Credicorp Ltd. (BAP) Q2 2023 Earnings Call Transcript

Credicorp Ltd. (NYSE:BAP) Q2 2023 Earnings Call Transcript August 11, 2023 10:30 AM ET

Company Participants

Milagros Ciguenas – Investor Relations Officer

Gianfranco Ferrari – Chief Executive Officer

Cesar Rios – Chief Financial Officer

Reynaldo Llosa – Chief Risk Officer

Francesca Raffo – Chief Innovation Officer

Cesar Rivera – Head of Insurance and Pensions

Conference Call Participants

Ernesto Gabilondo – Bank of America

Juan Recalde – Scotiabank

Yuri Fernandes – JP Morgan

Geoffrey Elliott – Autonomous

Tito Labarta – Goldman Sachs

Carlos Gomez – HSBC

Sergey Dubin – Harding Loevner

Andres Soto – Santander

Operator

Good morning, and welcome to the Credicorp Second Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Milagros Ciguenas. Please go ahead.

Milagros Ciguenas

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; and 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 entities. And I refer to 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 on an update of our outlook for 2023.

Gianfranco, please go ahead.

Gianfranco Ferrari

Thank you, Milagros. Good morning, everyone. Thanks to all of you who are 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’re 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 in other disruptive initiatives with the potential to generate value across our businesses.

We heard our — your requests to provide more information on Yape’s trajectory and have increased our disclosure 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 modes 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 partial 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 impact of — from the social unrest, the disruption from Cyclone Yaku as well as the added effect from the Coastal El Nino resulted in a [indiscernible] 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 manage on the retail side and wholesale demand showed reflecting the economic climate. And 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 relationship, 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 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 payment capacity of clients. We have strengthened great risk management and remain focused on maintaining stringent origination standards and disciplined loan pricing. Our disruption initiatives continued to gain traction during the quarter, driven in 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, CESA 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 half — second quarter, sea surface temperature anomalies associated with El Nino Costero motivated the cancellation of the industrial anti-efficiency session and also impacted the agricultural sector. El Nino Costero phenomenon is expected to continue until the summer of 2024 as a consequence of the high probability of development of El Nino and El Pacifico Central.

For the summer of 2024, the highest probability scenario today is that El Nino Costero will have a week 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 El Nino Costero [indiscernible] shock, Peru will be in a favorable position to convert to Latin America average income per capital 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

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, a structural loan growth in retail banking at BCP and the bank 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 raising 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 BCP and by Mibanco.

Allowances for loan losses were equivalent to 5.7% of the structural loan. The insurance underwrite result rose 53%, which reflected increased profitability in the life business and a stable year-over-year result for property and cashflow. 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.

Next slide, please. For the second quarter, the Peruvian economy is expected to have registered a fly contraction impacted by El Nino Costero, which pushed growth rates in the agricultural fishing and manufacturing cycles into negative terrain, growth in the mining sector attributable to increased copper production at Quellaveco and the recovery of production at Las Bambas after temporary should launch last year, partially offset this decline. These dynamics, hopefully, with the impact of the first quarter marked by social and wealth 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 expectation has dropped materially in LatAm. Central banks in Chile and Brazil have already started the red cutting cycles and Peru Central Bank is expected to follow suit in the last quarter of this year.

Regarding our outlook, Peru GDP is expected to grow around 1% this year. GDP growth in Colombia is expected to slow to 1.6%, while Chile GDP growth is expected to be flat. As you know, we are closely monitoring the evolution of El Nino Costero weather phenomenon and it’s impacting our businesses. In its last official statement on July 21 and 10 assigned a 40% probability that El Nino Costero will be weak during the summer of 2024, 36%, it will moderate and 11% that it will be strong.

In his last speech of July 28, President Boluarte communicated the importance of private investment as a tool for economic growth and development, moving apart from the previous government stance. She announced, for instance, that $1.8 billion worth of infrastructure projects will be awarded in the second semester through [indiscernible], 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 keep moving forward.

Next slide, please. 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 raising funding costs.

BCP 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 a recessive high inflation environment in the first half of the year affected the payment capacity of vulnerable sub segments, which are more leveraged and stable jobs.

Additionally, SME-Pyme segment drove the uptick in provisions. On a year-over-year basis, growth in net income was pure by a 29.6% increase in NII. This evolution was driven by raising interest rates and 5.2% increase in structural loans, which was driven primarily by a 10.9% uptick in retail banking loans through SMEP credit card 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 SMP, which were affected by economic conditions. Operating expenses grew 8.3%, driven mainly by IT and marketing expenses and investment in disrupted 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 Bolivia Central Bank has dropped materially, and banks have daily limits in U.S. withdraws regardless BCP Bolivia and Encino remains stable.

Next slide, please. Yape continues to progress towards monetization by pursuing its medium-term targets: one, to be the main payment network in Peru; second, be please present in the daily loose apparels and finally meet the financial needs of the apparels. Features launched in the last 18 months have allowed Yape to continuously grow its active use base, engagement and incongeneration.

Monthly active users reached the 9 million mark at the average monthly transaction level for this group has risen from 14.9% to 23.5% in just 1 year. Currently, 5.2 million users generate income. Our main monetization drivers continue to be rooted in the past 6 months, 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 the end of June and 2.2 million transactions. To Yape promos, the gross merchant volume grew 4.8x to stand and PEN25 million at the end of June, notably in the last 6 months, monthly disbursements of micro loans rose 18%. In the aforementioned context, unit economics are moving towards breakeven. The revenue per active user per month is growing and start at PEN2.5, while the cash cost per active user per month stood at PEN4.4 at the end of June.

Next slide, please. Mibanco’s profitability began to recover this quarter after a challenging start early this year on a quarter-over-quarter basis, Net interest income rose 4.6% after a structural loan disbursement recovered from a difficult first quarter. Disciplined loan pricing bolster II and offset the impact of an uptick in the funding cost.

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 main high due to a deterioration in payment capacity.

From a year-over-year perspective, NII rose 1% to an uptick in structural loans and interest rate pass-through, which mitigated the impact of raising funding costs. Non-interest income rose 26.6% due to the same factors are those outlined in the quarter-over-quarter and agro. [indiscernible] provision 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 untap potential exists in the Colombian microfinance market.

Next slide, please. 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 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 [indiscernible]. In the life business, the insurance and the rotor 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 and the router results rose 5.1% through an improvement in medical assistance results, which was partially offset by a downturn in the result for cars.

Next slide, please. 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 with managed ASV cash surplus via structural portfolios and short-term investments. In terms of recurring businesses, assets under management, wealth management grew 4.2% and drop income growth, while the assets under management level in the Asset Management business remains 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, we generated earnings via the same dynamics seen quarter-over-quarter. Regarding recurring businesses, wealth management, assets under management grew 9% and drop income growth, while assets under management homes contracted 17% driven by outflows in third-party funds and income decreased slightly as these outflows generate lower fees.

Next slide, please. Now we will look at Credicorp’s consolidated dynamics. On a quarter-over-quarter basis, our restructural 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 constructed 3.5% or 1.8% with FX neutral.

This evolution was driven by a drop in low-cost deposits, which was 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 has fallen system-wide, but our market share has risen to 40.6% and currently represent 65.1% of our total deposits.

Next slide, please. 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. Different was attributable to volume dynamics discuss early 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 [indiscernible] transaction. It is important to note that both lines has been affected by our strategy at Bolivia in which we have adjusted our fee framework for foreign chances to offset the impact of FX transaction due to restrictions on foreign currency availability. If we exclude this impact, fee income increased 4.1% quarter-over-quarter and a kick in transactions while the result of SF transaction remained flat — on a year-over-year basis, excluding Bolivia, fee income contracted 3.3% driven by lower fees in the pension business and the elimination of intercity fees.

Next slide, please. Let’s look at 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 the structural nonperforming loans was driven by Mibanco after loan reprogram in the first quarter fell delinquent by SME-Pyme, where low ticket risk subsegment reported poorer garment performance and credit cards and consumer loans where the debt service capacity of vulnerable segment fell due to over indebtedness and a stable employment. The aforementioned was partially offset by a sale of a delinquent portfolio in the energy sector in hotel banking, which had been previously provisioned. On a year-over-year basis, extract nonperforming loan volumes increased due to an uptick in refinance collateralized loans in the retail state and tourist sectors served by Wholesale Banking.

The evolution of nonperforming loans in retail banking, Omnibanco was driven by the same factors as those seen in the quarter 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. Please refer to Appendix 2 for more details.

Next slide, please. Moving on the 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 have 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 level as a recessive high inflation in bio in the first half of the year affected the payment capacity of clients at BCP, vulnerable subsegments, which are more leveraged and have a stable jobs were the most impacted, while Mibanco clients were severely hit by the first quarter events.

Additionally, 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 a stricter origination guidelines for individuals, SME-Pyme and Mivan,

Nonetheless, the impact of recent measures on asset quality metrics will take some time to fully materialize. We will be view in this page the evolution of efficiency on an accumulated basis 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 Credicorp level.

At BCP, core businesses fueled growth in expenses through and a tick in IT expenses related to an increasing usage of cloud and client become more digital, more usage of IT applications, license and other software to enhance capacities and improve car security and move to attract more specialized digital talent. Marketing expenses mainly driven by advertisement to boost deposit and digital sales and growth in not product expenses. The aforementioned dynamics were partially offset by a nonrecurring tax expense results.

Expenses by disruptive initiatives at credit core level increased 70% to ensure market leadership in the long term. Operating leverage remained strong at BCP stand-alone, at Mibanco operating expenses remain under control, but income grew at a slightly lower pace. Our efficiency ratio stood at 44.4% this first half, down 310 basis points compared to last year and driven by high income and BCP and Pacifico.

Next slide, please. Similar to the previous quarter, record quarter profitability was driven by strong results in our nasal 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 relatively low effective tax rate in this semester due to the strong performance of our insurance business and due to the fact that 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.

Next slide, please. Our updated macro scenario for 2023 is now a GDP growth of around 1%, which incorporate the scenario of a week to moderate El Nino Costero at year-end. Regarding loan growth, the social and climate events of the first part of the year, coupled with a sluggish internal demand are taking at all on our client borrowing capacity, particularly in our consumer loans, credit card 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 we higher than initially expected cost 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 of credit restrictions before BCP. We achieved solid efficiency levels in a context marked by an acceleration in investment to develop future businesses.

Our ongoing efforts to [indiscernible] are expected to partially offset the aforementioned input headwinds and results in an efficiency ratio between 45% and 47%. Finally, we remain — maintain our ROE guidance of around 17.5%, but now acknowledge downside risk associated with asset quality deterioration in El Nino Costero.

With these comments, I would like to start the Q&A session.

Question-and-Answer Session

Operator

We’ll now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ernesto Gabilondo with Bank of America. You may now go ahead.

Ernesto Gabilondo

Thank you. Hi. Good morning, Gianfranco, Francesca and Cesar, and good morning, everyone. Congrats in 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 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

So this is Gianfranco. I’ll ask Cesar to go into the details for the answer.

Cesar Rios

Okay. Thank you, Ernesto. First, effectively, we are maintaining our guidance of around 17.5%. At the beginning of the year, we have probably a conservative approach mentioning 17.5%. Now I have already mentioned that we have some downside risk due to potential credit deterioration. This is as 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 on a 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, [indiscernible] and 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 of the last part of the year that I previously mentioned and the trend in the 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

Maybe just to add on what Cesar mentioned, Ernesto. Also when we provided the original guidance and the expected results at Pacifico were not the results we’re getting. So as we mentioned in the previous call and at the Investor Day, the — due to some specific events, Pacific is having an outstanding year this year, and that may — that is going to offset in part what Cesar just mentioned.

Ernesto Gabilondo

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

Reynaldo?

Reynaldo Llosa

Yes, Ernesto, this is Reynaldo Llosa. We — as you know, we don’t provide guidance for next year, and we will do it in the first — during the first quarter of 2024. Having said that, there’s a lot of uncertainty in terms of the impact of El Nino. So we need to confirm that information, eternto have a better projection of the number.

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 BTP 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

Perfect. Thank you very much. And just 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 Prima ASB Bank. All of them continue to deliver ROEs above 20%. But on the other side, when looking to BCP Bolivia, Mibanco, 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 like a medium target in each of them?

Cesar Rios

Yes. Thank you for your question, Ernesto. Let me go one by one. Actually, how we manage core capital and ASP if we manage them as a business unit — and correct some wrong about that business is with an ROE of 17%. So it is close to what the ROEs were expecting for that business. Having said that, this first half, we have had some nonrecurrent positive impact that helps, obviously, the ROE. But going forward, we have established a transformation plan for that business, aiming to have an ROE of between 16% to 17% by 2025.

Regarding Mibanco, both Mibanco Peru and Mibanco Colombia, the microfinance business is a much more volatile business and we are definitely in the downturn of the business. But we’re working both in the short run and the long run. The short run basically focused on risk. And in the long run, we need to revisit the whole business model so as to go back to the ROEs of over 20% we have had in the past in that business.

And finally, Bolivia, Bolivia is Bolivia. That’s my answer. We’re doing whatever the best we can do in Bolivia –The ROEs are — if you compare our ROEs to the banking system in Bolivia, they are quite good. There’s not much more to do in that business.

Ernesto Gabilondo

Excellent. Thank you very much.

Operator

Our next question will come from Juan Recalde of Scotiabank. You may now go ahead.

Juan Recalde

Hi. Good morning. Congratulation 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 Jape and also related to the growth in the services 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

Sure. Francesca, are you there?

Francesca Raffo

Yes. Thank you for the question. Yape, as mentioned in the Investor Day has plans on meeting monetization and business. So the growth in terms of TPV is growth basically around P2P transactions, contraction in basis and by merchant and also on the line transaction. So that’s the mean volume in terms of frequency patent. On the modernization side, growth is mainly around usage where we see an NDRC, utility experience that is beginning to go follow transactions that we have and also the online payments around digital.

Having said that, we will tightly export the bench is growing. We see an increase in the number of transactions and also on average amount in per customer. The promotions that Reynaldo mentioned as an engagement tool that there’s also a take rate that is also growing. And we are actually exploring ticket sales gains and different very useful growth that are coherent with Yape’s [indiscernible] in terms of whatever being — whatever we can be in activity and engagement.

Juan Recalde

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 Bolivian are one-off and how sustainable are these levels.

Gianfranco Ferrari

Cesar?

Cesar Rios

Yes. I wouldn’t consider that one-off, I will consider more than temporarily, and the distortion is an accounting thing. Let’s say, what you are doing is charging a fee and recognizing in the other part of the equation, higher FX exchange. For that reason, I will say we have a positive margin, but is reflected in an abnormally high fee and an abnormal loss in effects. So it’s a structural business that in this moment has more volume and wider spreads in these two variables. That is part of the business in Bolivia.

Gianfranco Ferrari

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. Were we have — when I say we basically BCP Peru was transactional app in Peru. That’s obviously paying off. And what we’re also seeing and maybe Yape part of it is — the amount impacted in noncash alternatives is constantly increasing beyond Yape. I mean David grade and things like that. And obviously, that is also an important driver for fee income generation.

Juan Recalde

That’s helpful. Thank you for the comments.

Operator

Our next question will come from Yuri Fernandes with JP Morgan. You may now go ahead.

Yuri Fernandes

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, lower GDP. My call is regarding 2024. I guess, the scenario still I don’t uncertain here. But in this 2.1% to 2.5% cost of risk, the level we should expect for 2024? Or basically, you are going to build those anticipatory provisions for the total environment now? And maybe for the next year, we should see cost of risk running at a more normalized level. So 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 put 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 LP formation.

Gianfranco Ferrari

Reynaldo?

Reynaldo Llosa

Yes, in terms of the guidance for next year, what I can mention as of today, Yuri, is that, I mean, our estimations, our levels of provisions today include the impact of El Nino with the probability between weak and moderate. That is reflected on 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, and we will be able to provide you more information in the following months and next two quarters probably. And in terms of the sale of that specific case in the wholesale banking, it’s around $30 million.

Cesar Rios

That was — that’s the sovereign bond — that’s not in exchange we made. And we…

Gianfranco Ferrari

We’re talking about the sale of term.

Reynaldo Llosa

It was a loan we had in our books, and we would be — we had an impact in terms of the NPL or the wholesale book of around USD30 million.

Yuri Fernandes

But we didn’t recognize any gain on that? Like did you need to provision and sell at face value? Or did you have like an economic gain on that sale? Just trying to understand like the formation, right? Because if this was an outperforming loan, probably you had some amount of provisions– just trying to understand the moving parts on the economic future.

Reynaldo Llosa

Yes, we — I mean, as compared to the provision level, we had a profit. So we estimated a higher loss than what we finally obtained by the sales. So it had a positive impact on our levels of provisions in the quarter.

Operator

Our next question will come from Geoffrey Elliott with Autonomous. You may now go ahead.

Geoffrey Elliott

Good morning. So 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 now with that 2.1% to 2.5?

Cesar Rios

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 [indiscernible] level of provision. So that’s incorporated in the projection of the second semester, all those loans that are default, but not fully provisioned as by the end of the first semester.

And it included what I just mentioned in the forecast of the impact that El Nino would have under current information in terms of the portfolio looking forward. So that’s why we are — have increased the guidance in the cost of risk expected for the year as a whole.

Geoffrey Elliott

Okay. So if [indiscernible] ends up being more severe, then there’s some further risk that it could go even higher. Is that fair?

Cesar Rios

Yes. That’s a fair statement, yes.

Operator

Our next question will come from Tito Labarta with Goldman Sachs. You may now go ahead.

Tito Labarta

Good morning. Thank you taking my questions. I have two questions. One is on your insurance results continue to deliver good results there. Just to understand how do you think about the sustainability of that going forward so that 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.

And my second question, just — if you can remind us the sensitivity of your margin to a lower rate environment. Your margin has been doing well so far. But do you think — how much pressure could there be as rates go down. And you also show there the risk-adjusted margin, which has been relatively stable — do you think that can continue to be stable as we’ve seen recently?

Gianfranco Ferrari

Tito, I’ll ask Cesar Rivera to answer that — the first question.

Cesar Rivera

Hello, Tito, thank you. Well, maybe it’s important to explain or to comment something about the port results in the insurance business for the first two quarters. Maybe one of the relation is the higher investment results we obtained in our — because the reinvestment rates we obtained in our investment portfolio and because of the good performance of our investment portfolio in general.

The second reason of this higher results is the higher profits we have obtained in the disability and survivorship insurance. This is the insurance that is related of the affiliates to the AFP, the IPPS sorry. Because in the last bidding contest, we obtained an important person for these contracts and with an interesting increase in the rates.

So we have obtained an interest increase in premiums without the COVID claims that we expected some part of claim for this year. So this has generated a high profit for this business. And the surface relation is related with the higher profits that we have obtained in the Group Life and Medical life business. Due to the repricing we made in the previous years, considering that results we have obtained during the COVID pandemic.

So considering that the following the market trends and the competitive situation in the market. We expect some reductions in their collective group life business in the next months. And we will obtain good results for this year, but we expect to have a sustainable ROI around the low 20s for the next and the following years.

Gianfranco Ferrari

Yes. And Cesar could you answer the second question?

Cesar Rivera

Yes. With an instant adjustment, I think our sensibility is around 25 basis points, the first year of the adjustment, a little bit higher than we mentioned probably a couple of years ago when the interest rates start to rise because the portfolio has shortened.

And our expectation is that we can maintain a margin — a NIM similar to the actual one with a combination of reduced rates and a change in the profile of the portfolio that moves towards a more retail products of the increase in retail banking in BCP and a more accelerated growth in Mibanco.

Tito Labarta

Okay. So the stablish NIM, but you meant 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 in retail.

Cesar Rivera

Yes. And I will emphasize you is because it’s around we are not talking about signed decimals.

Tito Labarta

Sure. Okay. And on the risk-adjusted NIM and any comments, particularly as you grow in retail?

Cesar Rivera

Yes. The risk-adjusted NIM should improve the short-term level when we adjust accordingly the cost of risk down the road. But this is not a precise guidance. This is a trend, what I have mentioned at this point.

Tito Labarta

Okay. Yes. So asset quality normalize as you can see some improvements, but a bit more medium term, it sounds.

Cesar Rivera

Yes.

Operator

Our next question will come from Carlos Gomez with HSBC. You may now go ahead

Carlos Gomez

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 [indiscernible] gives us the taintight about how things are going — two questions.

One, 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

Sure. Carlos, yes, as of today, and again, correct me Cesar if I’m wrong. Our chief economies expect Peru to grow 2.5% 2024. Is that correct?

Cesar Rivera

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 Nino at the beginning of the year. The number of events and mention is more representative without the impact of the.

Gianfranco Ferrari

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 property in Peru was reduced dramatically over the last 20 years until COVID — went back, we went back like in a couple of years, like 10 years in terms of that ratio. And we — 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 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 — As a Tempo recently got the 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 — and the Tempo business becomes more relevant for Credicorp. We plan to do something similar to what we’re doing with Yape regarding information disclosure.

Carlos Gomez

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 expectations were in the business about what Peru can do over the next three to five years? And also, how does that translate into credit growth for you?

Gianfranco Ferrari

Yes. So long term in Peru is much less than three to five years. We have had six presence in six years, so it’s quite difficult I don’t think — and this is a personal opinion. I don’t think with the current scenario, political, social and macroeconomic scenario, I don’t think that it is achievable for Peru to grow 4% over the next few years. We need to do a lot of structural reforms that we don’t see them being done in the near future.

Regarding growth portfolio growth, I want — I rather don’t provide an answer in that because there’s a lot of variables regarding the multiple of portfolio growth related to GDP growth. That’s the main reason why — or one of the main reasons why we’ve started to try to decouple from GDP growth, so as to keep growing at a much faster multiple.

Operator

Our next question will be a follow-up from Yuri Fernandes with JP Morgan. You may now go ahead.

Yuri Fernandes

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 strong are. 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 prepare to say no, , we prefer to have ROEs below 60, below 50, whatever, but keep investing on technology and keep expenses high. Just trying to understand if expenses could be evolved for the company in the case there is a high stream event. That’s one.

And regarding also El Nino, I remember in 2017, you had extraordinary provisions for the event and later, I guess, reverted like it was not as bad as we expected. So in the case, the things get clear that this is a moderate to strong [indiscernible], if the company could do like voluntary anticipatory provisions as you did, I guess, in 2017?

Gianfranco Ferrari

Yes. Regarding your first question, Yuri, maybe a quick previous comment, which we shared on the Investor Day also. Most of the investments we’re doing in the digital ventures and the digital transformation, we are registered them as expenses rather than as investments. The main reason there is that obviously, there’s a high risk in these investments, we’d rather be conservative.

And if something goes out, we don’t want to surprise the market. So going to your question — your specific question, there is some room. We are not planning to do that whatsoever. We are — because of the results we’re having in the digital ventures and the discipline we’re pursuing in the investment we’re making, we don’t plan to cut as of today, obviously, we don’t plan to cut any investments in that sense.

Obviously, if there is a major dramatic scenario, which we don’t see today, there is some room to cut expenses. I don’t think — having said that, I don’t think that the expenses we can cut will offset all the negative impact we may have in a dramatic scenario. But again, I highlighted the word dramatic scenario.

Yes, I’ll ask Reynaldo to answer the second question.

Reynaldo Llosa

In terms of our level of provisions, if we have information by the last quarter, I mean, that we have an incoming that is a higher impact of the moderate level that 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 situations. Companies are more prepared in the wholesale segment is more exposed to the El Nino phenomenon. And we have learned a lot during the last crisis, the COVID situations and the 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 deteriorations in those portfolios, we expect to have a relatively a lesser impact than what we had in 2017 where the situation was totally different. So that’s, in general, our strategy, but we will have more information in the following months.

Gianfranco Ferrari

And maybe to complement, Jon, I would say that as a country, we are better prepared than what we were in 2017. And on top of that, and this is a pointer to my closing remarks, we’re almost all of the subsidiaries at Credicorp we’re 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 and no major effect will come.

Yuri Fernandes

Thank you, Gianfranco. And I don’t want to sound super bearish here and just checking the box, what would be like if this happens, what would be your message and 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.

Gianfranco Ferrari

Great.

Operator

Next question will come from Sergey Dubin with Harding Loevner. You may now go ahead.

Sergey Dubin

Good morning. Three questions, actually. So the first one, there was some news about some ongoing or resurfacing political unrest again in [indiscernible] 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

Sure. I’ll take that one head Sergey. Good to hear from you. I don’t want to downplay the social noise that was in July. And as we mentioned in the Investor Day, what we see is like we have a fragile stability today in — a professional political cabin. But the social noise we had in July, it was very little. There’s nothing going on 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, that stability improves as we move forward.

Sergey Dubin

Okay. Great. And then my second question is regarding cost of risk. So I’m a little confused about this me. It looks like from the presentation, you — it’s going to be a summer 2024 event, if I understood this correctly, but you also talked about how your cost of risk for 2023 is already incorporating that. So can you help me with the timing of — are you expecting anything in 2023? Or is that entirely 24 event? That’s first part of this question.

And then the second part is, you mentioned that you expect cost of risk rent to diverge in the second half with [indiscernible] of going down and perhaps BCP going up. Can you help explain why that is? Is that related to the steps that you’re taking in terms of [indiscernible] appetite, but any color around that would be helpful.

Reynaldo Llosa

Yes. In terms of 2023 closing June numbers, we included everything that we expect for this year, incorporating some outlook of the level of growth that is impacted for 2024. That, in general, it includes all the events that are under our control and that we foresee for the remaining of the year.

And in terms of Mibanco and BTP, as Cesar mentioned, Mibanco has started with some specific measures before BTP. So the remaining provisions left 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 BTP. That’s what Cesar specifically mentioned.

Sergey Dubin

Okay. And these steps that you’re talking about, that relates to what. I mean are you carving you like curtailing risk or curtailing loans to more risky segment? Could you explain what is that Mibanco already did and BCP hasn’t done yet?

Reynaldo Llosa

You are totally right. I mean, 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 terms of the first six months of the year, and that’s a reflection of our stringent — more 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 there are specific events that happened in Peru in the first quarter.

Sergey Dubin

Okay. And the third question is regarding NIM trajectory. So I believe you mentioned in the beginning of the call that a bunch of Latin American central banks already cut interest rates and you expect Peruvian Central Bank to cut their rates in Q4 of this year. So could you remind you what is — again, what is the sensitivity of.

Reynaldo Llosa

I don’t know.

Sergey Dubin

Let’s say, 25 basis of rate cuts. And then how would you expect NIM to sort of shape up in you see success of rate cuts in 2024?

Cesar Rios

Yes. First, as Ajay mentioned previously, the sensitivity of our [indiscernible] is 100 basis point reduction in portfolio is around 25 basis points the first following year. That’s the sensitivity. Our guidance is to remain in 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 lead us to maintain our guidance in terms of NIM. The expected results of a decrease in reference rate is a gradual compression of the NIM that is going to be offset for the relative faster growth of the retail segments and Mibanco as already mentioned previously. At this point, we are not providing guidance for 2024.

Sergey Dubin

Okay. Well, just to just make sure I quarterly, 100 basis point cut in interest rate leads to 25 basis point NIM compression was a 12-month lag or next year, essentially, right? Is that correct?

Cesar Rios

The instantaneous effect to change in the composition of the portfolio is that if you have the inter portfolio and you reduce at once 100 basis points, the impact through the year is 25 basis points with a combination of maturities, sensitivity and for one.

Sergey Dubin

Okay. I understand. Okay. That’s fine. Thank you.

Operator

[Operator Instructions]. Next question will come from Andres Soto with Santander. You may now go ahead.

Andres Soto

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

Yes. Sure, Andreas. We shared — [indiscernible] actually who runs a business share in data at the Investor Day, basically, the plan is to focus in wealth and asset management. We’re in that process. We already — we’re pulling off that most of the investment banking business.

Part of it is we’re closing basically the M&A businesses in Colombia and Chile. Obviously, it has to — it’s not a onetime as if you have to pull off — as we finish the mandates we have and we already transferred the lending business that we had improved to BCP. So today, I would say that by year-end, we will have positive results in terms of — we will have finished all the cost reductions we expected and be very in shape to start growing both organically and if there are opportunities inorganically in that business going forward.

Andres Soto

Understood. Thanks again and congratulations on the strong results despite the challenging environment.

Gianfranco Ferrari

Thank you.

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

Thank you all for your questions. As Cesar noted, our GDP growth expectation considers sales of weak to moderate El Nino 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 structure on 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 risk mainly associated to asset quality deterioration and El Nino Costero.

Looking ahead, we remain confident in delivering a longer-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 bad 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 vacational content and support in the face of telematic threats through both mass distribution channels and targeted individual actions. Examples include 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 prevision 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

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.