Credicorp Ltd Q1 FY2022 Earnings Call

Good morning, everyone. I would like to welcome you to the Credicorp Ltd, First Quarter 2022 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp's website. Today's conference call is being recorded. Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Ciguenas. You may begin.

Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer; Reynaldo Llosa, Chief Risk Officer; Diego Cavero, Head of Universal Banking; and Cesar Rivera, Head of Insurance and Pensions. Before we proceed, I would like to make a following safe harbor statement. Today's call will contain forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligations to update or revise any forward-looking statements to reflect new or changed events or circumstances. Gianfranco Ferrari will start the call discussing our strategic initiatives, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance and provide an update on our outlook for 2022. Gianfranco please go ahead.

Thank you, Milagros. Good morning, everyone. Thank you for joining us today. Please turn to Slide 3 of our earnings presentation. We were pleased to recently have the opportunity at our Digital Day to introduce to many of you our holistic approach to continuing to challenge and transform ourselves to maintain our leadership position in Peru and beyond as we expand regionally. Our first quarter results underscore the effectiveness of our strategy as we capture market opportunities, capitalize on synergies and leverage our brands and scale to deliver strong operational milestones, financial metrics and enhance shareholder value. Despite the current political turmoil, the successful execution of multiple initiatives across our lines of business enabled us to maintain solvency and to increase our declared dividend to PEN 15 soles per share for the 2021 fiscal period. Today, we are also adjusting our 2022 outlook for Credicorp. Cesar will discuss this in more detail shortly. Now please turn to Slide 4. As you all know, when I came to the role of CEO earlier this year, it was after having spent many years working hand-in-hand with the prior leadership, establishing the foundation of what are the key strategic initiatives that we remain focused on today. Two years ago, we announced important additions to our governance and operating structures to ensure that sustainability would remain and become even more a core part of how we do business. In fact, it is one of the 3 key priorities of our long-term strategy that is guiding the future of Credicorp's businesses and the impact that we want to have on society. At our Digital Day took place in mid-March, we outlined the governance structure and core initiatives that would also ensure that the early successes in digital transformation we achieved at BCP would be replicated and enhanced throughout the company, all while intensifying our focus on internal and external disruption and innovation to meet and anticipate the needs of our expanding customer base. Finally, everything we do is based on the relationships we have with our customers and our ability to deliver on the trust they are putting in us. As such, attracting and retaining our skill and talent is fundamental to the success of all of our initiatives. Working under a framework guided by these 3 key priorities will allow us to unlock Credicorp's full disruptive, scalable and market expansion potential. Please turn to Slide 5 to review these initiatives in more depth, starting with the acceleration of our digital strategy. As I just mentioned, we've expanded our governance structure by adding 2 new governance bodies at the Credicorp level; the Innovation Committee and the BAP Innovation Table both led by Francesca Raffo, our Chief Innovation Officer. This is designed to enhance our disruptive and entrepreneurial culture while adding an extra layer of support to foster creativity and innovation while optimizing the return on investment in innovation. Fundamentally, our digital strategy is aimed at facilitating our ability to live our purpose, to contribute to improving lives by driving the changes that our countries need. Execute on our values and achieve our sustainable growth objective of expanding our total addressable market and strengthening our operational drivers. Our innovation initiatives are taking place both internally, through innovation laboratories where we're disrupting ourselves and expanding our tech capabilities and data-driven approach at each of our subsidiaries, and externally through Krealo, the Corporate Venture Capital Center. Please turn to Slide 6. To successfully meet our transformation and growth objectives, we are committed to continuing to retain and attract the best talent, all while managing their potential, development and succession with a comprehensive value proposition that strikes the balance between human and business perspectives. In 2022, our Talent strategy parallels our business transformation strategy. This includes focusing on developing an attractive talent with technological and digital capacities while accelerating initiatives for gender equality. We know this is a competitive environment for talent and are committed to evolving our model to offer current and potential employees a proposal that focuses on their personal development, flexibility and well-being, including specifically addressing executive compensation and a hybrid remote work-from-home approach. This is generating new opportunities and modalities for us by facilitating borderless hiring. Moving on to an ESG update on Slide 7. During the quarter, we were especially active within the environmental and social front and we continue to progress along our ESG journey. On the environmental front, we doubled down our Eco-factoring product reaching $4 million in disbursement during the first quarter of the year. We also launched green products such as financing imports and acquisition of electric vehicles at BCP Bolivia and continue to develop capabilities on sustainability issuance at Credicorp Capital. During the quarter, we financially included 275,000 people through our digital wallet. We also accelerated our gender equality initiatives with our Credito Mujer product at Mibanco, Peru supporting more than 6,000 women. While at Mibanco Colombia, we issued the first social bond with a gender focus raising $20 million to fund microloans for Colombian women entrepreneurs. On governance, 2 of our subsidiaries were recognized by MERCO for their good corporate reputation and were ranked among the top 20 best companies in Peru. You will note that we have included a new section in our earnings report outlining our ESG priorities and approach. We will be updating our progress on a quarterly basis. We were pleased that the progress we're making on our sustainability journey is being recognized by the market. Not only did MSCI upgrade Credicorp's ESG rating to the Leader's category this past December, but Sustainalytics also improved Credicorp's ESG Risk Score in February 2022. Finally, I invite all of you to review our 2 recent publications on sustainability. An update on our 2020-2025 Sustainability Strategy and Execution and our 2021 Annual and Sustainability Report. Now let me turn the call to Cesar Rios, who will provide a brief overview of our operating and financial performance for the quarter. Cesar, please go ahead.

Thank you, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable overall operating and financial results. I will focus on the year-over-year results, which are not impacted by seasonality effects. The structural loans grew 12%, driven by BCP and Mibanco, while low-cost deposits grew 3.9%, accounting for 60% of our funding base. Core income grew 17.7% compared to the previous period. Net interest income benefited from a more favorable asset mix, higher interest rates, and effective control of funding costs. Fees and gains on FX transactions increased in line with higher transactional levels and market volatility. Other income was negatively affected by results from net gains on securities related to Pacifico and Credicorp Capital's fixed income investment portfolios. The cost of risk remained low, and the loss ratio in the insurance business continues to improve. As noted during our Digital Day, we expect operating expenses to rise as we enhance our digital and innovation strategies. In summary, our profits were robust this quarter, we maintained a solid capital base, and BCP and Mibanco played significant roles in achieving a consolidated ROE of 17%. Please move to Slide 8 for a brief overview of macro dynamics in our markets. Global monetary authorities responded to supply chain disruptions and inflation by increasing interest rates, leading to higher funding rates in various countries. Despite inflationary and social challenges from rising commodity prices, the Peruvian economy has shown resilience. The Central Bank of Peru has effectively controlled inflation expectations, raising the reference interest rate to achieve a neutral real interest rate of 1.5% plus expected inflation. Additionally, excise taxes were significantly reduced for certain fuels, while some crude items have temporarily had sales tax accelerated to ease the impact of rising import prices. The minimum salary was recently increased, and the exchange rate has appreciated 4.5% year-to-date, dropping from PEN 4 to around PEN 3.82 per dollar. While high commodity prices have had a marginal effect on the balance of payments, Peru is projected to grow 2.5% in 2022. Colombia and Chile are facing political challenges but are showing resilient economic indicators. The Colombian economy is expected to grow 5.5%, although inflation and interest rates are rising quickly. In Chile, a constitutional assembly is developing measures that may negatively impact the business climate and GDP growth potential, contributing to an expected growth of just 1.5%. These macro dynamics impact our business in mixed ways. Higher interest rates enhance our margins at BCP, but they also increase funding costs for our microfinance operations. Furthermore, high long-term interest rates affect the value of our fixed income investment portfolios, posing challenges for our investment banking and wealth management sectors. Although clients' payment performance remains strong, we are carefully monitoring the described dynamics. Now, I will discuss our lines of business performance. Next slide, please. BCP has demonstrated strong year-over-year profitability, with core income growing 18.6%, driven by net interest income from rising interest rates and a 14% increase in structural loans based on average daily balances. In Wholesale Banking, structural loans grew 19.7% partly due to a base effect from corporate clients amortizing short-term facilities in Q1 of 2021. In Retail Banking, structural loans grew 8.8%, driven by Consumer and SME-Pyme segments, utilizing data analytics and digital capabilities for growth. Digital sales accounted for 34% of total units sold this quarter. Additionally, fee income rose by 15%, supported by increased transactions, particularly through POS and Interbank transactions. Gains on FX transactions saw a 38.4% increase, showing our capability to leverage intelligence in a volatile market. Operating expenses rose 19% due to increased investments in digital strategies, rising transaction costs, and heightened variable compensation. Consequently, the return on average equity for this quarter stood at 23.5%. Quarter-over-quarter, results were influenced by seasonal effects, notably in expenses. Next slide, please. I hope you had a chance to hear Raimundo discuss Yape during our Digital Day. Yape's objective is to become the primary app for Peruvians, evolving into a SuperApp with three main goals. The first is to become the main payment network in Peru by competing with cash. Yape targets low-ticket cash payments, achieving 5.1 million monthly active users who made an average of 13 transactions monthly, totaling PEN 4.1 billion. The long-term goal is to reach 10 million active users transacting more than PEN 100 billion annually. The second ambition is to integrate into users' daily lives, initiated with top-ups launched in November 2021. In Q1 of 2022, top-ups grew by 133%, capturing 5.3% of a gross merchandise market worth 1 billion a year. Yape aims to become Peru's #1 marketplace for products and services. Finally, Yape seeks to address all of Peru's financial needs, having launched a pilot feature for small loans through the app targeting over 2 million users. Next slide, please. At Mibanco, the hybrid model has been critical in driving results through centralized assessments and alternative distribution channels, resulting in record levels of structural loan disbursements year-over-year. Core income increased by 28%, fueled by growth in net interest income from a 12.6% rise in structural loans and increased yields. Commissions saw growth due to bancassurance sales. However, operating expenses rose alongside increased activity post-pandemic. Improved macro conditions and client payment performance led to a 24% reduction in provisions. Consequently, the return on average equity at quarter-end stood at 17.1%. Quarter-over-quarter, Mibanco's earnings fell 18%, while core income rose slightly but was offset by increased provisions returning to typical levels following historically low figures. At Mibanco Colombia, while portfolio growth and quality remained strong, profits decreased quarter-over-quarter amid more typical provisioning. Next slide, please. Pacifico's insurance underwriting results are recovering as COVID-19 claims decline and claims normalize. In the Life segment, net earned premiums grew due to price adjustments and high origination, complemented by a reduction in claims as conditions improved. In the P&C business, net earned premiums rose due to price increases and higher origination, especially in medical assistance. Claims increased mainly in the commercial sector as restrictions eased. As a result, the total loss ratio is now at 69.3%, nearing pre-pandemic levels. Quarter-over-quarter, net earned premiums decreased due to FX impacts and contract cancellations in the alliance channel, though a seasonal policy renewal increase was offset by fewer large claims. Overall, underwriting results continued to improve. However, Pacifico's results were negatively affected by an impairment charge from a downgrade in some fixed income investments, with Grupo Pacifico's return on equity reaching 12.8%. Next slide, please. The Investment Banking and Wealth Management sectors face challenges from market volatility and political uncertainty impacting corporate finance and capital market activities. Additionally, income from Asset and Wealth Management has been influenced by last year’s fund outflows. Lower management fees in 2021 were offset by redemptions and third-party fees, but 2022 saw deteriorating market values and lower volumes. Reported income decreased both year-over-year and quarter-over-quarter due to lower income from Wealth and Asset Management and seasonal corporate finance activity. Total assets under management remained stable quarter-over-quarter but declined 6% year-over-year. We're launching various initiatives to recover volumes and attract new investments. Next slide, please. Now, I will explain net interest income and margin dynamics in our consolidated results. Our net interest income rose 19.3% year-over-year due to a 12.7% increase in interest income and a 7.9% decrease in interest expenses. The rise in interest income resulted from a 62 basis point increase in average asset yield, coupled with a better asset mix where structural loans grew 12.4%. Short-term market interest rates in foreign currency had minimal impact on asset yields. The reduction in interest expenses reflects a nonrecurring liability management charge from Q1 of 2021 and lower bond interest rates, with some offset from increased time deposit expenses. The predominance of low-cost deposits in our funding base has been crucial in controlling recurring interest expenses. Overall, our net interest margin increased by 71 basis points year-over-year to 4.44 this quarter. Given our limited floating rate assets, future sensitivity to rising interest rates will depend on several factors: our balance sheet structure, the magnitude of rate hikes, the pass-through of market rates, and the duration of our portfolio. Next slide, please. Year-over-year, core income rose 17.7% due to significant growth in all components. Fee income rose by 7.3%, driven by the adoption of cashless transactions, with notable increases in POS and Interbank transactions. Net gains on FX transactions increased by 45.8% year-over-year due to higher transaction volumes and increased volatility. Quarter-over-quarter, core income increased slightly due to growth in net interest income, while fee income from FX transactions was affected by seasonal trends. Next slide, please. I will now address Credicorp's structural loan portfolio and quality dynamics. Year-over-year, structural loans grew 13.7%, mainly driven by wholesale banking and retail banking at BCP and Mibanco. Growth in structural loan volumes and improved client payment behavior resulted in a decline in the structural NPL ratio during the period. Notably, Mibanco's NPL volumes have evolved positively, with new disbursements displaying better risk profiles. Quarter-over-quarter, there was a slight decline in structural loans due to exchange rate effects and seasonality, leading to an increase in the structural overdue portfolio and NPL ratio. The growth in NPL volume was associated with clients in the SME segment with Reactiva loans who have not yet resumed payment cycles. Provisions in retail banking contracted year-over-year due to improved payment behavior, and in Mibanco due to lower-risk profiles of new loans. Provision expenses increased quarter-over-quarter after historically low levels in the last quarter of 2021. In this context, the structural cost of risk stood at a low 0.79%, aligning with pre-pandemic levels. Next slide, please. Operating expenses increased by 14.2% year-over-year due to a rise in administrative expenses and employee compensation. The increase in administrative expenses reflects higher transaction costs associated with increased activity, aligned with our digital transformation efforts. Rising salary costs were attributed to increased variable compensation amidst expected higher earnings. Consequently, Credicorp's efficiency ratio deteriorated by 50 basis points year-over-year. Mibanco's efficiency ratio improved significantly, aided by a hybrid model that has boosted operating income while keeping expense growth modest. Excluding operational expenses related to disruptive initiatives, the efficiency ratio would be 42.5%, showing a 200 basis point difference from the reported figure. Next slide, please. In summary, with an ROE of 17% this quarter, we continue to strengthen our profitability. This positive trend is largely driven by our banking operations. By delivering consistent results and maintaining robust solvency, we are positioned to gradually increase dividend payments. We announced a regular dividend of PEN 15 per share to be paid in June, representing a 39% payout of our 2021 earnings. As we continue to secure capital strength and plan future investments, we may consider a complementary dividend later this year. Now, I will provide our revised outlook. Next slide, please. Given the current geopolitical context and the Central Bank's measures, we have adjusted our 2022 guidance. Our GDP growth estimate remains at 2.5% for this year. Retail loans have seen an uptick, particularly in consumer, SME, and microfinance segments. We now anticipate that the structural loan portfolio will grow between 9% and 11% based on average daily balances. The pace of interest rate growth and the shift toward retail lending suggest our net interest margin will accelerate to between 4.6% and 4.9% this year. We believe that a significant portion of COVID-19-related impacts has been absorbed this quarter and any further impacts will be minimal. We are attentive to how higher inflation affects our clients' payment behavior and risk profiles. With current information, we feel confident in maintaining our cost of risk guidance between 0.8% and 1.1% for this year, reflecting diverse performances across segments. Higher-than-expected income through net interest income and fees from FX transactions has prompted us to adjust our efficiency ratio guidance to between 44% and 46%. Based on these outcomes, we anticipate achieving an ROE around the high end of our initial guidance of approximately 17.5%. With these remarks, I will now open the floor for questions.

Our first question comes from Ernesto Gabilondo with Bank of America.

Congratulations on your results and your ROE guidance despite the political uncertainty. My first question is about the macro outlook. Can you share some insights on the recent political uncertainty and whether there might be any potential regulations that could impact the financial sector?

Okay. Sorry Ernesto for the technical problem. Good morning, Ernesto. Good morning, everyone. Thank you for your words, Ernesto. A difficult question to answer. As you might be reading in the news, there's a lot of political turmoil. A lot of balls that are being juggled at the same time. However, nothing specifically on the financial system as we speak. That doesn't mean that going forward, there might be any regulation. We don't see anything specific at this time.

Okay. Perfect. So then my second question is on the loan growth expectations. Considering the high inflation and the higher interest rates, what do you think is the level of interest rates in which you could start to see an impact in loan growth or maybe some specific products such as mortgages, which have long-term activity and are at a fixed rate?

Cesar, can you take that question please?

Yes. Ernesto, thank you for the question. I think our guidance has already captured this part of the framework. What we are seeing is a very good pace of growth in microfinance and consumer segments in which we are also able to have some pass-through of interest rates. By the long-term operations in general, are already challenged in mortgages and long-term corporate and middle market clients, where we see a combination of the impacts of higher rates and political uncertainty deterring further investments. So different dynamics are affecting consumer, SME, and medium-term operations.

The next question comes from Jason Mollin from Scotiabank.

My question is mainly about the outlook for profitability. You mentioned guidance for the group that appears quite positive. In this quarter, we reported a 17% return on equity for Credicorp. The contribution from the bank, BCP, was significant at over 23%, with Mibanco contributing 17%. Grupo Pacifico followed with nearly 13%, and Prima showed a strong return on equity of almost 20% with a contribution of PEN 24 million. How should we view the development of these subsidiaries in relation to long-term return on equity? I assume BCP will remain a key player, but do you anticipate significant changes in the 17% return we are currently seeing at Mibanco and the 13% at Pacifico? There has indeed been improvement, and I would like to hear your insights on Prima as well. If you could provide some clarity on the expected contributions to the profitability outlook, that would be beneficial. What are your general expectations?

Jason, I will provide a conceptual answer, and Cesar, feel free to add. We view this as a portfolio. Our main objective is to achieve an overall return on equity in the high teens. We continuously strive to enhance the return on equity based on the performance and conditions of each subsidiary, ultimately aiming for that target. Specifically, we expect Mibanco and BCP to return to their pre-COVID return on equity levels in the medium term, ideally by year-end. In the insurance sector, the influence of COVID has been significant. This quarter, the insurance business experienced a notable profit impact. However, we do not anticipate any further effects in that regard, so the return on equity in the insurance area should also see improvement. Cesar, do you have anything to add?

Yes, probably in the same line, only putting a little bit more color. In the case of BCP, as Gianfranco mentioned, we are going to probably have higher margins and higher cost of risk, ending up having profitability probably superior to 20%. Mibanco is improving. In the short term, they are going to have some challenges due to the cost of funds. But overall, the profitability is improving, and we expect to return to levels similar to pre-pandemic. In the case of Pacifico, as Gianfranco mentioned, we are having a good dynamic this quarter. We have been impacted by a couple of factors, still COVID and some impairments, but down the road, we see the business improving profitability in the high teens with a significant input from bancassurance and digital sales. And I think these are probably the biggest business. In corporate banking, investment management, we see some challenges in the medium term due to the close correlation between these results and market dynamics. All in all, these operated businesses are going to grow in profitability and sustain that. We need to consider also the short-term impact of the disruptive initiatives that caused, in the short term, around 3% of our cost to income; but we are building and creating business for the future. Finally, the impact of the withholding tax is expected to grow in line with growing dividends. In all, we feel comfortable with the guidance that we are providing with a short-term perspective midterm and in the general ballpark figure that we provided in the Digital Day for the midterm.

The next question comes from Tito Labarta from Goldman Sachs.

My question is regarding your cost of risk guidance. I'm trying to understand how long you believe you can maintain the cost of risk at these levels. I noticed that you haven't adjusted the guidance, but we have observed some deterioration, especially in the SME portfolio. With GDP growth slowing and your coverage ratio being consistent with historical levels, I'm curious about the outlook for asset quality going forward with non-performing loans. Additionally, while you have provided guidance for this year, I'm interested in your thoughts on when the cost of risk might return to more normalized levels in the long term.

Reynaldo, would you take that one, please?

Yes. Thank you, Tito, for your question. I mean this year, as we mentioned, is expected by the beginning of the year we will have these below pre-pandemic levels for the rest of the year. Having said, we feel comfortable with the level of provisions today. And we'll get back to normal by the second semester of 2023. I think we'll have to see how the economic conditions of the country develop in the following quarters. Having said that, in terms of average, we are still above pre-pandemic levels. I want to emphasize the difference between the coverage ratios in the different portfolios. You see in the presentation, Mibanco has a coverage of 143%. And remember, that's our portfolio with almost no collateral. And BCP, it has 117%, which is also above Credicorp's pre-pandemic levels, which was around 110%. And we have important collaterals in our nonperforming portfolio there. So I would say that we feel quite comfortable with the actual levels. I mean we have still some space for further provisioning without affecting the profitability of this year and the following years.

Great. That's helpful. And just a follow-up, I guess, on the asset quality outlook. We did see some deterioration in the SME portfolio. Other segments are still kind of improving. Do you expect particularly, I guess, these other segments to improve any further? When do you expect some deterioration there? And also on the SME portfolio. I think there was some FX impact on there, but how do you see the outlook for that portfolio as well?

In terms of the SME portfolio, you see an increase in non-performing loans. But there has been a special effect during this quarter, as we wrote off the SME portfolios; we wrote off the whole position, including the government-backed programs and our own portfolios. So this is a process that takes some months. We are delaying some of the write-offs for the SME portfolio, both in BCP and Mibanco, waiting for the actual authorization of the government to write off the loan. So there is like some receiving numbers in terms of what you have seen in our report. Having said that, we feel comfortable with the performance of the SME portfolio today. I mean, it's below our expectations. Remember that a lot of the loans from the government projects are starting to be paid by the clients, and we expected some deterioration of the portfolio. In terms of the other portfolios, I would say the wholesale book would be payable. The personal loans probably will start to pick up a little bit just because we are starting to underwrite a little of the segments or the new segments that come along with our strategy of market penetration in personal loans.

The next question comes from Olavo Arthuzo with UBS.

Actually, my question is very in line with the one made from Tito about the delinquent increase in the wholesale and the SME segment. I just wanted to hear from you what do you expect or what can we expect for the next quarter alone this year for the behavior of the delinquency rates for these 2 portfolios. And further, I just wanted to hear from you as well about renegotiated loans and selling of credit portfolio. I just wanted to understand because I couldn't find any mention about the selling of credit portfolio or renegotiated loans in the release. So I just wanted to hear from you what are the expectations for the bank going forward related to these potential renegotiation of more loans and selling of the credit portfolio?

I'm watching Reynaldo. He was having some troubles in hearing you. I think I got your question. So let me answer it, and if that wasn't your question, maybe interrupt me and do it again. What I got is two things. One is the overall portfolio going forward. The second one is how the Reactiva program is going. Is that correct?

Yes. On average, I expect the portfolio to remain stable over the coming months or for the remainder of the year. We might see some improvements in certain segments, particularly in the wholesale portfolio. Overall, things appear positive, and the performance across all books exceeds our initial budget projections for year-end 2021. This is reflected in our costs being slightly below our guidance in the first quarter. Regarding Reactiva, the current figures are better than anticipated. Initially, we projected a default rate of about 20% for Reactiva loans, but it is now in the low double-digit range. Additionally, government bonds are performing well, and we are actively assisting our clients in managing these debts, as we have a policy in place to ensure that they pay back both the government-backed loans and our own portfolio loans.

The next question comes from Geoffrey Elliott with Autonomous.

The rate environment has clearly shifted much faster than I think any of us would have expected a few months ago. And at this point, it seems very much like it's a positive for you in terms of net interest margins. But can you give us a sense of when you think that benefit starts to decrease as rates go higher? And I'm talking both about the point that was mentioned earlier in terms of credit demand, credit quality, but also, is there a point where you think you could start to see deposit repricing accelerate or deposits shift out of non-interest-bearing and into interest-bearing? And I think we'll consider it as positive for now, but is there a level, if rates continue to go up, if inflation continues to accelerate, where you'd start to see it as less of a positive?

Cesar, can you take up?

Yes. Geoffrey, thank you for the question. Probably, I will come back to the main factors that impact our repricing capability. I think it goes back to the structure of our balance sheet in which we don't have variable loans as a significant part of the portfolio; it is really minimal. Most of the part is fixed rate. So we need to take the market on the rate increases. What we have had, in solid, is a significant increase in short-term interest rates and in long-term interest rates from the third quarter of last year to now, but in dollars, that are relevant, particularly for the wholesale portfolios. As you know better than us, the real increase has started to happen only this year. So what we are looking at in our books is a combination of solid really impacting our books, and dollars only very moderately at this point. We are passing through the interest rate but with care and carefully, because we have parts of the portfolio in which we can reasonably translate the interest rate without affecting the demand, but there are other parts of the portfolio, and there is a lot of competition, particularly in the long-term loans, mortgages. As I mentioned, in middle and long-term, corporate and middle companies, we are having challenges with the demand. All in all, what we are seeing — and I have repeated myself a little bit — is a good combination of pass-through and volumes in short-term facilities and a challenging environment for longer-term facilities. As a general rule, we think that we are going to have this high interest rate in solid for this year and probably half of next year. After some point, we expect to see a decrease in solid interest rates because the nominal rate is too high to be sustainable. The long-term goal of the Central Bank is an inflation of 2%, and our real rates are around 1%, 1.5%. So we should see an increase in this rate, and probably starting in the middle of next year, a decrease in rates. We don't hamper too much economic growth. I don't know if this helps you.

That does. And I guess from your comments on expecting rates to go down again, it sounds like you're quite optimistic. On the inflation outlook kind of going from 2% to nearly 8% in Peru over the last year, clearly, the truckers are unhappy. We know that. But is there anything that you're seeing that makes you think inflation might be getting more entrenched, stickier, harder for the Central Bank to reverse?

Allow me only to make a slight comment. In the international rate, I agree with you. In the local rates, probably, we have a difference. It's that a significant part of the inflation is not demand-driven but supply-driven for the price of the commodities, the things that we import, and this was a key driver of inflation in our case. It was not a demand-driven inflation for the most part.

The next question comes from Alonso Garcia with Credit Suisse.

My question is on capital and dividends. So you announced a dividend last week of PEN 15 per share, which represents a payout of around 32% based on last year's earnings, which is below what you paid on 2018 and 2019 earnings prior to the pandemic, even though you are still above your internal minimum CET1 level of 11%, and the fact you are expected to accumulate capital going forward. So my question is, what led you to take a more conservative approach this year? And if we could expect a second payment later in the year? Or if you are seeing other uses for your capital, maybe some opportunities on M&A or something?

Yes. Alonso, as we've always stated, it's quite a simple equation in order to distribute dividends. So out of the profits we made the prior year, we retain whatever is needed to keep our growth in terms of the portfolio at the bank safely. On top of that, if there is, as you said, an M&A opportunity, which as we speak, there is nothing relevant on the table, we keep some excess cash for that. And on top of that, everything is distributed. So that's the policy we've been following for a few years now. We've stated that, again, several times. To be more specific on the second special dividend of the year, we might do it, but we haven't decided on anything yet. Maybe giving you a more long-term vision regarding the dividend, but maintaining the same policy is that we will try to slightly increase dividends as we move forward in the following years.

The next question comes from Yuri Fernandes with JPMorgan.

Congrats on the guidance and the results. I have a quick one on the OCI impact on your equity. We saw some increase, I guess, PEN 200 million, PEN 300 million this quarter. My question is, what do you expect here? Because markets have been very volatile, FX, rates. I would like to understand the moving parts here of this OCI for your equity growth. My concern here is the tenure, like when we look at the tenure in Peru, since March, it moved up a lot. So my question is, should we expect like your OCI accounts should keep being impacted during this year? And if this is important for your dividend payment, because I guess you mentioned a potential additional dividend payment later this year. Just trying to understand how this could have some impact on your payout later in the year.

If I got it right, you're talking about the sovereign bond portfolio, right?

Yes. I'm talking about your shareholders' equity. Like when you look at your shareholders' equity, you see the OCI that talks about a lot of things, right? I guess, treasury, it's a big portion of that. And there was a negative hit this quarter.

Sure. Cesar, you can take that one.

Yes. Okay. To establish the levels of equity dividends, we follow the path that Gianfranco explained, and you have the current profit of the period and unrealized gain or losses. In this regard, in some of the groups of the company, we have a negative effect due to the rate increases, as you mentioned. We have had a relative impact in the first quarter and probably we are going to have some impact in the next one, but nothing that we think could change fundamentally our policy or solvency ratios down the road. But you are right, the interest rates are rising, and this affects the prices of our long-term investments in the several books that we have in BCP, in Pacifico and Credicorp Capital through ASB, in particular.

The next question comes from Carlos Gomez with HSBC.

I have a question more on the political side. I mean, in the current discussions, what is the probability that we will have changes in the constitution? And as you mentioned, there has been no discussion about changes to bank regulation. But where are we on the changes to the pension funds or to the mining sector?

Thank you, Carlos. We can play the roulette in order to answer your first question. If you recall, and I met with most of you in March, the change in constitution at that time in March was, as I mentioned, not over the table, but the probability was very low. We still believe that the gravity is low. Maybe what has changed from March to today is that the discussion is on the table again. Having said that, our base case scenario is that it wouldn't change because it shouldn't pass through Congress. That's our base case scenario. As we mentioned regarding the financial system, actually, what has changed is that there have been some regulations promoting more competition, which I believe is healthy for the whole system. Regarding pension funds, I mean yesterday, it was approved that another withdrawal from pension funds could be released. In our opinion, that's a huge mistake. Actually, the pension fund, the overall system has been, I would say, structurally damaged not because of this low, but because of what has been happening over the last few years. Hopefully, a thorough and structural pension fund reform comes into place, but as we speak, a lot of damage is being done to the pension fund system. And regarding the mining sector, a lot of noise, but we haven't seen anything regarding any legal changes as we speak.

The next question comes from Andres Soto from Santander.

My question is related to the profitability of the non-banking subsidiaries. In particular, looking at the insurance and pension management system, I was curious about your comment that you look at this as a portfolio. And I imagine, based on what is going on in the country regarding pension withdrawals and the need for a structural reform, as you just said, probably the profitability that you get from this business in the pension management system is not sustainable. But at the same time, what I see is the insurance one. In the past, we say that the structural ROE of that unit was 12%. Now it is at 13%, even with impairments and some COVID impact. So what should we be thinking about the profitability for insurance over the medium term? And is that going to be enough to offset the impact of any structural reform on the pension fund?

Yes. There were actually two questions combined into one. Concerning the insurance business, we anticipate returns in the high teens in the short term. Even in this quarter, we will see an adjustment for the impairment on the investment. The core of the business remains strong, and we expect the insurance segment to finish the year in the high teens as well. We are quite optimistic about this. We are pursuing various initiatives, particularly in digital and bancassurance, which are greatly benefiting the insurance business. On the topic of pension funds, I am more concerned about the pension fund system as a whole than about the specific results from Prima. Our politicians are jeopardizing the pension system for millions of Peruvians, which is a significant concern for us. We need to focus on this issue and advocate for a structural reform to create a sustainable pension system for the next decade.

The next question comes from Alonso Aramburú with BTG.

I wanted to follow up on the pension fund withdrawal. Could you clarify, Gianfranco or Cesar, that this is a fixed withdrawal? What kind of short-term impact should we expect? While I agree that it may not be favorable for the system in the long run, there might be a short-term increase in the policy, which could benefit your funding costs. Could you provide some insight on the potential short-term effects of these funds leaving the pension fund and possibly entering the banking system? Additionally, regarding private investment in Peru, I understand you have a GDP estimate of 2.5% for this year. What is your outlook on private investments? What are you hearing from the companies you work with about private investment trends for the upcoming quarters?

Alonso, I'll take the first one and maybe Cesar or Diego, I don't know who can take the second one. Yes. So in the end, overall, the net excess liquidity because of this withdrawal of the pension funds, because those funds end up in deposits, and we have a very strong position in retail deposits. So as I mentioned before, Alonso, we are more concerned about what's going on structurally going forward than what's going to happen either for Prima in the negative side or for BCP in the positive side. But going specifically to your question, we get a benefit because those withdrawals end up in the banking system, as we all know, because of the market share we have in retail deposits, we got an important chunk of that. I don't know, Cesar or Diego can answer the second one.

Only probably I can add one small comment to your answer, Gianfranco, probably with a more macro view. What we expect is that this extra liquidity is going to propel a little bit more inflation and local interest rates, what is going to be the short-term impact. Regarding private investments, I think we are going to have a couple of factors because with these impacts over the pension fund, you are really taking one key player out of the table in terms of funding long-term local bonds, because the private pension funds, instead of buying long-term facilities, they are forced to sell to fund the withdrawals and adds an extra layer of uncertainty regarding the goods. So in terms of private investment, I would say, all in all, it is a negative one impact. Also, in terms of business sentiment, I would say that most corporate large investments are being held and they are in a wait-and-see mode while current investment for maintenance are going forward. We don't expect private investment to grow this year.

It appears there are no further questions at this time. I will now turn the call back over to Mr. Gianfranco Ferrari, Chief Executive Officer for closing remarks.

Thank you all for joining us in this conference call. Wrapping up, despite the escalating political turbulence and instability we have been experiencing in Peru, we managed to deliver a solid quarter with strong profitability at Credicorp. These results underscore the consistent execution and strong progress made on each of our 3 strategic priorities discussed during this call: our sustainability journey, our focus on advancing on our digital strategy, and our goal of retaining the best talent. Credicorp's earning power and the recovery experienced over the recent quarters have also helped us maintain strong solvency across our businesses and deliver the PEN 15 per share cash dividend, which was announced last week to our shareholders. Recent global and local dynamics of high inflation and increasing interest rates generate near and mid-term tailwinds, particularly for BCP, but also represent a challenge in terms of funding costs for our microfinance business. Moreover, increasing long-term interest rates negatively impact the value of our fixed income investment portfolio. And volatile capital markets generate challenges for our investment banking and wealth management business. Looking ahead, we are closely monitoring macro dynamics and their impact on the disposable income and payment performance of our customers. As we have done in the past, we will manage those variables that are under control, while navigating market and political volatility. While our reports have resulted and we expect them to continue to result in strong performance, unfortunately, the country is missing out on the opportunity to drive higher growth, lower unemployment, reduce poverty, and attract higher foreign investments. For our part, we are guided by our purpose of contributing to improving lives by accelerating the changes our country needs. It is infinitely clear to us that achieving this goal is closely tied to increasing financial education currently. With this power, those that are looked inferior: women, the elderly, people that live in rural areas, as well as those at the lower socioeconomic and educational level can achieve better levels of security through saving, greater income generation, and economic independence. To this end, we are committed to accelerating our financial inclusion agenda to facilitate greater financial education and access to the financial markets where we operate. A key element of this strategy is the launch of products and channels that involve anywhere and every day market. Again, thank you all for joining us. With this, we conclude the call. Have a great day.

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