.

At Mibanco, on time payments improved in the context of lower expirations and growing transactions and income due to economic reactivation. The high uncertainty portfolio contracted from 19% to 12% this quarter due to the positive evolution of payments. The government program loans for government, which are primarily under Reactiva Peru, began to expire in June 2021. By the end of the month, the balance was 7% lower than the record high in the fourth quarter of last year.

The retail banking government program portfolio represents 65% of the total government program portfolio. By the end of June, 54% of the retail portfolio was still within grace period, 30% have made the first payment, 14% has been reprogram and 2% has become overdue. In the chart on the right-hand side, you can see the profile of wholesale banking and for Mibanco. It is important to note that the new government reprogramming facilities expire next year. So the real deterioration levels will not be fully evident until 2022. It is important to note that the government guarantees back a substantial percentage of these portfolios.

The NPL ratio for structural loans in the wholesale banking registered no variation after the deterioration of a small number of middle market clients was offset by the increasing loan volumes in retail banking, the ratio [bold] positively in the individual segment, but was slightly attenuated by an increasing overview SME loans. At Mibanco positive payment behavior, higher write-offs draw an improvement in NPL. As a result, Credicorp's structural NPL dropped from 6.05% to 5.38%. The downward trend in the structural cost of risk was not working. This improvement was driven by BCP stand-alone, where the ratio dropped 46 basis points, situating at 1.11% in a context marked by a decrease in the probability of default. In this scenario, Credicorp's structural cost of risk contracted 69 basis points from 1.92% to 1.23% in year-to-date figures, the structural cost of risk stood at 1.51%. And at the end of June, the provisions stock was equivalent to 7.7% of Credicorp's structural loan portfolio.

Credicorp's structural [mean] increased 14 basis points quarter-over-quarter to stand at 4.32%. Recovery was attributable to a more profitable asset mix, which was generated by growth in structural loan origination and improvement in the funding mix and a decrease in interest expenses. The positive evolution in NIM was mainly driven by BCP. Risk-adjusted NIM increased 64 basis points this quarter and reached 3.38%. This metric is recovering after the NIM in line with normalization of provisions of loan losses.

Core income, which is composed of net interest income, fees and net cash transaction was situated close to pre-pandemic levels. The increase in net interest income was primarily attributable to growth in structural loans and a decrease in the funding cost. Fee income grew alongside an uptick in transactions and foreign transfers at BCP and in brokerage fees at Credicorp Capital. The FX transactions also increased in a context of high demand for dollars.

Noncore nonfinancial income this quarter also reflects a management decision to reduce interest rate sensibility in the investment portfolio at BCP, as indicated earlier. Additionally, we executed an active derivative trading strategy at BCP and Credicorp Capital, both of which rendered positive results.

Insurance underwriting results continue to be severely impacted this quarter, which was mainly due to an increase in COVID-19 claims in the life business and to a lesser extent, to higher claims in the property and casualty business after mobility restrictions were lifted. On a quarter-over-quarter basis, regarding net earned premiums, there was a slight contraction in life business associated with a decrease in sales of (inaudible) and seasonal effect of renewals in insurance or high-risk occupations.

In property and casualty, there was an uptick to renewals in the medical assisting line and an increase in cars due to new sales and renewals. In the life business, COVID-19 claims reach a peak in April before beginning of March downward, accompanied by ongoing decline in IBNR provisions in a context of declining mortality during the quarter. If the sanitary situation continues to improve, we expect this trend to continue. It is important to note that on a year-to-date basis, net earned premiums grew in the life business through SISCO V, which expanded the activity base for fees and contemplated a more favorable fee structure. This is a pension fund related business.

The risk of a third wave appears imminent. Nonetheless, vaccination rates and doubling masking mandates may mitigate impacts this time around. In the first half of 2021, Credicorp's efficiency ratio grew 250 basis points year-over-year. Improvements were driven mainly by the positive evolution of income in the microfinance and insurance and pension lines of business. Mibanco's interest income was up due to growth in structural loans and a decrease in the cost of funding, while expenses remain under control. Pacifico's income was boosted in the first half of this year due to repricing and the fact that it won a higher proportion of the SISCO V in general.

Credicorp job shows an operating leverage of 6 percentile points in a conflicting income acceleration and controlled growing expenses. Year-over-year, growing operating expenses during the first half this year reflects our commitment to digitalization and was generated primarily by cybersecurity and IT. Regarding distribution footprint recycling, it is worth noting that BCP stand-alone and Mibanco reduced the number of total branches by 9% and 2%, respectively, year-over-year.

In terms of liquidity, even after contract outflow of foreign currency, BCP stand-alone and Mibanco have maintained high levels of liquidity, well above regulatory and internal limits. Regarding capital, each of our subsidiaries maintains adequate capital level, which ensures solvency. The slight increase in the core equity Tier 1 of BCP stand-alone and Mibanco was attributable to an uptick in retained earnings, which was driven by recovery of both subsidiaries this quarter.

At BCP, we continue to work on key digital initiatives to achieve our objectives for experience and efficiency and ensure our competitiveness in the long-term. Alongside initiatives to accelerate digital investments, we seek to improve time to market and operating stability without losing sight of cyber risk. The number of new software releases more than doubled year-over-year this semester and the downtime for key channels fell 54% in the same period. Our aim for year-end is to fully comply with all the statements of the FFIEC cybersecurity assessment tool at the baseline, evolving an intermediate level and fulfill 90% of all the statements at the advanced level. To date, we have fulfilled 82% of this target.

Client satisfaction was negatively impacted by an active in the demand for services, which coincided with a reduction in on-site service capacity due to the pandemic. We moved swiftly to replenish our service capacity by leveraging digital services, improved the client journey. Consequently, we have recovered satisfaction levels and are now shooting to exceed expectations. The effectiveness of our efforts to execute digital initiatives is reflected in the evolution of the tool of digital science, which represented 55% of the total client base this quarter and continues to see growth. Exponential growth in digital transactions, coupled with an increase in digital sales in recent years led us to rethink and resize our distribution model. Consequently, we reduced our branch network by 9% in the last 12 months.

At Credicorp level, we are developing different fintech initiatives and ecosystems to boost the group's potential. Later this year, we will be able to give you a much more detailed overview. Right now, I would like to comment on our progress with key and specific initiatives (inaudible) we reached the 6.6 million user mark by June '21 and have added 1 million new clients to the banking system since 2020. Transactions grew fivefold with regard to the figure reported for the same period last year. Recent integration with Niubiz and Izipay opens ecosystem to payments through concept cells, which will propel an additional increase in transactions indicators such as frequency of use, cost of acquisition, and NPS continues to grow, and we expect that this will be the case moving forward.

In the second half of this year, Yape, we provide an interesting monetization pipeline. We will share more information on this point as new features are released. Yape is now better prepared to operate independently at BCP and the decision-making results, culture and operating levels. Nonetheless, we have no intention of divesting this business in the foreseeable future. Tenpo is the only fintech with a digital wallet solution in Chile. Within a year of its launch, Tenpo the second largest solution in terms of number of users with a client base of 537,000 of it with an inter-monthly low level for processed transactions that stands at 30%, high volumes and a strong NPS pro forma indicator of 68%, we expect positive trends to maintain. This represents an opportunity to continue growing our customer base as we consolidate in this market.

Finally, Tyba, a digital initiative that began in Colombia to offer low ticket investments has hit the 293,000 users marked this quarter with $89 million in assets under management, Tyba still has significant room to grow in Colombia. Additionally, Tyba was launched this quarter in Peru, where we expect it to grow faster as we leverage our lending position in the market and extensive knowledge base.

Now let me talk about our sustainability journey. We have stated that (inaudible), our social focus is the core objective of our sustainability program. Our efforts has speeded up. And in the first half of 2021, we progresses towards several milestones. On the environmental front, we are pushing the group to mitigate and reduce carbon emissions to 3-prongs, carbon neutrality, environmental policy and environmental management plan. It is worth noting that a new BCP was recognized by the Ministry of Environment for reducing the carbon footprint and was the first bank in Peru to earn the level 3 award. With the support of industry experts, we have made progress in assessing our ESG risk management framework. Additionally, we have launched an eco-factoring line with a sustainable textile company. On the social front, (inaudible) our financial inclusion efforts and 1 million citizens and 35,000 SMEs were brought into the banking fold, financial education programs at BCP and Pacifico have also reached millions of people.

We implemented a program where female board members meet and exchange views with female senior executive with an eye on strengthening networks, increasing the visibility of female talent and addressing gender equity challenges. We have also established directional goals to improve our gender balance and are including agenda perspective in our succession plans for senior executives. On the government front, we have included sustainability goals in corporate level incentive programs and have made full improvement on the compliance front. By year-end, we expect to report progress on relevant ESG initiatives and adhere to international reporting standards.

We expect our overall ROE of 2021 to remain within guidance given that favorable results in the banking businesses are expected to offset the less than favorable scenario in the insurance. Peruvian real GDP growth is decelerating and our estimates for the end of the year this within range. Loan portfolio growth in average daily balances is expected to decelerate given that the uptick in the second half of 2020 was generated by Reactiva disposals. Current uncertainty may impact low denomination year-end. Net interest margin achieved an inflection point that recovery will be gradual. As such, we expect NIM in 2021 to situate at the lower end of the guidance. The cost of risk, however, has improved faster than expected given the positive evolution of client base. In this context, we expect to register a cost of risk below our guidance range this year.

Regarding efficiency, the 43.9% ratio posted in the first half of 2021 is slightly below our guidance. Nonetheless, we expect the levels to increase albeit with an expected range as higher year-end expenses are recorded. The outlook we are sharing today is for 2021, although uncertainties remain on an extended horizon. After evaluating different scenarios, we'll reaffirm our long-term business strategy. We are carefully monitoring the evolution of specific variables and are poised to make tactical changes to adapt to challenging situations. We will continue accelerating value generation through the digital strategy in each of our businesses, which coupled with our sustainable journey will ensure that we sustain growth efficiently.

With these comments, I would like to start the Q&A session.

(Operator Instructions) Our first question comes from Ernesto Gabilondo with Bank of America.

My first question is related to the insurance business. We saw better operating trends in general, net interest income growth for the first time in 3 quarters, an important recovery in fees and significantly lower provision charges. However, we saw this wider loss in the insurance results. So considering that the region is going to a third wave of COVID-19 and that the delta is affecting younger people not vaccinated, how do you see the outlook for Pacifico's insurance business in the next quarters?

Thank you, Ernesto. This is Walter Bayly. I will let Alvaro Correa answer that question. Alvaro, please.

Ernesto, this is Alvaro. Well, there are a few things that are happening after this trend that we saw in the second quarter of the year, which at the end was -- I mean, for this second wave, it was like a 15% or so higher impact on results than the first wave. So the question that you're raising is what is going to happen in this potential third wave. There are a few elements that we have to take into consideration. One is that the vaccination process is getting better. And since the government has started vaccinating people from older to younger, that coincides somehow with the population that is insured. So basically, what we're expecting is that the impact for the country would not be as high as the second wave and the impact on the insurance business won't be as high as in the second wave as well, right? So that's very -- that's something that we are expecting, really. But again, this is something that we do not -- we do not have specific guidelines so far.

And then my second question is on the political outlook. How do you see the possibility of Velarde accepting another period as Head of the Central Bank? And if you think reaffirming his position could reduce volatility in the sector? And also related to the political outlook, do you think that the proposal to change the private pension system? Is it still on the table? Or do you see a more moderate tone from the new administration?

Sure. I will answer those questions, Ernesto. I think the basic scenario here regardless of whether Julio, who is a very well-respected central banker. The question is whether we will have an orthodox central bank or not. Our expectation at this stage is that, yes, we will continue to have a central bank that will act accordingly to more orthodox policies. And once those are confirmed, of course, volatility should be reduced. Regarding the pension system, it has been on the table for quite a while to redo the pension -- private pension fund system and the public system as well. That is a necessary thing to do.

The private pension fund system has been, I think, severely damaged. The amount of withdrawals that have happened and the fact that currently -- the current legislation allows people from 60-year -- the amount in which you can start withdrawing funds has been reduced. And that is, of course, counter to what has happened all over the world, were due to the now returns of the portfolios because of low interest rates, the age at which individuals can achieve their pension has been increased. We have gone counter that cycle.

So at this stage, the private pension system does not have enough money to provide for adequate pensions. So a reform is urgently needed. It is a difficult task for any government and any Congress. It is on the table, but we do not have expectations that this is something that is going to happen very quickly or very easy. I don't know if I answered both your questions, Ernesto.

And then just a last question related to your digital transformation. We're starting to see in each countries of the region, the creation of digital banks. So given all your fintech initiatives such as Yape, Tenpo, Tyba, all the digital transformation inside BCP, do you see the possibility at some point to consolidate all of these initiatives in a digital bank in the future?

I will pass this question on to Gianfranco. Gianfranco, would you care to take it? And I can complement afterwards.

Sure. Good morning, Ernesto. Yes, the answer is yes. We are considering the possibility of launching a digital bank. As we talked in earlier conference calls, the vision we have is that we have to make a few different bets in order to be successful. Some of the bets we've already made are being successful, in some other we fail. However, going specifically to your question, we may pursue, I would say, a dual strategy. One is the vision of launching a digital bank built on what we already have, while at the same time keep the current initiatives or ventures growing and once they're successful, expanding them to other countries.

The next question is from Yuri Fernandes with JPMorgan.

I will limit myself to one question regarding loan growth. I guess you provided guidance likely converting to the lower end of the guidance for this year. But looking ahead, what should we expect? Because my concern here is that about 70% of our loans are business related loans, right? When you add the SMEs, the wholesale, about 70% of your loans in Peru, they are business related. And the concern here is that this political uncertainty may drive maybe you, increasing your risk appetite, right? And also your clients like lower demand from them. So how should we think about loan growth, not only for this year, but for 2022, for 2023, given like this higher [incent]? Should loan growth in Peru be below like nominal GDP? Like what should we expect now? And if you can provide some data in June or July that maybe can, I don't know, show some trend of deceleration, that would be helpful as well? Because in the second Q, I guess that was a good quarter, right, for growth? The question mark is what's going to happen in the second half in 2022.

Thank you, Yuri. I will give a brief answer and maybe Cesar, you can complement. Yes, you are right to the extent that the private sector is not aggressively investing, growing and spending. Obviously, loan growth will be subdued. The long-term trend in Peru is that loans should grow at 1.5x nominal GDP. I think that to the extent that this political uncertainty continues to be a cloud above us, we will be, of course, on the lower end of that long-term trend. So that is reality, and that is what we are preparing ourselves for. Having said this, Cesar, would you care to comment a little bit more on loan growth?

Yes, Walter. Thank you, Yuri. Yes, only to complement, I will think in terms of individuals, there is still demand for consumer and mortgages in line with the private spending that probably is going to be fueled temporarily with a number of government imposed initiatives. And in the wholesale segment, being said that it's going to be probably less investment. It's going to be also some substitution effect from less emission in international markets are probably a little bit less appetite, risk appetite from international banks. So at least in the short-term, we think that we can have these sources of growth.

The next question is from Tito Labarta with Goldman Sachs.

Maybe first, a follow-up on the political environment. Any update or what you're hearing on the caps on interest rates, regulation on fees and any forced lending, anything like that? Any color you can provide there?

No, no further news. The 3 issues that you mentioned are the ones that, of course, post certain amount of difficulty or risk for the financial sectors, you well mentioned, we do have a law that sets caps of interest rate, and that is reviewed every 6 months by the Central Bank. So at this stage, there have been no comments to make any changes on that. There's been a little bit noise on fees, but nothing. We do have rather stringent regulation on fees already. So in the short term, we don't anticipate anything further.

And no mentioning about forced lending, though we have heard there's been a lot of noise from the government and to the extent that Banco de la Nacion should be an active participant, particularly in (inaudible) and SMEs. That, of course, could create distortions in the short-term. In the long-term, we have, in the past, competed with public sector banks. And in the long run, they usually are not the toughest competitors. They tend to have difficulty attracting talent, are usually not very good on the commercial front. And usually technology is not the strength of government-owned financial institutions, particularly in Peru. Thus, in the long-term, it is no concern. Though in the short term, because of price considerations, it can create a certain amount of distortions in the market.

We all remember what happened in the Brazilian banking system during the Lula administration when the series of government-owned financial institutions, under mandate, a political mandate, started aggressively lending in several sectors of the banking industry. And that, of course, in the short-term, creates distortions. So we are not concerned in the medium-term or long-term, but in the short-term, there could be distortions. Nevertheless, Banco de la Nacion is not prepared today from a risk management perspective, from a commercial perspective to go and aggressively be an active participant. It is important to keep in mind that in Peru, about 45% of all the lending done into the SME and micro-lending is done by public sector, financial institutions, basically the Cajas Municipales. So we are watching this closely. But at this stage, we do not have a lot of serious considerations. Did I answer your question, Tito?

Yes, Walter, that was very helpful. If I could ask a separate question then on cost of risk, is low this quarter. I know you provisioned quite a bit last year. How do we think about that for the rest of the year?

Sure. I will pass that question along to Reynaldo and Cesar Rios. Can you start, Reynaldo?

Very positive performance on all our portfolios, a lot better than we expected. And we see these trends continuing during the second half of the year and probably during 2022. Having said that, there's still some small portion of the portfolio, which is still benefiting from grace periods. So that might have a small impact on the performance of the portfolio. But we are feeling very positive and up-to-date with the performance of both wholesale and retail portfolios as well as the trends we are watching at Mibanco. Bolivia is benefiting from regulatory rules that give the clients the opportunity of having very long grace periods. So I would say that would be probably the most challenging things for Credicorp in 2022.

Cesar, is there something you would like to add?

Only something very slightly that in line with Reynaldo, we expect a positive behavior in probability of support and cost of risk, but probably a little bit uptick in deteriorated portfolio and the deterioration that was expected that started to materialize, but materially was already provisioned as the reprogram portfolio has started to become due.

The next question is from Jason Mollin with Scotiabank.

The presentation was excellent. All my questions, you addressed all of them actually, as well as in the previous questions. But I can ask one on, given the consumer demand that you talked about from government support and perhaps companies that are not in the best position that could need some liquidity here. How are you managing the risk here? And how do you see that impacting your market share going forward? Do you think that Credicorp's businesses will actually be looking in this environment to give up the weaker credits or weaker clients and will retrench and that would result in lower market share?

Thank you, Jason, and thank you for your kind words. No, at this stage we do not anticipate. Of course, as it was mentioned by Cesar during the presentation, we have made a thorough review of our long-term strategic positioning. And we do not think that at this stage, there is anything that merits any changes in our long-term strategy or view of what we want to become and where we want to play. Nevertheless, under such a changing environment, tactical responses are something that one has to be ready to tackle. And of course, we are watching the development of each of our different market segments, product market segments.

But at this stage, we have no intention of not continuing active participation that we have in all the products and segments in which we are currently present. So the answer -- in short, the answer is no. We do not have any objective of reducing any portion of our portfolio or market share going forward. And as Cesar mentioned, maybe what could provide somewhat of a growth opportunity is the fact that the domestic capital market because of the lack of liquidity and the pension funds and the lack of international capital markets, maybe there could be some more lending for top corporates available in the corporate center. I don't know if, Gianfranco, would you like to add something?

We have, as always, there's a fine balancing act between risk and business opportunities. On top of what Walter has said, we still have a long-term strategy, leveraging on technology in order to reach new segments of both the population and SMEs at BCP, I'm talking. So we -- even though maybe the macro-environment might not be so positive, we are still positive on the opportunities in getting more businesses and in tackling new segments of businesses.

Maybe I could just ask, I mean, you guys have mentioned that some of the competitors, I think, that's in the micro-lending, some of your competitors have had a tough time with funding. And that is a segment that there are a lot of question marks about the addressable market and how that will evolve. Could it actually result -- could you guys see some gain in market share in that segment in the near-term? If competitors are not going after the clients or not able to? Or any color on that at segment will be helpful.

Yes, go ahead, Gianfranco.

Yes. So maybe the answer is twofold, Jason. And I believe we talked about it before. The micro-business, the microfinance business is a high cost business. At Mibanco, we are -- at this stage, we're developing a hybrid model in which we leverage, even though it's still a high-touch business based on RMs, we're leveraging on technology and tech tools in order to be much more efficient. And as a matter of fact, if you measure the cost to asset ratio, Mibanco is way under its competitors. So we do see an opportunity there.

Then I switch to BCP. In the past, we haven't been successful to tap those low ticket clients in the SME business, basically because of the distribution cost. Again, we already have a distribution channel, a full digital distribution channel, which were -- piloting today, and we do see opportunities to tap that market through that channel [in this thing]. So the answer, in the long run is, I do see opportunities to gain market share in the SME business in the low ticket clients.

Thank you, Gianfranco. Jason, let me add to that, that particularly on the SMEs and the microfinance side, as you well know, last year, we did a very aggressive provisioning and we did a capital increase to allow the bank to continue to operate under capital standards that we feel comfortable. Under pressure from the other participants in the microfinance, particularly the Cajas, the government set up a program that allowed injection of capital. So far, that program is still not active. And we have not seen the level of provisioning or a statistical evidence that the cleanup in the portfolios of some of the Cajas has happened. And we are all operating in the same market with the same customers. So that leads us to believe, based on that data, that the day of reckoning has yet to be acknowledged in those portfolios. And when that happens, it's probably when those opportunities that you mentioned will probably start to appear and allow us to become even furthermore of a leader in that market. Did we answer your question?

Yes. Thank you very much.

The next question is from Alonso Garcia with Credit Suisse.

My question is regarding the interest rate cap. I mean, back in April, Central Bank set the rate cap at 83% for the May to October period. So now 3 months later, I wanted to hear how you adopted to the new regulations? If you had to do some adjustments to your strategy for certain segments of the portfolio or if not really? And moreover, how did you see your competitors adapting to the regulation? And if you think probably your competitive positioning against them changed in some way following the implementation of this regulation?

Sure. Thank you, Alonso. I will answer regarding Mibanco and Gianfranco can, after I finish, tackle the issue of BCP in the consumer side. On the Mibanco side, yes, we have had to withdraw from a certain portion of the customers that because of distribution costs and cost of risk did not -- were not profitable with the interest rate cap. It was not the most profitable segment, but that is reality. So we have abandoned that market. We are not aggressively pursuing there, those loans. It was, as I mentioned, not the most profitable segment. It was even probably just a breakeven segment, but it was very core to our purpose of including -- of financial inclusion. So it is a shame that we're unable to be more aggressive there. But having said that, I don't think it will have an impact on the P&L. So that is the answer from the microfinance side. And Gianfranco, would you tackle from the consumer side?

Sure. Just a quick comment on what Walter just mentioned. And we've said it before, from the client perspective, the most expensive loan is the ones you need and you cannot get. And in a country where we're still lacking financial inclusion, it's a period that legislation that the one you mentioned has been installed. Regarding the consumer business, yes, we've adopted. The heat more than in the cap of interest rate, it comes from the delinquency fee. The whole consumer business has been hit. And the strategy is quite similar to what Walter mentioned for Mibanco. So we are pulling off of some of the low segments in consumer finance, specifically in credit card, which is a business or a segment which, for us, wasn't as relevant as our competitors, both in terms of market share and in terms of profitability.

And if I may, a second question on the OpEx side. I mean, for the first half of the year, expenses are up 3.9%, so slightly ahead of inflation. But for the second quarter alone, expenses increased strongly, both quarter-on-quarter and year-over-year. So -- which you attributed to digital marketing campaigns. So I just wanted to check what drove this uptick in marketing campaign? I mean, was it driven by pressure from competition maybe from other banks or any fintech companies? And based on this, what should we expect for OpEx growth for the full year?

Thank you for your question. Cesar, could you tackle this one, please?

Yes, Alonso, thank you for the question. In addition to the factors that you already mentioned that I am going to replay a little bit, is also the seasonality. As you remember, at BCP, particularly, we have a low level of expenses in the first quarter and a higher one in the fourth. So when you compare the second with the first quarter, you are capturing the seasonality effect. Another 2 factors were, I would say, the normalization of the variable compensation given the fact that now we are close to, I would say, normal levels of profitability and drives that -- the pool of variable compensation. And finally, we have a jump-start and have improved a lot the digital marketing initiatives in Yape and in other BCP [polls], and we are starting to gain awareness, to spending awareness, that also in actual client engagement. And this is -- it has a correlation with the level of sales of digital products and is part of the internal strategy.

The next question is from Carlos Gomez with HSBC.

I wanted to ask you about the relationship with the new economic authorities. And I mean, I remember in the previous conference call, you make a judgment that we were going to have a new administration, and that's what happened. Would you say that the current economic team is going to last for the duration of this administration? Or should we expect further changes? And would you say that you have already engaged in dialog with them?

Thank you, Carlos, for your question. It's -- you're asking for a very speculative answer. Obviously, we have absolutely no clue as to whether this current administration or administration at the Ministry of Finance will be there for the next 5 years. That's a tough call. So we don't know. We have not engaged yet in conversations with the Ministry of Finance. There have been a couple of meetings with some, with (inaudible) and some of the other groups, not individual meetings. I think the scenario that we are seeing at this stage is one that was described to me as having a good level of macroeconomic orthodoxy, both at the Central Bank and at the Ministry of Finance, meaning that we will have a central bank that will be watching monetary policy, with a good eye on keeping inflation under control. And at the Ministry of Finance, we will have a team that will make sure that the deficits, and we run a relatively balanced situation.

So we will have macroeconomic orthodoxy from a monitoring fiscal point of view and a lot of initiatives from the micro-point of view that are quite unorthodox. That is the scenario that at this stage, we are seeing. But of course, these are just speculative ideas on my side. We have no further evidence. There's still a lot of uncertainty going around. Did I answer your question, Carlos?

I think you answered the question as best as can be answered at this point. If I can follow a little bit, completely different area. You mentioned, and that was very clear that there was a decline in the level of service to your clients that you addressed with more resources. At the same time, you have reduced the number of branches by 9%. Isn't there a contradiction in reducing your retail network when perhaps there is more demand for your services?

I understood the comment you made regarding the fact that we are reducing the branches. Yes, that is reality that is happening both at Mibanco and at BCP. And that is, of course, because customers are utilizing more actively digital channels to interact with either institutions. But I did not understand the first part of your question, we are reducing the level of services. I did not understood.

No, at some point during the presentation, you mentioned that the satisfaction of your clients has dipped a little bit and you had to put more resources to restore it?

Yes. Okay. Got you. Yes. Well, we are constantly measuring the level of customer satisfaction. And yes, that results in a whole series of initiatives to how you counter that, but less and less the quality of the service provided is related to the amount of branches. We measure which are all the different pain points in which our customers and points of contacts that our customers have. And as I reiterated, less and less, that has relevance to do with the actual branch. It has to do with some of the digital channels, the phone, maybe even the way our bank statements are sent via e-mail. It's a whole bunch of different points of interaction and pain points our customers have that are not related with the branches. So we think there is no contradiction at all with the fact that we are gradually reducing our physical footprint with the fact that we want to continue improving our customer satisfaction.

The next question is from Andres Soto with Santander.

My first question is regarding the potential new regulation that would potentially come under Castillo administration. When I look at his proposals in terms of more active role of a government-owned bank, setting caps differentiated by sectors in the economy, et cetera. This looks a lot to me like what you guys have experienced in Bolivia. So I would like to hear your thoughts, given that you have experience in this market. If you see a parallel between the Bolivia right now and what Peru is moving to? And given that the ROE that you got in Bolivia back in 2019, pre-pandemic, is 8%, can we assume that this 8% could be a reference for Credicorp ROE and a more radical version of Castillo Administration?

That's a strange question. Okay. Let me tackle this. We do not think that the scenario that we are looking as the most likely scenario is anything related to what you have just described. I have already mentioned the all -- made a lot of comments regarding a more active participation of government entities in the lending arena. And I will make those comments again. What has been mentioned is that Banco de la Nacion will take a more active role in lending to the small SMEs and micro-companies. That, of course, is a possibility that in the short-term could create distortions. But in the medium term, it is of no concern. Competing against public sector entities has in the past proven to be not the most difficult task.

But in the short term, it could create distortions to the extent that you have an institution that lends at rates that do not reflect cost of risk or return on equity. Having said that, implementing that strategy as distortive as it can be in the short run, it's not easy for Banco de la Nacion. Banco de la Nacion is an institution that is struggling with some of those changes in its core applications and its systems, does not have lending experience, nor does it have a commercial muscle to go ahead and aggressively compete with about 20 or 30 different financial institutions that are out there aggressively competing in the market. So yes, it's a possibility. It's a long shot. It does not keep me awake of night.

Interest rate caps, again, we have already commented on that, the responsibility to regulate that has been given to the Central Bank, which will review this on a 6-month period. The regulation that we have today is one that has strived to comply -- has complied adequately with the law while trying to minimize the impact on financial inclusion. To the extent that we have a central bank that continues to have that view, and we believe that will be the case. We think that further damages to financial inclusion, if happen, could be marginal, more than dramatic.

We have not had any discussions, nor there has been any noise in creating pockets of lending, forced lending. And the scenario that you pointed out that Peru becomes Bolivia is not our basic scenario, and I would give it a 15% probability. And if that 15% probability happens, our return on equity would come down, yes. At what level? I have absolutely no idea. I don't know if I answered your question, Andres.

No, that's clear, Walter. And talking about another country where you guys have experience, which is Colombia. And when you look at Castillo's proposals, all of them are fiscally expansionary and will increase deficit and will -- required additional taxes. Are you guys concerned about the possibility of increased taxation over the medium-term and potentially specifically targeted towards the banks?

Yes. I think this is something that is going to happen all over the world. During the health crisis that we have -- are still living the tail -- hopefully, the tail end. All the governments in the world have embarked, rightly so, on very aggressive fiscal spending. And all the countries in the world need to get back on a more sustainable fiscal plan. That will require additional taxes, which will further -- which are further compounded with a movement all over the world, let's call it, to tax the rich, find out the rich individuals or the rich companies. So yes, we think that there is a very likely scenario in all over the world, including Peru, that taxes will increase. Yes, that is a very likely scenario.

Perfect, Walter. And moving to a totally different topic. When you describe the outlook and the uncertainties and the potential lower growth for the second half of this year and even next year. And I look at your capital, and you obviously have an excess capital position. I would like to hear your thoughts regarding this. What is your current assessment or your capital level? In the past you spoke about $850 million, if I'm not wrong. And if the investors can expect this money to be returned to them either as a buyback or extraordinary dividends?

The short answer is yes. The scenarios that we see going forward, and which we have -- are discussing in this call, probably call for less growth, less growth in the country, less growth in the lending needs and less growth in risk-weighted assets, while we continue to generate decent returns on equity. Thus the scenario is that we will be generating excess cash, which will clearly be distributed to our shareholders. We are going in the next Board meeting to take a proposal, which has to be reviewed, approved and discussed at the Board level, what to do with the current excess capital that we have. And we will communicate as soon as that is, of course, decided upon.

But in summary, yes, we do think that we will be able to generate profits that will exceed the funding requirements, the capital requirements of our subsidiaries. Thus, we will be able to retake or resume a growth path in our dividends as we had prior to the crisis starting.

The next question is from Thiago Batista with UBS.

I have 2 small questions. The first one is about the funding. If, because of all the uncertainties in Peru, if the bank has seen already a migration of deposits to U.S. dollar, and if this is true, how we consolidated it with the material reduction, probably close to the all-time low in the level of cost of funding for local currency? So if we are seeing the shift to U.S. dollar deposits and how this consolidated with the very low level of funding costs? The second one is about Yape. You mentioned that the digital wallet achieved already about 7 million clients or close to it. Do you have a sense if there's a big overlap between Credicorp's clients and Yape clients? And how do you believe will be the monetization process of Yape?

Those are good questions, Thiago. I will pass the -- I will let Cesar answer the first part -- the first question regarding funding dollarization. And then, Gianfranco, you can tackle the question about Yape, Yape customers and monetization. So pass on to you, Cesar.

Thank you, Walter. Thiago, talking about funding, what we have seen is a significant increase in low cost funding, particularly at BCP level. And in general terms, you have seen the increase of this low-cost funding in forms of savings and noninterest-bearing deposits for the wholesale business as a result of the liquidity provided by the government, but also the government-mandated release of funds from the pension funds. And we have maintained during all this period, very high levels of liquidity that has maintained almost, including more than we were expected previously. And we have seen some migration from soles to dollars, but not a very significant degree.

From the first month of elections to now, there has been some migration of funds from Peru to outside. But the target level of deposits in the system has been maintained. And in the case of BCP, we have even gained market share. Trying to reconcile this with the cost of funds, this composition explains the reduction of cost of funds because most of our funding comes from these very low-cost sources, and when you blame with the proportion of long-term funding, in average, we reduce our cost of funds.

In the short term, as a result of the increase in the reference rate of the central bank that was announced last night, this is a net positive for us because the cost of fund in the short-term are starting -- continue to be at very similar level for a significant part of our restructure, while at the same time, we are going to be able to re-price in this proportion, this 25 basis points through the rest of the year, the high -- the very liquid parts of our investment portfolio and the short-term part of our loan portfolio.

So we are still seeing a low cost of funding. And with this, a small increase of reference rate in the Central Bank and increasing our margins in the short term. By the way, this signal from the Central Bank is very positive because at the same time, they maintain ample liquidity and support for the financial system, they are giving a clear signal that they are watching over the inflation and setting expectations. I don't know if this answer helps you.

No, clear. Very clear.

Let me go on the Yape question. Out of the 7 million clients Yape has, I would say, it's 20% to 25% are related to Credicorp. The remaining clients are clients from other institutions. You have to bear in mind that already 6 or 7 financial institutions are part of Yape. So their clients can come down -- if there are clients, they come down at Yape. But more important, we already have over 2 million users that are not necessarily related to any financial institution through Yape Card, which is a virtual debit card.

But more important than that is that the overlap in terms of usage. We -- and we've talked about it for several years now. We have ambition of [war] on cash. And the more alternatives we provide our clients, the more -- or the less usage of cash we will see from our clients. What we -- so the amount transacted through Yape in June was like 5x or 6x what was being transacted a year ago. At the same time, the amount transacted in debit card and credit card grew over 20% as compared to 2019. So I would argue that there's basically no cannibalization or marginal cannibalization among those parts. And when you compare the amount -- the ticket, the average ticket transacted through the Yape compared to the ticket transacted through mobile banking is like, mobile bank is like 10x larger.

So the vision there is that Yape is definitely a very strong complement to the payment methods we have in the past. On top of that, Yape has already reached 1 million QR codes distributed among micro-businesses. So if you may recall, Yape started as a P2P application. Now it's obviously a P2P, also a P2B through this QR code -- physical QR code. But in addition to that, as Cesar mentioned, Yape QR code is already exposed through the point-of-sale of both Izipay and Niubiz, which basically represents, I would say, 99% of the amount transacted through point of sale.

Regarding your question on monetization, obviously, that's one line of amortization, MDR we get through QR codes through new Niubiz and Izipay. And for this quarter, we're launching top-ups, and we're launching micro-loans. Top-ups, obviously, we get a fee from the telephone companies, but the vision is more than a vision of monetization, is a vision of how to increase -- how to further increase the usage of Yape, the number of transactions per client. And in terms of micro-loans, we are already lending -- providing micro-loans based on the Yape information, but not through Yape, not through the Yape app. So the UX is not good today. However, the response rate is quite interesting. We really expect that the response rate should increase dramatically when it's through the app. So we are very positive on these new 2 features that should be launched this quarter.

The next question is from Ingo Lupatelli with Autonomous Research.

On the increase in expenses coming from marketing and IT, how should we think about it moving forward in the second half and also in 2022? So how much is transitory versus should we expect an increase or this level to continue?

Thank you, Ingo. Cesar, could you help me with this one?

Yes. If we focus on the specific lines, Ingo, probably they are going to increase, but what we are striving to do is to transform the cost structure of the bank, particularly at BCP and the same in Mibanco. So you are going to see the increase of certain lines related to IT. While at the same time, for example, as reflected in the reduction of the traditional footprint, we are going to control costs in other parts and jointly strive for improvement on the efficiency ratio of the -- both -- all the organization of BCP. So I think we are striving to improve efficiency ratio by changing the composition of specific clients, aligned with the digital transformation.

And on the marketing expenses, how should we expect this to continue?

In this particular line, it's in the same line. For example, Gianfranco mentioned efforts to launch new facilities in Yape. This entails to be much more active in the market, probably at the beginning, spending more in third parties. And when we have more flow, internal flow, we are going probably to change using internal traffic to gain awareness. That is part of the same strategy to (inaudible) for the clients, improve engagement. And when you have more traffic, starting to exposure of products using gradually this and, yes, third-party, the most costly alternative.

And now I would like to turn the conference back to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.

Thank you. The results of this first half of 2021 are very much in line with what we have been anticipating to the market, namely that 2021 is the year in which we rebuild our margins, our volumes and our profitability. This, of course, after a very difficult 2020 in which the focus was to adequately generate the required credit provisions to reflect the damage in our loan portfolios of the biggest drop in GDP in Peruvian modern history. Even though this first half results, which show an annualized return of 11.3%, are, as mentioned before, well in line with anticipated results. There are differences within the different business units of Credicorp. I will briefly comment on the 3 main subsidiaries.

Clearly, Pacifico is the unit whose results are way under what we had anticipated. The second wave of COVID infections and mortality greatly exceeded our expectations and those of the first wave. As you know, Pacifico is the clear market leader in life insurance, which includes credit life and life insurance associated to customers of the private pension system. Our life insurance business has been, and once normalized, will continue to be a driver of growth and profitability. Thus, short-term results do not change our long-term view going forward. We anticipate our life insurance business to return to profitability in this third quarter as the impact of the second wave of infection has already decreased in a very relevant way. As Cesar mentioned, of course, the possibility of a third wave is real, but vaccination efforts have recently accelerated and already reached 35% of the most vulnerable population with at least one dose. Thus a potential third wave should result in lower mortality.

BCP stand-alone results are for the second quarter, in a row, very positive, achieving returns of equity above 18%. Structural loans have started to grow, though at a subdued rate, NIMs have started to recover, while cost of risk is coming down. We continue to be extremely focused on all different digital initiatives, which continue to advance very successfully. As anticipated, we have accelerated the pace at which we invest and spent in these initiatives.

Mibanco's results are also encouraging and recovering very well as we are already exceeding our anticipated return on equity, estimated at high single digits by year-end, and we already have 10.3% as of June. Volumes have started to grow, while cost of risk is coming down. Productivity is climbing ahead of our plans as 1/3 of the number of monthly disbursements have already been done without the intervention of the loan officer.

Finally, the evolution of NIMs is also positive. We are very encouraged by yesterday's timely decision of the Central Bank to very modestly increase our local currency reference rate. This modest increase gives the message that our Central Bank is watching closely the evolution of inflation while still maintaining an extensive monetary policy. This move is also a message to the FX market.

To conclude, all variables under management control are evolving favorably and believe we are well positioned to exceed our expected results this year. We are faced with an unstable political scenario, but it is good to remember that unfortunately, political stability has not been the norm in Peru. Our macro-fundamentals in the fiscal monitoring financial system continue to be strong. And while our demographic system of checks and balances is and will be tested and challenged, we are cautiously optimistic on the final outcome. The coming year will be full of challenges and not without volatility on the political front. We will, nevertheless, as we have in the past, weather this political volatility and continue to be focused on our mission and purpose.

With this, I finalize our conference call. And again, we thank you all for your continued interest and for joining us in this call. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.