Credicorp Ltd.
Q2 2020 Earnings Call Transcript

Published: 9 Aug 2020

[Operator:]

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd.'s Second Quarter 2020 Conference Call. [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; Mr. Cesar Rios, Chief Financial Officer; Ms. Francesca Raffo, Deputy CEO of BCP; and Ms. Milagros Cigüeñas, Investor Relations Officer. It is now my pleasure to turn the conference over to Creditcorp's Investor Relations Officer, Ms. Milagros Cigüeñas. Ms. Cigüeñas, you may begin.

[Milagros Ciguenas:]

Good morning, everyone, and welcome to Credicorp's conference call. Before our results presentation, I would like to invite you to our Credicorp Day event, which will be held virtually on October 1, 2020, the same month that we will celebrate the 25th anniversary of the listing of our stock on the New York Stock Exchange. Next week, we will be releasing our formal save the date. But in the meantime, please bear in mind that the event will be at 9

[Cesar Rios:]

Thank you, Milagros. Good morning, and welcome to Credicorp's conference call on our earnings results for second quarter of 2020. Since our previous conference call, the COVID-19 pandemic has continued to wreak havoc worldwide. Uncertainty remains regarding the course that COVID-19 will follow. The Peruvian economy activity was severely hit during second quarter of 2020. In April, economic activity fell 40% year-over-year and in May declined 33% year-over-year. Our estimates suggest the contraction around 20% year-over-year in June. Nonetheless, there are already clear signs of economic reactivation. First, electricity demand has begun to register a gradual recovery. Last week, demand reflected only a 4% decrease in year-over-year terms after falling around 31% year-over-year in the worst weeks of April and May. Second, our aggregated weekly indicator, which includes transactional data suggests that household consumption has recovered 77% of its prepandemic level. Third, employment indicators deteriorated notably in the second quarter of 2020. Nonetheless, the occupied economically active population Metropolitan Lima registered an uptick in June. All in all, in our opinion, GDP figures for the third quarter of 2020 should show significant improvement compared to the second quarter of 2020. If a new lock down were necessary, we expect it to be focalized. As such, the worst appears to be behind for GDP figures. Next slide, please. In the current context, we expect the economics to show lower levels of year-over-year contraction in the months ahead. Specifically, we foresee upcoming quarter-over-quarter expansion after the decline in the second quarter. Our estimates, with available data, suggest that GDP may contract between 11% and 15% in 2020. For 2021, we expect the GDP to rebound between 6% and 10%, underpinned by the economic measures adopted. In terms of growth, Peru is positioned to register the highest rebounds in the region, driven by large-scale economic stimulus programs, which represent around 56% of GDP. In our last conference call, economic measures represented approximately 20% of GDP. Since then, additional measures has been announced, most of which focus on economic reactivation. The most recent economic measures include Arranca Peru, a road maintenance and temporary employment program that represents almost 1% of GDP. Importantly, the program aims to create around 1 million temporary jobs in the short term. In addition, the government plans to bolster investment projects through the government-to-government scheme that was used for Lima's 2019 Pan American Games. The scheme will be used to reconstruct the north of the country and to drive investment projects in the health and education sectors. All of these investments are equivalent to 7 points of GDP over time. Other new measures since our last conference call include the implementation of liquidity provision program such as the new FAE sponsor enterprises and this includes FAE-Tourism and FAE-Agro which adds PEN 3.5 billion of fresh working capital. We believe that this will lead economic recovery in Latin America towards 2021 due to both economic measures implemented and the country's strong macroeconomic fundamentals. Next slide, please. The country's economic reactivation is reflected in the recovery of the financial system. Transactional data for credit and debit cards indicate considerable acceleration from the lows of April and May, both in the financial system and at BCP. This trend is expected to continue in coming months. Additionally, the financial system is currently highly liquid. In this case, highly liquidity has been driven among other factors by the implementation of the Reactiva Peru program, which is currently in its second phase. This program consists of 2 phases of PEN 30 billion each to provide working capital loans with government-backed guarantees and liquidity provided by the Central Bank. The liquidity held in Central Bank's current account by the banking sector currently stands around PEN 20 billion, where the liquidity indicator stood around PEN 3 billion in normal times. The Reactiva Peru program has supported private sector loans. And as of June, total loans of this segment grew around 13% year-over-year. If we exclude Reactiva loans, growth drops to around 4% year-over-year. The Central Bank expects private sector loans to increase around 15% in 2020, as fueled by the Reactiva Peru program. Next slide, please. Despite these trying times, our priorities remain unchanged. As a leading organization, we are committed to protecting and supporting all of our stakeholders. Regarding our employees, we are providing personal full medical coverage for COVID-19-related illness. At the branch level, we continue to protect occupational health and help balance performance indicators to monitor service, loan portfolio management and sales. Finally, 95% of our support functions employees are working remotely and will continue to do so, I believe, through 2020. Productivity remains high during this period. Our focus is on alleviating our client financial goals. We have offered medium-term solutions and structural programming facilities and continue to offer skips. We are helping SME clients boost their sales by offering no-cost advertising to our digital channels and providing free business education platforms. In addition, all Pacifico health insurance clients have been warranted 100% coverage for COVID-19-related bills. We have worked to ensure business continuity in this rapidly changing scenario. This has been possible, thanks to the commitment of more than 35,000 employees, who have worked tirelessly to provide essential services. We have taken cybersecurity measures and are bolstering capacity management across channels. Finally, we have actively managed liquidity and solvency to preserve this solid financial condition of our businesses. Excuse me for the interruption, Milagros. I think there is some problem with the line. Can you confirm that, please?

[Milagros Ciguenas:]

I can hear you well.

[Cesar Rios:]

Okay. Thank you. Our commitment to community support is unwavering. We have already distributed the donation gather to BCP's "Yo me sumo" campaign. Additionally, our health provider business works in close coordination with the Health Ministry and has joined in a sector-wide effort to provide flat rate hospitalization services for COVID-19 patients with public health coverage. Finally, in addition to the PEN 135 million in donation collected by the "Yo me sumo" campaign last quarter, Prima, Pacifico and Credicorp Capital contributed PEN 4 million this quarter to equip our health system with medical oxygen. Next slide, please. In this context, we have adapted with remarkable agility, leveraging our scale and digital capabilities to fulfill the accelerated demand for digital services. In BCP, our individual digital clients reached 50% or 4.3 million clients, 1.7 million clients more than the same month last year. This growth has driven by an increase in digital sales and transactions. In terms of digital transactions, the channel that posted the highest growth were Yape and mobile banking. In June, we see the 3 million user mark in the Yaperos, meaning transfers, during the quarter topped PEN 985 million compared to PEN 170 million the same quarter last year. In mobile banking, we have 3,200,000 users and monthly transaction doubled in comparison to last year's figure. We are about to launch a new version of our mobile banking app and have changed the infrastructure, traffic and transactional flow to optimize the user experience. With regard to digital sales, the share of digital sales of total sales of savings accounts grew considerably year-over-year rising from 2.7% in 2019 to 42.3% in 2020. There is still significant potential to leverage this channel to boost digital adoption and financial cost. To harness this opportunity, we have trained 2,100 agents BCP to inform clients about Yape or mobile banking. Our goal is to reach 1 million clients through these partner agents by year-end. In insurance and pensions, our apps and client portal has stood out as the best means to handle client questions and request remotely and quickly. Self-service digital transaction stood at 54% and 91%, respectively. Finally, at Mibanco, 85% of our loan officers are using URPI, a mobile app that provides online access to information of client, sales leads, loan disbursements and other budgets. This boosts agility, improves the client experience and optimize our advisers' productivity. The change in the behavior of our users is proof that our transformation strategy is moving in the right direction to harness potential for growth and inclusion across business segments. Next slide, please. Going on to our second quarter 2020 financial highlights, you will see that we have leveraged our balance sheet strength while maintaining a conservative approach. This temporarily compromises results that will allow us to absorb most of the impact of the crisis by year end. I would like to highlight our loan portfolio and deposit base are growing at a significant pace, more than 21% and 25% year-over-year rate, respectively driven mainly by loans from the government relief programs we Reactiva and FAE. After isolating the effect of this program, Creditcorp's structural loan portfolio grew 7.7% year-over-year. The cost of risk was highly impacted this quarter and situated at 7.76% after forward-looking provisions were set aside in a more challenging macroeconomic outlook due to COVID-19 and updates were made to the probabilities of the call in each segment. Our coverage ratios improved to situate at 167.5%. Backed by a solid capital base, we are prepared to face potential negative outcomes for this crisis. Our NIM situated at 4.03% this quarter due to several factors, which we will explain in detail later on. If we exclude extraordinary charges and the impact of government programs we are given by, the structural NIM is situated at 4.88% this quarter. The decrease in transactional activities during the current time negatively affected fee income but was partially offset by gains in the investment portfolio. Additionally, the contraction in co-outpays, the reduction in expenses, which were 2.6% lower than in the second quarter last year. In this context, Credicorp posted a loss of PEN 620 million this quarter, which represents a return over equity of minus 10.7%. I will now explain the results of our main operating units. Next slide, please. I will start explaining BCP Stand-Alone quarterly results. BCP loan portfolio and deposit rates has been growing at a faster pace than the banking system. This quarter, loan growth was mainly driven by Reactiva loans, the government program loans. Through BCP, we have been supporting our existing and new clients by disbursing more than 40% of the first PEN 30 billion Reactiva tranche. This portfolio is mainly concentrated in SME business and middle market segments. Regarding the year-over-year evolution, the total loan portfolio posted 18.6% growth in average daily balance. SME business and SME-Pyme grew 30.6%, of which 90% was attributable to Reactiva loans. While wholesale loans increased 21.3% year-over-year, driven by structural loans to corporate clients. If we isolate Reactiva effects, the structural portfolio grew 10.4% year-over-year. In second quarter 2020, total deposits grew 9% quarter-over-quarter, driven mainly by growth in lower-cost deposits. This led to a reduction in higher-cost time deposits. In the context of the quarantine, corporate and SME obtained fresh liquidity from Reactiva loans, which was subsequently retained in bank deposits. Clients that have the wage deposit in payroll accounts retained funds in saving accounts, reflecting a contraction in consumption. Regarding the year-over-year evolution. Total deposits grew 26%, led by noninterest bearing demand deposits and saving deposits, which grew 67% and 32%, respectively. Next slide, please. Now I will comment on the initiatives that we have been implemented to manage BCP Stand-alone loan portfolio. In Retail Banking, we have conducted service of SME-Pyme to understand the impact that COVID-19 has had on their businesses. We have provided facilities such as installment freezing to May, it skips to June, and more recently, we have offered mainly a structural reprogramming in the form of medium-term solutions. The retail portfolio reprogramming profile in the figure shows the composition of our retail portfolio as of July 27. 71% of the Retail Banking portfolio is up-to-date, 24% received reprogramming facility to the -- in the second wave, and 4% is overdue. The reprogramming portion of this portfolio, which accounted for 58%, during the first wave, March to April, has fallen significantly to 24% in the second wave, June to August. The SME-Pyme portfolio is the most impacted, given that 54% of the portfolio is up-to-date and 40% is reprogrammed. Now analyzing the payment performance of the retail portfolio due, we see clearly signs of reactivation in every segment. The percentage of the portfolio that is due and paid each month increased from 35% in May to 88% in July. Although this payment performance data is encouraging, you can also see that the percentage of the total portfolio that is overview each month increased from 1% in May to 6% in July. It is still too early to reach a fully informed conclusion on portfolio health, given that some reprogramming facilities offer are not yet due. In the wholesale business, we are managing lots on a case-by-case basis. 20% of the wholesale portfolio is associated with economic sectors that are highly exposed due to COVID-19 crisis. Next slide, please. To buffer the effects of uncertainty, we have set aside forward-looking provisions in a context where our expectation for a contraction in GDP has deteriorated in the second quarter 2020. And we have updated the probability of default for all of our segments based on impact assessments. Provisions are mainly concentrated in the individual and SME client segment in the retail portfolio. Provisions in Wholesale Banking are associated with a specific client that are highly exposed in the COVID-19 crisis. In this scenario, provisions at BCP increased by 79.3% of quarter-over-quarter and 510.7% year-over-year. This led to a structural cost of risk of 7.99% for the quarter and 6.28% year-to-date. Regarding asset quality, the NPL for the structural loan portfolio deteriorated particularly in the individual segments, given that clients who were delinquent prior to the lockdown, were not eligible for reprogramming facilities. As a result, our NPL coverage ratio reached a record high and situated at 160.3%. Total accumulated provisions represent 6.6% of the structural portfolio. Next slide, please. Going on to BCP results. BCP's NIM was impacted by several factors. First, 2 extraordinary factors triggered by the evolution of our loan portfolio in the COVID-19 environment

[Operator:]

[Operator Instructions] We will go to our first question. That comes from Ernesto Gabilondo of Bank of America.

[Ernesto Gabilondo:]

My first question is on provision charges. As you have mentioned in your presentations, provision should normalize in the next quarters. So would it be reasonable to assume provisions normalizing to the levels that we saw in the second half of 2019? Or more to the levels that we saw during the first quarter of this year? That will be my first question. And then I will make my other questions.

[Walter Bayly:]

Reynaldo, you take this? You take this?

[Reynaldo Llosa:]

Yes. Well, we -- as Cesar has mentioned, we've done an important level of provisions during the first half of the year, especially in the second quarter. In terms of your questions, the second semester, we expect a lower level of provisions than what we've done in the first semester. Having said that, at this time, we wouldn't expect to be as good as it was in the last semester of the previous year. But we have some indicators that the performance of the portfolios is -- might be improving. So at this stage, it's a different -- it's a quite difficult to give you a precise estimate on the level of provisions in the future.

[Ernesto Gabilondo:]

Okay. Understood. And then you mentioned that in your Wholesale loan portfolio, there's around 20% with high exposure and that around 5% of the provision charges that you have created were allocated to this exposure. So after evaluating all your portfolio, where you have made an important effort in individuals and SMEs, do you think higher provision charges could come from the wholesale loan portfolio?

[Reynaldo Llosa:]

No. I would say that in that specific case, we've done a one-to-one analysis on every specific client. We've seen positive results in the last weeks in terms of the level of payments they were offering. So we don't expect an important charge in Wholesale Banking provisions for the following months.

[Ernesto Gabilondo:]

Perfect. And then my last question is on the political and regulatory outlook. We have seen a lot of changes in the cabinet with less than 1 year ahead of presidential elections. And then we were hearing this potential banking deal that was trying to present an interest amount cap. So can you provide us some details on what are the last update on the political and regulatory fronts as well as the withdrawal of pension funds?

[Walter Bayly:]

Gianfranco?

[Operator:]

Sir, perhaps you forgot unmuting.

[Gianfranco Ferrari:]

Yes, can you hear me?

[Operator:]

Yes, we can hear you.

[Gianfranco Ferrari:]

Sorry, can you hear me? Okay. Great. Sorry about that, Ernesto. Regarding the political model, although it looks good right now, especially on Congress, there are 3 potential legislations in Congress. The agro business, the -- I would say, the valuation have lowered over time. I do believe, and I'm positive that the congress are understanding the impact with those measures. We've had, on the banking sector -- not only the banking sector, but especially in the microfinance sector, which is the most vulnerable part of the whole financial sector, and obviously, on the economy. So as we speak, there are 3 initiatives. One, what I would say is the best one, which is creating like a specific commission, involving all the relevant stakeholders regarding interest rates and how to provide more facilities to debtors, that's the status on political matters. As you know, the cabinet has recently -- actually, yesterday, it has been appointed. I would say the structure of the cabinet is quite similar to what we have had in the previous cabinets, so we are positive that the social measures that are being taken will stay going forward.

[Operator:]

We will move to our next question that comes from Thiago Batista with USB.

[Thiago Batista:]

It's Thiago Batista from UBS. I have 1 question about the margins. You already mentioned that the NIM should contract because of Reactiva Peru. But I want to double check if the impairment of the 0 facility that you booked in the second Q, these do not repeat -- do not happen again in the 3Q? And also, if you believe that NII, in solid terms, not in margins can return to the level of the last Qs in -- is the last Qs is the new normal of NII or is this second Q is the new normal of NII?

[Cesar Rios:]

Okay. So probably, I would like to review the composition of the margin for every key component. In terms of loans, we have been impacted for this onetime event, and the results, if the loans are starting to pay according to schedule, is that you are going to have a reversal of this initial charge. Already it has been happening in the May and June because most of the impact has been registered in May. And we are starting to reverse this initial provision. Under the currency constancy, this is one only way, a one-off event. The another factor in the loan portfolio, thinking about no margins, but total income is the composition of the loan book. For some months, we have been very focused on restructuring the reprogramming loans and offering reactive approach to our clients. And due to the change in the risk profile, we have been originating and at a slower pace than previously. This dynamic is starting to change in July. And gradually, we are starting to originate to reach the previous levels. The impact in the short term is that we are going to have a smaller portfolio in the retail part of BCP client in Mibanco, because as you have seen, we are having very good levels of payments. So for some months, we are going to have more payments than new disbursements. And over time, probably at the end of the year, we are going to balance out this effect. The order of dynamic that is going to affect our income in the short term is the reset of the liquidity portfolio rate. We have, for example, titles of the Central Bank at 2.2%, 3.5%, 2.5% that are coming due and renovated and at rates that are much lower due to the decrease in the reference rate. This is going to impact at least for 1 more quarter. And after that, we are going to stabilize this part of the portfolio. In the expense sides of the book, what we are doing is resetting the cost of funds at a very good pace, but we are going to have a one-off event due to the issue in BCP of a new subordinated loans, that's an important amount, $850 billion, in which we have changed bonds that mature next and the following year for new ones with a significantly lower interest rate, but we are going to register a one-off charge due to the premium that we pay for the interchange. But coming down the road, this is going to be a reduction in the cost of funds. I will say that this is the general dynamic that we are going to see in the coming quarters.

[Operator:]

Our next question comes from Gabriel Nóbrega with Citigroup.

[Gabriel Nóbrega:]

I'd actually like to ask my first question regarding your refinance loan book. Could you maybe give us a bit more color of what is the current risk profile of these clients? What are the collaterals that they have? Or declines that were maybe paying before? And also, if you could explain to us how you're accruing interest on these loans?

[Reynaldo Llosa:]

Your question is in what specific portfolio? Excuse me?

[Gabriel Nóbrega:]

Sorry. The renegotiated portfolio.

[Reynaldo Llosa:]

I didn't get you, on what specific portfolio?

[Gabriel Nóbrega:]

Yes. On the renegotiated portfolio, which you've been giving a grace period.

[Reynaldo Llosa:]

Yes. I mean we've been quite active during the -- especially, the first quarter of the year in April. We've been restructuring a lot of the loans, both in the SMEs and individual loans. As you've seen in the charts, this demand for further reprogramming has dropped quite dramatically, especially on individual loans. And we've seen still an important level in the SME market. We have both loans with collaterals and without collaterals. But the trends we've seen in terms of payments of the amounts due in the recent months have been surprising for us. We expected them to be more affected and to request even further reprogramming which we haven't seen. And I would say we have both -- in both segments, SMEs and individuals, I would say loans with and without collateral. So I would say it's a fair representation of our portfolio in both segments.

[Gabriel Nóbrega:]

All right. Then as for my second question, looking at your expenses, we saw that you did some cost containments during the quarter. But I imagine that in COVID, a lot of your clients started using much more of your digital bank. And also adding to this, that you were already investing in your IT platform. I was just trying to understand for the remainder of the year, if you still plan to continue on investing in your IT platform? Or are you already starting to collect some or already starting to collect some efficiencies from your investment?

[Cesar Rios:]

I think we have 2 different dynamics. In the more traditional fee income, we have an impact due to the decreased level of activity. A number of these collections are related to transactional activity in most of the traditional channels. And as we -- as the economy reopens, we have seen already an uptick in this regard. And in the case of the digital channel, it's core of our strategy. We'll continue to invest. And what we are going to get out of this is a much lower operating cost down the road. So we are continue investing in digital channels that are going to provide us with the significant efficiencies down the road.

[Operator:]

Our next question comes from Yuri Fernandes with JPMorgan.

[Yuri Fernandes:]

I have a more mid-, long-term question here regarding your ROEs. And I totally understand that it's very tough in this kind of environment to think what's going to happen in 2021, what's going to happen in 2022. But when do you expect ROEs to go back to those 18%, 19% more sustainable ROEs, if that is still the case? And if you can comment a little bit about the dilutive impact of Reactiva loans? Because I understood that you have a lot of one-offs on your margin this quarter, but most of those Reactiva loans, they have like 36 months term. And they should stay on your balance sheet for a while. So my question is, even if like economy rebound, even if the cost of risk normalized in 2021, could we continue to see ROEs lower for a longer term, given you have like this pressure for Reactiva, this dilutive impact on your margins for a while?

[Cesar Rios:]

We are not providing exact guidance at this point, as mentioned previously, but the dynamic that we see is that we are going to have, for a couple of years, while the interest rate are especially low, reduce margins. But we are working actively in efficiency to return to profitable levels down the road. But this is going to be an adjusting process because the immediate effects of the reduction on interest rate, you need to recover gradually. And in terms of the Reactiva loans, we have mentioned that the main effect of the Reactiva loans is to reduce the structural risk of the portfolio because it provides risk capital to the client. And effectively, we are going to have this loan for 3 years, 1 year without payments, and after the 13th month, a gradual repayment process. So in terms of NIM, this is going to be a structural effect. But in terms of -- the total amount of income should stabilize once we finish the disbursement process during the third quarter.

[Walter Bayly:]

Gianfranco, do you want to complement on what Cesar just mentioned?

[Gianfranco Ferrari:]

Yes. How I see the dynamics is that the main lever in order to return to -- or to improve our ROE going forward is how the provision account looks. I do believe that the impact on margin because of Reactiva should be managed by the reduction of cost. So that should be a zero-sum game. The key lever here is how to manage provisions. And that's the underlying reason why we've been so, not only active but also proactive in the Reactiva program, in order to keep our clients related and be coherent with our long-term vision of these relationships.

[Operator:]

Our next question comes from Tito Labarta with Goldman Sachs.

[Tito Labarta:]

I guess following up on provisions. Just to understand a little bit more how you came up with the level of provisions that you booked. I mean I understand your GDP could fall anywhere between 10% to 15%, but you also expect a strong recovery in 2021. So just to understand, I guess, a little bit of the thought process or some of the analysis you did behind the provision levels. Like how much of this is just preventative and being cautious? Because if we look, I guess, at least regionally your -- you have the highest cost of risk amongst most banks in Latin America. Just to understand, I guess, is it because the short-term risk in Peru are very high given the level of COVID infections? But you also mentioned how much government stimulus is 26% of GDP. So just to understand how much of this is sort of a short-term preventative measure? And how -- as well as how much you are concerned about how much you're going to have to eventually write-off and what's going to become nonperforming? So just trying to get a little bit more color on how you come up with the level of provisions that you booked in the quarter, and also considering you had already a high level of provisions in the first quarter.

[Reynaldo Llosa:]

Yes, Tito, thank you for your question. Basically, what we've done this quarter, we've mixed 2 approaches. The one we did in the first quarter, which was basically a macro level approach top-down, to try to estimate the impact that changes in GDP we have in our portfolio. There has been a further deterioration on the expectations of the GDP growth -- I mean, drop for the year. So that has definitely had an impact on what we expect will happen on the following months. But in this quarter, we have complemented that analysis with a bottom up approach, by which we have, as Cesar mentioned, survey, an important part of our clients, specifically in SMEs and individual clients as well as on the most important wholesale clients to try to estimate the impact that COVID might have on the portfolio. We have also included some demographics -- demographic information, economic sectors to see the different impact that the COVID have had on these economic sectors independently. And also some early warning systems that measure change in the level of deposits, change in the level of debt or change in the use of all the credit facilities' great lines. Altogether, that has given us, I would say, a good estimate, as of today, of the provisions required by the end of the first semester of the year. Having said that, I mean, the key information that we would require to have a more precise number in the following months is the level of payments that we would see in the reprogram part of our portfolio. The first indicators are very positive, as you have seen, but there's still an important share of our portfolio that will come due in this quarter and in the fourth quarter of the year. By year end, we will probably have a more precise estimate of the level of provisions that would be required and the level of impact that would have on nonperforming loans.

[Tito Labarta:]

Okay. That's helpful. Maybe just to follow-up a little bit there. I guess based on what you're seeing initially so far and what you've done, I know you said provision should be lower than the first half of the year, but even that kind of gives us a very wide range. I mean do you think it could be even lower than the first quarter where the cost of risk was 4.5%, like even that was a bit elevated. So should it go somewhere between where you were in 2019 and what the first half was? Or it's just relatively to the -- relative to the first half of the year when the cost of risk on average is around 6%? So it just -- only because of the wide range, just trying to see if we can narrow it down a little bit in terms of how you think based on what you've seen so far at least, that level of provisions can go to.

[Reynaldo Llosa:]

Yes. One thing we need to incorporate in the analysis that Gianfranco was mentioning was the impact of the Reactiva programs and the reprogramming efforts the bank has done to the portfolio. In general terms, I would say it would be probably around what we've done in the first semester, but there are a lot of uncertainty still on that number.

[Tito Labarta:]

Okay. That's helpful. So around the level I thought.

[Reynaldo Llosa:]

On the first quarter, I mean. On the first quarter, not on the first semester, yes.

[Tito Labarta:]

So around 4.5% cost of risk, given what you're seeing today is, at least in the short term, sort of a reasonable sort of assessment, you think?

[Reynaldo Llosa:]

Yes. The information we have today is probably a fair assumption, yes.

[Operator:]

Our next question is coming from Jorge Kuri with Morgan Stanley.

[Jorge Kuri:]

Thanks for all the commentary around delinquency and provisions. I actually just have another one on that same topic. And maybe similar to the previous question, but asked differently. The -- your expected loss model that's driving your provision, what is the expected loss that you're assuming that drove the provisions that you have as of now? Your NPL ratio is at 3.8%, I believe. So where does that peak in this expected loss model? And I think that will help us understand the magnitude of the provisions that you have and the room for either being able to lower provisions or the other way around? That's my first question.

[Reynaldo Llosa:]

Yes. I would rather give you a -- I mean we have different expected loss for the different portfolios. Definitely, our main concern today is the SME market because it's the one that has been most impacted and where we have seen the highest level of reprogramming. I would like to date -- I mean, to provide you a general number of expected losses in terms of NPL, but I'll probably try to work a number, and get back to you.

[Jorge Kuri:]

I'm sorry. I'm not sure I understood your question -- your answer, I'm sorry.

[Reynaldo Llosa:]

No. I mean we -- at this time, and usually, we don't provide, I mean, these numbers on a forecast basis. I am not able to provide you what is our NPL levels expected for the second half of the year.

[Jorge Kuri:]

All right. Okay. Let me ask something that is probably a bit more under your control. On expenses, which we've seen most banks in the region rightly saw trying to be as aggressive as possible on managing expenses to offset some of the top line challenges. What is the commitment of the consolidated bank, the consolidated financial conglomerate in terms of expense growth for this year and next year?

[Gianfranco Ferrari:]

Yes. So let me answer your question, I would say, in 2 stages. So for -- maybe for the first 3, 4 months, we weren't as concerned in our -- focusing in expenses. We were focusing in health of our employees and health of our customers. And due to the massive reprogramming, specifically in retail loans, we will really focus on that. As you have seen, the expenses have gone -- despite that, expenses have gone down basically because of the slowdown in the economy. Going forward, I would say, there are like 3 main levers. One lever is what Cesar mentioned in his presentation that we're seeing it in bank, we see it on massive movement towards -- by our clients, adopting digital channel and digital products. The second one, which is we -- because of that, we are going to reduce our footprint this year, I would say, by anything between 4% to 6% of our footprint. And the third one is that -- which is a more structural one, is I strongly believe that -- and this goes beyond BCP or Peru, but the banking business is -- the margins will be lower going forward. So we are very well going to start an efficiency program that may take anything between 6 to 18 months in order to implement. It's something similar to what we did, obviously by attacking all of our levers, but something similar to what we did 5 years ago.

[Jorge Kuri:]

So when you put it all together, what do you think your expenses, on a full year basis, will grow or decline this year? And same question for 2021? I'm just looking for a number really.

[Gianfranco Ferrari:]

Yes. Maybe -- yes. Yes, sure, sure. On 2020, quite difficult to answer. The -- sorry, again. The expenses, we would be -- current expenses are -- there was a decrease of 9%, I would say, that's the number. But it's quite difficult to provide a specific number. On 2021, our ambition is to return to the cost-to-income level we had in 2019.

[Operator:]

Our next question comes from Geoffrey Elliott with Autonomous.

[Geoffrey Elliott:]

Can you give us a little bit more detail around your expectations for loan growth from here? Maybe kind of breaking it down into the retail components of the structural portfolio, the wholesale and then the government-guaranteed Reactiva portfolio? A bit more detail on how you think each of those is going to grow.

[Gianfranco Ferrari:]

Yes. It's quite difficult to -- I would say it's too soon to answer that question in detail or to a breakdown. What we're seeing, and Reynaldo mentioned it before, our economic activity is picking up. So a lot of macro leading indicators, I don't know, like energy distribution and also micro leading indicators like data charts usage, amount of cycle in the credit line. For us, several conversations we are currently having with our -- especially with our corporate customers provide us that a good feeling of what the economy is -- how it's going to perform in the second half of the year, so we are positive on that. Having said that, we -- the counterforce is we still need to manage the performance of the portfolio that was hit by COVID. So we are trying to gather between growing the portfolio and at the same time, maintaining or improving the quality of -- the risk quality of the portfolio. So it's quite difficult to provide a specific number in terms of growth for the rest of the year. Regarding your -- the question on Reactiva, in the first tranche of Reactiva, which was PEN 30 billion or close to it, we got a market share over -- close to 40%. In this second tranche, our participation is going to be lower, maybe 20%, 20-some-3 percent. You have to bear in mind that the second tranche of Reactiva and maybe I can jump into Mibanco, that the second tranche of Reactiva was well targeted for the microfinance -- so that microfinance institutions can provide that facility to their clients.

[Operator:]

Our next question is coming from Jason Mollin with Scotiabank.

[Jason Mollin:]

I have 2 questions, some with follow-ups. I wanted to return to your bank's -- BCP's north stars for 2021 that you had talked about in the past extensively and the key objectives there, number one, in customer experience, cost income ratio in the mid-30s, double the cross-sell, be the numer one in employee experience. If you can give us an update, and actually, I would say, I think on the digital side, you're probably moving very quickly. But if you can give us an update there and how this current COVID situation has adjusted those north stars, it would be [indiscernible] have if you could? And then my second question is also related to provisioning. Where you talk about the base case scenario that provisions will reach in the second half of 2020. Can you frame that with a bold case scenario? What happens if things go better? Or what would promote -- what would drive that? And perhaps the base case scenario, how bad things could get?

[Gianfranco Ferrari:]

Jason, let me take your first question. So the objectives we made public, maybe a couple of years ago or 1.5 years ago, they're the same. It has been the same. Some of them, we may not reach them by 2021 because of what is going on with the prices. But still structurally, we strongly believe that the play is to provide the best customer experience and to be the most efficient player in the market. So that is -- those goals and that strategy is still the same. Again, maybe we will have to redefine through time. What I would add is that very clearly, some are changing and will change, maybe more is that we -- and I'm talking about discipline here. And maybe Walter will mention a little bit about Credicorp also, is that -- the crisis has reflected us that there are some social gaps in Peru that need to be solved. Because of the relevance of BCP in the Peruvian economy, we need to get more connected on -- regarding those gaps and obviously, we are not going to absorb them by ourselves. But we do believe that we can play with Santander regarding those differences and including stakeholders that maybe weren't as present in our strategy before. So I would say going back to your question that -- I would say that the main change that you will see and we will make public in a short period of time will be done. I will now let Reynaldo take the question regarding provisions and risk.

[Reynaldo Llosa:]

Yes. I would say the key issue that is going to either provide us a more pessimistic or optimistic view in terms of the provisions required for the second part of the year is the ability of the government and the country as a whole to control the sanitary problem. I mean if we've seen in this -- since the economy started to free up and some sectors starting to operate very positive numbers in all -- in transactions in the level of activity in the demand of loans. But I mean if we need as a country another big lockdown, overall lockdown in all regions of the country, specifically in Lima, that would probably provide us a more blooming outlook for what will happen in the next -- I would say that's key. And regarding 2021, I mean we have elections on April, and that's also a key question mark in terms of what could happen for the company on our longer term.

[Operator:]

Our next question comes from Sergey Dubin.

[Sergey Dubin:]

The first one is you guys are speaking about economy getting better gradually. You're also talking about Reactiva Peru program is giving fresh capital to the borrowers, which is going to help them. And then thirdly, you also said that these -- basically, you reprogram the loans, which means you deferred installment payments, et cetera. So all these things suggest to me that you should see an improvement in the provisioning cost and cost of risk, but your provisioning levels suggest that you actually see the opposite. So I'm having -- help me reconcile these statements that don't seem internally consistent to me. So my first question is, how can you help me reconcile these statements in your provision cost with it skyrocketing?

[Gianfranco Ferrari:]

Yes. A great question to say. We're also struggling with the same issues because I think -- well, there's a lot of evidence that the economy is performing better. I would say, on the macro side, the worst is over. And definitely, note Reactiva, we are, let's say, the corporate midsized companies almost now and the SMEs companies also has played a very important role. Obviously, there are some sectors that are not -- is not -- it's not going to have structural problems. But in general, what I would say that the payments flow in the economy haven't stopped, so which is very positive. On the retail business and the personal business again, there has been a lot of liquidity that should affect the long-term stability of those people, which is the pension funds but has provided a lot of liquidity into the market. So yes, there are like -- to focus here, one is that the hit that we have taken as a country in the second quarter of this year, which obviously has been relative but there has been 2 or 3 macro actions by the government that are having a positive impact. The other variable that is quite difficult to assess is the health model. Unfortunately, the management of the sales prices in Peru hasn't been good. It is completely public. Any ratio that we can compare in terms of sales compare to other countries in the world, we were among the worst performance, so that's the only issue. But yes, I would say we're still solving. We are at high positive going forward. But this quarter it's difficult to provide specific figure for the next couple of quarters.

[Sergey Dubin:]

Okay. So if you - yes, go ahead.

[Reynaldo Llosa:]

If I could add something to what Gianfranco has mentioned. I mean as we've mentioned, we've seen some positive indicators in both macroeconomic numbers and specifically on the level of payments to all of our clients. But you will see in one of the charts, still 25% of the retail portfolio has required some further reprogramming, specifically in the SME market. And there's still an important size of the portfolio overdues. So the key question here is how this portion of the portfolio, which is, of course, of the total retail portfolio is going to perform in the following months. So that's what makes us uncertain of exactly what the numbers would be for the next 6 months. So that's the level of confirmations of the payment ability in August, September and the rest of the year would provide us the necessary information to have a more precise number in the second half of the year. That's why we cannot have, as of today, change our perspective in terms of the provision required for the portfolio.

[Sergey Dubin:]

Okay. That is helpful. My second question has to do with your NIMs and specifically your funding costs. So you talked about how Central Bank of Peru has cut interest rates, which has pressured your asset yields. But it should also help you on the funding side in terms of funding cost. So can you discuss -- I think you might have touched briefly upon this earlier, but can you give a more comprehensive answer and just walk through how quickly your loans reprice? How quickly your deposits reprice? And what's the net effect of that given obviously, the pressure that you face from the Reactiva loans, which are sub-1%. But all in, how should we think about your funding cost and the NIM?

[Cesar Rios:]

Yes. Probably going further in the information that I gave previously, talking about the funding cost, we need to consider that we have already, before the crisis, a very cheap funding costs, around PEN 60 billion at BCP between saving accounts and current accounts that already were paying float to 0%. So you have a significant part of the portfolio that cannot improve, given the new relative interest rates of the market. That is attractive. And of course, we are repricing the additional parts of the portfolio, the time deposits, some short-term funding. I mentioned also the subordinated loans. But in the other side, you have a short term, almost, I would say, almost immediate impact from the liquidity portfolio that has been invested at rates closely to the reference rate that has been adjusted very fastly. And the other factor that I mentioned previously was the gradual readjustment of the loan portfolios that are starting to pay down by the origination for some months going to be less than the payments that has improved significantly in the last month. I don't know if that's help.

[Sergey Dubin:]

Okay. So overall, would you -- how long do you think that NIM pressure is going to continue? And when would the NIM stabilize?

[Cesar Rios:]

I think we are going to have an in-pressure in the remaining of the year. And it's going to improve as soon as we started to originate more retail loans with higher rates.

[Sergey Dubin:]

Okay. Okay. And then my third question is on capital. You mentioned that you raised $500 million bond before the -- as I understand it, before June. So does your capital adequacy ratio that you show for the second quarter, does that include -- I assume that they've gone into a Tier 2 capital, so does this capital adequacy ratio included that $500 million in there?

[Cesar Rios:]

Yes. Talking about BCP, we have a sound capital base at the end of the second quarter, but in core equity Tier 1 measures and in the regulatory measures more than 11% and around 15% by BIS. The issue of the bond is going to improve the BIS ratio for the marginal $130 million tranche that was issued, that is going to be around 30 basis points for the BIS. For equity Tier1, of course, is not impacted for this transaction.

[Sergey Dubin:]

Okay. So I'm sorry, I misheard. You said that the bond issue would improve CAR ratio by 130 bps? Is that correct?

[Cesar Rios:]

No, no, no. The bond issue is going to improve the BIS ratio because it's a Tier 2 of around 30 basis points because you are substituting one with bond with another one for $720 million and only the marginal amount that this $130 million improves the figure.

[Sergey Dubin:]

Okay. So the marginal improvement is 30 bps for BIS.

[Cesar Rios:]

Yes, yes, yes.

[Sergey Dubin:]

. Okay. Okay. And then the last question has to do with, again, I think you spoke about it, but the connection was very bad. So I didn't hear the answer well regarding the potential interest rate cap on -- that's being proposed in your legislation, I guess. Can you talk about exactly what the proposals are? And what do you think is the likelihood that they will pass? And if they do pass, how would you deal with that sort of issue?

[Gianfranco Ferrari:]

Sorry, can you repeat the question?

[Sergey Dubin:]

Yes. The question is regarding the proposed interest rate cap. I believe you touched on that before, but I haven't heard the answer because the connection was very bad. So I'm asking just if you could repeat and elaborate a little bit as far as the proposals, or what is the likelihood of them passing? And what's your response?

[Gianfranco Ferrari:]

Yes. Thank you. I will. There's a project or proposal at the Congress regarding interest rate cap, that's the status. And obviously, that has go through the judiciary process. And after that, we -- actually we use a whole commercial system. We will see if it's legal, if it's according to the constitution and things like that. It's obvious that it will keep very hardly, especially the microfinance industry. But we're working on that and trying to educate and create awareness on the negative impact of measures like that will take on the -- not only on the financial system, but also in the reactivation of the economy. And that we start with today.

[Sergey Dubin:]

Right. So just in the level of presentation or can you give us a sort of the time line maybe? It's going to -- is that something that will [indiscernible]

[Gianfranco Ferrari:]

It's quite difficult to -- so time line to market. It's very difficult to assess. As I have a lot of factors. As we speak, it's a project. So not every project becomes a law. And if it becomes a law, it goes through a process that has to be approved or not by the accredited power. And let's assume it's approved, we're still evaluating if it's according to our -- the Peruvian constitution or law.

[Operator:]

We will move now to our next question from Andres Soto.

[Andres Soto:]

My question is regarding the Reactiva 2 program, the second phase of the government guarantee scheme. Gianfranco already commented 20% market share in that one, mostly dedicated to Mibanco. What I heard is that the process for disbursement of this money is taking much longer than in the first phase. So I would like to understand how much of this money that I understand from the Central Bank, they have already awarded 70% of that. How much of that money has already reached your clients? And when would you expect this to be completed? That will be my first question.

[Gianfranco Ferrari:]

The rules for Reactiva 2 are much more complicated, not on our side, but more on the COFIDE which is the government institution that we were doing the due diligence on the file. For us, the number of loans since Reactiva 2 is also targeted to microfinance institution loans, I would say, well at least tripled. So we will go from 77,000 loans to over 250,000 loans on the -- not BCP. I don't have this data, but sort of have it top of mind, I can look for. Out of the PEN 30 billion maybe, there has been auctions for around PEN 20 billion or PEN 17 billion. I can double check, I'll provide that. But the speed of this business is quite, quite slow. So and again, it's a matter, not on the financial institutions, but it's a matter on the COFIDE which will be with the government institutional doing the due diligence.

[Andres Soto:]

My second question is on dividend. Obviously, this is going to be a tough year for net income. But the way you look at your numbers at the holding company level, you still have $500 million as a rainy day fund that, at some point, you were discussing to use for M&A, but do you say that those opportunities are not there anymore. So what are your thoughts about this morning? Are you -- given your strong capital levels of your subsidiaries? And given the more positive outlook for 2021, can our shareholders still expect dividend distribution this year?

[Cesar Rios:]

Okay. Should I? As we see it, as we have stated, this is a precautionary fund. As you remember, we were operating the previous year with a reserve fund of around $600 million, PEN 2 billion as we continue with the payment of the dividend at corporate level, but we reduce the dividends on an operational business unit. So we have issued this bond that we have an extra layer of that precautionary measure. When we have a better assessment of the risk, we could again see opportunities to use these funds. But in the short term, it's an extra layer, as a matter of precaution.

[Walter Bayly:]

This is Walter Bayly. Let me add something to the dividend question. I think that this is not probably the right time to start thinking about dividends. We are -- we will have to rebuild the capital of all our banking subsidiaries. So if we would not expect the banking subsidiaries to send any substantial dividends to Credicorp. Thus, if we distribute any dividends, it will be a marginal number.

[Operator:]

Our next question comes from Carlos Gomez-Lopez with HSBC.

[Carlos Gomez-Lopez:]

Two questions. The first one refers to a change in your equity. As you mentioned, you paid the dividend, but I was still surprised that we did not have more of a recovery in this quarter. Is there something else that we have not changed beyond the movement in securities? Did you sell the securities when they were low? And the second, I think Walter also answer this one. You have obviously made huge fix provisions. You have given a lot of thought to it, but you can probably provide it 2 to 3x what other banks in the region have provided. So I see 3 possibilities, either your circumstances or your portfolio are different. Or you are more conservative than perhaps you should be. Or the others have not really taken the crisis to the extent that they should, which would probably -- which do you think is the most likely explanation?

[Cesar Rios:]

Sure. I was talking about the equity and the unrealized gains. During the first quarter, we had an unrealized loss of PEN 730 million. And in the second quarter, we have PEN 792 million unrealized gains. So a significant change in this number, and we have also realized some gains that you can see impacting positively in the P&L. Actually, we have increased the size of our investment portfolios.

[Reynaldo Llosa:]

And in terms of your question of provisions, I would say there are several issues. Peru has been hit very hard as compared to other countries in the region. Also I mean, we -- as you know, are conservative, and we take that approach always in estimating the respective flaws. I mean we are based on models, and we try to be as much early as we can. And as it was mentioned also, we will try to absorb all that potential losses this year or at least most of them. And finally, we have an important share of our portfolio in the SME market, which is a very sensitive market in terms of losses when these scenarios occurred. So I would say it would be a mix of the different things you have mentioned.

[Operator:]

We will move to our final question, and that comes from Brian Flores of Citibank.

[Brian Flores:]

Just a quick follow-up. In a previous question, I had some connection problems, couldn't hear very well. You mentioned some figures for OpEx. Could you please repeat them? I think it was for a colleague called main profit.

[Operator:]

And speakers, do we still have you?

[Walter Bayly:]

Sorry, could you repeat the question? I think we failed to understand your question. And Cesar, could you please answer? I think it's referring to OpEx, but I wasn't quite sure because of the connection. Could you please repeat, Brian?

[Brian Flores:]

Okay. Sure, no problem. In the previous response to a colleague, you mentioned some figures that could help us understand the development of OpEx going forward. My connection was a bit bad, so I just -- I'm asking if you could repeat those figures, please.

[Cesar Rios:]

Okay. Yes. We mentioned that during this year, we have controlled costs in several nonessential projects and also reducing variable compensation. So this is going to be the reality during this year. And now we are starting to work in a new efficiency program that is going to give results between 6 and 18 months to control in a more structural way, the cost structure, leveraging the digital capabilities that have been evident during this pandemic period in which the clients have moved aggressively towards digital channels. One of the measures, for example, will imply to reduce the footprint of the distribution -- the traditional distribution network, use more remote work, and we are working also, in an already mentioned, like relation with suppliers and so on. The expectation is to maintain similar cost-to-income ratio next year than the 2019, but leveraging different levels, working in expenses and being conscious that the NIMs are going to be somewhat impacted in the short-term due to the reduction of general interest rates in the market.

[Operator:]

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

[Walter Bayly:]

Thank you, and good morning to all of you. Undoubtedly, this has been an extraordinary quarter with GDP falling by about 33% when compared with the same quarter last year. This is without precedent, not only in Credicorp's history, but in the last 100 years of Peru's history. And as you are all aware, this is the worst performance of any Latin American economy. In this context, our results should not be surprising. And on the contrary, should be reassuring. And then our balance sheet allows us to front-load what our models indicate will be the required provisions rather than deferring the bulk of the impact over time. Looking forward, we are watching 3 points of inflection and key indicators of the future

[Operator:]

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