Earnings Call
Credicorp Ltd (BAP)
Earnings Call Transcript - BAP Q2 2023
Operator, Operator
Good morning, and welcome to the Credicorp Second Quarter 2023 Conference Call. All participants will be in listen-only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Milagros Ciguenas. Please go ahead.
Milagros Ciguenas, Executive
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; Cesar Rivera, Head of Insurance; Pension; and Carlos Otello, CFO at Mibank; and Diego Cabero, CEO or Head of Universal Banking. 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. I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Gianfranco Ferrari will start the call commenting on the highlights of our strategy, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance and provide an update of our outlook for 2023. Gianfranco, please go ahead.
Gianfranco Ferrari, CEO
Thank you, Milagros. Good morning, everyone. Thanks to all of you who were able to join us during our June 20 Investor Day, where you heard directly from our leadership team on the progress of our businesses. It was also a highly valuable opportunity for us to hear from you. I'd like to take a few moments before discussing our Q2 results to recap some of the key takeaways. First, we are taking a disciplined approach to investing in businesses that we expect will begin in the midterm to further decouple our performance from that of the macro context. Two undertakings include expanding the share of retail business across our portfolio as well as increasing our noninterest income through adjacent businesses. While generally, our disruptive initiatives have a long-term orientation, Yape stands out as a venture that plays a pivotal role in this strategy in the shorter term. It has already shown very promising results with income approaching cash cost and is on track to reach breakeven by 2024. Thus, we intend to further invest in expansion, as well as other disruptive initiatives with the potential to generate value across our businesses. We heard your requests to provide more information on Yape's trajectory and have increased our disclosures on the business. Our goal is to provide you with meaningful updates as Yape continues to evolve. Second, while we're proud to be the market leader, we don't take that position for granted. We're strengthening our competitive moats by becoming increasingly digital and harnessing the power of data. Our priority is and will continue to be attracting and retaining the best talent so that we maintain our competitive edge. Finally, we're committed to enhancing our governance and transparency while continuing to pursue social impact initiatives. We aim to set a progressively real influence on our clients and communities to strengthen their sustainability efforts while playing a key role in financing the energy transition. Now let's turn to this quarter's results. While the political scenario in the second quarter improved, the impacts from social unrest, the disruption from Cyclone Yaku, as well as the added effect from the Coastal El Niño, resulted in a challenging first half of the year in Peru. Despite this backdrop, Credicorp turned in favorable results this quarter. Net income expanded 22.6% year-on-year, with ROE for the quarter at 18.6%, driven by strong results in the Universal Banking and Insurance businesses, as well as a modest recovery in the microfinance business. Loan volumes, however, experienced a slight drop as we managed on the retail side, and wholesale demand showed weakness reflecting the economic climate. Even though we saw a decrease in low-cost deposits, along with a system-wide contraction, we continued our market leadership in capturing these deposits, thanks to our long-term client relationships, trusted brand and extensive reach. Our strong balance sheet provides us sustained resilience to navigate the current weak macro backdrop as we continue to execute our value creation strategy. Cost of risk has increased primarily due to the SME-Pyme and the most vulnerable sub-segments in individuals. Mibanco's cost of risk is still high but diminished this quarter. This evolution reflects the impact of an environment of lower internal demand, high inflation, and high interest rates on the payment capacity of clients. We have strengthened our risk management and remain focused on maintaining stringent origination standards and disciplined loan pricing. Our disruptive initiatives continued to gain traction during the quarter, driven by the inclusion of a growing number of Peruvians. Nonetheless, having registered strong income at BCP and Pacifico this quarter, we have managed our cost-to-income ratio. Regarding macro perspectives for this year, Cesar will elaborate further, but social and climate events resulted in a tougher first half than we expected. At this time, our GDP growth forecast for 2023 is 1%, even though we foresee a rebound of around 2% growth in the second half, driven by stimulus measures taken by the government. During the second quarter, sea surface temperature anomalies associated with El Niño Costero motivated the cancellation of the industrial anti-efficiency session and also impacted the agricultural sector. The El Niño Costero phenomenon is expected to continue until the summer of 2024 as a consequence of the high probability of development of El Niño in the Pacific Central. For the summer of 2024, the highest probability scenario today is that El Niño Costero will have a weak to moderate magnitude. As the situation unfolds, we will keep you up to date on the experts' outlook and its potential impact on our businesses. It is important to remember that Peru's macroeconomic fundamentals remain strong. After the El Niño Costero shock, Peru will be in a favorable position to convert to Latin America's average income per capita level. The speed of catch-up will depend on Peru's ability to promote and unlock private investment, which has been the most important growth driver in the past. Thank you. And let me now turn the call over to Cesar.
Cesar Rios, CFO
Thank you, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable lower financial results. I will start with a brief comment on quarter-over-quarter dynamics but will focus on the year-over-year evolution. On a sequential basis, structural loan growth in retail banking at BCP was offset by a contraction in wholesale banking. On the funding side, the deposit mix continued shifting towards higher yield deposits. Low-cost deposits fell across the system and at Credicorp. Nonetheless, we maintained our undisputable leadership position in this funding source with 41% market share. Asset quality metrics deteriorated, reflecting the impact of challenging macro dynamics in the first half of the year from a year-over-year perspective. NII grew 21.5%, driven by rising interest rates and the structural loan dynamics, and partially offset by higher funding costs. Structural loans rose 5.5% measuring average daily balances, fueled primarily by retail banking at BCP and Mibanco. We are managing our asset quality metrics with a challenging backdrop. The structural cost of risk increased 127 basis points to 2.3%, driven mainly by SME-Pyme individuals at BCP and by Mibanco. Allowances for loan losses were equivalent to 5.7% of the structural loan. The insurance underwrite result rose 53%, reflecting increased profitability in the life business and a stable year-over-year result for property and cash flow. Operating expenses increased 9.1%, driven mainly by core expenses at BCP and disruptive initiatives, while operating income increased 16.6% fueled by BCP and Pacifico. The efficiency ratio improved 310 basis points and stood at 44.6%. In summary, this quarter, positive results and an ROE of 18.6% over a sound capital base were driven mainly by Universal Banking and Insurance businesses. Having said this, a note of caution is in order, as I will explain when I present our updated guidance; we expect softer results in the second half of the year. For the second quarter, the Peruvian economy is expected to have registered a contraction impacted by El Niño Costero, which pushed growth rates in the agricultural, fishing, and manufacturing sectors into negative territory. Growth in the mining sector, attributable to increased copper production at Quellaveco and the recovery of production at Las Bambas after temporary shutdowns last year, partially offset this decline. These dynamics, along with the impact of the first quarter marked by social unrest and climate events, could lead to a 0.5% decline year-over-year in economic activity in the first semester of 2023. This represents the most significant reported decline in 22 years, excluding the pandemic period. Domestic demand fell 2% year-over-year in the first half, driven by a sharp 10% decline in private investment and a sluggish 0.6% growth in private consumption. Price pressures are finally easing, and inflation expectations have dropped materially in LatAm. Central banks in Chile and Brazil have already started the rate-cutting cycles, and Peru's Central Bank is expected to follow suit in the last quarter of this year. Regarding our outlook, Peru's GDP is expected to grow around 1% this year. GDP growth in Colombia is expected to slow to 1.6%, while Chile's GDP growth is expected to be flat. As you know, we are closely monitoring the evolution of the El Niño Costero weather phenomenon and its impact on our businesses. In its last official statement on July 21, the Central Bank assigned a 40% probability that El Niño Costero will be weak during the summer of 2024, 36% that it will moderate, and 11% that it will be strong. In his last speech on July 28, President Boluarte communicated the importance of private investment as a tool for economic growth and development, distancing herself from the previous government's stance. She announced, for instance, that $1.8 billion worth of infrastructure projects will be awarded in the second semester through the investment promotion agency. Peru's macroeconomic fundamentals remain robust, with low public debt and net international reserves equivalent to 33% of GDP and 29%, respectively. This government's ability to unlock and mobilize private and public investments will be crucial going forward. BCP results were favorable despite this context. Regarding the key quarter dynamics. NII increased 0.9% despite a slight 1% drop in loan volumes. This drop reflects a downturn in economic activity, primarily in wholesale banking, and more conservative origination guidance in retail. Our NII reflects a disciplined approach to pass-through and our ability to leverage a transactional funding base to mitigate rising funding costs. BCP's fee income rose on the back of higher transactional levels, particularly through digital channels, and POS provisions in consumer loans and credit cards remain at high levels as high inflation in the first half of the year affected the payment capacity of vulnerable sub-segments, which are more leveraged and in stable jobs. Additionally, the SME-Pyme segment drove the uptick in provisions. On a year-over-year basis, growth in net income was fueled by a 29.6% increase in NII. This evolution was driven by rising interest rates and a 5.2% increase in structural loans, which was driven primarily by a 10.9% uptick in retail banking loans through SME credit cards and mortgages. Loan loss provisions increased 177.8% over a low base. Additionally, growth was driven by an increase in provisions on consumer loans, credit cards, and SMEs, which were affected by economic conditions. Operating expenses grew 8.3%, driven mainly by IT and marketing expenses and investment in disruptive initiatives. This increase was partially offset by a nonrecurring tax expense reversal. Consequently, BCP's efficiency ratio dropped 420 basis points and stood at 37%, while ROE reached 24.2%. At BCP Bolivia, our risk appetite remains low. Since the beginning of this year, U.S. dollar reserves in the Bolivia Central Bank have dropped materially, and banks have daily limits on U.S. dollar withdrawals. Regardless, BCP Bolivia and Encino remain stable. Yape continues to progress towards monetization by pursuing its medium-term targets: one, to be the main payment network in Peru; second, to be present in the daily lives of users; and finally to meet the financial needs of the users. Features launched in the last 18 months have allowed Yape to continuously grow its active user base, engagement, and income generation. Monthly active users reached the 9 million mark, and the average monthly transaction level for this group has risen from 14.9% to 23.5% in just one year. Currently, 5.2 million users generate income. Our main monetization drivers continue to be rooted in the past six months, where monthly mobile top-up transactions grew 20% to total 11 million transactions at the end of June in just three months. Utilities payments have grown 4.8x and stand at 2.2 million transactions at the end of June. The gross merchant volume grew 4.8x to stand at PEN 25 million at the end of June. Notably, in the last six months, monthly disbursements of microloans rose 18%. In the aforementioned context, unit economics are moving towards breakeven. The revenue per active user per month is growing and currently stands at PEN 2.5, while the cash cost per active user per month stood at PEN 4.4 at the end of June. Mibanco's profitability began to recover this quarter after a challenging start earlier this year. On a quarter-over-quarter basis, net interest income rose 4.6% after structural loan disbursement recovered from a difficult first quarter. Disciplined loan pricing bolstered NII and offset the impact of an uptick in funding costs. Consequently, NIM increased 80 basis points and stood at 13.5%. Other income rose 3.5% after the bancassurance fee level rose alongside growth in disbursements. Mibanco's provision expense dropped slightly after risk models were fine-tuned to better reflect client payment behavior but remained high due to a deterioration in payment capacity. From a year-over-year perspective, NII rose 1% due to an uptick in structural loans and interest rate pass-through, which mitigated the impact of rising funding costs. Non-interest income rose 26.6% due to the same factors outlined in the quarter-over-quarter analysis. Provisions rose fueled by a downturn in payment performance and a more challenging macroeconomic outlook. Operating expenses rose 5.9%, and the efficiency ratio stands at 52.4%. Finally, ROE rebounded to 9.5% in the quarter. Mibanco Colombia is facing high inflation, high funding costs, lower interest rate ceilings, and a deterioration in economic expectations. We have adopted our strategy accordingly, and we believe that untapped potential exists in the Colombian microfinance market. Grupo Pacifico was high this quarter and stood at 32.1% driven by the Life business. Regarding quarter-over-quarter dynamics, net income deteriorated on the back of a lower net gain from associates. This evolution reflected a downturn in result for corporate health insurance over a particularly high base last quarter. Year-over-year profitability was up, driven primarily by the Life business and secondarily by property and casualty. In the life business, the insurance results improved due to an upswing in income from insurance service through pensions, Life Group, and Credit Life, which benefited from better prices and more favorable volume dynamics. Reduced expenses for claims also contributed to this improvement. In the property and casualty business, the insurance results rose 5.1% due to an improvement in medical assistance results, which was partially offset by a downturn in the result for cars. As you know, our strategy is to focus on recurring businesses to improve ROE in the medium term. Nonetheless, the uptick in profitability in recent quarters has mainly been driven by nonrecurring income. On a quarter-over-quarter basis, income was boosted primarily by the treasury department managing a cash surplus via structural portfolios and short-term investments. In terms of recurring businesses, assets under management in wealth management grew 4.2%, while asset management levels remain stable. Year-over-year, income increased 32%, driven mainly by the capital markets business, which reported gains on the proprietary fixed income portfolio in Colombia and by the Treasury Department. Regarding recurring businesses, wealth management assets under management grew 9%, while assets under management in homes contracted 17% driven by outflows in third-party funds. Now we will look at Credicorp's consolidated dynamics. On a quarter-over-quarter basis, our structural loans measured in average daily balances fell 0.6% or increased 0.2% with FX neutral. Growth in BCP, Retail Banking, and Mibanco was offset by a contraction in wholesale banking at BCP. Our deposit base contracted 3.5% or 1.8% with FX neutral. This evolution was driven by a drop in low-cost deposits, which were partially offset by growth in time deposits. On a structural year basis, structure loans increased 5.5% measured in average daily balances, fueled primarily by retail banking at BCP and Mibanco. Deposit balances dropped 2.7% or 0.2% with FX neutral. Low-cost deposits have fallen system-wide, but our market share has risen to 40.6% and currently represents 65.1% of our total deposits. Now let me explain core income dynamics. Core income rose 3.3% quarter-over-quarter and 15% year-over-year on the back of NII. NII grew 2.3% quarter-over-quarter and 21.5% year-over-year. The difference was attributable to volume dynamics discussed earlier and to discipline in pass-throughs. In this context, the net interest margin rose 18 basis points quarter-over-quarter and 110 basis points year-over-year to stand at 6.02%. Risk-adjusted NIM increased marginally to 4.56%. We're analyzing the results for fee income and transaction trends. It is important to note that both lines have been affected by our strategy in Bolivia, in which we have adjusted our fee framework for foreign transactions to offset the impact of foreign currency availability restrictions. If we exclude this impact, fee income increased 4.1% quarter-over-quarter and remained flat on a year-over-year basis. With regard to the dynamics of structural nonperforming loans, as indicated earlier, adverse events in the first quarter of the year, coupled with a contraction in internal demand, high inflation, and high interest rates have notably impacted client payment performance and consequently portfolio quality this quarter. In this scenario, on a quarter-over-quarter basis, growth in structural nonperforming loans was driven by Mibanco after loan reprogramming in the first quarter fell delinquent from SME-Pyme, while low ticket risk sub-segments reported poorer performance. The aforementioned was partially offset by a sale of a delinquent portfolio in the energy sector in wholesale banking, which had been previously provisioned. On a year-over-year basis, nonperforming loan volumes increased due to an uptick in refinancing collateralized loans in the retail, state, and tourist sectors served by Wholesale Banking. The evolution of nonperforming loans in retail banking, Mibanco was driven by the same factors as those seen in the quarter's analysis and was partially offset by the sale of a delinquent retail banking portfolio during the first quarter of the year. In this context, the structural coverage ratio stood at 108%. To analyze our structural coverage ratio, it's important to review the NPL portfolio mix in terms of unsecured and collateralized products. Moving on to provisions and the cost of risk, we have consistently indicated that our cost of risk will increase as we shift our loan portfolio mix towards small retail. Additionally, cost of risk has further increased as client payment capacity has been impacted by macroeconomic conditions. Provisions in consumer loans and credit cards at BCP and Mibanco remain at high levels as high inflation in the first half of the year affected payment capacity of clients at BCP, vulnerable sub-segments, which are more leveraged and have stable jobs were the most impacted, while Mibanco clients were severely affected by the first quarter events. Additionally, the SME segment at BCP drove the uptick in provisions quarter-over-quarter. In this context, the structural cost of risk stood at 2.3%. We are closely monitoring our asset quality metrics, have refined our client segmentation by risk profile, and have gradually implemented stricter origination guidelines for individuals, SME-Pyme and Mibanco. Nonetheless, the impact of recent measures on asset quality metrics will take some time to fully materialize. We will review this later to isolate the impact of seasonal effects. Operating expenses grew 11.2% in the first half of the year, driven primarily by core businesses at BCP and disruptive initiatives at the Credicorp level. At BCP, core businesses fueled growth in expenses mainly due to a rise in IT expenses related to increased usage of cloud services, and clients becoming more digital. Additionally, marketing expenses were driven by advertisement efforts to boost deposits and digital sales. Moreover, we experienced growth in non-product related expenses. The aforementioned dynamics were partially offset by a nonrecurring tax expense reversal. Expenses related to disruptive initiatives at the Credicorp level increased 70% to ensure market leadership in the long term. Operating leverage remained strong at BCP stand-alone while Mibanco's operating expenses remained under control, but income grew at a slightly lower pace. Our efficiency ratio stood at 44.4% in the first half, down 310 basis points compared to last year and driven by high income at BCP and Pacifico. Similar to the previous quarter, record quarterly profitability was driven by strong results in our universal banking and insurance businesses. ROE this quarter expanded by 130 basis points year-over-year and stands at 18.6%. Meanwhile, ROE for the semester was 18.9%. Note that we have benefited from a relatively low effective tax rate this semester due to the strong performance of our insurance business and because Axent interest income accounted for a larger share of the revenue mix at BCP. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. Now I will move to our updated guidance. Our updated macro scenario for 2023 is now a GDP growth of around 1%, which incorporates the scenario of a weak to moderate El Niño Costero at year-end. Regarding loan growth, the social and climate events of the first part of the year, coupled with sluggish internal demand are taking a toll on our client borrowing capacity, particularly in our consumer loans, credit cards, and SME segment at BCP. Accordingly, we adopted a stringent origination guidance in those segments. In addition, demand for loans in wholesale banking has weakened, which reflects a downturn in business activity. These dynamics led to lower expected structural loan growth, which now stands at between 1% and 4% measured in average daily balances. Our NIM guidance remains unchanged between 5.8% and 6.2%, as higher than initially expected costs of funds will offset the positive impact of a higher yield from the loan portfolio, which was triggered by a reduction in wholesale loan share in the total mix. We expect the cost of risk to stand between 2.1% and 2.5%, largely driven by the impact of the macro conditions on BCP performance. Note that BCP and Mibanco are likely to have diverging dynamics on this front during the second semester as Mibanco started its cycle of loan deterioration before BCP. We achieved solid efficiency levels in a context marked by an acceleration in investment to develop future businesses. Our ongoing efforts to improve efficiency are expected to partially offset the aforementioned input headwinds resulting in an efficiency ratio between 45% and 47%. Finally, we maintain our ROE guidance of around 17.5%, but now acknowledge downside risks associated with asset quality deterioration in El Niño Costero. With these comments, I would like to start the Q&A session.
Operator, Operator
We’ll now begin the question-and-answer session. Our first question will come from Ernesto Gabilondo with Bank of America. You may now go ahead.
Ernesto Gabilondo, Analyst
Thank you. Hi. Good morning, Gianfranco, Francesca, and Cesar, and good morning, everyone. Congratulations on your second quarter results. My first question is on your ROE guidance for the year. As you mentioned, it was maintained at 17.5%, although anticipating softer loan growth and a higher cost of risk. So can you elaborate on which would be the other lines that can help to compensate for the softer loan growth and higher cost of risk? And what are the trends that you're expecting for loan growth and cost of risk next year?
Gianfranco Ferrari, CEO
So this is Gianfranco. I'll ask Cesar to go into the details for the answer.
Cesar Rios, CFO
Okay. Thank you, Ernesto. First, effectively, we are maintaining our guidance of around 17.5%. At the beginning of the year, we probably had a conservative approach mentioning 17.5%. Now I have already mentioned that we have some downside risk due to potential credit deterioration. This is a general framework. It's important to note that we already have gone through half of the year with very positive results with an ROE north of 18%, around 18.6%. Down the road, what we are expecting is effectively softer loan growth with a composition that is going to be tilted to retail, but with lower yields than previously expected because we are being more conservative in our origination approach. This is going to be accompanied by higher cost of risk and the usual acceleration of non-income sources, including transactional activity that is usually higher during the second part of the year, and finally, by the seasonal increase in expenses that has two main components: the normal seasonality during the last part of the year and the trend in acceleration of IT and disruptive initiatives. All in all, we think that with these elements, we can be around the 17.5% previously mentioned.
Gianfranco Ferrari, CEO
Maybe just to add to what Cesar mentioned, Ernesto. Also, when we provided the original guidance and the expected results at Pacifico, they were not what we are getting. So, as we mentioned in the previous call and at the Investor Day, due to some specific events, Pacifico is having an outstanding year this year, and that may offset in part what Cesar just mentioned.
Ernesto Gabilondo, Analyst
Perfect. Thank you. Just a follow-up in terms of the cost of risk, you are guiding between 2.1% and 2.5%. So looking into next year, would that be the same trend that we should expect? Or do you think most of the worst part will happen in 2023 and probably it should be normalizing when thinking about next year?
Gianfranco Ferrari, CEO
Reynaldo?
Reynaldo Llosa, Chief Risk Officer
Yes, Ernesto, this is Reynaldo Llosa. As you know, we don't provide guidance for next year, and we will do it in the first quarter of 2024. Having said that, there’s a lot of uncertainty in terms of the impact of El Niño. So we need to confirm that information to have a better projection. But also, we expect next year to have much better results due to all the things we are doing in terms of managing the risk in the consumer and SME portfolios, both in BCP and Mibanco. So there are headwinds and tailwinds, and we will have more information on that regard by the first months of 2024.
Ernesto Gabilondo, Analyst
Perfect. Thank you very much. And just a second question related to the ROE of your subsidiaries. You have a nice chart in your report showing all the ROEs per subsidiary. And we can see that BCP stand-alone, Grupo Pacifico, and Prima ASB Bank, all of them continue to deliver ROEs above 20%. But on the other side, when looking at BCP Bolivia, Mibanco, and Credicorp Capital, we continue to see ROEs at most at 10%. So what are the strategies that you're implementing to improve the ROEs across the subsidiaries? And I don't know if you have a medium target in each of them?
Cesar Rios, CFO
Thank you for your question, Ernesto. Let me address each point individually. We manage core capital and ASP as a business unit, and when we correct some misconceptions about that business, it has a return on equity of 17%. This is close to the returns we anticipate for that business. In the first half of this year, we experienced some nonrecurring positive impacts that contributed to the ROE. Looking ahead, we have implemented a transformation plan for that business, targeting an ROE of between 16% and 17% by 2025. In terms of Mibanco, including both Mibanco Peru and Mibanco Colombia, the microfinance sector is inherently more volatile, and we are currently navigating a downturn in this business. We are focusing on risk in the short term, while in the long term we need to rethink our entire business model to return to the ROEs above 20% that we have achieved in the past. Regarding Bolivia, we are doing our best in that market. The ROEs there are relatively strong compared to the overall banking system in Bolivia, and there isn’t much more we can do in that business.
Ernesto Gabilondo, Analyst
Excellent. Thank you very much.
Operator, Operator
Our next question will come from Juan Recalde of Scotiabank. You may now go ahead.
Juan Recalde, Analyst
Hi. Good morning. Congratulations on strong results, and thank you for the opportunity. My questions are related to Yape. So first, the fee income generating monthly active users have been increasing as a percentage of total users. So I was wondering if you can provide some color on what are the drivers here and how you are increasing monetization? And the second question is related to the strong growth in payment volumes that we saw in Yape, also related to the growth in service payments. So my question there is how much of the TPV growth has been driven by the service payments? And what are the other drivers of TPV growth?
Gianfranco Ferrari, CEO
Sure. Francesca, are you there?
Francesca Raffo, Chief Innovation Officer
Yes. Thank you for the question. Yape, as mentioned in the Investor Day, has plans on meeting monetization and business goals. So the growth in terms of total payment volume (TPV) is mainly around P2P transactions, along with services and merchant transactions contributing to the volume increase. On the monetization side, growth is mainly around usage where we see an increase in the number of transactions and also the average amount per customer. The promotions that Reynaldo mentioned as an engagement tool are also contributing to an increasing take rate. We are exploring ticket sales gains and different revenue growth opportunities that align with Yape’s objectives.
Juan Recalde, Analyst
Then I had another question related to fee income, which was quite strong this quarter, held by the Bolivian operations. So how much of the fees in Bolivia are one-off, and how sustainable are these levels?
Gianfranco Ferrari, CEO
Cesar?
Cesar Rios, CFO
Yes. I wouldn't consider that one-off; I would consider it more of a temporary distortion due to an accounting adjustment. In this case, we are charging a fee and recognizing it in the other side of the equation, which reflects a higher FX exchange rate. Therefore, I would say we have a positive margin, but it is reflected in an abnormally high fee and an abnormal loss in currency exchange. It's a structural business that currently has more volume and wider spreads in these two variables. That is part of the business in Bolivia.
Gianfranco Ferrari, CEO
But maybe on top of that one, what we're seeing in the fee income business is that what we've been investing for, I would say, decades now, is paying off. When I say we, BCP Peru has become a transactional app in Peru. And what we're also seeing, and maybe Yape is part of it, is that the adoption of non-cash alternatives is constantly increasing across the board. And obviously, that is also an important driver for fee income generation.
Juan Recalde, Analyst
That's helpful. Thank you for the comments.
Operator, Operator
Our next question will come from Yuri Fernandes with JP Morgan. You may now go ahead.
Yuri Fernandes, Analyst
Hi, guys. Thank you. Good morning. I have a question regarding your cost of risk. I understand you have expected losses. So now you're calling for a challenging outlook, with lower GDP growth. My call is regarding 2024. I guess the scenario is still uncertain here. But in this 2.1% to 2.5% cost of risk, is the level we should expect for 2024? Or basically, are you going to build those anticipatory provisions for the total environment now? And maybe for next year, we should see the cost of risk running at a more normalized level? Just trying to understand if this is like somewhat a new normal for the short term or maybe you're just doing this now because you're seeing a challenging environment. And given you do expect losses will improve at some point. That's the first one. And I would like to check the box on the portfolio sale. I guess you pointed out that some of the wholesale NPL improvement was regarding a portfolio sale. How big was that? Just to understand how that affected your new NPL formation.
Gianfranco Ferrari, CEO
Reynaldo?
Reynaldo Llosa, Chief Risk Officer
Yes, in terms of the guidance for next year, what I can mention as of today, Yuri, is that our estimations, our levels of provisions today include the impact of El Niño with the probability between weak and moderate. That is reflected in our provision level today and that's included in the guidance for a year-end or between 2% and 2.5%. Regarding next year, as I mentioned before, it's too soon to tell; we will be able to provide more information in the following months and probably in the next two quarters. The sale of that specific case in wholesale banking is around $30 million.
Cesar Rios, CFO
That was the sovereign bond sale. That wasn't an exchange we made.
Gianfranco Ferrari, CEO
We're talking about the sale of the loan.
Reynaldo Llosa, Chief Risk Officer
It was a loan we had in our books, and we had an impact in terms of the NPL or the wholesale book of around $30 million.
Yuri Fernandes, Analyst
But we didn't recognize any gain on that? Like, did you need to provision and sell at face value? Or did you have an economic gain on that sale? Just trying to understand the moving parts on the economic futures.
Reynaldo Llosa, Chief Risk Officer
Yes, we estimated a higher loss than what we finally obtained from the sales, so it had a positive impact on our levels of provisions in the quarter.
Operator, Operator
Our next question will come from Geoffrey Elliott with Autonomous. You may now go ahead.
Geoffrey Elliott, Analyst
Good morning. The cost of risk has been 2.1% in the first half, and you're guiding to 2.1% to 2.5% for the full year. So that seems to capture, particularly at the 2.5% end of the range, quite a big step-up in provisions in the second half. I'm just trying to understand what sort of scenario it would take to get that big step up and get you to the high end of the range and how cautious you feel like you're being with that 2.1% to 2.5%?
Cesar Rios, CFO
Yes. What I can mention is remember that we haven't finished digesting all the impact that we've had in the first semester in our provision levels. So that's incorporated in the projection of the second semester, all those loans that are in default but not fully provisioned by the end of the first semester. It includes what I just mentioned in the forecast of the impact that El Niño would have under current information regarding the portfolio looking forward. So that's why we have increased the guidance in the cost of risk expected for the year as a whole.
Geoffrey Elliott, Analyst
Okay. So if El Niño ends up being more severe, then there's some further risk that it could go even higher. Is that fair?
Cesar Rios, CFO
Yes. That's a fair statement.
Operator, Operator
Our next question will come from Tito Labarta with Goldman Sachs. You may now go ahead.
Tito Labarta, Analyst
Good morning. Thank you for taking my questions. I have two questions. One is on your insurance results, which continue to deliver good results there. Just to understand how do you think about the sustainability of that going forward? We saw a bit of a decline this quarter; should that normalize? Or can it remain above historical levels for some time? Any color you can give on that would be helpful.
Cesar Rivera, Head of Insurance
Hello, Tito, thank you. Well, maybe it's important to explain or to comment on something about the results in the insurance business for the first two quarters. One of the reasons for the higher results we obtained is the higher investment results we achieved because of the reinvestment rates in our portfolio. The second reason for this higher result is the increased profits we have obtained in disability and survivorship insurance, which is related to the affiliates to the AFP. In the last bidding contest, we obtained an important portion for these contracts with an interesting increase in the rates. So we have obtained an interest increase in premiums without the COVID claims that we expected. So this has generated a high profit for this business. The service ratio is related to the higher profits obtained in the Group Life and Medical life business due to reprovisioning we made in the previous years. Considering the market trends and the competitive situation, we expect some reductions in their collective group life business in the next months. We will obtain good results for this year, but we expect a sustainable ROI around the low 20s for the next years.
Tito Labarta, Analyst
Yes. So the established NIM, but you mean a 25 bps, that's for about 100 bps cut in rates. Is that the right sensitivity? And also if you can comment on the risk-adjusted NIM also, particularly as you go into retail?
Cesar Rivera, Head of Insurance
Yes. And I will emphasize that because it's around we are not talking about signed decimals.
Tito Labarta, Analyst
Sure. Okay. And on the risk-adjusted NIM and any comments, particularly as you grow in retail?
Cesar Rivera, Head of Insurance
Yes. The risk-adjusted NIM should improve in the short term level when we adjust accordingly the cost of risk down the road. But this is not precise guidance; this is a trend, as I have mentioned at this point.
Tito Labarta, Analyst
Okay. Yes. So asset quality normalizes as you can see some improvements, but a bit more medium term, it sounds.
Operator, Operator
Our next question will come from Carlos Gomez with HSBC. You may now go ahead.
Carlos Gomez, Analyst
Good morning. First of all, thanks again for your improved disclosure on capital and on the digital initiatives. You started last quarter, but I mean, it continues to improve and we really appreciate it. Two questions. One is different from what you want to hear. You emphasized your detachment from the macro, but we would like to know what you think that growth can be in Peru in the long term and your credit growth can be in Peru in the long term? And the second one is on the digital initiatives. If you can tell us more about Tempo and EO at this point.
Gianfranco Ferrari, CEO
Sure, Carlos. Yes, as of today, and again, correct me if I'm wrong, Cesar, our chief economist expects Peru to grow 2.5% in 2024. Is that correct?
Cesar Rivera, Head of Insurance
At this point, I think it's more around 2.1% because we are considering a basic scenario with the combination of weak and moderate El Niño at the beginning of the year. The number of events I mentioned is more representative without the impact of the economic conditions.
Gianfranco Ferrari, CEO
So anything between 2% to 2.5% growth, Carlos. Just a quick comment on that: Peru needs to grow much faster. This comment goes beyond the impact on our business. If the level of poverty in Peru was reduced dramatically over the last 20 years until COVID, we went back like 10 years in terms of that ratio. To go back, we need to grow as a country at least 4%, so that's a challenge we have. Again, this goes beyond our business. Regarding Tempo, let me start with EO. EO is actually in our friends and family proof of concept with very good results, and we're going to launch it, I believe, in a couple of weeks. So we could talk much more about initial results in the next call, but the initial results are quite good. In terms of user experience, that's the only indicator we have to the composition. Regarding Tempo, it's performing quite well, again, in operating indicators. We recently got approval from the Chilean Superintendence to issue Credicorp. We're in that process. And so that's the next relevant stage in the Tempo regional business case. So as soon as we start to get more relevant information, we plan to disclose something similar to what we're doing with Yape regarding information disclosure.
Carlos Gomez, Analyst
And if I can go back to the beginning. You mentioned, yes, this is what Peru needs to grow. One core to my question is in the medium term: what is your real expectation for what Peru can do over the next three to five years? And also, how does that translate into credit growth for you?
Gianfranco Ferrari, CEO
Long term, I see the situation in Peru as being much shorter than three to five years. Our presence in the market has been limited over the past six years, which makes it quite challenging. Personally, I don't believe that, given the current political, social, and macroeconomic scenario, Peru can achieve a 4% growth in the next few years. We need significant structural reforms, which I do not expect to be implemented soon. As for our portfolio growth, I prefer not to give a precise answer due to the many variables associated with portfolio growth in relation to GDP growth. This uncertainty is one of the main reasons we have begun efforts to decouple our performance from GDP growth, enabling us to pursue a faster growth trajectory.
Operator, Operator
Our next question will be a follow-up from Yuri Fernandes with JP Morgan. You may now go ahead.
Yuri Fernandes, Analyst
It's me again. I have a follow-up regarding costs here. Let's put the worst-case scenario, right? This is not a moderate one; this is a stronger one. You need to revise your cost of risk; you need to decelerate your loan growth, and this impacts your profitability. Can you cut your expenses on the investment plan, like the same as 150 bps on ROE headwind? I'm just trying to understand what you can do, like if there is a worst-case scenario, what can you do on all your digital initiatives? Or if the bank will be prepared to say no, we prefer to have ROEs below 16%, below 15%, whatever, but keep investing in technology and keep expenses high. Just trying to understand if expenses could be reduced for the company in the case there is a high-stress event.
Gianfranco Ferrari, CEO
Yes. In response to your first question, Yuri, I want to reiterate a point we made during Investor Day. Most of our spending on digital ventures and transformation is categorized as expenses rather than investments. This is primarily because these investments carry high risks, and we prefer to take a conservative approach. We want to avoid surprising the market if something goes wrong. Now, to answer your specific question, there is some potential for adjustments. However, we are not planning any cuts at this stage due to the positive results we are seeing from our digital ventures and our disciplined approach to investments. We don't have plans to reduce expenses at this time. That said, if an extremely adverse situation were to arise—something we don't foresee—we might have some leeway to reduce expenses. Still, I want to emphasize that any reductions we could make wouldn’t likely cover all the potential negative impacts from a severe scenario. Now, I’ll turn it over to Reynaldo to address your second question.
Reynaldo Llosa, Chief Risk Officer
In terms of our level of provisions, if we have information by the last quarter, I mean, that we have incoming that is a higher impact than the moderate level, that’s what we have already considered in our projections. Of course, we would start increasing our level of provisions. Having said that, comparing to what we had in 2017, we have a totally different situation. Companies are more prepared in the wholesale segment that’s more exposed to the El Niño phenomenon, and we have learned a lot during the last crisis, during the COVID situation and through social unrest, and the political situation we had to provide assistance and help to those clients in the retail banking that are exposed to these kinds of events. So in terms of the level of deterioration in those portfolios, we expect to have a relatively lesser impact than what we had in 2017, where the situation was totally different. So that's our strategy in general, but we will have more information in the ongoing months.
Gianfranco Ferrari, CEO
And maybe to complement, Yuri, I would say that as a country, we are better prepared than we were in 2017. And on top of that, all of the subsidiaries at Credicorp are closely working with our clients, both at the corporate level and at the retail level in educating them and helping them to be much better prepared if a major effect comes.
Yuri Fernandes, Analyst
Thank you, Gianfranco. And I don’t want to sound super bearish here, just checking in. What would be your message? Thank you for being candid, and I mentioned that we don't want to cut expenses, but if there is a need, you may do so. So thank you for the clarification.
Operator, Operator
Next question will come from Sergey Dubin with Harding Loevner. You may now go ahead.
Sergey Dubin, Analyst
Good morning. Three questions, actually. So the first one, there was some news about some ongoing or resurfacing political unrest again in Peru in July. Has that died down? Is it continuing? And kind of how do you see the trend there? Maybe that's the first question.
Gianfranco Ferrari, CEO
Sure, I'll take that one Sergey. Good to hear from you. I don't want to downplay the social noise that was in July. As we mentioned in the Investor Day, what we see is like we have a fragile stability today in the political cabinet. But the social noise we had in July was very little. There's basically nothing going on today. And obviously, nothing to compare to what we saw last year, by year-end, and in January and February of this year. So today, we're, again, going through a fragile stability, and we hope that stability improves as we move forward.
Sergey Dubin, Analyst
Okay, great. My second question is about the cost of risk. I'm a bit confused. According to the presentation, it seems the event is scheduled for summer 2024, but you mentioned that the cost of risk for 2023 already reflects that. Could you clarify the timeline? Are you anticipating anything for 2023, or is it solely a 2024 matter? That’s the first part of my question. The second part is you mentioned that you expect cost of risk to behave differently in the second half, with Mibanco decreasing and possibly BCP increasing. Can you elaborate on the reasons behind that? Is it tied to the measures you’re implementing regarding risk appetite? Any additional insights would be appreciated.
Reynaldo Llosa, Chief Risk Officer
Yes. In terms of 2023 closing June numbers, we included everything we expect for this year, incorporating some outlook of the level of growth that is impacted for 2024. That, in general, includes all the events that are under our control and we foresee for the remaining year. And in terms of Mibanco and BCP, as Cesar mentioned, Mibanco has taken specific measures before BCP. So the remaining provisions for both institutions vary. I mean, the need for Mibanco provisions for the rest of the year are relatively lower than we will see in BCP. That’s what Cesar mentioned.
Sergey Dubin, Analyst
Okay. And these steps that you're talking about are related to what? I mean, are you curtailing risk or curtailing loans to more risky segments? Could you explain what is happening in Mibanco already and BCP hasn’t done yet?
Reynaldo Llosa, Chief Risk Officer
You are totally right. The things we have done in both banks have limited the growth of the portfolios. As you've seen, it hasn't been a very good year in terms of loan growth in the first six months of the year, and that's a reflection of our stringent credit policies in both banks. So that's what we've seen, and that’s what we expect to have a better outlook in terms of the new loans, but we still have in our portfolio some loans that were impacted by the macro trends and specific events that happened in Peru in the first quarter.
Sergey Dubin, Analyst
The third question is about the trajectory of net interest margin. You mentioned earlier in the call that several Latin American central banks have already lowered interest rates, and you anticipate that the Peruvian Central Bank will reduce rates in the fourth quarter of this year. Could you clarify how sensitive your margin is to a lower rate environment? Your margin has performed well thus far, but what level of pressure might arise as rates decrease? Additionally, you indicated that the risk-adjusted margin has remained relatively stable. Do you believe it can maintain that stability moving forward?
Cesar Rios, CFO
Yes. First, as I mentioned previously, the sensitivity of our margin to a 100 basis point reduction in portfolio yields is around 25 basis points for the first year of the adjustment, a little bit higher than we mentioned probably a couple of years ago when the interest rates started to rise because the portfolio has shortened. Our guidance is to remain at the same level that we previously mentioned, but a combination of factors. We are going to grow the retail portfolio less than was previously expected. But at the same time, the wholesale portfolio has already reduced in some degree. So the combination of these factors leads us to maintain our guidance in terms of NIM. An expected result of a decrease in reference rates is a gradual compression of the NIM that is going to be offset by the relatively faster growth of the retail segments and Mibanco as mentioned previously. At this point, we are not providing guidance for 2024.
Sergey Dubin, Analyst
Okay, well, just to make sure, I query, a 100 basis point cut in interest rates leads to 25 basis point NIM compression, that’s a 12-month lag or next year, essentially, right? Is that correct?
Cesar Rios, CFO
Yes, that’s correct.
Operator, Operator
Okay. I understand. Thank you. Next question will come from Andres Soto with Santander. You may now go ahead.
Andres Soto, Analyst
Good morning, Gianfranco and team. Most of my questions have already been answered, but I would like to take the opportunity to ask for an update regarding the strategic plan for investment banking and wealth management. In the past, you commented that you wanted to implement a plan to increase scale, specifically in the wealth management business that may potentially include M&A activity. I would like to get a sense of how that's shaping up and when can we expect news about that?
Gianfranco Ferrari, CEO
Yes, certainly, Andres. The head of the business provided details at the Investor Day. The plan is to concentrate on wealth and asset management, and we are currently in that process, gradually divesting most of our investment banking operations. This includes closing the M&A businesses in Colombia and Chile. It's not a one-time effort; as we complete our existing mandates, we will see this through. We have already transferred our lending business to Banco de Crédito del Peru. By the end of the year, we expect to see positive results from the cost reductions we anticipated and be in a strong position to begin growing both organically and through potential inorganic opportunities in that sector moving forward. Thank you.
Operator, Operator
This concludes your question-and-answer session. I would like to turn the conference back over to Gianfranco Ferrari for any closing remarks.
Gianfranco Ferrari, CEO
Thank you all for your questions. As Cesar noted, our GDP growth expectation considers the scenario of weak to moderate El Niño Costero, as well as announced government reactivation plans. Additionally, while the macro scenario will likely improve in the second half, we still expect to see a lag effect, which is reflected in our credit risk management approach and expectations for full-year structural loan growth and cost of risk. Importantly, we've been managing efficiently better than initially expected, despite accelerating investments to strengthen our future businesses. All in all, we maintain our ROE guidance at around 17.5% while noting potential downside risks mainly associated with asset quality deterioration and El Niño Costero. Looking ahead, we remain confident in delivering a long-term ROE of approximately 18%. This is underpinned by Peru's strong fundamentals and our emphasis on broadening noninterest income via disruptive investments to decouple from the macro, complemented by our potential to leverage our brand strength, expand our client network, and seize structural growth opportunities as they reemerge. These efforts are fortified by our strategic advantage in acquiring low-cost profit and realizing efficiency improvements through transformational investments. Now I'd like to give you a better understanding of how we are currently helping our clients and investing in a more prosperous future for Peru. We're working across our organization and leveraging synergies to develop and deliver educational content and support in the face of telematic threats through both mass distribution channels and targeted individual actions. Examples include the Pacifico Seguros Communal Segura program aimed at promoting a culture of risk prevention through workshops and conferences for families, microentrepreneurs, and community leaders. Additionally, Pacifico and BCP are sharing recommendations on how to manage climatic events through their financial education podcast and popular webcast, while Mibanco is distributing educational content on financial planning across multiple channels. We are implementing a strategic approach driven by the need to safeguard our portfolio and, more importantly, minimize the adverse effects on the lives and businesses of individuals in Peru. We firmly believe that these are the crucial investments that will yield long-term benefits and unlock the vast opportunities in Peru. Thank you all for your continued support. Have a great weekend.
Operator, Operator
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.