Credicorp Ltd.
Q1 2021 Earnings Call Transcript

Published: 9 May 2021

[Operator:]

This is recording of the Credicorp’s First Quarter 2021 Conference Call on Friday, May 7, 2021 at 9

[Cesar Rios:]

Thank you. Good morning and welcome to Credicorp's conference call on our earnings results for the first quarter of 2021. I hope you and your families are healthy. As you know the current sanitary situation in Peru as well as the political landscape are key factors of uncertainty. The sanitary situation in Peru and metropolitan Lima has not improved in recent months, as is reflected in data on excess mortality. Peru's vaccination rollout, which began in February has progressed at a slower pace than the other of countries in the region. Nonetheless, the government has announced there will be an acceleration in the organization process in the coming months. In this challenging context, we continue to put the well-being of Credicorp's employees first, as we focus on ensuring operating continuity and offering financial solutions to clients and employees alike. Our ultimate goal is to serve society as we continue to create value. On the political scene, candidates Pedro Castillo and Keiko Fujimori will face off in the second round of Presidential elections on June 6. The latest polls show candidate Pedro Castillo in the lead. Mr. Castillo from the political party Peru Libre has proposed a number of measures. According to the party's government plan it intends to shift away the current market-oriented economic model to one that prioritized a so-called popular economy with markets. Under this model, the state will play much more active roles in businesses. Peru Libre's plan also includes holding a constitution assembly to write a new constitution and nationalizing so-called strategic cycles. Mrs. Fujimori in contrast favors maintaining an economic model that supports national and foreign investments and advocate a restricted and secondary role for the state in the economy. Mrs. Fujimori also believes that the current constitution should remain in effect. It is still early to predict the outcome of this election. Polls can shift considerably in the Peruvian context, which is marked by high levels of voter indecision. In any scenario, the new executive branch will need to generate consensus to be able to implement changes. The recent elected congress is highly fragmented and composed of 10 political parties.

[Walter Bayly:]

Thank you, Cesar. Good morning to all of you. I would like to summarize the key results of this first quarter conference call make some additional comments before opening up to Q&A portion of the call. ECP delivered a strong quarter with 18.4% annualized . We are still not seeing growth in the loan portfolio and loan growth will probably be sluggish throughout the year. These strong results were largely driven by lower cost of risk. Mibanco's structural recovery was negatively impacted by the lockdown measures which curtailed loan origination. The situation did stabilize and I am confident that Mibanco can still deliver high single-digit return on equity this year. Pacifico's results were severely impacted by the second wave of COVID-related deaths. This was exacerbated by changes in the methodology utilized with more accurately calculated incurred, but not reported claims. We should see the tail end of this second wave in the second quarter. The impact should nevertheless be less severe in that the statistics indicates that the second wave is already declining. And the allowed us to anticipate IBNR claims. A third wave cannot be ruled out before year end, but the severity should be less that the vaccination process is already underway with approximately 5% of the population already vaccinated. But the relevant risk factors today are not related to the performance of any of Credicorp's units and are centered around the legislation and politics. As Cesar mentioned, Congress recently passed and enacted legislation around interest rates which benefits no one. This legislation has limited impact of BCP who is traditionally more focused on -- consumers. This legislation is more relevant to Mibanco who will have to redirect its loan origination salesforce to other segments. This could even be marginally more profitable since entry-level microfinance loans were have the most profitable, but are core to our purpose and mission of financial inclusion. This piece of legislation which is being challenged at the -- will have a very negative impact on financial improvement. Other legislation worth mentioning is an additional distribution of from the private pension system. This will represent approximately PEN11.4 billion or 24% of assets under management. But of course, the largest risk factor is around the upcoming second round of presidential elections. The outcome is still unclear. With important segments of the population still undecided, they could change the results either way. We will have a clearer picture as the election date comes closer. But it is very worrisome that one of the candidates has made public statements regarding his party's intention to shut down or eliminate institutions such as the which are pillars of our democratic system. Furthermore, Peru libre's government program mentions the states taking over oil gas mining and other sectors of the productive side. Such initiatives have been tested in Peru in the past and in labor countries with very negative results from production levels, employment, investment, and overall economics royalty. Members of Congress have already been elected and we will have a very fragmented Congress. And whoever becomes President, will have a hard time enacting new legislation. To the extent that the new administration governs within the boundaries of democracy the checks and balances of our system should be--. Having said that this political and economic volatility is extremely negative and comes at a moment when Peru is struggling to recover from the worst economic and health crisis in this history. Peru's population is very much impacted by the health and economic crisis and hopefully, we will be able to continue down the path over the past decades that has proven successful in reducing poverty and improving the quality of life in Peru. With this, I finish my comments and we'll open up the Q&A session.

[Operator:]

Thank you, sir. Our first question comes from Ernesto Gabilondo with Bank of America.

[Ernesto Gabilondo:]

Hi, good morning Walter and Cesar. Thanks for your presentation. I have a couple of questions, so I will ask the first one. I will let you to answer and then I will do my second question. So, the first one is on the political outlook. I just want to know your thoughts on what could be the risk for the financial sector if Castillo is elected president.

[Walter Bayly:]

Yes. It is very unclear Ernesto what that -- what -- what an explanation would be passed regarding the financial sector. There is nothing specific in the economic program so there's very little that we can comment.

[Ernesto Gabilondo:]

Okay, perfect. And then my second question is on your cost of risk which came at 1.6% so below your guidance of 1.8% 2.3%. Do you think that now the cost of risk would be more in the low end of your guidance?

[Reynaldo Llosa:]

Hello, Ernesto this is Reynaldo. Yes, I mean the performance of the portfolio in general has been quite good better than we expected by the end of last year. So, I mean your forecast is probably correct. We expect that the performance continues in these good trends on the low side of our guidance.

[Ernesto Gabilondo:]

Perfect. Thank you so much.

[Operator:]

Thank you. Our next question comes from Brian Flores with Citi.

[Brian Flores:]

Hi, good morning. Thank you for opportunity to ask you question. Just a quick follow-up on the guidance. You mentioned cost between 1.8% and 2.3%. So, do we expect higher provision for the coming quarters? And then if you could talk about what we should expect the expenses given that in this quarter they serve maybe 6% -.

[Walter Bayly:]

I couldn't hear very clearly.

[Cesar Rios:]

In terms of customer risk we haven't changed our guidance. There are still some uncertainties on the future. There is a quite important side of the portfolio which is still on reprogramming facilities without payments, so we haven't changed our guidance as to this point. Having said that as I mentioned before we are positive on the trend and on the performance of most segments of our market, so we are expecting to be as I mentioned in the lower side of our guidance for the next quarters.

[Walter Bayly:]

Brian, I think you made an additional question but I couldn't hear you clearly.

[Brian Flores:]

Yes sorry. The additional return to expenses saw a decrease of around 6% year-over-year. So, how should we think about this line for this year particularly?

[Cesar Rios:]

If I hear you and understand well, we think our expenses are under control. And what we saw during the last year was a reduction of variable compensation. Variable compensation now is going to be adjusted more in line with the current results and to normalized levels. At the same time, we are enforcing a number of initiatives to control other expenses and increase efficiency particularly for example in Mibanco. So, in terms of cost, we think that we are going to be very much in control that the combined ratio the cost-to-income ratio is going to be more affected by the trends of income that as we stated during the initial remarks are somewhat challenged in terms of margins.

[Brian Flores:]

Thank you.

[Operator:]

Thank you. Our next question comes from Thiago with UBS.

[Thiago Batista:]

Yes, hi guys. Thanks for the opportunity. I have one question about Mibanco. Mibanco used to have an ROE of close to 20% or even above 20% before COVID. Do you see this level again considering a more normal Peruvian scenario? Or there are any -- or any driven change in the markets that should prevent the ROE to return to this 20% level?

[Walter Bayly:]

Thank you for your question. I will take it. This is Walter. Yes expect, we have -- we feel very comfortable that Mibanco will be able to return to the 20% fast return on equity next year. This year our target as I mentioned in my comments is to have probably the maybe in the high single digits. The size of the portfolio the profitable portfolio at Mibanco suffered a lot. The duration of that for the full year is about 13 months. So a couple of months with very sluggish loan origination due to the lockdowns really shrank the profitable portfolio in a substantial way. So, we think we can go back once the situation gets normalized in terms of our sales force being able to move freely and we are also making a lot of efficiencies in the hybrid model which is not exclusively dependent on the salesperson. So in short, yes, we can get to the 20-plus return on equity not this year next year.

[Thiago Batista:]

Perfect. Very clear.

[Operator:]

Thank you. Our next question comes from Jason Mollin with Scotiabank.

[Jason Mollin:]

Hi. Hello everyone. My question is a general question about the current context of the uncertainty that you mentioned, particularly given the political scenario, how -- and you've dealt with this kind of political uncertainty in the past. How should we think about what Credicorp can do to prepare now just with this uncertainty? Are there actions to be taken in terms of shoring up positions, US dollar positions? Are there things you're doing now to prepare for a less market-friendly environment?

[Walter Bayly:]

can you tackle this one?

[Jason Mollin:]

Hi can you hear me? Yes could you hear me?

[Walter Bayly:]

Yes, could you hear me? Yes. Cesar, are you there?

[Cesar Rios:]

Yes. Yes. We are preparing I will say in two different prongs. One in the short-term, we are managing the FX position and the sensibility of our books to the volatility of interest rates. And in parallel, we are analyzing how we can navigate in a different scenario. But I would like to emphasize the experience of the institution and the management team in general dealing with uncertainty and complicated situation throughout the history of the company. We have managed challenging situations before and thrive increasing the capabilities through this kind of time. So we are prepared in the short-term, a number of measures and we in general think that we have the capabilities to adapt and manage uncertainty down the road. It's very early to say what specific impacts they could have, but we rely on these strengths of the companies and the culture.

[Walter Bayly:]

Let me add something to what Cesar just mentioned. Apart from the very obvious increase in liquidity maybe some FX positioning and managing less exposure to interest rates, we are long . We are an institution that is basically fully phased and that is what is what we are. Against that, we have certain levers that we can manipulate. But more importantly, we will -- we have as Cesar mentioned navigated in the past through very difficult political situations and we think we can continue to do so. But we have of course done the obvious of increased liquidity taking some FX positioning within the limits of what is reasonable.

[Jason Mollin:]

Thank you, very much. I have seen Credicorp really manage some pretty challenging situations, so I understand that. Is there anything that's different this time than what we've experienced in the past and through in the last 25 years?

[Walter Bayly:]

No, no. Really when got elected, we went through a similar situation. And this one is no different.

[Jason Mollin:]

Thank you very much for the comments. Congratulations on the results in the tough environment.

[Walter Bayly:]

Thank you, Jason.

[Operator:]

Thank you. Our next question comes from Alonso Garcia with Credit Suisse.

[Alonso Garcia:]

Hi, good morning everyone. Thank you for taking my question. I want to touch base on the interest rate caps. I mean the Central Bank are announced a level of 83.4%, which was actually much higher than we had expected and much higher compared to rate caps in Colombia and Chile. So, certainly a more benign outlook for Credicorp based on this rate cap. But could you please share your views on the potential impact or the potential percentage of your portfolio that would likely be impacted in case the rate caps in enlisted at 83.4%? And also, if you could discuss the timing -- the potential timing for implementation of this rate cap? Thank you.

[Gianfranco Ferrari:]

Yes. This is Gianfranco. Let me take this question. Good morning everyone. I tend to disagree with your comment on being a benign rate. You have to for that the level of formality of the economy in Peru. Therefore the -- both the cost assessment or the cost of risk plus the distribution costs are very high in our market. The major impact is going to be in terms of financial inclusion. There are some studies that say that over one million people that are currently financially included that have gotten a loan will be excluded in the upcoming months. So that's actually the major impact. Regarding BCP -- about BCP and Mibanco unfortunately the small-ticket loans are going to be hurt the most. That's not relevant in terms of size of the portfolio. However it's relevant again in our financial inclusion agenda. Regarding your question on timing as of -- actually I believe, it's Monday yes May 11 this cap starts to be in place.

[Alonso Garcia:]

This is very clear. And just as a follow-up is there like legal challenges to the straight cap in place or it will be indeed put in place next Monday?

[Gianfranco Ferrari:]

Yes. Yes. The answer is yes. Well first of all the executive power has mentioned that they will present, I don't know how to say it, a proposal a requirement to the constitutional review in order to ask for -- asking for that this law is unconstitutional. There's another -- it's that have also -- which is a private association has also experienced the same requirement. And there are some financial institutions that have already presented another type of legal requirement. So, the answer to your question is yes.

[Alonso Garcia:]

Thank you.

[Operator:]

Our next question comes from Yuri Fernandes with JPMorgan.

[Yuri Fernandes:]

Hi, all. Thanks for the questions. I have a question regarding FX deposits. We saw some increase .

[Operator:]

It looks like Mr. Fernandes' line cut out, so we're going to go to our next question Brian Flores with Citi.

[Brian Flores:]

.

[Unidentified Company Representative:]

I couldn't have.

[Brian Flores:]

.

[Unidentified Company Representative:]

I couldn't hear.

[Unidentified Company Representative:]

I'm sorry. I think a understood the question. It was related to dividend payments. I think was the question. At this stage we are -- we feel comfortable with the capital gains that we have and we are working to clear some of the uncertainties around the health situation and the political situation to be able to analyze paying dividends in the second half. I think that was the question. I'm sorry the line is not very clear yes.

[Brian Flores:]

Yes, sorry. very clear. Thank you.

[Operator:]

Thank you. Our next question comes from Alonso Aramburu with BTG Pactual.

[Alonso Aramburú:]

Hi, good morning. Thank you for the call. I wanted to follow-up on the interest rate capital income. Is it possible to quantify the impact of income from this law? And do you know if the challenges -- if the constitutional challenges presented to the tribunal will this also impact the fee income or the constitutional challenge only for the interest rate cut?

[Unidentified Company Representative:]

Alonso it's for both. It's actually for both. In our case I'm talking about DCP the impact is much higher on the fee side rather than the interest rates. But I don't have the exact figure as of -- I don't know Cesar if you have some info there.

[Cesar Rios:]

Yes. The impact in interest rate is actually very modest impacting the number of clients significantly as Gianfranco mentioned before but the fee income impacts around 4% of the fee based on a yearly basis.

[Alonso Aramburú:]

That is 4%.

[Cesar Rios:]

Yes.

[Alonso Aramburú:]

Okay. And do you know if the challenge will also challenge the constitutionality of the fees being imposed or being taken a out?

[Unidentified Company Representative:]

Yes. Yes. No the challenging is for the whole law Alonso both on the fee side and the rate cap. Yes.

[Alonso Aramburú:]

Okay. Thank you.

[Operator:]

Thank you. Our next question comes from Andres Soto with Santander.

[Andres Soto:]

Good morning everybody. I would like to hear your thoughts regarding margins. Obviously Credicorp is facing a low-rate environment, but asset mix has probably been a bigger factor in turning that and recently given the increased weight of securities versus loan in your asset composition. So can you please comment on your NIM on loan trends. And also, if you can exclude from that the effect of Reactiva on how your current levels compared with those before the pandemic?

[Cesar Rios:]

Yes. I would say that even if you exclude Reactiva loans, we now are operating under a lower margin. That is the reflection of the low short-term interest loans that affect the investment portfolio, but also the short-term corporate and enterprise loans that are a significant part of the portfolio. So, this is impacted and it's going to be impacted as long as the interest rates are as low as it is now. In terms of mix, we have as was explained in the remarks mainly by two factors in the case of BCP lower demand in corporate loans, the companies are optimizing the balance sheet and are in general change liquid, so lower demand in corporate loans. And in the retail portfolio, we have an impact particularly in credit cards, due to two factors. One is the big-ticket discretionary expenses are a lower level and this is going to be the case until the lockdown is in place or restricted measures are in place and some restrictions in risk appetite for the consumer segments. The other parts of the portfolio are growing a healthy pace. And in the case of Mibanco as Walter mentioned, we have a decrease in volumes that are recovering now. And also we are transitioning from lower risk, lower margins to higher margins with a little bit more risk down the road. This mix are going to be visible down the road. But until the pandemic is still with us, the mix is going to be affected in the Prima sector and the credit cards particularly.

[Gianfranco Ferrari:]

Maybe just a quick comment -- additional comment on what Cesar just mentioned, is over the last I would say 30 days also the mortgage -- the mortgage performance in terms of new origination has slowed down, which makes total sense with the political uncertainty. The last quarter of last year and maybe the first couple of months of this year or three months of this year were very positive in terms of the mortgage growth. However, as we speak the state of originations has lowered quite a bit for the last 45 days.

[Andres Soto:]

Thank you. And my second question is regarding other measures that -- laws that have been approved in Congress one regarding new ASP withdrawals a significant amount almost $10 billion according to some estimates. And also the one approving that withdraw from CTS's accounts, which obviously impact Credicorp on the funding side. But besides these negative effects on your businesses, are there any opportunities that you see given these high levels of liquidity that we are going to have in Peru as a consequence of these measures?

[Walter Bayly:]

Let me take the question on CTS and maybe someone else can take question on pension part. On CTS, you have a game of relativity. So the institutions that they're going to hit -- being hit the most are the and other financial institutions that have -- their funding structure was -- or their long-term funding structure was heavily based on CTS. That's not the case neither for Mibanco or BCP. So in terms of -- that's an opportunity for us we would see especially in the microfinance business, several financial institutions that are going to have a problem both in terms of liquidity and funding. And normally what happens for us because of the market share we have -- I'm talking about BCP, is that we end up getting more deposits in terms of sales and current accounts. I don't know who on you take the answer -- the question on pension funds. Alvaro, are you there?

[Alvaro Correa:]

Hello, everyone. Good morning. Yes. On pension funds, the challenge today with this new law is to manage investments in order to minimize the impact on values and therefore could not affect as much those customers who stay at the fund and in turn do the required payments without any major stress. As you know, there are investments in the local markets, but also in the foreign markets and in order to keep the balance of the portfolios probably both of them will have to be used. But that's the challenge. The opportunity for Credicorp, I would say has to do with what happens with those with withdrawals. People go and deposit that on the financial system and that's typically something that benefits the most solid financial institutions and especially over the last year was beneficial for BCP deposits. So that's the opportunity that I find in that event.

[Andres Soto:]

Perfect. Thank you for the answers and congratulations on the results.

[Operator:]

Thank you. Our next question comes from Sergey Dubin with Harding Loevner.

[Sergey Dubin:]

Good morning, Thank you for the presentation. My first question is with regard to your guidance on the loan growth, are you assuming sort of a stable political scenario here? And how -- if there is a victory of Castillo in the elections, how could -- how should we think about the loan growth going forward? That's the first question. And then my second one -- actually let's listen to the first one first and then I'll ask the second one later.

[Cesar Rios:]

Okay. Yes, our guidance assumes, I would say the continuation of the economic model. I think it's very early to project the impact of a change in the case of Castillo wins and -- Mr. Castillo wins. And we need to hear the specific measures that they implement or proposed as an elected officer and not as a candidate.

[Walter Bayly:]

Maybe just to complement that, there's a high correlation between GDP growth and loan growth. The history tells of that. Obviously, we still expect Peru to grow anything between 8% to 10%. Therefore, there should be a growth in -- an important growth in our portfolio. Obviously, political uncertainty generates some -- the economic agents to be much more conservative. That's the reason why I was mentioning that it's going on. But what is currently going on with mortgage -- in the mortgage portfolio obviously, the corporates are also very conservative today. So again, GDP is going to grow in a very strong pace this year. Therefore, loan growth should follow that trend, but the political scenario is still to be seen.

[Sergey Dubin:]

Okay. And then the second question is related to that in terms of -- I think you mentioned before but I'd like to maybe elaborate on that. What is kind of -- what are specifics -- I know it's very hard to know because you still don't know what is being proposed or what's being -- what kind of rules are going to be put in place? But as a management team, directionally, what are you seeing in terms of worst-case scenario preparations? Like does it -- I think you mentioned something about reducing foreign currency exposure. Can you maybe elaborate on some of the steps that you may be taking? And also what's the impact? Without specific numbers, how should we think directionally about the impact of these measures?

[Walter Bayly:]

I take initially this. What we are trying to in the very short-term and this is not a strategic response, but this is a tactical one is to be long in the FX side and manage the exposure to medium-term bonds. But this is a tactical response.

[Sergey Dubin:]

So does that mean that you want to increase your FX holdings or FX exposure, because you believe there is a current risk of currency…

[Walter Bayly:]

Yes within the established limit by the regulation. In any case it will have a moderate impact in total results.

[Sergey Dubin:]

Okay, okay. Thank you.

[Operator:]

Thank you. Our next question comes from Yuri Fernandes with JPMorgan.

[Yuri Fernandes:]

Thank you again guys. I hope this time it works well. Congrats on the BCP special results this quarter. I have a first question regarding your liability notably deposits in dollars. We saw some increase this quarter right in term deposits in dollars. How is that tracking lately for you in April and May? And if this trend continues like of this slightly dollar relations some of the liabilities, how that impacts your margins? So that's my first question. And if possible I'd like to make a second question later. Thank you.

[Walter Bayly:]

Okay. We have seen -- in terms of liquidity and general level of deposits we have not seen any negative trend. We have seen some change in composition of the deposits, a slight decrease in solid deposits and an increase in dollar deposits and we maintain our books regarding that. Given the ample level of liquidity and the relative low rate both in dollars and solid, the short-term impact of these increases are minor. If we think in the very short-term Fed funds return of let's say nine, 10 basis points or the Central bank 25 basis points, the difference between one and another is real but minor.

[Yuri Fernandes:]

Super clear. And if I may a second question regarding Bolivia. Can you talk a little bit about the challenge you face in the country, not for COVID but even before COVID, we saw that the Bolivian unit was reaching like 11%, 12% ROE? That is lower than the group. So can you explain a little bit like historically what were the challenges you saw in Bolivia? Like what explains this RPE gap? Is the difference in scale? Is it different on penetration? Is a rate gap issue in Bolivia? Like can you talk a little bit about the business in that country? Thank you.

[Cesar Rios:]

Sure. Let me take that one. Actually it's all of the above. Bolivia -- doing business in Bolivia and especially being in the banking sector in Bolivia is really challenging. There's a lot of -- or I would say excess of regulation. There are both interest caps on the loan side, on the lending side and also on the deposit side. There are also like you have to have a specific portfolio in some sectors a subsidized rate. And on top of that recently due to COVID there have been a lot of limitations in order to both -- to collect actually interest and installments. So it is quite complicated to do business in Bolivia. It is unfortunately -- it is unfortunate, because we do believe that we have a strong franchise in Bolivia specifically in the mid-size and corporate. But actually I would say it's all of the above. Bolivia is still a country that there's a lot of potential to do business, but the current political situation and economic way -- the economic policy of the current government, it makes it very complicated.

[Yuri Fernandes:]

Perfect. Thank you very much.

[Operator:]

Thank you. Our next question comes from Brian Flores with Citi.

[Brian Flores:]

Hi. Just a quick follow-up. You mentioned the liquidity breakups, liquidity of 4%, importantly what item specifically? Thank you.

[Walter Bayly:]

Brian, sorry, I couldn't hear clearly.

[Brian Flores:]

So can you hear me better now?

[Walter Bayly:]

Yes.

[Cesar Rios:]

Now it's better.

[Brian Flores:]

Okay. Perfect. Now just a quick follow-up on your comments on the liquidity breakup. You mentioned an impact of 4%. My question is concerned to what items specifically?

[Walter Bayly:]

If I understood well you want additional comments regarding the interest rate caps and fee restrictions. The percentage that I mentioned of 4% was related to the fee impact -- to the free restrictions impact from the fee income line on a normalized basis. The interest rate impact as we mentioned previously is moderated.

[Reynaldo Llosa:]

Yeah. But let me -- sorry let me stress my previous comment. That might be a very short-term vision or answer. What concerns me -- what concerns us is that going forward, there is -- there's a huge potential for growth in lower segments of the population. This interest rate cap is going to have a huge impact on that both, on the business for the financial institutions, but more importantly, on the un-banked or under-banked today.

[Brian Flores:]

That’s great. Reynaldo, thank you very much.

[Operator:]

Thank you. Our next question comes from Carlos Gomez with HSBC.

[Carlos Gomez:]

Hi. Good morning. You may have already answered this. And I apologize, I joined the call late. I would like to know if you could comment on the, allowed withdrawal for CTS and insurance employment funds, whether that could affect any of your business or units and whether that can affect the bank system as a whole. Because I understand that's an important part of the funding for some smaller banks? Second on the…

[Reynaldo Llosa:]

Yes.

[Carlos Gomez:]

… yeah, go ahead.

[Reynaldo Llosa:]

Yes. The CTS we have system-wide around PEN21 billion, around PEN7 billion at BCP. As we mentioned, in a situation like this, we will expect an important withdraw of these funds. But what usually happened is that, the deposits came back in another form for example, saving deposits or short-term CDs. In the previous cases BCP ended up gaining share, in another form of deposits. But the impact in system-wide can be significant for the smaller institutions which has a significant part of this fund -- or the funding based on CTS at high interest rate. For them it can be a significant pressure in terms of funding.

[Carlos Gomez:]

Do you expect these funds to ever return to the system?

[Reynaldo Llosa:]

Usually the funds are recycled, but usually change in the forms of CTS that have restricted funds into more transactional funds or certain parts goes to deposits of short-term fund -- investment funds. But in different institutions is usually what happens in situations like this.

[Carlos Gomez:]

Okay.

[Reynaldo Llosa:]

The money is not going to disappear. The PEN21 billion are not going to disappear are going to be recycled among the institutions in the system.

[Carlos Gomez:]

Yeah. We understand that. The question was more whether -- I mean, this is a form of long-term savings and we wonder if, in the future this will be rebuilt. Or is it something that the system will have lost forever?

[Reynaldo Llosa:]

No. If other measures are not taken the funds are going to rebuild. But it's going to be a lengthy process because what is, deposits is one-twelfth of the yearly income, on a yearly basis with two deposits. So, to reach these levels it's going to take probably three, four years in the extreme case, that all the deposits are taken out. But that's an extreme case not the basic scenario.

[Carlos Gomez:]

Okay. That's very clear. And if I can ask another question, is regarding your insurance business. Obviously, you have had an impact in the short-term, because of the higher claims which is completely understandable. I imagine that you would continue to have it this year. I don't know if you have given some guidance. In the long-run, I'm talking three, four, five years from now do you see your insurance business changing for the better or for the worse because of the challenge and the experience of COVID?

[Walter Bayly:]

Hi Carlos, this is Walter. We recently had a very interesting conversation at the board at Pacifico. We questioned whether our portfolio mix deserved to be revisited given the changes that have happened with COVID and whatnot. And the conclusion was no that precisely the portfolio that we have which is highly skewed towards sales through the banks, the down for the credit and other financial institutions is very low portfolio that is mostly individual rather than corporation is a good portfolio. It has been extremely profitable in the past. And we are -- we think that once the region normalizes, it will continue to be a profitable portfolio as it had been in the past.

[Carlos Gomez:]

Very good. That’s clear. Thank you so much.

[Operator:]

Thank you. At this time, we have no further questions. So, I'll turn it back to Mr. Walter Bayly, Chief Executive Officer for closing remarks.

[Walter Bayly:]

Okay. Thank you. Thank you all for joining us in this conference call. These are indeed challenging times. We hope that, by the next conference call the mood will be better. And we will be able to continue the path of recovery of our profitability in our finances. This year has been very strange. We are working towards recovering the profitability and concluding with all our expansion programs and digital investments that we've made. Again, thank you all for joining us. And see you all will be at the next conference call. With this, we conclude the call. Thank you all.

[Operator:]

Ladies and gentlemen, that concludes this morning's presentation. Thank you for your participation. You may now disconnect.