Credicorp Ltd.
Q1 2020 Earnings Call Transcript

Published: 10 May 2020

[Operator:]

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd. First Quarter 2020 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. Reynaldo Llosa, Chief Risk Officer; and Mr. Cesar Rios, Chief Financial Officer.Now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

[Cesar Rios:]

Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the first quarter of 2020. Thank you for attending today. I hope you and your families are healthy and faring well in the challenging environment generated by COVID-19.We are experiencing an unprecedented phenomenon. Despite these trying times, we could not be more thankful for and impressed with the drive, engagement and collaboration of our teams. Employees at all of our operating units have rolled up their sleeves to respond as needed to the pandemic. And as an organization, we are protecting and supporting our employees, clients and communities.Our top priority has been our employees. We are focused on warranting that our thousands of employees remain healthy and continue to work in optimum conditions. Our more than 19,000 frontline employees have received protective equipment and are working in secure environments. Additionally, incentives and performance indicators for employees and branches currently prioritize client service over sales. 95% of our employees at the office level are working remotely from home. Finally, we have implemented programs for employees to ensure the physical, emotional and financial stability of the Credicorp community.As a customer-centric organization, we are aware that many of our clients are experiencing significant duress. More than 1.5 million of them are benefiting from initiatives to alleviate financial pressure across Peru, Colombia and Bolivia. Currently, we are offering a number of measures through our operating units, including debt and insurance premium reprogramming, cost-free cash management services, COVID-19 health and life insurance coverage and partial reimbursements of premiums on car insurance.Moreover, clients are taking advantage of our digital channels. We have managed the continuity of each of our financial services and health businesses, which are basic services that shore up the economies where we operate. We have taken preventing physical and cybersecurity measures and focused on capacity management to ensure operating continuity across channels. At the same time, we are actively managing liquidity and solvency to maintain our solid financial condition in each LoB.Finally, having faced several crises in our 130 years history, we have demonstrated and will continue to show clear commitment to supporting our communities. During this crisis, 160,000 impoverished families in Peru will benefit from BCP's donation drive, "Yo me sumo", which collected PEN126 million, PEN100 million from BCP, PEN10 million from Mibanco and PEN16 million from other companies and thousands of individuals. Moreover, front line national emergency workers, including health professionals, police and the Peruvian Armed Forces now have life insurance policies, thanks to a donation of PEN5 million from Pacifico.Finally, we have been working in close coordination with the health and finance ministers, giving support during crisis response to design measures for subsequent execution through our health and banking network. This includes providing health services to public sector patients through our health network and distributing government cash payments to our banking network, all of which benefit thousands of families.Next slide, please. In this challenging context, our clients have been able to rely on the strong relationships we have built and have been benefiting from our digital networks. During the lockdown period, volumes, both in loans and deposits, have materially increased. In the second half of March, corporate and large enterprises, as defined by the superintendency, increased the short-term funding needs in this segment. BCP's loan growth, which was situated at 15.7%, outpaced the expansion of 12.3% posted by multiple banking. This dynamic boosted BCP's total loan portfolio growth to 11.9% compared to 9.6% of the multiple banking level.Part of the fresh liquidity obtained by the aforementioned segment has been maintained at the bank as demand deposits. And from February to April, our wholesale deposits increased by almost PEN3.6 billion. 80% of these funds were held in demand deposits. Our retail client deposits increased almost PEN3.6 billion, where growth to approximately PEN4 billion in savings deposit was offset by a decrease in other types of deposits. This context has also been an opportunity for our clients to benefit from our digital channels. Yape welcomed 580,000 new users from January to April this year. And as of April, the monthly amount transacted through this app has grown fourfold in 1 year. Moreover, our BCP digital channels have registered a material gain in their share of our distribution network due to an uptick in use during lockdown. As of the end of April, our digital sales of individual savings accounts increased from representing 2% of these product sales to reflecting 27% of the same in just 1 year.Additionally, the digital channel's share of our retail transaction was situated at 70% - 73% versus 48% last year. Finally, the digital channel's share of collections and service payments in Wholesale Banking was situated at 60% this year compared to 32% last year.Next slide, please. Peru's government has stepped up to face these crisis. President Vizcarra took quick and stringent measures to control COVID-19 contagion through a country-wide lockdown. The lockdown duration is data-dependent. As of today, it's expected to last 56 days until May 10. To its credit, Peru has seen some of the strongest macroeconomic fundamentals of all emerging markets and has maintained a stable credit rating and outlook over the past few years.The government has instituted an ample package of measures to mitigate and stimulate the economy for the equivalent of approximately 16% of GDP. The ability to implement measures of this magnitude is directly correlated with the prudent macroeconomic policies that has been carried out for decades. The economic measures taken have primarily focused on containing immediate economic damage due to loss of income at the individual and company levels.We believe that these measures are moving in the right direction as this provide - as they provide support for companies and households that have suffered extreme duress. In particular, the government has targeted the business sector to 2 government-backed programs

[Operator:]

[Operator Instructions]. We'll take our first question.

[Ernesto Gabilondo:]

Ernesto Gabilondo from Bank of America. My question is on provision charges and cost of risk. After more than doubling your provision charges in 1 quarter, with the expected loss from COVID-19, do you think you have reached the peak of provisions? Or do you think it will be more tangible next quarter? And how much of the provision charges of the quarter are considering the client applications in SME-Pyme, Mibanco and Individuals? And what level of your DSP from minus 7% to minus 13% is considering the expected loss model? As you have mentioned, we will not follow the expected loss mechanically, but I think it will be very helpful to understand the assumptions that you are considering to be the provision charges.

[Reynaldo Llosa:]

This is Reynaldo Llosa. Yes. Definitely, this has been a soft quarter. And to our best estimate, at the end of March of this year, we have estimated some loss of provisions. As Cesar has mentioned throughout his presentation, this is a forward-looking estimate. Our numbers, our baseline for them was a weighted average on GDP of around 5.25%. We will need to update our projections in the following quarter. Having said that, there are a lot of other initiatives in terms of reprogramming and all the initiatives of the government, sponsored by the governments, which would probably give us a better outlook of what will happen with provisions throughout the year. But definitely, this is going to be a tough year.

[Ernesto Gabilondo:]

Okay. And then my second question is on loan growth. We note an important acceleration due to the currency depreciation but also, I think, from some withdrawals from companies anticipating to have liquidity. However, I would like to know your strategy in the short term. Are you going to focus in your own client base? Or are you also going to provide credit to new clients? Also any color in which portfolios do you expect to be more selective and which ones will be the ones delivering the growth will be very helpful [Technical Difficulty].

[Operator:]

We'll take our next question.

[Jason Mollin:]

This is Jason Mollin from Scotiabank. My question is related to Slide 7, asset exposure and mitigation. I thought that was very helpful the way you showed the most exposed - the chart with the most exposed to the less exposed, that showed Mibanco and SME on the top and the wholesale on the bottom. If you can talk about giving us - if you can talk a little bit about the expected loss in those most exposed and less exposed. And I guess is that average what - it wasn't that easy to hear. But is that kind of - previously, is that kind of where you're coming out with your expected loss, cost of risk in the quarter?And also on this slide, if you can just give us some details on the Reactiva Peru program. And you did mention that you have an important share through BCP and Mibanco. Is that similar to your market share in those markets? And how do those auctions really work?

[Reynaldo Llosa:]

Well, in terms of the expected losses levels for the specific segments, we don't have a rough number. You can understand that for this specific estimation in terms of the end of the first quarter, we were basically considering the impact it would have in the macro level. So we have worked very closely with all the segments in trying to estimate a general impact in the portfolio. And we are not able, at this time, to provide a specific level of the credit loss for each of the portfolios. And in terms of the participation or market share on Reactiva Peru, I would say it's somewhat of our average market share.

[Operator:]

We'll take our next question. Hearing no response, moving to the next question.

[Jorge Kuri:]

Jorge Kuri from Morgan Stanley. Can you remind us your sensitivity on net interest margins to movements in rates? And is there a particular expectation that you have for NIMs by the end of this year? And I guess we also would appreciate the details, what your expectation is for reference rate at the end of the year.

[Cesar Rios:]

The reference rate is already at the minimum historical level at 0.25%, and the interest rate has already been passed through in the new transactions. So we wouldn't expect a significant change in reference rates during the year. Even say that probably the markets are going to be capturing in the new transactions, in the new origination and a higher expected probability of default. But I will say both in soles and dollars, we are in a low level in terms of reference rate, and probably we are going to have some expansions on margins but based on probability of the call not reference.

[Jorge Kuri:]

Sorry. I didn't really mean adjusted risk margins. I mean just net interest margins. Not sure I understood the point about probability of defaults.

[Cesar Rios:]

No. Yes. What I am trying to tell you is the reference rate is already in historical lows both in soles and dollars. So the new marginal rates are going to increase based on a probability of default. So the margins are going to increase slightly based on these new originations. You should also consider that the new originations are going to be particular in retail banking and a slower pace than historically has been happening due to the decreased demand in the short-term period.

[Jorge Kuri:]

If I may ask a second question, can you talk about what you can do on the expense side to try to provide some offset to the downturn on revenues both in 2020 and 2021?

[Cesar Rios:]

Yes. We are already working in a number of measures, as I mentioned previously. We have adjusting variable compensation. We are freezing most of the companies of the group probably with the exception of the investment banking in terms of hiring and salary increases. Some of the expenses are going to be naturally adjusted based on the level of activities, particularly during the second quarter. And additionally, we are working very disciplined - in a very disciplined way identifying expenses that are not absolutely necessary in the short term, but we are maintaining investment, developing core capabilities, particularly in terms of digitation and intelligent decision-making.

[Gianfranco Ferrari:]

This is Gianfranco. Maybe just to - and just to - I have a few words on what Cesar just mentioned. You are all aware that we've been working in a - we're heavily developing our digital capabilities. Obviously, due to this crisis, the demand on digital channels have stepped up dramatically and another lever of - that we are currently analyzing is how to rethink our distribution channels. And the main objective there is not to reduce expenses but to provide a better service to our clients. But obviously, a concept or a scenario would be that our footprint in several branches should be trimmed down in the next couple of years.

[Operator:]

We'll take our next question.

[Marcelo Telles:]

Marcelo Telles, Crédit Suisse. I just want to follow up on your front loading of provisions, the more than PEN700 million in the quarter. Can you just tell us what was the GDP assumption that was considered in the models for that provisioning? I understand you still expect between minus 7% to minus 13% GDP this year. Is that something that was already spent into the model just to understand how much has already been factored in of that worse scenario?

[Reynaldo Llosa:]

Yes. On the margins on - yes, on the margins provisioning, we use a weighted average fall on GDP of around 5.3% for the year.

[Marcelo Telles:]

Okay. All right. That's very clear. And for next year, is there any - in terms of the duration of the crisis, I mean, how does the duration, let's say, take into account what kind of recovery was taken into account for, let's say, 2021 from economic growth standpoint?

[Cesar Rios:]

Probably, if I can comment on that, as Reynaldo mentioned, we have used for the close of March a weighted average of the - of 5.3% GDP. Now we think that the GDP is going to decrease more, but we expect a significant uptick in 2021 in the tune of probably 5%, 6% increase next year after a decrease in this year in the range probably between 7.5% to 11% as basic scenarios for this year. These things have been impacted because, during the month - the last weeks, the lockdown has been extended, and this impacts directly in GDP levels.

[Operator:]

We'll take our next question.

[Unidentified Analyst:]

Yes. I have just one follow-up again on the expected losses. So you mentioned that you did provisions with GDP of 5%, a decline of 5%. Now you have something close to 7% to 11% of decline. So is it possible to say that you need to do more provisions in next quarter? Or at least, if you need to define a provision today, you need to do a high amount of provisions again in the next Q?

[Reynaldo Llosa:]

Well, basically based only on the macro cap originations, obviously, we will need to do some extra provisions. We expect that to happen. Having said that, there are a lot of things we are doing on the other side, as I mentioned and Cesar mentioned, in terms of reprogramming and government-based initiatives that would probably let us compensate in some terms the levels of provision we would need to do in terms of this more skip or more dramatic freeze in the macro environment.

[Operator:]

We'll take our next question.

[Jorg Friedemann:]

My question is related to understanding a bit further how the IT transformation program continues in such an environment. I think more and more, it will be needed, but at the same time, you have to work on the cost containment strategies. So just for us to understand if there is any change in the development of the program and in parallel with that, to understand how much of your transactions have been originated in the digital channels and how much continues to be originated throughout the physical channels.

[Gianfranco Ferrari:]

Maybe I can take this question. Thank you for your question, Carlos. On the contrary, actually, as I mentioned before, which was obvious and I would say, each and every bank in the world has happened the same, the digital demand has spiked. And actually, we're investing and more importantly as of this time, developing faster applications in order for our clients to interact more through digital channels with us. As Cesar mentioned at the beginning of the presentation, I believe, at the company, what happened in Yape that even though transactions across channels at the beginning of the crisis were reduced by over 50%. In Yape, the amount of assets increased. So we're doing - what we've seen is that the trend of our clients using more digital channels have increased massively over the last couple of months. And therefore, our plan to keep investing in the - digitalizing both front end and back end of the bank, it has become more important. The way in order to scope with that investment - additional investments is how to reduce cost in digital channels, for us how to be more efficient because we are digitalizing also interaction with our clients.

[Jorg Friedemann:]

No, perfect. Just a follow-up there. And by the way, this is Jorg Friedemann from Citigroup. Sorry for not introducing myself. But just a follow-up to understand in terms of costs what you believe will happen going forward with the IT transformation program if it is accelerated. Or on the other hand, to contain costs, is there any parts of the project that can be freezing for a while?

[Cesar Rios:]

Yes, probably, I can make - sorry. Go ahead.

[Gianfranco Ferrari:]

Go ahead, Cesar.

[Cesar Rios:]

Yes. As I mentioned before, we are taking a number of measures that are going to contain costs focusing on variable compensation, reducing nonstrategic initiatives and being very fast and focused on developing digital capabilities. We see that the direction, the strategy is correct, but this crisis has - tell us clearly that we need to go deeper and faster and more focused. So we are redirecting costs and overall reducing the expenses but redirecting cost to improve the capabilities and go faster on developing digital capabilities. As a result, you are going to see less overall cost, but we are going to go deeper and faster developing these capabilities, not only thinking in the year 2020 but into the future. The crisis has shown how powerful are these tools, and the clients really need these tools to interact with us in a more efficient way.

[Jorg Friedemann:]

That is very clear. I really appreciate. Just a final follow-up there if you allow me. How many branches are open nowadays? And I know that you are in full lockdown. How many branches you expect to open after May 10? And how many were opened by the end of March?

[Gianfranco Ferrari:]

Let me answer that question, Cesar. The original plan was to stay flat in terms of number of branches for this year for 2020. The plan was to basically to open, I believe, it was 10, 12 branches this year and obviously close a similar number. Again, we - as of today, we haven't decided how to really shift this plan, but my educated guess would be that by year-end we should have a lower number of branches. And currently, and this is because of the crisis, we are operating with 70% of our branches. The remaining 30% remains closed, but it is because of the crisis.

[Operator:]

We'll take our next question.

[Carlos Gomez:]

This is Carlos Gomez from HSBC. I want to ask about the evolution of your equity. If we look at your consolidated shareholders' equity, it declined 11.6% in the quarter. We imagine that is because of the valuation of securities. Can you give us an update as to how that has evolved after the end of March, if you have recovered somewhat or it remains at those levels? And also, if you could reconcile the capitalization figures that we see on Page 42. So you have the Tier 1 at 11.9% and - sorry, the Tier 1 at the level which is 10.3%, which is 1.6% lower than the CET1. I know there is an explanation about how the calculation is made, but that still is a bit - it is common practice, right?

[Cesar Rios:]

Okay. I take this one. The decrease in shareholders' equity at Credicorp level is mainly due to 2 factors. First is the declaration of dividends. There's a significant amount, is around PEN2.4 billion that has already been registered as a liability and is going to be paid today. And the other factor is the decrease in unrealized gains. The unrealized gains decreased during March and has been recovered in a meaningful way in April. And you have another question that I couldn't take notice of.

[Carlos Gomez:]

Yes. Initially - and this comes from before, is the difference between the CET1 and the Tier 1. Almost any bank, the CET1 is less than the Tier 1. In your case, the Tier 1 is below the CET1. Could you reconcile that difference?

[Cesar Rios:]

I don't have these figures at this moment. Sorry, I can come back with you with the specific answer. Sorry.

[Operator:]

[Operator Instructions]. We'll take our next question.

[Piedad Alessandri:]

My name is Piedad Alessandri from Credicorp Capital. I wanted to ask about Bancompartir and Colombia separation. If you could give me a bit of your view on Colombia's separation and your future plan for them.

[Walter Bayly:]

I can answer this one. This is Walter Bayly. The second part of the question, we have no future plans at this time. At this stage, we'll focus on our existing operations and businesses that we have. There's a lot of work to do, and this is not a time to change focus from where we are focused today. We are clearly not at the end of the crisis yet. We do not feel there is an inflection point. Thus, we're extremely focused on what we have today. Our operations in Colombia have been working, aggressively refinancing their customers and are doing a similar protocols to what we do domestically, obviously, with some differences. That's all I can mention about it.

[Piedad Alessandri:]

And regarding Bancompartir?

[Walter Bayly:]

I was mentioning about Bancompartir.

[Operator:]

We'll take our next question.

[Sergey Dubin:]

This is Sergey Dubin from Harding Loevner. My first question is with regard to your skips and, as you call it, reprogramming of the loans. Are you saying that these - are these loans considered basically performing? Are they, in any way, factored into your NPL ranges at all? And also on Page 7, you show, for example, that you reprogrammed 50% of your BCP loans for retail, but it looks like it's only really 25% of retail that's highly exposed. So my question is how are you deciding what to reprogram and what not to reprogram. That will be the first question.

[Reynaldo Llosa:]

Yes. Basically, in terms of the initial aid we have given to our clients, we are basically concentrated on all those clients that require some kind of support during the crisis. That was - we were basically both reactive and proactive in giving some kind of short-term facility, either a freezing of 2 installments or the skips in between 1 and 3 months or the next 1 or 3 payments. Having said that, our challenge here is the next phase, which will be to be in contact with all those clients and approach them in terms of their needs of further reprogramming initiative that will require - adjust their installment program to their ability to phase their loans during the crisis.And in terms of the exposed portfolio, yes, I mean that's the macro numbers in terms of the exposed clients but everybody has been, to a certain degree, affected by this crisis. So as I was mentioning, we have been actively, reactively and proactively addressing these reprogramming initiatives in the short term through the skips and freezing initiatives.

[Sergey Dubin:]

Okay. And then the follow-up question, you talked about your level of provisioning, which is correlated to your assumption of GDP contraction. It sounds like it was 5.3%. So - but we also have this Reactiva Peru program that kicks in and helps. There's a government take, 80% to 98%, of the risk. So how do you - so the two questions there is, first, I didn't really understand the explanation how these auctions work, if there is multiple banks involved. And obviously, everybody wants to get part of this program. Does it mean that it's allocated based on market share? Or if you can really explain that better, that would be helpful.And then the second question is, with respect to your credit loss assumption, how do you factor - obviously, you have your own models, but you also have this government support, which is fairly significant. So how do you factor those supports in your credit metrics and credit loss assumptions?

[Walter Bayly:]

Yes. [Indiscernible].

[Gianfranco Ferrari:]

[Indiscernible].

[Walter Bayly:]

Go, go.

[Gianfranco Ferrari:]

I was going to explain the - sorry, the way the funds are signed, what the Central Bank has done is these are not - the Central Bank does auctions. Based on the coverage by the government, the Central Bank has set a fixed rate for the filing - for the banks. And banks participate in those auctions, and therefore, they get the amount. The one that auctions the lowest rate for that branch is the bank that gets the amount auctioned. After that, each bank provides that funding to its clients. And the tax is the rate that was offered by the bank in the auctions. And Reynaldo, please complement me in terms of the risk part.

[Reynaldo Llosa:]

Yes. To be clear, I mean the auction is based on what bank operates the least final rate to the client in different banks, depending on the cycle of the loan as well as on the level of coverage by the government in their guarantees. In terms of the impact of Reactiva Peru, we think it's going to be a positive impact, of course, but we will see that number effect probably on our estimation of provisions in these following quarters. We haven't computed that effect yet in the closing numbers for the first quarter.

[Sergey Dubin:]

Okay. Got you. And then the very last follow-up, I didn't hear your response. So these reprogram loans that you have, these are still considered performing loans, correct? They haven't really been classified as an NPL in any way, right? So the NPLs are pretty much the same as they were.

[Cesar Rios:]

Yes. Yes, they are considered performing loans.

[Reynaldo Llosa:]

That's correct, our base of all the performing loans.

[Operator:]

We'll take our last question.

[Yuri Fernandes:]

Yuri Fernandes from JPMorgan. I would like a follow-up on margins. I understood from what you mentioned that margins, they could move up in the next quarter as we are repricing some loans up given the high risk, but if you - I don't know if I got this properly, like, that margins should go up because you have like Reactiva Peru that should cut a little bit the needs, even though it's a good program. You have like wholesale likely growing more in retail. And also the lower rates, I think like low rates, that should be somewhat negative on your security book. And finally, I guess, renegotiated loans, you are doing some renegotiations for credit cards and other products with 0 interest rate. And about 50% of your repayable was renegotiated. So my point is how can we see margins go up. And regarding the renegotiations, should we expect a big pressure on NIMs in the second Q?

[Cesar Rios:]

Yes. Let me go from parts. And probably, my answer was relating to, I will say, the standard portfolio not including Refinancia Peru because you are right. Refinancia Peru is going to come with very thin margins. In average, the interest rate has been at 1% with cost of funds of 0.5%. So in average, you are right. If you consider Refinancia Peru, the average is going to go down definitely with this - for this factor.Relating to the other parts of the portfolio, what is going on is that new refinanced loans, part of the loan has been refinanced at an interest rate of 0. And probably we are going to make some kind of impairment charge between some interest rate and the 0 for these installments, in particular. But the other parts of the portfolio tend to be refinanced in rate similar to the original rates, but you extend longer terms. And the new origination that is going to be smaller than it has been in the previous quarters are going to be originated on higher - with higher spreads. Down the road, during this year, we should see this aspect. But you are right, if you consider the effect of Refinancia Peru, the average plan that is going to go down for this factor. I was referring to the more structural portfolio.

[Yuri Fernandes:]

No, super clear, and I don't know - super clear. A final one just if I may. On Reactiva Peru, is there any similarity on the debt? Like do like a client need to pay Reactiva Peru before they pay previous lines of the bank?

[Cesar Rios:]

The idea of Reactiva Peru is to provide new fresh working capital and they intended not to repay or prepay another debt but to provide fresh working capital to clients. That's the intention of the program. If you combine all the measures, you have a very comprehensive package. You - and facing the uncertainty, you offer the client skips and freezing. After that, you provide Reactiva Peru to have fresh working capital and down the road based on specific circumstances, probably there's going to be new refinances but more tailor made based on the performance in the following quarters.

[Gianfranco Ferrari:]

Yuri, do you listen?

[Yuri Fernandes:]

Yes, I'm here.

[Gianfranco Ferrari:]

Yes. Just to add on what Cesar mentioned about Reactiva, it's correct that the idea is to provide fresh working - new working capital. However, there are no - the only limitation regarding paying previous bank financing facilities is not to prepay any credit.

[Yuri Fernandes:]

In the case, the client didn't survive down the - if the client didn't survive down the road, like which credit has seniority? Your loan that was done before or the Reactiva Peru that you need to collect this, I don't know, any kind of money that was remaining?

[Gianfranco Ferrari:]

So how it works is that - obviously, the 80% to 98% of the Reactiva Peru loans is backed by the sovereign risk and then we have to collect whatever can be collected from the client on a pari passu basis. If the financial institutions have any collateral that was placed as a - pledged as a collateral for a previous loan, that collateral is not shared.

[Operator:]

We do have one more question.

[Unidentified Analyst:]

Yes. Often previous discussion. So essentially, the way you decide how much is auctioned and how much to allocate, how much lending to do at 1% rate is based on your stress test of your clients, right? So if you see that the client is very - in a best position and the better to extend 1% or even 0% loan to them as opposed to them to default, then you would do that because that would save potential with the client and save you from recording NPL even though you may sacrifice interest income essentially, right? So that's how you decide how much to dial up or dial down this participation of the program. Is that correct?

[Gianfranco Ferrari:]

That's - your assessment is correct. The objective for us regarding the Reactiva Peru program is to provide most of the benefit to our clients and obviously, the risk profile of our clients due to this new working capital facility at extraordinary rates and conditions improve the risk profile of our portfolio. So - and so far, what we expect is that - and the Reactiva Peru has already - over 2/3 of the program has already been auctioned, but we expect this to satisfy demand of almost of all our clients.

[Unidentified Analyst:]

Okay. And the same goes for FAE. As you mentioned, that's for micro businesses. Is that the same mechanics that banks participate in the auction? And then obviously the loan limits may be different. But is it essentially the same idea, the same - it works the same way as Reactiva, right?

[Gianfranco Ferrari:]

The FAE is targeted small to the micro finance. As you may be aware, there's a high correlation with formality and the micro business. So the typical client of micro finance, institutions didn't qualify for Reactiva because of the lack of formality. So the FAE, the target is basically informal clients. But despite that, the process is similar.

[Unidentified Analyst:]

Okay. Understood. And then the very last question was a discussion on interest rates and NIMs. You said that - so obviously rates have dropped by 200 basis points in the last two months ago. It looks like, if I'm interpreting your disclosures correctly, that you guys have essentially - when the rate drops, your net income increases, right? Is that correct? They basically stay [indiscernible]...

[Cesar Rios:]

Under normal circumstances, it doesn't happen because you have already some funding at very low rates like demand deposits and savings that we paid low rate. So in normal circumstances, what you have is lower interest rate less margins because you can have a smaller - smaller margins. What I had mentioned is that due to the change in the risk profile, we are both going to originate loans with wider margins in order to reflect higher probabilities of default, but normal circumstances, lower rates means lower margins because you already have a funding very close to zero.

[Unidentified Analyst:]

Okay. So you just have to price the loan higher essentially than we would have otherwise. And so would everyone else in the banking system, right?

[Cesar Rios:]

Yes.

[Operator:]

We'll take our next question.

[Unidentified Analyst:]

Sorry for jumping in late, but I had a follow-up. So let's just give an example here. If there is a PEN40 million loan to a client and you lend an additional PEN10 million from government lending lines. He defaults, and there is only PEN40 million in collateral. Who gets the PEN40 million? You or the line that goes to the government? And my second question, if I may, is also a follow-up on NII. When you do not charge interest on the renegotiated line for two months, do you recognize 0 NII in that quarter? So second Q now is going to be 0? Or do you reprogram the entire loan and you start recognizing in a different accrual method where your second Q is not as impacted?

[Cesar Rios:]

Probably I take the second question.

[Gianfranco Ferrari:]

Yes, go ahead.

[Cesar Rios:]

Yes. I'll take the second question. What we are doing conceptually in the case of 0 interest rate is to originate a new loan to pay the older installments and originate a new program in the case of BCP is in several installments and in the case of Mibanco, in most of the cases, is a balloon. And what you are going to do in the second quarter is to recognize some kind of impairment between certain interest rate and the zero rate that you are going to charge. This recognition is going to be all through the time offset it because you are going - at the end, you have no and a specific loss in onetime but a lower interest rate that is zero to a tie. I don't know if this helps.

[Unidentified Analyst:]

It does help very much. So you don't have to beat in the second Q. It's clear. And in the other one about the collateral?

[Gianfranco Ferrari:]

Yes. Let me take that one. So yes. If the collateral was pledged before the granting a loan, that collateral is not sure. Let's say it wasn't pledged, but there are assets that can be taken as a collateral or as a way of collecting, then you will share on a pari passu base. Obviously, regarding risk, the bank has 80% to 98%. Right away, the grade defaults, I believe, at three months, and after that, we have the responsibility of collecting for both ourselves and the government.

[Operator:]

We will be taking our last question now.

[Carlos Gomez:]

Carlos Gomez again from HSBC. I have another macro question. You said that you expect the government to start releasing prescriptions at the end of the month. However, for anybody who follows the numbers in Peru, unfortunately, we continue to see an increase in cases and an increase in deaths. What is your realistic expectation as to when the lockdown will be eased? And have you already included that in your 7% to 11% expectation for GDP decline?

[Cesar Rios:]

Yes. What we are assuming so far - sorry. What we are assuming so far is that the economy now is working at around 45%, 50%, with the initial releases going to go after 70% and after that, gradually to up to 100%. What is difficult to estimate is how effective is going to be the comeback of specific activities not only based on regulation but based on behavior of the customer, letting in tourism or restaurants. So when we are talking about this ample range of GDP expectations, we are considering the first case starting reopening that follows the schedule and in the most pessimistic figures of 13% that is a more gradual or lesser active reopening process. But as you can notice, the range is very wide and has been moving based on decisions taken in terms of extension of the lockdown and methodology of the opening the economy.

[Operator:]

Now I'd like to turn the conference back to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.

[Walter Bayly:]

Thank you, and good morning to all of you. These are clearly unprecedented times. Some of us have gone through several domestic and international crises, and they all have been somewhat different. The key aspects to understand better - to better understand the current and forward-looking scenarios and what make this current situation different in my mind out are the following

[Operator:]

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