Earnings Call
Credicorp Ltd (BAP)
Earnings Call Transcript - BAP Q2 2021
Operator, Operator
Good morning everyone. I would like to welcome all of you to Credicorp Limited Second Quarter 2021 Conference Call. We now have all of our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. Please follow the operator's instructions. With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Cesar Rios, Chief Financial Officer; Mr. Reynaldo Llosa, Chief Risk Officer; and Ms. Milagros Cigüeñas, Investor Relations Officer. And now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.
Cesar Rios, CFO
Thank you. Good morning and welcome to Credicorp's conference call on our earnings results for the second quarter of 2021. I hope you and your families are healthy. Official data indicates that the economy grew around 20% in the first half of 2021 and came close to hitting pre-pandemic levels. It is noteworthy that the construction sector grew 15% with respect to the first half of 2019. In addition to the statistical rebound, recovery in the past few months has been boosted by a favorable external environment where copper prices remain high and our main trading partners have resumed growth. Regarding the sanitary situation, mortality rates have fallen considerably after reaching a peak at the beginning of the second quarter. This improvement has been driven by a noteworthy uptick in the vaccination rates in June and July. Currently, around 37% of the adult population have received at least the first dose. Although this rate lags behind that registered by some peers in the region, the government's role is that all adults and children from 12 to 18 years will be vaccinated by year-end. All in all, we still expect that Peru's GDP will rebound around 9% in 2021 due to strong commodity prices and expansive monetary and fiscal policies. However, political uncertainty in Peru has generated a negative impact on financial indicators. The exchange rate has depreciated more than 12% year-to-date, and the dollar has reached a record high despite the Central Bank's move to sell almost $6 billion year-to-date in 2021, engaging in active intervention in FX markets via multiple instruments. Furthermore, foreign rates in domestic currency have exceeded expectations, and the rate has also climbed to levels above the peaks registered in 2020. Despite the pandemic and political shocks, Peru continues to outperform peers in the region in terms of macroeconomic indicators. Our net international reserves currently represent 35% of GDP, our annual inflation rate stands at 3.8%, and our public debt, which represents 37% of GDP, is among the lowest in the region. Additionally, our banking system maintains high liquidity. Current political instability is rooted in decisions taken by the new government. Beginning with the move to appoint a highly controversial cabinet with limited technical skills, questions regarding the direction that monetary policy will take, as well as who will lead the sector, continue to loom. Announcements have been made indicating that higher levels of state intervention are on the horizon via new public credit facilities, fee regulations, increased regulation for private health insurance, and structural changes in the private pension system. The government's ability to implement its radical agenda may meet with significant obstacles and resistance. First, Peru Libre has only 37 seats out of 130 in Congress and with allies can contribute only five more votes. Second, it’s worth noting that in the first round of elections, Pedro Castillo secured only 19% of valid votes, which represents 10% of registered voters. In the second round, he won by an extremely narrow margin of 44,000 votes, less than 0.2%. Additionally, a recent data survey conducted between the second and the fourth of this month indicates that Castillo's approval rating is 39%, one week into his term, marking one of the lowest initial ratings registered by a Latin American President in recent history. In the same survey, only 5% of those polled indicated that the Constitutional Assembly should be the government's top priority. In fact, the assembly ranks sixth among seven priorities, with reactivation of the economy, improvements in the health system, and improvements in the quality of education ranked first, second, and third, respectively. Going into Credicorp's results, let me highlight our quarter-over-quarter evolution. The loan portfolio rose 4.4% in the quarter in balances, driven primarily by an uptick in structural loans in the wholesale banking and SME business segments. Net interest income grew 8.7% driven by an increase in structural loans, a drop in funding expenses, and the fact that a one-off expense was recorded last quarter for liability management operations. In this context, our net interest margin resumed growth and stood at 4.01%. Provisional expenses fell after client behavior registered positive performance across sectors, which led the cost of risk and a structural cost of risk to situate at 1.02% and 1.22% respectively this quarter. Core non-financial income, which is composed of fees and FX transactions, grew 8.4% due to a considerable uptick in transactions. This evolution was offset by a contraction in non-core non-financial income driven mainly by BCP, which sold long-term bonds at a loss to reduce interest rates and stabilize the available-for-sale portfolio. Insurance underwriting results continue to be impacted by COVID-19 related claims and include but are not reported provisions in the lines of business. However, train performance has improved. The efficiency ratio improved by 30 basis points, boosted by income recovery. Net income at Credicorp totaled PEN 699 million in the second quarter of 2021, which represents an increase of 5.9% quarter-over-quarter. Our return on equity continues its upward trend and stood at 11.3% at quarter-end. For the first half of the year, our ROE stood at 10.9%, within our guidance range. Our balance sheet remains strong with ample liquidity and adequate capital ratios. I will briefly describe the results on a business level but will provide further detail in the section of consolidated performance. Universal Banking drives our recovery. BCP’s Stand-Alone contributed PEN 726 million in earnings, registering a return on equity of 18.1%. Core income registered notable growth at 80% quarter-over-quarter, which was mainly driven by an uptick in structural loans, a contraction in funding costs, and growth in transactions. BCP sold available-for-sale long-term bonds at a loss to reduce interest rate instability, partially offsetting the negative impact on our U.S. dollar loan position. This strategy resolved in a partial offset of core non-financial income growth. The main driver of an uptick in profitability this quarter was the 83% quarter-over-quarter contraction in provisional expenses, which reflected an improvement in client payment behavior. Efficiency deteriorated 10 basis points quarter-over-quarter, mainly driven by higher digital marketing and mileage stability program expenses, in line with growth in vehicle sales and debit and credit card usage. BCP Bolivia’s ROE stood at 8.2%, reflecting a decrease in risk appetite and relative stability in the loan portfolio in a context marked by larger-scale government-mandated loan programs. Results were impacted by provisional reversal due to the inclusion of guarantees in the consumer portfolio, partially offset by new provisions to cover delinquencies. The provision levels were equivalent to 4.72% of the total loan portfolio. Mibanco showed clear recovery this quarter. Net interest income growth was thanks to an uptick in the origination of lower-risk structured loans, a drop in funding costs, and a reversal of interest income provisions made previously for our program portfolios. This positive evolution in net interest income was partially offset by regulatory restrictions on fees. Loan provisioning normalized in a context of improvement in payment performance and growth in transactions. However, we are closely monitoring the 12% of the structural portfolio that we sustained within grace periods or are past due. Colombia's results improved due to an uptick in disbursements over original volumes despite social tensions. The focus is currently on maintaining adequate risk management, workforce productivity, and efficiency at the commercial level. Regarding insurance and pensions, this quarter, Pacifico’s contribution continued to be impacted by higher COVID-19 related claims and IBNR provisions in the life business. Losses in this business negatively affected a return to profitability at the group level. It is important to note that at quarter-end, claims and IBNR provisions began to fall in line with a drop in COVID-19 mortality. In property and casualty, growth in net premiums was offset by an increase in claims after mobility restrictions were lifted and activity levels rose. The corporate health insurance and medical services were affected by higher claims quarter-over-quarter with an increasing healthcare demand as the economy reopens. Our three-month assets under management contracted 2.2% quarter-over-quarter, reflecting fund withdrawals for a total of PEN 1.8 billion as of June under government-mandated tax facilities in May. These withdrawals represented 15% of total funds that are available for withdrawal. We expect assets under management to continue to contract in the short term given that the ASP withdrawals can be made for the year. Despite these fees, we have remained stable due to growth and contributions for our fees. In Investment Banking and Wealth Management, the quarterly evolution indicates assets under management contracted by 0.5%, primarily attributable to Peruvian-based fund outflows from the asset management business due to political uncertainty. In Wealth Management, assets under management remain stable after local transactions migrated abroad and to offshore platforms. The contraction in asset management was compounded by a devaluation in local currency. Income contribution expanded 15.8%, driven primarily by positive results in capital markets and wealth management, fueled mainly by growth in the sales of securities and upfront fees from entering third-party funds to international platforms. It is worth noting that Investment Banking and Wealth Management lines of business continue to consolidate their regional presence and 76% of their assets under management are held outside Peru. The recent integration of funds to offshore platforms represents an opportunity for growing investment options for clients. Now, I will discuss Credicorp’s consolidated performance. Quarter-over-quarter, the loan portfolio grew by 4.4% in ending balances and 2.2% in average daily balances. This evolution was driven primarily by an uptick in structural loan origination and wholesale banking campaigns in the fishing and agricultural sectors. Expansion was also fueled, albeit to a lesser extent, by growth in SME business, mortgage and consumer loans, and by the evolution of the exchange rate. The mix of interest-earning assets improved, marked by a 7.8% quarter-over-quarter contraction in the investment portfolio after BCP sold sovereign bonds and reduced exposure to long-term interest rate risk. The deposit needs improved and reflected an uptick in low-cost demand and savings deposits in foreign currency that were partially offset by withdrawals of time and severance indemnity deposits. Additionally, the funding needs in foreign currency grew due to low-interest borrowing and through the execution of the remaining maturity hold redemption from a liability management operation. The consequent funding structure, coupled with lower interest rates, led the funding costs to fall and expand by 1.18%. Both payment behavior and the structural portfolio profile evolved favorably this quarter. In Retail Banking, on-time payments from loans due stood at 95%, driven by an uptick in the SME-Pyme segment. Quarter-over-quarter, the high uncertainty portfolio, composed of reprogrammed loans that are still within grace period, and overdue loans increased slightly to an unrepresentative 10% of structural loans. It is important to note that this increase was driven by loans that were less than 15 days delinquent, which are considered the most recoverable. At Mibanco, on-time payments improved in a context of lower explorations of rolling transactions and income due to economic reactivation. The high uncertainty portfolio contracted from 19% to 12% this quarter due to a positive evolution of payments. The government program goals, which are primarily underway and active in Peru, began to expire in June 2021. By the end of the month, the balance was 7% lower than their record high in the fourth quarter of last year. The Retail Banking government program portfolio represents 65% of the total government program portfolio. By the end of June, 54% of the retail portfolio was still within grace period, 30% had made the first payment, 14% had been reprogrammed, and 2% had become overdue. In the chart on the right-hand side, you can see the profile for wholesale banking and for Mibanco. It is important to note that the new government reprogramming facilities expire next year. So the real deterioration levels will not be fully evident until 2022. It is important to know that the government guarantees back a substantial percentage of these portfolios. The NPL ratio for restructured loans in wholesale banking registered no variation after the deterioration of a small number of middle market clients, offset by an increase in loan volumes. In retail banking, the ratio evolved positively in the individual segment but was slightly attenuated by an increasing overdue SME loan. Thus, at Mibanco, positive payment behavior and higher write-offs drove an improvement in NPL. As a result, Credicorp’s structural NPL dropped from 6.05% to 5.38%. The downward trend in the structural cost of risk was noteworthy. This improvement was driven by BCP’s standalone, where the ratio dropped 46 basis points, situating at 1.11% in a context marked by a decrease in the probability of default. In this scenario, Credicorp’s structural cost of risk contracted 69 basis points from 1.92% to 1.23%. Year-to-date figures indicate the structural cost of risk stands at 1.51%. At the end of June, the provision stock was equivalent to 7.7% of Credicorp’s structural loan portfolio. Credicorp’s structural NIM increased by 14 basis points quarter-over-quarter to stand at 4.32%. Recovery was attributable to more profitable asset needs, driven by growth in structural loan origination, an improvement in the funding mix, and a decrease in interest expenses. The positive evolution in NIM was mainly driven by BCP, which suggested NIM increase 64 basis points this quarter and reached 3.38%. This metric is recovering faster in line with the normalization of provisions for loan losses. Core income, which is composed of net interest income, fees, and FX transactions, was equated close to pre-pandemic levels. The increase in net interest income was primarily attributable to growing structural loans and a decrease in funding costs. Fee income grew alongside an uptick in transactions on foreign transit at BCP and in brokerage fees at Credicorp Capital. First transactions also increased in the context of high demand for dollars. Non-core non-financial income this quarter reflects a management decision to reduce interest rates and stabilize the investment portfolio at BCP, as indicated earlier. Additionally, we executed an active derivative trading strategy at BCP and Credicorp Capital, both of which yielded very positive results. Insurance underwriting results continue to be severely impacted this quarter, mainly due to an increase in COVID-19 claims in the life business and, to a lesser extent, higher claims in property and casualty after mobility restrictions were lifted. On a quarter-over-quarter basis regarding net earnings premium, there was a slight contraction in the life business associated with a decrease in sales of products in annuities and seasonal effects on renewals for high-risk occupations. In property and casualty, there was an uptick to renewals in the medical assisting line and an increase in costs due to new sales and renewals. In the life business, COVID-19 claims peaked in April before beginning to decline in March, accompanied by ongoing declines in IBNR provisions in a context of declining mortality during the quarter. If the sanitary situation continues to improve, we expect this trend to continue. It is important to note that, year-to-date, net earnings premiums grew in the life business through Cisco 5, which expanded the affiliate base for fees and contemplated a more favorable fee structure. This is related to our pension fund-related business. The risk of a third wave appears imminent. Nonetheless, vaccination rates and masking mandates may mitigate impacts this time around. In the first half of 2021, Credicorp’s efficiency ratio improved to 150 basis points year-over-year. Improvements were driven mainly by the positive evolution of income from the micro-finance and insurance and pension lines of business. Mibanco’s interest income grew due to the growth of structural loans and a decrease in the cost of funding, while expenses remained under control. Pacifico’s income was boosted in the first half of this year due to repricing and due to a higher proportion of the SISCO V tender. Credicorp shows an operating leverage of 6 percentage points, an accounting acceleration in income controlled growing expenses. Year-over-year, growing operating expenses during the first half of this year reflect our commitment to digitalization and were generated primarily by cybersecurity and IT. Regarding distribution footprint resizing, it is worth noting that BCP's standalone and Mibanco reduced their number of total branches by 9% and 2% respectively year-over-year. In terms of liquidity, even after controlled flows of foreign currency, BCP’s Stand-Alone and Mibanco have maintained high levels of liquidity well above regulatory and internal limits. Regarding capital, each of our subsidiaries maintains adequate capital levels, ensuring solvency. The slight increase in the core equity Tier 1 of BCP Stand-Alone and Mibanco was attributable to an uptick in retained earnings, driven by the recovery of core subsidiaries this quarter. At BCP, we continue to work on key digital initiatives to achieve our objectives for experience and efficiency and ensure our competitiveness in the long term. Alongside initiatives to accelerate digital investments, we seek to improve time to market and operating stability without losing sight of cyber risks. The number of new software releases more than doubled year-over-year this semester and the downtime for key channels fell 54% in the same period. Our aim for year-end is to fully comply with all the payments of the FFIEC cybersecurity assessment tool, evolving towards an intermediate level and fulfilling 90% of all its payments at the advanced level. To date, we have fulfilled 82% of this project. Client satisfaction was negatively impacted by an uptick in the demand for services, which coincided with a reduction in on-site service capacity with the pandemic. We moved swiftly to replenish our service capacity by leveraging digital services to improve the client journey. Consequently, we have recorded satisfaction levels that are now aimed to exceed expectations. The effectiveness of our efforts to secure digital initiatives is reflected in the evolution of the pool of digital clients, which represented 55% of the total client base this quarter and continues to see growth. The exponential growth in digital transactions, coupled with an increasing digital service in recent years, led to the resizing of our distribution model. Consequently, we reduced our branch network by 9% in the last 12 months. At Credicorp level, we are developing different FinTech initiatives and ecosystems to boost the group's potential. Later this year, we will be able to give you a much more detailed overview. Right now, I would like to comment on our progress with key specific initiatives. Yape now reached the 6.6 million user mark by June 21 and has added 1 million new clients to the banking system since 2012. Transactions grew fivefold compared to the figure reported for the same period last year. Recent integration with Niubiz anticipates opening the ecosystem to payments to console sales, which will propel an additional increase in transactions indicators, such as frequency of use and cost of acquisition at NPS, which continues to grow. We expect that this will be the case moving forward. In the second half of this year, Yape will provide interesting monetization pipelines. We will share more information on this point as new features are released. Yape is now better prepared to operate independently at BCP and in the decision-making of results, culture, and operational levels. Nonetheless, we have no intention of divesting in this business in the foreseeable future. Tenpo is a digital wallet solution in Chile, and within a year of its launch, it has become the second-largest solution in terms of number of users with a client base of 537,000 affiliates, with an impressive low level of transaction costs standing at 30%. High volumes and a strong NPS performance indicator of 68% indicate we expect positive trends to continue. This represents an opportunity to continue growing our customer base as we consolidate in this market. Finally, Tyba, a digital initiative that began in Colombia to offer low ticket investments, has hit 293,000 users this quarter with $89 million in assets under management. Tyba is still poised for significant growth in Colombia. Additionally, Tyba was launched in this quarter as we expect it to grow faster leveraging our lending position in the market and its extensive knowledge base. Now, let me talk about our sustainability learning. We have stated that honing our social focus is the core objective of our sustainability program. Our efforts have accelerated, and in the first half of 2021, we made progress towards several milestones. On the environmental front, we are pushing the group to mitigate and reduce carbon emissions through three prongs: carbon neutrality, environmental policy, and environmental management. It is worth noting that BCP has been recognized by the Ministry of Environment for reducing its carbon footprint and was the first plant in Peru to win the Level 3 awards. With the support of industry experts, we have made progress in assessing our ESG risk management framework. Additionally, we have launched an ecofactory line with a sustainable textile complex. On the social front, Yape and Mibanco drove our financial inclusion efforts, reaching 1 million citizens and 35,000 SMEs into the banking system. Financial education programs by BCP and Pacifico have also reached millions of people. We implemented a program where female board members meet and exchange views with female senior executives, with the aim of strengthening networks, increasing the visibility of female talent, and addressing gender equality challenges. We have also established directional goals to improve gender imbalance and have added a clearly defined agenda perspective to our succession plans for senior executives. On the government front, we have included sustainability goals in corporate level incentive programs and have made further improvements on the compliance front. By year-end, we expect to report progress on relevant ESG initiatives and adhere to international reporting standards. We expect our overall ROE for 2021 to remain within guidance, given that favorable results in the banking businesses are expected to offset the recent unfavorable scenario in the insurance business. Peruvian real GDP growth is decelerating and our estimate for the end of the year is within the range. The loan portfolio growth in average daily balances is expected to decelerate, given that the uptick in the second half of 2021 was generated by Reactiva deposits. Current uncertainty may impact loan demand at year-end. Net interest margin achieved an inflection point that recovery will be gradual. As such, we expect NIM in 2021 to situate at the lower end of the guidance. The cost of risk has improved faster than expected given the positive evolution of client payments. In this context, we expect to reduce the costs of risk below our guidance range this year. Regarding efficiency, the 43.9% ratio cost in the first half of 2021 is slightly below our guidance. Nonetheless, we expect the levels to increase, albeit with an expected range higher than the year-end expenses we have reported. The outlook we are sharing today is for 2021. Although uncertainties remain on an extended horizon, after evaluating different scenarios, we reaffirm our long-term business strategy. We are carefully monitoring the evolution of specific variables and are poised to make tactical changes to adapt to challenging situations. We will continue accelerating our digital strategy in each of our businesses, which, coupled with our sustainability journey, will ensure that we sustain growth efficiently. With these comments, I would like to start the Q&A session.
Operator, Operator
Thank you, sir. Please follow the operator's instructions. Our first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.
Ernesto Gabilondo, Analyst
Hi, good morning, Gianfranco, Cesar. And good morning, everybody. Thanks for the opportunity. My first question is related to the insurance business. We saw there are operating trends in general, net interest income growth for the first time in three quarters, and important recovering fees and significantly lower provision charges. However, we saw this wider loss in the insurance results. So, considering that the region is going through a third wave of COVID-19, and that the Delta variant is affecting younger people not vaccinated, how do you see the outlook for Pacifico’s insurance business in the next quarters?
Walter Bayly, CEO
Thank you, Ernesto. This is Walter Bayly. I will let Alvaro Correa answer that question. Alvaro, please?
Alvaro Correa, Deputy CEO
Hello, Ernesto, this is Alvaro. There are several factors to consider regarding the trend we observed in the second quarter, which showed about a 50% greater impact on results compared to the first wave. Your question about the potential third wave is important. One factor is that the vaccination process is improving, and the government's approach to vaccinating from older to younger populations aligns with those who are insured. Therefore, we anticipate that the impact on the country will not be as significant as it was during the second wave, and similarly, the effect on the insurance business should be lesser as well. This is our expectation, but we currently lack specific guidelines on this matter.
Ernesto Gabilondo, Analyst
Thank you. And then, my second question is on the political outlook. How do you see the possibility of Velarde accepting another period as head of the Central Bank? And do you think reaffirming his position could reduce volatility in the sector? And also related to the political outlook, do you think that the proposal to change the private pension system is still on the table? Or do you see a more moderate stance from the new administration?
Walter Bayly, CEO
Sure, I will answer those questions, Ernesto. I think the basic scenario here, regardless of whether Julio, who is a very well-respected central banker, the question is whether we will have an orthodox central bank or not. Our expectation at this stage is that yes, we will continue to have a central bank that will act in line with more orthodox policies. And once those are confirmed, of course, volatility should be reduced. Regarding the pension system, it has been on the table for quite a while to redo the pensions, both the private pension fund system and the public system as well. That is a necessary thing to do. The private pension fund system has been, I think, severely damaged. The amount of withdrawals that have happened and the fact that currently the legislation allows people from 60-years-old indicates that the amount individuals can start withdrawing funds has been reduced. This is counter to what has happened all over the world, where due to low returns on portfolios because of low interest rates, the age at which individuals can achieve their pension has been increased. We have gone counter to that cycle. So at this stage, the private pension system does not have enough money to provide adequate pensions. Thus, reform is urgently needed. It is a difficult task for any government in Congress. It is on the table, but we do not expect that this is something that is going to happen very quickly or easily. Did I answer both your questions, Ernesto?
Ernesto Gabilondo, Analyst
Yes, perfect. Thank you very much. And then, just the last question related to your digital transformation. We're starting to see some niche countries in the region with the creation of digital banks. Given all your FinTech initiatives, such as Yape, Tenpo, Tyba, or the digital transformation inside BCP, do you see the possibility at some point to consolidate all of these initiatives into a digital bank in the future?
Walter Bayly, CEO
I will pass this question on to Gianfranco. Gianfranco, would you care to take it, and I can complement afterwards?
Gianfranco Ferrari, Deputy CEO
Sure. Good morning, Ernesto. Yes, the answer is yes. We are considering the possibility of launching a digital bank. In earlier conference calls, we talked about the vision we have, which is making a few different bets in order to be successful. Some of the bets we've already made are being successful, and in some, we have failed. However, going specifically to your question, we may pursue what I would call a dual strategy. One is with a vision of launching a digital bank based on what we already have, while at the same time, keeping the current initiatives or ventures growing, and those that are successful expanding them to other countries.
Operator, Operator
The next question is from Yuri Fernandes with JP Morgan. Please go ahead.
Yuri Fernandes, Analyst
Hello. Good morning. I will limit myself to one question regarding loan growth. I guess you provided this guidance, likely converging to the lower end of the guidance for the year. But looking ahead, what should we expect? Because my concern here is that about 70% of your loans are business-related loans. When you add to the SMEs and the wholesale, about 70% of your loans in Peru are business-related. And the concern here is that this political uncertainty may drive you to decrease your risk appetite and also reduce demand from clients. So how should we think about loan growth, not only for this year but for 2022, or even 2023? With these higher interest rates, should loan growth in Peru be below nominal GDP? What should we expect now? And if you can provide some data from June or July, that may show trends of deceleration, that would be helpful as well. Because in the second quarter, I guess that was a good quarter for growth. The question mark is what is going to happen in the second half in 2022? Thank you.
Walter Bayly, CEO
Thank you, Yuri. I will give a brief answer, and maybe Cesar can complement. Yes, you are right to the extent that if the private sector is not aggressively investing, growing, and spending, then, of course, loan growth will be subdued. The long-term trend in Peru is that loans should grow at 1.5 times nominal GDP. I think that to the extent that this political uncertainty continues to be a cloud above us, we will be, of course, at the lower end of that long-term trend. So that is the reality, and that is what we are preparing ourselves for. Having said this, Cesar, would you care to comment a little bit more on loan growth?
Cesar Rios, CFO
Yes, Walter. Thank you, Yuri. Yes, only to complement, I will think in terms of individuals. The research field demand for consumer and mortgages in line with private spending is probably going to be fueled temporarily by a number of government-imposed initiatives. In the wholesale segment, that is going to be probably less investment, and there’s going to be some substitution effect from less involvement in international markets, and probably a little bit less appetite from international banks. So, at least in the short term, we think that we can have some sources of growth.
Operator, Operator
The next question is from Tito Labarta with Goldman Sachs. Please go ahead.
Tito Labarta, Analyst
Hi, good morning. Thanks for taking my questions. Maybe first a follow-up on the political environment. Any update or what you're hearing on the caps on interest rates, regulation on fees, and any forced lending, anything like that? Any color you can provide there?
Walter Bayly, CEO
Good morning, Tito. No, no further news. The three issues that you mentioned are the ones that, of course, pose a certain amount of difficulty or risk for the financial sector. As you well mentioned, we do have a law that sets caps on interest rates, and that is reviewed every six months by the Central Bank. So, at this stage, there have been no comments on making any changes to that. There has been a little bit of noise on fees, but nothing significant. We do have rather stringent regulation on fees already, so in the short term, we don’t anticipate anything further. There have been mentions of forced lending, though we have heard there's been a lot of noise from the government, particularly that Banco de la Nacion should be an active participant, particularly in micro and SMEs, but that of course could create distortions in the short term. In the long term, we have in the past competed with public-sector banks, and they usually are not the toughest competitors. They tend to have difficulty attracting talent, are usually not very good on the commercial front, and usually technology is not the strength of government-owned financial institutions, particularly in Peru. Thus, from a long-term perspective, there are no concerns. However, in the short term, because of price considerations, it could create a certain amount of distortions in the market. We all remember what happened in the Brazilian banking system during the Lula administration when a series of government-owned financial institutions and their mandates started aggressively lending in several sectors of the banking industry. That creates distortions in the short term. We’re not concerned in the medium-term or long-term, but in the short term, there could be distortions. Nevertheless, Banco de la Nacion is not prepared today from a risk management perspective or from a commercial perspective, to aggressively participate. It is important to keep in mind that in Peru, about 45% of all the lending done to SME micro-lending is done by public-sector financial institutions, basically, the Cajas Municipales. We are watching this closely, but at this stage, we do not have a lot of serious considerations. Did I answer your question, Tito?
Tito Labarta, Analyst
Yeah, Walter, that was very helpful. Thank you. A separate question then on the cost of risk, better this quarter. I know you provisioned quite a bit last year. How do we think about that for the rest of the year?
Walter Bayly, CEO
Sure, I will pass that question along to Reynaldo and/or Cesar. Reynaldo, can you start?
Reynaldo Llosa, CRO
Reporting the performance on all our portfolios has been significantly better than we anticipated. We expect these trends to continue in the second half of the year and throughout 2022. However, there is still a small portion of the portfolio benefiting from grace periods, which may affect overall performance. Despite this, we remain very optimistic about the performance of both our wholesale and retail portfolios, as well as the trends we are observing in Mibanco. Bolivia is taking advantage of regulatory rules that allow clients to have extended grace periods, which will likely be the most challenging aspect for Credicorp in 2022.
Walter Bayly, CEO
Thank you, Reynaldo. Cesar, is there something you would like to add?
Cesar Rios, CFO
Only something very slightly that in line with Reynaldo, we expect positive behavior in probability and cost of risk, but probably a little uptick in the deteriorated portfolio as the deterioration that was expected will start to materialize; however, materially, this was already provisioned as the recruitment portfolio started to come due.
Operator, Operator
The next question is from Jason Mollin with Scotiabank. Please go ahead.
Jason Mollin, Analyst
Hello, everyone. Walter, Gianfranco, Alvaro, Cesar, Reynaldo, Milagros, and team, the presentation was excellent. All my questions were addressed actually, as well as in the previous questions. But I can ask one about the consumer demand you talked about from government support and perhaps companies that are not in the best position that could need some liquidity here. How are you managing the risk here? How do you see that impacting your market share going forward? Do you think that Credicorp’s businesses will actually be looking in this environment to give up the weaker credits or weaker clients and retrench, resulting in lower market share?
Walter Bayly, CEO
Thank you, Jason. Thank you for the kind words. No, at this stage, we do not anticipate, of course, as it was mentioned by Cesar during the presentation, we have made a thorough review of our long-term strategic positioning. We do not think that at this stage there’s anything that merits any changes in our long-term strategy or view of what we want to become, and where we want to play. Nevertheless, under such changing environments, tactical responses are something that one has to be ready to tackle. And, of course, we're watching the development of each of our different market segments and product market segments. But at this stage, we have no intention of reducing any portion of our portfolio or market share going forward. As Cesar mentioned, maybe what could provide somewhat of a growth opportunity is the fact that the domestic capital markets face a lack of liquidity and the pension funds, and the lack of access to international capital markets, possibly indicating that there could be more lending available for top corporates in the corporate sector. I don't know, Gianfranco, would you like to add something?
Gianfranco Ferrari, Deputy CEO
Good morning, Jason. What is always required is a fine balancing act between risk and business opportunities. On top of what Walter said, we still have a long-term strategy leveraging on technology in order to reach new segments of both the population and SMEs at BCP. I'm talking. So even though maybe the macro environment may not be highly positive, we are still optimistic about the opportunities in gaining more businesses and tackling new segments of businesses.
Jason Mollin, Analyst
Maybe I could just ask you guys have mentioned that some of the competitors, particularly in micro-lending, have had a tough time with funding. And that is a segment that there are a lot of question marks about the addressable market and how that will evolve. Could it actually result in you guys seeing some gain in market share in that segment in the near term if competitors are not going after those clients or are not able to? Any color that would be helpful?
Walter Bayly, CEO
Well, go ahead, Gianfranco.
Gianfranco Ferrari, Deputy CEO
Yeah, so maybe the answer is twofold, Jason. I mean, we talked about it before. The finance business is a high cost business. As the banker, at this stage, we’re developing a hybrid model in which we leverage, even though it's still a high touch business based on RMs, we’re leveraging technology and tech tools in order to be more efficient. As a matter of fact, if you measure the cost-to-asset ratio, Mibanco is way under its competitors. So, we do see an opportunity there. Then I switch to BCP; in the past, we haven't been successful in capturing those low ticket clients in the SME business basically because of distribution costs. Again, we already have a distribution channel, a full digital distribution channel, which we're piloting today. We do see opportunities to tap that market through that channel moving forward. So also in the long run, I do see opportunities to gain market share in the SME business for low ticket clients.
Jason Mollin, Analyst
Thank you very much.
Walter Bayly, CEO
Thank you, Gianfranco. Jason, let me add to that, particularly on the SMEs and micro finance side. As you know, last year we did a very aggressive provisioning, and we did a capital increase to allow the bank to continue operating under capital standards we feel comfortable with. Under pressure from the other participants in micro finance, particularly the Cajas, the government set up a program that allowed injection of capital. So far, that program is still not active. We have not seen the level of provisioning or statistical evidence that the cleanup in the portfolios of some of the Cajas has happened. And we're all operating in the same market with the same customers. That leads us to believe, based on that data, that the day of reckoning has yet to be acknowledged in those portfolios. And when that happens is probably when those opportunities you mentioned will start to appear, enabling us to become even further, more of a leader in that market. Did we answer your question?
Jason Mollin, Analyst
Yes. Thank you very much.
Operator, Operator
The next question is from Alonso Garcia with Credit Suisse. Please go ahead.
Alonso Garcia, Analyst
Good morning, everyone. Thank you for taking my question. My question is regarding the interest rate cap. I mean, back in April, the Central Bank said they would cap at 80% for the May to October period. So now, three months later, I wanted to hear how you adapted to the new regulation. If you had to make some adjustments to your strategy for certain segments of the portfolio or if not, really? Moreover, how did you see your competitors adapting to the new regulation? And do you think probably your competitive positioning against them has changed in some way following the implementation of these regulations? Thank you.
Walter Bayly, CEO
Sure. Thank you, Alonso. I will answer regarding Mibanco, and Gianfranco can tackle the issue of BCP and the consumer side. On the Mibanco side, yes, we have had to withdraw from a certain portion of the customers because of distribution costs and risks that were not profitable with the interest rate cap. It was not the most profitable segment, but that is reality. So we have abandoned that market; we are not aggressively pursuing those loans. It was, as I mentioned, not the most profitable segment. It was even probably just breakeven segment, but it was very core to our purpose of financial inclusion. So it is a shame that we're unable to be more aggressive there. But having said that, I don't think it will have an impact on the P&L. So, that is the answer from the micro finance side. And Gianfranco, would you tackle from the consumer side?
Gianfranco Ferrari, Deputy CEO
Sure. Just a quick comment on what Walter just mentioned and we've said it before. From the client perspective, the most expensive loan is the one you cannot get. In a country where we're still lacking in financial inclusion, it's a period of legislation that the ones you mentioned have been established. Regarding the consumer business, yes, we've adapted. The heat more than anything, comes from the delinquency fee. The whole consumer business has been hit. The study is quite similar to what Walter mentioned for Mibanco. So we're pulling off of some low segments in consumer finance, specifically in credit cards, which is a business segment that for us isn't as relevant as our competitors, both in terms of market share and profitability.
Alonso Garcia, Analyst
Thank you. And if I may ask a second question on the operating expenses side, for the first half of the year, expenses are up 3.9%, so slightly ahead of inflation. But for the current quarter alone, expenses increased strongly both quarter-on-quarter and year-over-year. So you attributed this to marketing campaigns. I just wanted to check what drove this uptick in the marketing campaigns. I mean, was it driven by pressure from competition, maybe from other banks, or many FinTech companies? And based on this, what should we expect for OpEx growth for the full year? Thank you.
Walter Bayly, CEO
Thank you for your question. Cesar, could you tackle this one, please?
Cesar Rios, CFO
Yes, Alonso. Thank you for the question. In addition to the factors you already mentioned, that I am going to detail a little bit is also the seasonality. As you remember, BCP particularly, we have a low level of expenses in the first quarter and a higher one in the fourth. So when you compare the second quarter with the first quarter, you are capturing the seasonality effect. The two other factors were, I would say, the normalization of the variable compensation, given the fact that now we are close to normal levels of profitability and rates, thus the pool of variable compensation. Finally, we have a jumpstart and have improved a lot the digital marketing initiatives in Yape, and other BCP approaches, which are starting to gain awareness and expand. This correlation is reflected in the level of sales of digital products, and is part of the internal strategy.
Operator, Operator
The next question is from Carlos Gomez with HSBC. Please go ahead.
Carlos Gomez, Analyst
Thank you for taking the question. I wanted to ask you about the relationship with the new economic authorities. I remember in previous conference calls you made a judgment that we were going to have a new administration; that's what happened. Would you say that the current economic team is going to last for the duration of this administration, or should we expect further changes? Would you say that you have already engaged in dialogue with them? Thank you.
Walter Bayly, CEO
Thank you, Carlos, for your question. You're asking for a very speculative answer. Obviously, we have absolutely no clue as to whether this current administration or the Minister of Finance will be there for the next five years. That's a tough call, and we don't know. We have not engaged yet in conversations with the Ministry of Finance. There have been a couple of meetings with some groups, not individual meetings. I think the scenario that we are seeing at this stage is one that was described to me as having a good level of macroeconomic orthodoxy, both at the Central Bank and at the Ministry of Finance. In essence, we will have a Central Bank that will monitor monetary policy with a good eye on keeping inflation under control, and the Ministry of Finance we will have a team that will ensure deficits and that we run a relatively balanced situation. We will maintain macroeconomic orthodoxy from a fiscal monitoring point of view, however, there will be many micro-level initiatives that are quite unorthodox as well. That is the scenario that we are seeing at this stage; however, these are just speculative ideas from my side. We have no further evidence, and there is still a lot of uncertainty.
Carlos Gomez, Analyst
I think you answered the question as best as it can be answered at this point. If I can follow up a little bit in a completely different area, you mentioned that there was a decline in the level of service to your clients that you addressed with more resources. At the same time, you have reduced the number of branches by 9%. Isn't that a contradiction in reducing your retail network when perhaps there is more demand for your services? Thank you.
Walter Bayly, CEO
I understood the comment you made regarding the fact that we're reducing branches. Yes, that is reality, that is happening both at Mibanco and at BCP. And that is, of course, because customers are utilizing digital channels to interact with either institutions more actively. But I did not fully understand the first part of your question. We are reducing the level of services. I didn’t understand.
Carlos Gomez, Analyst
No, at some point during the presentation, you mentioned that the satisfaction of your clients has dipped a little bit and you had to put more resources to restore it.
Walter Bayly, CEO
Yes, okay, got you. Yes, we are constantly measuring the level of customer satisfaction. Yes, that leads to a whole series of initiatives to counteract that. But less and less, the quality of service provided is related to the number of branches. We measure all the different pain points our customer face in their interactions. I’d reiterate that less and less that has relevance to do with the actual branch; it has to do with digital channels, the phone, and the way our bank statements are sent via email. It's a diverse set of different points of customer interaction that are not related to the branches. We think there's no contradiction at all with the fact that we are gradually reducing our physical footprint with the intention of improving customer satisfaction. Thank you very much.
Operator, Operator
The next question is from Andres Soto with Santander. Please go ahead.
Andres Soto, Analyst
Good morning, everybody. Thank you for the opportunity to ask questions. My first question is regarding the potential new regulation that will potentially come under Castillo's administration. When I look at his proposals for a more active role of government-owned banks, setting caps differentiated by sectors in the economy, et cetera, this looks a lot to me like what you guys have experienced in Bolivia. I would like to hear your thoughts on this given your experience in this market. Do you see a parallel between Bolivia right now and what Peru is moving towards? Given that the ROE that you achieved in Bolivia back in 2019 pre-pandemic for Credicorp is 8%. Can we assume that this 8% could be a reference for Credicorp ROE under the more radical version of the Castillo administration?
Walter Bayly, CEO
That's a strange question. Okay, let me tackle this. We do not think that the scenario we are looking at is anything related to what you have just described. I have already mentioned or made comments regarding more active participation of government entities in the lending arena. And I will repeat those comments again; what has been mentioned is that Banco de la Nacion will take a more active role in lending to small SMEs and micro companies. That is obviously a possibility that in the short-term could create distortions. However, in the medium-term, it raises no concerns. Competing against public-sector entities has proven to be not the most difficult task. The implementation of that strategy, though distortive, poses challenges for Banco de la Nacion. Banco de la Nacion is an institution that is struggling with some of the changes in its core applications. It lacks lending experience and does not have the commercial muscle to aggressively compete with about 20 or 30 different financial institutions that are currently present in the market. So yes, it's a possibility; it's a long shot. It does not keep me awake at night. Interest rate caps again, as we’ve already commented on, the responsibility to regulate that has been given to the Central Bank, who will review this on a six-month basis. The regulation we have today has complied adequately with the law while trying to minimize the impact on financial inclusion. We believe that will continue to be the case. If financial inclusion damages were to arise, they could be marginal rather than dramatic. We have not had any discussions or noise about forced lending. The scenario you pointed out of Peru becoming Bolivia is not our basic expectation; I would give it a 15% probability. If that 15% probability were to occur, our return on equity would reduce. To what level? I have absolutely no idea. Did I answer your question?
Andres Soto, Analyst
No, that's clear, Walter. And talking about another country where you guys have experience, Colombia. When you look at Castillo’s proposals, all of them are fiscally expansionary and will increase the deficit, requiring additional taxes. Are you guys concerned about the possibility of increased taxation over the medium-term, potentially specifically targeted towards banks?
Walter Bayly, CEO
Yes, I think this is something that is going to happen all over the world. During the health crisis we have experienced, all the governments have embarked on very aggressive fiscal spending. All the countries in the world need to return to a more sustainable fiscal path, which will require additional taxes. This is further compounded by a movement all over the world to tax the rich, aiming to have wealthy individuals or companies pay their fair share. Yes, we think there is a very likely scenario, not just in Peru but across the globe, where taxes will increase.
Andres Soto, Analyst
Perfect, Walter. And moving to a totally different topic. When you described the outlook and the uncertainties and the potential lower growth for the second half of this year, and even next year, and look at your capital, you obviously have an excess capital position. I would like to hear your thoughts regarding this. What is your current assessment of your capital level? In the past, you spoke about $850 million if I’m not mistaken. Can investors expect this money to be returned to them either as a buyback or as extraordinary dividends?
Walter Bayly, CEO
The short answer is yes. The scenarios we see going forward, and which we are discussing in this call, probably call for less growth, less growth in the country, less growth in lending needs, and less growth in risk-weighted assets. As we continue to generate decent returns on equity, we will be generating excess cash, which will clearly be distributed to our shareholders. We are going to the next board meeting to take a proposal which will be reviewed, approved, and discussed at the board level regarding what to do with the current excess capital we have. We will communicate that as soon as it is decided. But, in summary, we do believe we will be able to generate profits that will exceed the funding requirements and the capital requirements of our subsidiaries. Thus, we will be able to resume growth paths in our dividends as we did prior to the crisis.
Andres Soto, Analyst
That's very helpful. Thank you, Walter, for your answers.
Walter Bayly, CEO
You're welcome, Andres.
Operator, Operator
The next question is from Thiago Batista with UBS. Please go ahead.
Thiago Batista, Analyst
Hi, guys. Thanks for the opportunity. I have two small questions. The first one is about the funding. Because of all the uncertainties in Peru, has the bank seen a migration of bonds to USD? If this is true, how do we reconcile it with the material reduction, probably close to the all-time low in the level of cost of funding for local currency? So are we seeing this shift to USD deposits and how does this reconcile with the very low level of funding costs?
Walter Bayly, CEO
Okay, thank you. Those are good questions, Thiago. I will pass the question to Cesar regarding funding dollarization. Then, Gianfranco, you can tackle the question about Yape, Yape customers, and monetization. So I'll pass on to you, Cesar.
Cesar Rios, CFO
Thank you, Walter and Thiago. Talking about funding, we have seen a significant increase in low-cost funding, particularly at the BCP level. And, in general terms, you’ve seen this increase in low-cost funding in the form of savings and non-interest-bearing deposits for the wholesale business as a result of the liquidity provided by the government, along with the government-mandated release of funds from pension funds. We have maintained high levels of liquidity, almost including more than we expected previously. There has been some migration from soles to dollars but not to a significant degree; currently, it has been a strong immigration of funds from Peru to outside. The staggering level of deposits in the system has been maintained, and in the case of BCP, we have even gained market share. This compounding explains the reduction in our cost of funds because most of our funding comes from these very low-cost sources. When you blend that with the proportion of long-term funding, on average, we reduce our cost of funds. In the short term, as a result of the increase in the reference rate of the Central Bank, which was announced last night, this is a net positive for us because the cost of funds in the short term will continue to be at very similar levels for a significant part of our structure. Meanwhile, we will be able to reprice this 25 basis points through the rest of the year. The fact that this signal from the Central Bank is very positive because it maintains ample liquidity and support for the financial system, while also showing they are watching inflation and setting expectations.
Gianfranco Ferrari, Deputy CEO
Let me address the question regarding Yape. Out of the 7 million clients Yape has, I would say 20% to 25% are related to Credicorp. The remaining clients from our institutions have basically come from six or seven financial institutions that are participants within Yape. So if there are clients, they can download the Yape app. More importantly, we already have over 2 million users that are not necessarily affiliated with any financial institution. So Yape card, which is a virtual debit card. More importantly than that, is that the overlap in terms of usage has always been for several years now. We have visions of a war on cash, and the more alternatives we provide our clients, the less cash will be used. The amount transacted through Yape in June was around five or six times what was transacted a year ago. Meanwhile, the amount transacted in debit cards and credit cards grew over 20%, compared to 2019. So, I would argue that there's basically no cannibalization or marginal cannibalization among those products. When you compare the transaction tickets—average tickets between Yape and mobile banking, Yape's mobile transactions are like 10 times larger. The vision there is that Yape is definitely a strong complement to the payment methods we have. In addition, Yape has already reached 1 million QR codes distributed among micro-businesses, allowing it to serve both P2P and P2B transactions.
Thiago Batista, Analyst
Very clear. Thanks for the answer.
Operator, Operator
And now I would like to turn the conference back to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.
Walter Bayly, CEO
Thank you. The results of this first half of 2021 align well with our market expectations. Namely, that 2021 is the year we rebuild our margins, volumes, and profitability. This, of course, follows a very difficult 2020 in which the focus was on generating credit provisions to reflect the damage in our loan portfolios from the biggest drop in GDP in Peruvian modern history. Even though these first-half results demonstrate an analyzed return of 11.3% ROE, as mentioned before, well align with anticipated results. However, there are differences within the different business units of Credicorp. I will briefly comment on the three main subsidiaries. Clearly, Pacifico is the unit whose results are well below what we had anticipated. The second wave of COVID infections and mortality greatly exceeded expectations compared to the first wave. As you know, Pacifico is the clear market leader in life insurance, which includes credit life and life insurance associated with customers in the private pension system. Our life insurance business has been and will continue to be long-term drivers of growth and profitability once normalized. Thus, short-term results do not change our long-term view going forward. We anticipate that our life insurance business returns to profitability this third quarter as the impact from the second wave of infections has decreased significantly. As Cesar mentioned, of course, the possibility of a third wave is real, but vaccination efforts have accelerated and already reached 35% of the most vulnerable population with at least one dose. Hence, a potential third wave should result in lower mortality. BCP's standalone results over the last two quarters are very positive, achieving returns of equity above 18%. Structural loans have started to grow, albeit at a subdued rate. Net interest margins have begun to recover while the cost of risk is coming down. We continue to maintain extreme focus on our various digital initiatives, which continue to advance successfully. As anticipated, we have accelerated the pace at which we invest and put spending into these initiatives. Mibanco’s results are also encouraging, recovering well, already exceeding our anticipated return on equity, estimated at high single digits by year-end, reaching 10.3% as of June. Volumes have initiated growth, and cost of risk is abating. Productivity advances ahead of our clients, as one-third of the monthly disbursements are now executed without a loan officer's intervention. Finally, the evolution of NIMs appears positive. We are very encouraged by yesterday's timely decision by the Central Bank to increase the local currency reference rate modestly. This increase sends a message that our Central Bank is monitoring inflation closely while sustaining an expansive monetary policy. This move also conveys a message to the FX market. To conclude, all variables under management control are evolving favorably, and we believe we are well-positioned to exceed our expected results this year. We are facing an unstable political scenario. However, it is good to remember that, unfortunately, political stability has not been the norm in Peru. Our macro fundamentals—fiscal, monetary, and financial systems—remain strong. While our democratic system of checks and balances will be tested and challenged, we are cautiously optimistic about the final outcome. The coming year will be full of challenges and not without volatility in the political arena. Nevertheless, as in the past, we will withstand this political volatility and keep focused on our mission and purpose. With this, I finalize our conference call. We once again thank you all for your continued interest and for joining us today. Thank you very much.
Operator, Operator
Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.