Earnings Call Transcript - BAP Q4 2022

Operator, Operator

Good morning, everyone. I would like to welcome you all to the Credicorp Limited Fourth 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. As a reminder, all participants will be in a listen-only mode. There will be opportunity to ask questions at the end of today's presentation. Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Cigüeñas. You may begin.

Milagros Cigüeñas, IRO

Thank you, and good morning. 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 Reynaldo Llosa, Chief Risk Officer; Dario Ferrari, Head of Universal Banking; Francesca Raffo Chief Innovation Officer; Cesar Rivera, Head of Insurance and Pension; and Carlos Sotelo, Mibanco's Chief Financial Officer. Before we proceed, I would like to make the following safe harbor statements. 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. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Gianfranco Ferrari will open the call and will comment on the key milestones achieved in 2022, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance, and provide our guidance for 2023. Gianfranco, please go ahead.

Gianfranco Ferrari, CEO

Thank you, Milagros. Good morning, everyone. Thank you for joining us. While we reported a solid quarter, I would like to reflect on some of the key accomplishments of the year. First of all, I am closing my first year as CEO of Credicorp. As you know, when I came into the role earlier in 2022, I had already spent many years with the group, and in particular, at BCP. I had worked as part of the prior leadership to establish the foundation of what are the key strategic initiatives that guide us today. I am very proud of the important work we've done in advancing our governance and operating structures over the last three years aimed at ensuring that sustainability would remain an important part of how we do business. Today, sustainability is being integrated into our strategy, propelling our ability to become the change agent that we aspire to be and driving positive impact in the countries in which we operate as sustainability becomes more aligned with the core of our business strategy, which is present in how we think and act every day. We have shifted the way we operate in record time because our purpose and commitment have been embraced from top down to bottom up, leveraging our competitive advantages to be a key enabler of financial inclusion and financial education in the Andean region. We've launched multiple initiatives across our subsidiaries. I would like to highlight that in 2022, we have financially included more than 1.1 million people through Yape and our financial educational web series from BCP surpassed 47 million views. This year has also been a year of learning for me and an opportunity to flex my strength. I reinforced my knowledge of all our businesses, including insurance and wealth management, which were newer to me. Moreover, I lent a hand to our overall digital transformation strategy based on my experience at BCP where we are more advanced in this area. Fundamentally, our digital strategy is aimed at facilitating our ability to live our purpose and achieve our sustainable growth objective for expanding our total addressable market and strengthening our operational drivers. We highlighted our Digital Day in March of last year, the innovation initiatives that are taking place through innovation labs are disrupting ourselves and expanding our tech capabilities and data-driven approach at each of our subsidiaries. Our more mature disruptive initiatives such as Yape keep growing exponentially and are positively impacting society. At the end of the year, Yape had over 11 million users in Peru, which is an integral part of everyday life, solving their financial needs. Approximately half of the low-income population in Peru uses Yape. We are on the track to be the payment network for Peru. Overall, we have had a very positive year, not only based on our solid financial results, but most importantly, I would say that as a holding, we have already absorbed the negative impacts due to COVID. Our net income grew almost 30% and ROE was 16.7%. We maintain our prudent stance in managing risk and our cost of risk is on the road to normalization. We go into 2023 with a very strong balance sheet to support our initiatives as well as navigate any near-term volatility in front of us. It is important to highlight that despite continued political instability, fundamentals in Peru remain strong, including the relatively low levels of debt to GDP, important levels of international reserves, and an independent central bank led by a technical and experienced board. Some important highlights of the year that I would like to point out include the very strong performance of BCP, which turned in an ROE of 22% for the year. Mibanco is on track to deliver the ROEs we expect from that business. Finally, Pacifico, a business where you have to express reservations in the past, has now reached an ROE of 19.2%. We are optimistic about our ability to keep increasing the levels of penetration of this business. On the other hand, we still face a challenging environment for investment banking and wealth management, requiring us to redefine our strategy going forward to reach the ROEs we aspire for these businesses. I expect that we will be able to share more details on this regard during our next call. Before I pass the word to Cesar, I do want to acknowledge how concerned we are that, again, the continued political turmoil and the social unrest we're experiencing in Peru after the failed coup on December 7, has resulted in near-term headwinds, not only to our businesses, but most importantly, to Peru and its citizens. We, at Credicorp, remain focused on fulfilling our purpose and take very seriously our responsibility and obligation to step up, speak up, and proactively work to solve the fundamental structural issues in the countries we operate. We are accelerating our agenda of inclusion and financial allocation, which are key factors related to poverty alleviation. Through greater inclusion, we aim to offer those vulnerable populations levels of security through savings, income generation, and economic independence. Cesar, please go ahead.

Cesar Rivera, CFO

Thanks, Gianfranco, and good morning, everyone. We are closing a very good year where the fourth quarter reflects less favorable macroeconomic perspectives in Peru, which translated into higher provisions and the habitual seasonality expenses at year-end. I want to start by highlighting some key quarter-over-quarter dynamics. The structural loans grew 0.8% measuring average daily balances, driven primarily by retail banking at BCP and Mibanco. Deposits contracted 3% due to a drop in demand deposits in a context marked by lower liquidity across the financial system. Low-cost deposits, which have fallen in recent quarters after having increased significantly in 2020 due to the pandemic relief measures, still represent a significant proportion of our funding base weighing in with a 50.7% share at quarter end compared to 49% at pre-pandemic levels. In terms of asset quality, the structural NPL ratio edged up to 4.95% after funding growth in wholesale banking, particularly in real estate and tourism sectors, as we expected. The aforementioned was partially offset by the improvement of Mibanco and Consumer segment NPL portfolios. In turn, structural cost of risk increased by 85 basis points to stand at 2.06%. At BCP, growth in provisions was driven by an update to our estimates for key macroeconomic variables such as inflation, interest rates, and GDP growth, and also reflects the negative impact that rising inflation has had on payment behavior in the Consumer segment. Provisions at Mibanco also increased materially this quarter due to an initially low comparative base and an increase in the low portfolio default ratio. This evolution was driven by the maturities of specific vintages, which led us to change our credit policy in the second quarter of 2022. From a year-over-year perspective, net interest income registered very strong growth of 30.9%, driven by a 10.4% expansion in structural loans measured in average daily balances, ongoing repricing of our portfolio in a context of higher rates and a very competitive funding base. Gains on FX transactions increased due to improvements in products and channels. Fee income decreased due to a drop registered in investment banking and wealth management, which was partially offset by growth at BCP stand-alone. Provision expenses increased materially over a typically low base last year. Asset quality remains adequate, and we continue to maintain strong allowances for loan losses which are equivalent to 5.6% of structural loans. Our coverage level for structured and nonperforming loans remained substantial at 112.2%. In the insurance business, the loss ratio fell significantly to 65.4%, which although close to pre-pandemic levels, still reflects the impacts of COVID-19. In this context, Credicorp registered in the quarter an ROE of 15.3% and continued to maintain both a sound capital base and a diversified business portfolio. At the beginning of 2023, conditions for emerging markets improved due to two main drivers. First, inflation in the U.S. is trending downward and is now far from its peak in June. This has raised expectations that the Fed has slowed down the pace of rate increases even further in what is already its most aggressive rate hike cycle in four decades. Second, the Chinese government shifted gears and eased its highly restrictive COVID-19 stance and moved to shore up the real estate sector seeking to propel economic growth. Both of these factors have had a positive effect on metal prices. Prices for copper, Peru and Chile's main export product reached the highest level in 7 months of around $4.2 per pound. Gold, another of Peru's primary exports, has shipped a nine-month high. As inflation decelerates, U.S. treasury yields have dropped, generating a more favorable environment for emerging markets as a whole. Peru's GDP is expected to grow around 2% this year and social unrest ceases this quarter. We believe that GDP in Colombia will decelerate to 1.3% after posting one of the highest growth rates in the world in 2022. Chile, in turn, is expected to contract 0.5%. LatAm Central Banks have been decisive in preventing the anchoring of inflation expectations. In the context of slowing inflation, the Chile Central Bank maintained the same monetary policy rate in four consecutive sessions. The Colombia Central Bank, on the other hand, instituted rate hikes at a strong pace given the inflation shows no signs of peaking. In Peru, upside risks to inflation have emerged recently in a context of social unrest. As such, Central Bank decisions moving forward are likely to be influenced by the impact of the current situation, which may mean that record high interest rates continue longer than previously expected. Despite the challenging context, BCP continues to deliver strong profitability. Results were driven by an increase of 8.4% in core income, skewed by a 12.2% growth in net interest income which rose despite the fact that the average daily balances of structural loans registered little variation. This quarter, gains in FX transaction growth as we leverage intelligence capabilities in a volatile FX market. Nonetheless, income fell this quarter after fees were eliminated for transfers between different cities in September 2022. Operating expenses were also up due to seasonality in this context, return on average equity stood at 20.4% on a full year basis. Growth in net income was skewed by a 28.5% increase in net interest income, bolstered by raising interest rates and a 12.2% increase in structural loans measured in average daily balances. Wholesale Banking grew 12.3%, while retail banking expanded 12%. Additionally, fee income increased 11.3% fueled by an uptick in transactional levels, particularly through digital channels and POS, and growth of 12.4% in the net gain in FX transactions as we manage FX volatility and roll out improvements in products and channel offerings. Loan loss provisions increased 55.6% driven by the Consumer and SME segments. Operating expenses grew 13.4%, driven by growth in variable compensation in line with higher income, an uptick in IT expenses bolstered transactional capabilities, and an increase in investments in disruptive initiatives. In this context, BCP's efficiency ratio stood at 40.7% and ROE at 22%. Yape has more than 11 million users and 8.1 million active users. If we consider users that make at least one transaction per month, Yape is closer to reaching its 2026 target of 10 million active users. Currently, 42% of Yape's active users generate revenue, and this number is on the rise. We continue to see positive trends across most of our metrics, including the measurement of our transactional volume, which grew more than 2.6 times this year to reach PEN 66.2 billion in 2022 with 19.5 monthly transactions per active user. Yape is trending upward and reached 9.8 million in December. This translated into a market share of 25% of total payments in the Peruvian market. As one of Peru's most important distribution channels, Yape is creating new sources of income for Credicorp through Yape Promos and Yape micro loans. By 2026, we expect 5 million affiliates will have access to financial products through Yape. Mibanco registered a drop in profitability this quarter, which was primarily driven by growth in provisions. The company hit a record high for disbursements, and an uptick in disbursement yield helped us mitigate growth in the cost of funds. Nonetheless, results were impacted by higher provisions due to two factors. First, we registered an initially low base last quarter after methodology improvements were incorporated into the model; and second, specific vintages mature, which increased the portfolio default ratio.

Gianfranco Ferrari, CEO

The higher risk reflected in these vintages was expected and drove our decision to review our risk appetite in the second quarter of 2022. Mibanco's structural NPL ratio dropped due to an uptick in write-offs and stood at 5%. As a result, Mibanco's quarterly earnings dropped 68% quarter-over-quarter from a full-year perspective. Net interest income grew 15% in 2022, driven by an increase in structural loans and in disbursement rates. Provision expenses rose 15% in 2022, which was attributable to loan growth and a variation in our risk appetite. Operating expenses grew 7% year-over-year, driven mainly by marketing and IT expenses and by variable compensation, which reflected growth in earnings and fulfillment of commercial targets. In this context, the efficiency ratio dropped to 51.3% in 2022, while ROE stood at 16.5%. The investment banking and wealth management business, while still challenged by market conditions, has registered a slight recovery in recent quarters. From a full-year perspective, assets under management dropped 18.7% driven by fund outflows in Peru and Chile and decreasing market value of funds. In this context, income fell 13.1% primarily in asset management. The change in the market environment led us to initiate a strategic review for this business, which is close to completion. We have identified key levers to achieve long-term profitability and are determining which business represents the greatest opportunity for growth and which can be used as a platform to capture efficiencies. Now we will talk about Credicorp's consolidating dynamics. Our interest-earning assets fell 3.1% due to a drop in available funds, investments, and Reactiva loans, while structural loans grew 0.8% driven by retail segments and Mibanco. Our funding base dropped 4.7% due mainly to a decrease in demand deposits. On a full-year basis, interest-earning assets and funding followed trends similar to those in this quarter. On the asset side, there was a shift in the mix where higher-yield structural loans name in microfinance and consumer loans reduced a higher growth than that seen in other segments. In terms of our deposit base, the mix tilted to higher-cost products, where time deposits were up 23%. These dynamics and the fact that we maintain a large share of the market transactional deposits led to an increase in our asset yields to obtain growth in the cost of funding. Now I will discuss the evolution of core income. On a quarter-over-quarter basis, core income grew 5.6%, driven primarily by an increase in net interest income. The net interest margin rose 42 basis points to stand at 4.73%, while structural NIM stood at 5.95%. Risk-adjusted NIM fell 6 basis points to stand at 4.44%. Moreover, the net gains from FX transactions also increased. Nevertheless, fee income fell 2% driven primarily by the elimination of fees for intercity transfers and the decrease in fixed pay for third parties, mainly due to higher transactional volumes. On a full-year basis, core income grew 17.9%, fueled by growth in net interest income which rose 23.1% in line with an uptick in loan volumes and interest rates. The 9.4% increase in banking services fees was partially offset by a drop in fee income from mutual funds. I will now move to Credicorp's structural loan quality dynamics. On a quarter-over-quarter basis, our structural NPL volumes increased slightly. NPL volumes increased mainly in wholesale banking after some clients in the retail and hotel sector delayed financing after having been reprogrammed during the pandemic. The aforementioned increases were partially offset by a reduction in NPL volumes at Mibanco and in consumer loans due to write-offs. Year-over-year, similar to quarter-over-quarter, the increase in NPL volumes was driven primarily by wholesale and SME-Pyme. The structural NPL ratio was basically flat at 4.95% after decreased NPL volumes, while it was offset by higher loan balances. Now let me explain structural loan loss provisions dynamics. On a quarter-over-quarter basis, growth in structural provisions was driven mainly by BCP and Mibanco. The main drivers at BCP were updates to macroeconomic projections for inflation, interest rates, and GDP which impacted retail banking in particular.

Cesar Rivera, CFO

The impact of high inflation on payment behavior in the consumer segment at Mibanco was due to an unusually low base last quarter and the maturity of specific vintages which led to the default ratios for the portfolio to rise. On a full-year basis, the structural provision expenses increased 38% over an exceptionally low base and are moving towards normalized levels. In this context, the structural cost of risk stood at 2.06% this quarter and 1.26% this year. As mentioned last quarter, a significant portion of our annual expenses are registered in the last quarter of every year. Operating expenses grew 11.5% on a full-year basis, which reflected an increase in administrative expenses and in salaries and employee benefits. Growth in administrative expenses was driven by an uptick in IT expenses related to cybersecurity, new functionalities, and a significant increase in digital transactional volumes. In this context, Credicorp's efficiency ratio improved 150 basis points on a full-year basis, driven by higher core income and BCP stand-alone and Mibanco. If we exclude investments in disruptive initiatives such as Yape and Krealo, the efficiency ratio for the year stands at 41.6%, which represents a difference of 290 basis points from the reported figure. Credicorp's full year profitability was fueled by better results at Universal Banking and microfinance and a solid recovery on the insurance front. In addition, profitability was impacted by lower results at the holding level mainly due to a decrease in net financial results and higher expenses for withholding taxes. Net financial results at the holding were impacted by an increase in the negative carry of the senior bond in line with the devaluation of the investments made with the use of these proceeds. Our guidance of maintaining our ROE in the high teens in 2023 includes our best estimate based on the information we have today. We expect NIM will continue to increase as the period of high levels of interest rates could be prolonged, and our loan portfolio continues to shift towards retail. Cost of risk will continue to normalize towards pre-pandemic levels. Finally, we expect to register high single-digit growth in the loan book. And to make this possible, we will continue investing in digitalizing our traditional businesses and disruptive ventures.

Gianfranco Ferrari, CEO

I am hopeful that the next general election brings the stability needed to rebuild the country in an environment of peace, democracy, and inclusion. Peru still maintains the institutional framework and macroeconomic fundamentals, which led the country to 14 consecutive years of poverty reduction prior to the pandemic. We hope that those elected protect those fundamentals and prioritize solving the structural problems in Peru, widespread poverty and unequal access to health and education. We are committed to contributing to achieve the goal of poverty alleviation, which is closely tied to increasing financial education and inclusion. By accelerating our financial inclusion agenda we can support the efforts of those that are the most excluded, women, the elderly, people living in rural areas as well as those of lower socioeconomic and education levels to achieve greater levels of security through savings, greater income generation, and economic independence. We also believe that Peru has an important opportunity for advancement in the context of the global energy transition process. The previous government wasted the opportunity of positioning our country as a leading participant in this process. The energy metrics will change fundamentally in the next five to ten years due to environmental and resulting policy changes, with investments shifting away from fossil fuels through renewables. Global demand for metals is growing exponentially as governments commit to advancing energy technologies capable of addressing climate change. And the Andean region should be a key supplier of these required metals. If only our governments can focus on stability and strengthening our fundamental infrastructure needs, then we can realize and reach more quickly the tremendous potential in front of us, thereby having a positive impact on poverty reduction and improvement in education and health services. Thank you all. I look forward to speaking with you on our next call.

Operator, Operator

Thank you. We will now begin the Q&A session. Our first question comes from Roberto Durono with Bank of America. Please go ahead.

Unidentified Analyst, Analyst

Hi, good morning. This is Gabilondo from Bank of America. My first question is on operating expenses and the digital investment strategy. We have seen a trend in the region that is focusing on profitability versus client growth, and also looking for an accelerated pathway to monetize the client. The experience in the region has been to have digital deposits and digital loans to monetize the clients. And I think it has been coming from both, not starting with the asset or the funding side. However, considering that Peru is still not safe in fintech competition like in Brazil, in Mexico, or Colombia, wouldn't it be reasonable to refocus the digital strategy on accelerated profitability and then maybe use those earnings to invest in multi-initiatives? I would like to hear your thoughts on this and how should we expect in terms of the operating expenses and the digital investments? Thank you.

Gianfranco Ferrari, CEO

Hi, good morning, Roberto. Thank you for your question. We do see the new competitive environment as positive for the exact same reasons you mentioned as positive for incumbents like us because, what I call, happy money has somehow dried up for new ventures. Regarding our strategy, we do believe that the current strategy we have is the right one. As Cesar mentioned, 280 basis points out of the cost-to-income of Credicorp was expensed in digital initiatives. That's within the range we provided, which is up to 300 basis points of cost to income and up to 150 basis points of ROE. So we're on track. We don't believe that we need to change our commitment regarding digital ventures. What we're seeing is that because there's less new money coming into these ventures, the path to monetization is going to be faster. The most mature venture we have, which is Yape, is right on track in that sense. We're very positive with what we're seeing. We shared with you the number of active users. We keep increasing the number of transactions per user, and also the number of users already generating income which is at a faster pace than we originally planned. So we're on track. Obviously, some of these ventures diverge, we will make the right corrections.

Unidentified Analyst, Analyst

Then my second question is on asset quality. I don't know if you can give us how much of the provision charges of the quarter were related to the inflation impacts. And when we look into your cost of risk guidance, it seems wider compared to the ones you guided in 2022. So you see a realistic cost of risk would be around 1.7%. And then your guidance is conservative at 2%. I wanted to hear your thoughts on that.

Reynaldo Llosa, Chief Risk Officer

Yes. This is Reynaldo Llosa. Yes. I mean, as Cesar has explained during his presentation, there are several reasons that are impacting the total risk and the guidance for this year. Basically, the return to normal levels as we have mentioned in previous calls, also the fact that the macroeconomic environment is challenging due to what we've been watching in the country in the past few months, and also for the fact that we are growing faster in the retail market than in the wholesale market. Having said that, there’s still a lot of uncertainty for the following months. So that's why we have provided guidance that is open between 1.5% and 2%. It will be reasonable that we will be somewhere in the middle, but it would be a little too soon to have a precise number or the final number for the year.

Unidentified Analyst, Analyst

Helpful. Thank you very much.

Daer Labarta, Analyst

Hi, good morning. Thank you for the call and taking my question. I guess my question is on your guidance, particularly the ROE guidance. Just to try to understand how you get to that 17.5% that you're expecting for this year? I mean, I know the margin is looking better than expected, but that cost of risk seems to be increasing. It does seem like you would be closer to that higher end of the cost of risk, if not even above that. So just to try to see what you're thinking and get you to that 17.5%. And maybe if you can provide some color on fee income growth or expense growth that will help you achieve that.

Cesar Rivera, CFO

Thank you for the question. I think the numbers that we provided in the previous guidance were coherent as a whole. But as you can see, we had a little bit more cost of risk at the end, which was in the middle of the range. So that explains the 16.7%, basically. For 2023, we are modeling something similar, in the sense that the combination of the different factors leads us to have around 17.5%. I would like to stress that this is an approximate figure, not an exact figure with decimal points. Regarding the specific question regarding risk, as Reynaldo already mentioned, we have been expected to come back to more pre-pandemic levels and to shift to a more retail portfolio. If you look at the whole picture, it doesn't seem that the shift is radical between wholesale and retail. But within retail, we have been growing significantly faster in Consumer and SME than in wholesale mortgages, for example. So the risk profile has changed, and we expect the same behavior during 2023. If we take out the specific events that impacted the fourth quarter, we consider that the range of cost of risk between 1.5% and 2% is reasonable according to general trends, and I will say if you package all of this, it leads us to believe that this range is reasonable. I hope this helps you.

Daer Labarta, Analyst

Yeah. No, that's very helpful. Maybe just to try to triangulate everything. Any color you can provide on the fee income growth and also expenses? I know you gave the guidance for efficiency, but just any color just on the specific growth in those segments, particularly in terms of expenses because of all the IT investments that you're doing, any color you can give on the growth that you expect in those lines?

Cesar Rivera, CFO

In terms of fees, we mentioned at the beginning of last year that we have experienced significant rebound in specific lines of fees related to Mibanco to the comeback of disbursements that align with specific commissions in the case of BCP's transactional activity that rebounded very significantly above pre-pandemic levels propelled by our digital capabilities. But this significant rebound has already occurred. Our fee income going forward is going to grow less than the net interest margin. In terms of expenses, I think the general trends are going to be similar but with different rates than in 2022, and a slight increase in variable compensation, and a significant increase in two or three accounts: IT expenses to increase product offerings, transactional activity, volumes that are growing significantly, and marketing-related expenses. The disruptive initiatives are growing income faster than expenses, but as a whole still impacts the core efficiency ratio being more significant in relative terms.

Geoffrey Elliott, Analyst

Hello, thank you very much for taking the question. I wanted to dig in a little bit more detail into the Mibanco vintages that you mentioned. Can you give us a little bit more detail on those loans when they were originated, what the characteristics of the customers were, and also help us understand why are we seeing the increased provisions now if it seems like this has been a known issue for a couple of quarters since you adjusted underwriting back in the second quarter?

Reynaldo Llosa, Chief Risk Officer

In terms of the specific vintages, we had quite important growth in the Mibanco portfolio. We were optimistic about the evolution of the performance of those segments in the market. Having said that, by the end of the first semester, we identified some specific risk increase in the quality of those segments. So we decided to implement changes in our strategy in the second semester. Our growth expectations for the portfolio were not met due to that event. These vintages have been maturing, and we are currently identifying the losses associated with those segments.

Yuri Fernandes, Analyst

Thanks, Gianfranco and Milagros. I had a question regarding efficiency. When we look at your guidance, the margins are very strong. You have structural loans growing 6% to 10%, meaning extending the midpoint of 90 bps. And when we plug this to your NII, it implies more than 20% NII growth if you assume interest-earning assets will grow at the same pace as loans, right? It's a very solid top line, but looking at your efficiency guidance, they are flat versus this year, when we had about 11%, 12% expenses growth, BCP leading. Given your main revenue line, NII should grow those 20% assuming our calculation is correct. What will happen to expenses? Are you calling for such an increase in expenses? Should we see expenses approaching those 20% levels?

Cesar Rivera, CFO

It's a very sensible question. I think it's a reasonable one. Just think of it this way: In our P&L, we have the net interest margin driven by both volume and higher average NIMs throughout the year. The second source of income is fees. The fee income growth will be more attached to business volumes in assets and increased digitalization and transactional capabilities rather than at the same pace that we experienced at the beginning of 2022. As for expenses, we plan to invest significantly in developing capabilities within the business units and in the disruptive ones. Inside the business units, the growth will align with expansion of client transactional activity. Regarding the disruptive initiatives, despite the income from these initiatives growing at a faster pace than the previous year, their cost base will also increase, thus impacting the core efficiency ratio more significantly in relative terms.

Juan Recalde, Analyst

Hi, good morning. Thank you for taking my question. My question is related to deposits and funding. The deposits had been relatively flat year-on-year in 2022. At the same time, we saw low-cost deposits decreasing as a percentage of total funding and interest-bearing deposits increasing. How should we think about deposit growth and the funding breakdown evolution for 2023? What role do you think Yape can play in the deposit growth and breakdown?

Gianfranco Ferrari, CEO

To understand the short-term dynamics, we need to go back to the pandemic period. Before the pandemic, we had a certain structure in the funding base and the relative sizes of low-cost deposits in the financial system. During the pandemic, there was a significant infusion of low-cost deposits due to Reactiva and the releases of the Peru pension funds, leading us to have record high levels of transactional deposits. As we start to normalize the economy, these figures will come down but we expect it to be somewhere between the temporary levels and pre-pandemic levels, promoted by our digitalization and transactional capabilities. Regarding Yape, when you digitalize money through electronic transfers instead of going to the bank, you maintain deposits in the bank, which reflects positively on our transactional deposits. We have measured this and found that we can potentially maintain 20-25% of the average transactional volume of our clients as additional deposits, making Yape a significant and valuable contributor.

Unidentified Analyst, Analyst

Yes, good morning, gentlemen. I have three questions; just going to go one by one. The first regarding loan growth. Your guidance is for structural loan growth of 6% to 10%. Given Reactiva accounts for about 7% of your total loans, implicitly, are you saying that you believe those Reactiva loans will be fully repaid? So the structural growth close to 7.5% for structural loans, once Reactiva is repaid, it is more or less around zero. Is that the correct assumption?

Cesar Rivera, CFO

It is a reasonable assumption. The impact of Reactiva in the P&L is minimal since those loans have thin margins.

Unidentified Analyst, Analyst

Okay. Good. So that was actually my next question regarding the margin. Your guidance assumes significant NIM expansion. How much of that NIM expansion is coming from the mix shift to retail, and how much of that is still from the interest rate delay impacts?

Cesar Rivera, CFO

The average rates for 2023 we expect to be higher than the average rate of 2022, even though the trend is downward. But the average for the year will be higher, which will be key for the expansion of the NIM. The shift in the portfolio composition, while significant, is a more gradual factor.

Unidentified Analyst, Analyst

Okay. Got it. And then the final question regarding Mibanco. Can you explain the disconnect between your NPL ratio trajectory and your cost of risk trajectory with respect to Mibanco?

Gianfranco Ferrari, CEO

The improvement in the NPL ratio reflects our aggressive write-off strategy used in Mibanco, which means that many loans were already 100% provisioned. The recent increase in the cost of risk, however, is also related to the challenging macro environment we are facing, which is incorporated into our projections of expected losses for year-end 2022 and will likely influence our risk assessments moving forward.

Carlos Gomez, Analyst

In terms of the impact on your operations, how concerned are you today? And do you see the situation better or worse than you did 6 or 12 months ago?

Gianfranco Ferrari, CEO

Carlos, this is Gianfranco. There’s a lot of volatility in terms of political noise and turmoil. I see light at the end of the tunnel. The prior government was marred by corruption, leading to a lack of execution. We are more positive in what we see going forward. Obviously, there's political turmoil and social unrest today, but overall, we are more positive today compared to six months ago.

Cesar Rivera, CFO

We have had operational issues at BCP, which we've managed correctly. We've had to shut down some branches on an hourly basis on a daily basis, but that hasn't had a major impact. Mibanco has experienced issues in rural areas, with two of its branches burned, but fortunately, there was no personnel impact. Mibanco is somewhat concerned about its small portfolio around 80 million due to logistic problems affecting client repayments.

Gianfranco Ferrari, CEO

Thank you for your questions. Despite the near-term outlook, which involves uncertainty, we will keep delivering based on our purpose, executing on our strategy and advancing the many initiatives we have underway throughout 2023. However, we will be prudent as we have always been in managing risk given the current local environment. Although it's still early to accurately estimate the potential impact of current social unrest in our economy and our businesses, our guidance of maintaining our ROE in the high teens in 2023 includes our best estimate based on current information. We expect NIM to continue increasing as the period of high levels of interest rates could be prolonged, and our loan portfolio shifts towards retail. Additionally, we expect to register high single-digit growth in the loan book. I am hopeful that the next elections will bring stability needed for rebuilding the country in an environment of peace, democracy, and inclusion.

Operator, Operator

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