Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd. First Quarter 2019 Conference Call. We now have 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. At that time, instructions will be given as to the procedure to follow, if you would like to ask a question.

With us today is Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. César Ríos, Chief Financial Officer; Mr. Reynaldo Llosa, Chief Risk Officer; and Ms. Francesca Raffo, Head of Transformation at BCP.

Now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. César Ríos. Mr. Ríos, you may begin.

[César Ríos, Chief Financial Officer]

Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the first quarter of 2019. Before we review Credicorp's performance in the first quarter of 2019, I would like to highlight some important matters that characterize the scenario in which we have operated in the last few months as tailwinds for our businesses. First, mining investment has continued to expand at double-digit rates in 2019. This is attributable to projects such as Qullaveco and Mina Justa, among others.

Second, trade talks between the U.S. and China have improved since late 2018. Moreover, the price of copper stands at around $2.9 per pound, which represents an increase of 7.5% year-to-date. Third, local assets were favored by inflows to emerging markets during the first quarter of the year. It is important to remark that in Peru, non-resident sovereign bond holdings increased S/ 10.1 billion during the first quarter, a historical peak in quarterly flows.

A headwind for our businesses. First, our estimate suggests GDP growth was 2.5% year-over-year during the first quarter of the year. We highlight that a contraction of primary sectors and public investment lowered GDP growth by 0.4% points and 0.3% points, respectively.

Second, the global GDP growth forecast have deteriorated in the past months, as factors to watch the developments of La Bamba's mining unit should be monitored to determine potential impact on investment climate. Finally, the corruption probes process relative to the Lava Jato case continue to negatively affect economic activity by paralyzing certain investment projects and generated political uncertainty.

Let's move to the next page, please. Here I would like to discuss the evolution of economic environment and the local economics performance in the first quarter. In table number one, you can see that IMF has cut its global GDP growth forecast for 2019. This is the third consecutive cut that institution has made for 2019. In chart number 1, you can see that Peru's GDP growth has decelerated in the first quarter of the year as mentioned previously. We still hold our GDP growth forecasts for 2019 at 3.7%, but there is a downward risk. Furthermore, the second quarter of the year will also post moderate growth rates due to a base effect. Our GDP expanded 5.5% year-over-year in the second quarter of 2018. In chart number 2, you can see that local and international interest rates, which affect our businesses, has decreased in the first quarter of the year. Additionally, the Peruvian Central Bank reference rate has remained stable at 2.75% since March 2019.

Finally, in chart number 3, the orange line shows that total loans in the Peruvian banking sector expanded 8.8% year-over-year in the first quarter of 2019. Consumer loans expanded 13.9% year-over-year in the same period, which represent a three-year peak. In this context, quarter end loan balances at Credicorp grew 7.7% year-over-year in the same period.

Next page, please. Regarding our quarterly and year-over-year performance, there are important aspects of our lines of business that I would like to mention. In the case of universal bank, for BCP, the results of the first quarter of 2019 were highly marked by seasonality as the fourth quarter of every year is usually more dynamic in terms of loan growth and income generation and reduced higher expenses. This is why it is important to focus on the year-over-year evolution of the main indicators.

In the first quarter of 2019, average daily loan balances at BCP posted 7.5% growth year-over-year. Growth was seen across businesses segment in Retail Banking segment in particular. Expansion was mainly in local currency, which offers higher margins than foreign currency loss. The loan mix and the currency mix favored the evolution of NIM. Finally, interest rates on investments and available funds increased, which also favored NIM, leading to an increase of 33 basis points in the year-over-year comparison.

Moreover, the cost of risk dropped year-over-year due to an improvement in the risk quality of new vintages in Retail Banking and the positive evolution of the construction sector portfolio. Finally, the cost-to-income ratio improved year-over-year due to mainly to the increase in interest income and loss, which, in turn, was associated with loan expansion. This helped offset increase in operating expenses, which was driven mainly by the increase in salaries and employee benefits.

BCP Bolivia reported a good level of loan growth and a reduction in provisions. However, the funding costs increased year-over-year in line with higher interest expenses on deposits. With regard to microfinance, Mibanco posted a moderate level of loan growth in quarter-over-quarter and year-over-year trends as it finalized the adjustments of its credit policies and continue implementing improvements in its pricing strategy. The cost of risk improved quarter-over-quarter after a process was implemented to fine-tune admissions and collections models during 2018.

Regarding margins. Downward pressure due to competition was caused net interest margin to deteriorate this quarter as interest rates of new vintages continue to follow a downward trend. Mibanco continues to focus on clients with better risk profiles, and this also has impacted margins. After significantly improving its operating efficiency in 2017 and 2018, Mibanco has started building capabilities to sustain business growth, which led to the pace of growth of operating expenses to accelerate.

Mibanco has continued to increase its number of employees mainly over the last two quarters and is building new channels to leverage data analytics and digital solutions, which has increased administrative and general expenses. Regarding Encumbra, we will ratify the viability of the business model and as you can see in the chart, the business has posted a year-over-year increase in its profitability.

With regard to insurance and pension funds. The net earning premiums increased this quarter driven by the fact that Pacifico won two out of six tranches in the last tender process for the disability, survivorship and burial expenses policies for the private pension fund system, which cover the period from January 1, 2019, to December 31, 2020.

However, the underwriting result contracted quarter-over-quarter due to the increase in net claims in property and casualty business, mainly in the mandatory automobile line. On the other hand, the corporate health insurance and medical services that we manage in association with UnitedHealth continue to improve. The pension fund business also improved after recovering the profitability of its legal reserve. This business' efficiency ratio has improved due to the increase in its operating expenses and an increase of its fee income.

In investment banking and wealth management, in the first quarter of 2019, the mark-to-market of proprietary investments recovered from the low levels of 2018. Regarding the wealth management business, growth plans in Colombia are currently under evaluation. In February 2019, Credicorp acquired Ultraserfinco, which registers approximately $500 million in assets under management and market shares of 22% and 23% in the equity and fixed income markets respectively.

We are now working to catch up synergies as they emerge. Corporate finance activity posted its lower growth at the beginning of 2019 that posted in 2018. Finally, regarding the asset management business, growth in assets under management is low mainly in Peruvian mutual funds.

Next slide, please. In this chart, you can see the most significant figures of Credicorp's performance in the first quarter. Credicorp reported net income of S/ 1,101 million, which was 15% higher than the fourth quarter results and 6.1% higher than the figures posted in the first quarter of 2018. The results represented a return on average equity and average assets of 18.5% and 2.5% respectively.

The quarter-over-quarter increase was mainly due to contraction in operating expenses in line with the seasonality of first quarter and a lesser extent, to the drop in provision for credit losses. The aforementioned was partially offset by the reduction in net interest income and increasing income tax, which was in turn due to the increase in net income and in the dividends paid by subsidiaries to Credicorp.

The year-over-year increase in net income is attributable to an increase in net interest income in line with loan growth positive effects from net interest income and increasing core items on non-financial income. This was partially offset by the increase in operating expenses, mainly in salaries and employee benefits and to a lesser extent, by the implementation of IFRS 16, which increased depreciation and amortization expenses and decreases leasing expense. It is important to mention that effect of IFRS 16 implementation did not have effect on net income. Finally, the improvement in cost of risk is no worry.

Next page, please. As you can see in chart number one, interest-earning assets measured in quarter end balances remained stable quarter-over-quarter, but increased by 3% year-over-year. The quarter-over-quarter evolution is a result of cancellation of short-term loans in Wholesale Banking loans and seasonality in the rest of our business segment. The aforementioned was generated by the increase in total investments.

Regarding the year-over-year evolution of loans. First, there was a change in the composition of interest-earning assets to favor our most profitable assets loans, which increased their share in total interest-earning assets to 66.5% at the end of March 2019. Second, as shown in chart number two, average daily loan balances expanded 7.2% year-over-year.

Furthermore, in terms of the loan mix by business segment, loan expansion was mainly driven by Retail Banking and BCP Stand-alone. It is important to know that the loan expansion in Retail Banking was led by the Mortgage loan book followed by the credit card and SME-Pyme segments. Finally, loan growth was posted mainly local currency loans, which have higher margins than foreign currency loans.

Next page, please. In terms of funding first, as you can see in chart number one, Credicorp's funding structure shows an ongoing increase in deposit share of total funding, which is more evident in the year-over-year analysis. Second, in chart number 2, for deposits by type, you can see that the mix in deposits has also favored the funding structure even the low-cost deposit such as saving deposits increased in the quarter-over-quarter share of total funding. However, demand deposits decreased quarter-over-quarter, which led to market share to drop at then the end of February 2019.

In the year-over-year analysis, the increase in total deposits was mainly attributable to savings deposits, which grew 10.9%. Before analyzing the funding cost, it is important to mention that from January 1st, 2019, onwards, we adopted a new requirement of IFRS 16, which, among other things, led us to report an increase of 15 -- of S/ 14 million quarter-over-quarter in interest expense. In this context, as shown in chart number 3, Credicorp's funding costs, excluding the effect of IFRS 16, has remained relatively stable year-over-year.

Next page please. Net interest income fell 2.5% quarter-over-quarter, mainly due to the decrease in interest on loans, which was, in turn, related to the contraction in loan portfolio of BCP Stand-alone and to the lower interest rates of new vintages of Mibanco. The increase in interest expenses on deposits related mainly to the increase in time deposit also has a negative although less significant impact in net interest income.

Year-over-year, net interest income grew by 7.1%. This performance shows; first, positive effect of loan growth of interest income where all segments of BCP expanded their portfolio.

Second, the currency mix of the loan portfolio favored income generation as loan growth was mainly in local currency; third, the increase in the return on investments and available funds also favored income generation.

This was partially offset by the following; first, the increase in interest expenses from deposits in line with growth in deposit volume; second, the deterioration of net interest income at Mibanco as margins continue to face pressure from competition; finally, the implementation of IFRS 16 led to an increase in interest expenses of approximately S/ 14 million.

Next page please. With regards to risk quality, in chart number 1, you can see the quarter-over-quarter evolution of the total cost of risk, which decreased six basis points. This reduction was due to the decrease in the cost of risk from Mibanco, in line with the decrease in the provision requirement after the adjustments made to the admission policies and collections but at the second half of 2018 led to a recovery on risk quality.

In chart number 2, you can see the year-over-year evolution of the total cost of risk, which decreased seven basis points. The reduction was in line with the decrease in the cost of risk at BCP due to improvements in risk quality of both the Retail Banking loan book and the construction sector portfolio in Wholesale Banking.

Next page, please. On this page, you can see the evolution of delinquency and coverage ratios. The non-performing loan ratio registered an increase year-over-year in line with; first, the refinanced loans that were granted to some clients in different sectors in Wholesale Banking and BCP Stand-alone; second, the impact of refinanced loans in second quarter 2018 and third quarter 2018 that were granted after the execution of performance bonds from construction sector clients and Corporate Banking at BCP Stand-alone; and third, and to a lesser extent, the increase in the internal overview loan book of SME-Business segment at BCP Stand-alone and the evolution of Mibanco as previously explained.

The new refinanced loan book has a coverage ratio after haircuts of around 180% with collaterals such as warrants of commodities and commercial mortgages. Additionally, the refinanced portfolio for the construction sector is perfectly provisioned, and the total exposure continue to decrease.

Next page, please. Credicorp's net interest margin has been relatively stable in the recent periods, reaching a level of 5.37% in the first quarter of 2019, which represents an improvement of 27 basis points year-over-year. The cost of risk also improved year-over-year, and as a result, Credicorp's risk-adjusted net interest margin increased 19 basis points and reached a level of 4.43%.

Next page, please. On this page, we will discuss the evolution of nonfinancial income. As you can see in chart number 1, non-financial income expanded 5.8% year-over-year due to the performance of its core fee income and net gain in foreign exchange transactions as the transactional activity in the banking business increased mainly at BCP Stand-alone.

In chart number 2, the core items of nonfinancial income expanded 5.4% year-over-year as we expected the pace of growth of this core item has decreased over the year due to the regulatory changes and the fee changes to retail clients, higher competition in the local market and our transaction strategy to encourage clients to migrate to digital channels.

Next page, please. In the year-over-year analysis of operating efficiency, which eliminate seasonality, the cost-to-income ratio improved in line with the acceleration in the pace of growth of operating income.

In chart number 1, you can see that the growth in operating income was mainly driven by decrease in the net interest in BCP Stand-alone, and to a lesser extent, to the growth of net earning premiums in the insurance space.

All the aforementioned was partially offset by an expansion in operating expenses, which was due to an increase in salaries and employee benefits and in depreciation and amortization.

It is important to mention that implementation of IFRS 16 this quarter, which requires that operating leases be treated as financial leases, led to an increase in reported interest expenses and in depreciation and amortization.

However, these increases in expenses were offset by a decrease in the leasing item, which is included in administrative, general and tax expense. The effect in the bottom line is negligible.

In chart number 2, you can see the contribution of each subsidiary to the valuation in the efficiency ratio. First, the improvement in the efficiency of Pacifico was mainly due to growth in net earning premiums, 64% of which was associated with the life insurance business. This was driven by a drop in the acquisition costs for the life insurance business. However, it is important to mention that decrease in net earning premiums was offset by the increase in net claims, which impacted net income.

In the case of BCP Stand-alone, the improvement of operating efficiency was mainly attributable to the increase in interest income and loans, in line with the year-over-year expansion in average daily balances also increase in the return on investment and available funds all for favor income generation. This offset the increase in salaries and employee benefits. The improvement in efficiency in Pacifico, at BCP was partially offset by deterioration and the operating efficiency of Mibanco. In the next slide, we will explain Mibanco's efficiency in more detail.

Next slide, please. The net interest margin at Mibanco deteriorated by 124 basis points. This was driven mainly by the decrease in interest income and loans as interest rate for new vintages continue to face downward pressure due to competition. To a lesser extent, the increase in interest expenses from deposits, which was associated with an increase in retail funding, also pressured margins.

The increase in operating expenses was mainly attributable to the following drivers. First, the increase in salaries and employee benefits, which is in line with the long-term strategy to train the new sales force to cover growth in the client base. Second, the growth of administrative, general and tax expenses due to three factors, the expenses related to the relocation to new headquarter, expenses generated by digital transformation efforts and leases expenses for new branches. This was partially offset by growth in fee income, which was partially attributable to a methodology change under which fees related to insurance and loans, which were previously accrued over 12 months have now registered at the moment the policy is sold.

Now I would like to hand over this call to Francesca Raffo, Head of Transformation at BCP, who will talk about the strategic initiative transformation that we are executing at BCP.

[Francesca Raffo, Head of Central Transformation]

Thank you, César. Good morning. I would like to go to BCP's Transformation strategies slide. Our Transformation began in 2014 when we realized we ranked fourth among the four major banks in Peru in terms of customer experience. That same year, we celebrated our 125th anniversary and started to think about what we needed to do to remain leaders for another 125 years. Those were the keys for what were then two major initiatives. The digital transformation looking to provide a distinctive customer experience through digital solution, and a cultural transformation aiming to define our purpose, our aspirations and the organizational changes required to fulfill this.

We initially progressed in each of them independently, defining our purpose, aspirations, cultural principles on the one hand and creating our innovation center and launching our first digital solution from the other. Early 2017, we merged both initiatives into one big transformation, as we realized we needed both to operate in sync to live a cultural -- to live our cultural principles and to provide digital solutions to our customers in order to fulfill our purpose, transform plans into reality.

In fact, as our digital transformation successfully progressed with great results with on-boarding and sales, we realized we needed to incorporate additional work streams into our transformation program, such as customer experience journeys, data, IT and risk. In 2018, we designed and communicated to the whole organization our 2021 north stars that we explained in detail in our next slide.

We established our two north stars for 2021 as being the number one bank in customer experience in Peru and having the best efficiency ratio in the region. To describe how they look like in more complete terms, we have set six key results. We have challenged ourselves also significantly to define them, and we know we might not achieve all of them. The purpose is to communicate the size of our ambition and to encourage the organization to move towards them. These key results are number one customer satisfaction, a cost-income ratio around mid-30s, duplicate cross-sell ratio, pre-approved 50% of the economically active population, be number one in customer experience and serve 70% of our sales digitally and a non-disclosed net income aspirations that will result from these key results.

The next slide, we see the program's scope. As I mentioned before, our Transformation program is a journey. And today, we describe it as a journey to planet XF, experience and efficiency. We are all on board on a spaceship that today has 10 engines, 10 work fronts, which I will briefly comment.

Digital journey. The work stream is focused today on improving customer experience through digital innovation. The number of Yape users, our peer-to-peer payments app, has grown significantly to more than 800,000 users as of today. Yape is a key piece in our digital strategy, and we are focused on increasing its use. It helps build customer loyalty, reduce the use of cash, increase deposits and allow us to obtain more customer data to serve them better. We also keep building new MVPs through digital innovation center to test functionalities and create business models.

Data analytics. This work front has the challenge to enable a data-driven organization. We have secured the first layer of three of our new data architecture, the data lake. We also established a team of data scientists to capture value using data analytics to solve common business problems.

Culture and leadership, we are adjusting our practices to manage human resources, developing new capabilities needed for our transformation and working to become the number one employer in terms of employee experience in Peru.

Digital operations, we are improving front and back offices processes with the automation tools to deliver faster, less risky and more efficient processes for increased customer satisfaction and cost reduction.

Digital risk, the team is focused on transforming the risk practice within the bank, so that we are more prepared to manage risk in a digital world.

Governance, we are gradually deploying a more agile and autonomous project and performance management system.

Agile @ scale, we continue to work on implementing agile methodologies across several units, seeking efficiency while improving speed and employee experience.

And now, I will go into a bit more detail about IT distribution model and customer experience.

Next slide, IT. BCP Standalone division is executing its 2021 strategies focused on three main areas. The first one is people, both employees and vendors, people-ready. It's about building a strong technical talent pool based on specialization and technical proficiency and enabling agility across IT to obtain higher frequency and value on each delivery.

The second one is technology to guarantee a wow! customer experience. We're having best-in-class architecture and reliable infrastructure is key. The last one is efficiency. Here, the focus is on prioritizing IT resources allocated based on value and tracking the progress to ensure the value is achieved.

Due to our efficiency operating model, the ratio of IT expenses to revenues decreased from 9.4% in 2011 to 8.1% in 2016. And it has continued to decrease with our transformation, reaching 7.8% in 2018. These expenses totaled S/ 702 million in 2016, S/ 705.2 million in 2017 and S/ 718.5 million in 2018.

Moreover, IT annual investments for both our day-to-day operations and our Transformation initiatives. They totaled S/ 227 million in 2016, S/ 250.5 million in 2017 and S/ 331.2 million in 2018. Although we have continue to invest in our digital transformation, continuous control and optimization efforts have allowed us to maintain expenses levels that grow at a compound annual rate of 1.2 from 2018 to -- from 2016 to 2018. We estimate our IT expenses to invest -- and investments to grow 7% in 2019 compared to 2018.

The next slide, transforming the distribution model. In terms of transforming our distribution model, our purpose is to offer an astonishing experience at the right place and time in an efficient way. We plan to do so by addressing three themes aligned to our overall excess strategy.

The first one is to provide a multi-channel experience. Here, we are looking into optimizing our branches in terms of footprint, size, format and role as well as migrating customer interactions to alternative remote and digital channels.

The second one is about incorporating the use of data, data analytics and digital marketing, as part of our commercial capability, so that we reach customers and make offerings according to their preferences. The last one is about developing digital capabilities by offering digital functionality, education -- educating our customers and aligning our performance management model to a digital world.

In terms of branch optimization, in 2018, we reduced the number of branches from 432 to 407 and the square meters in branches from 181,000 to 173,000 square meters. We do not set targets regarding our physical footprint. We review our performance every three months, evaluating our multi-channel experience, commercial and digital results, and we adjust accordingly to achieve satisfaction and efficiency targets.

Next slide, customer satisfaction. We remain as the market leader in customer satisfaction for all segments in our wholesale business market, corporate and institutional segments. And now, we have become the market leader in all retail segments as well.

We moved from third place in customer satisfaction in our Consumer segment, increasing from 23% in 2017 to 47% in the first quarter of 2019. This is a result of following a structured methodology to review our customer journeys, understand their pain points and implement changes to improve those journeys.

We are committed and continue our Transformation journey. We have seen relevant results in customer experiences, and we are now concentrating on gaining traction on digital sales and emphasizing initiatives that generate cost savings and new income.

Now I will turn it over to César.

[César Ríos, Chief Financial Officer]

Thank you, Francesca. On this page, you can see our guidance for full year 2019, which we presented in our previous conference call. In terms of macroeconomic indicators, we have lowered our estimate for the BCRP reference rate for the year end 2019 from 3.25% to 2.75% its current level. This reduction was made in a context where economic activity continues to grow below its potential while inflation remains under control and within the BCRP target range.

With these comments, I would like to open the Q&A, please.

[Operator]

Thank you, sir. [Operator Instructions] We'll take our first question from Jorg Friedemann with Citibank.

[Jorg Friedemann, Citibank]

Thank you very much for the opportunity. So my first question is related to asset quality and coverage. I understand that you have observed an improvement in asset quality for the Mibanco portfolio as well as other retail products. But SME Business in large corporates continue volatile with coverage achieving the lowest level ever, below nowadays of 110%. So how do you see the progression of asset quality going forward? And how comfortable you are with coverage, you know, at this point? I know that you do not manage coverage. This is a resultespecially taken into consideration IFRS 9. But just wondering, if you think that this could come down to -- at some point something around 100% or even below? Thank you.

[César Ríos, Chief Financial Officer]

Well, the quality of our corporate loans are specifically stable. We don't foresee any important changes in the quality of our assets in that portfolio. The coverage, as you mentioned, basically a result of our strict provisioning, and maybe you can see some deterioration in the coverage we see actually. However, we don't see it below 100%. We would see zealous stability in the future months and future quarters and we don't foresee having it below 100%.

[Jorg Friedemann, Citibank]

Perfect. And a follow-up here. Taking into consideration that expectation, would it be reasonable to assume that cost of risk would continue to progress towards the upper range of your guidance? Right now, you are slightly ahead the midpoint of the guidance. But I know taking that into consideration that coverage should not come down substantially from the point it is. It would make sense to converge to the upper range of the cost of risk guidance?

[César Ríos, Chief Financial Officer]

Well, we see it within the guidance range. I mean stable at 1.4 probably in the next quarter, and you have to remember that our corporate portfolio basically it's very well covered with that collateral, and basically we've got real estate behind that. So I mean that -- even 100% coverage considering the amount of collateral behind those loans, it's basically adequate in terms of coverage expected loss. So I mean we don't see the need to have additional provisions for that specific portfolio. Ferrari?

[Gianfranco Ferrari, Deputy Chief Executive Officer]

Yes. This is Gianfranco Ferrari. Complementing on what Reynaldo just said, you have to bear in mind that we manage our portfolio based on the risk-adjusted NIM rather than cost of risk by itself. And as was stated in one of the slides, the cost of risk -- sorry, the risk-adjusted NIM is improving, and we foresee a slight improvement in the upcoming months within the range we provided.

[Jorg Friedemann, Citibank]

That's perfect. Thank you very much for the clarification. And my second question would come related to loan growth. You just mentioned that the activity has been a bit slower than expected, below potential. You even reduced the estimates for the reference rate you're in. So looking into the loan growth so far, not only you are well below the guidance for the year, but you are still losing market share. How do you reconcile the improvements that you mentioned in your presentation in terms of customer satisfaction? And I know this is lower growth versus the market. And how do you see this evolving throughout the year for you to be able to reach your guidance? Thank you very much.

[César Ríos, Chief Financial Officer]

Maybe it's a twofold answer. If you go into the retail portfolio, retail portfolio is growing at a stable pace. And in general terms, we're not losing market share. And that's very related to the customer satisfaction impact Francesca mentioned before.

Regarding the wholesale portfolio, specifically the corporate portfolio, the first quarter has been poor in terms of growth basically because by the end of last quarter, there were -- the growth was very high, and there has been a lot of activity in both local and international capital markets by the major corporate. That has impacted our balance sheet. We don't foresee that happening in the remaining quarters of the year. And we are still -- we still believe that we will be within the guidance by year-end.

[Jorg Friedemann, Citibank]

Perfect. But just a brief follow-up, for that to happen, you’d have to be able to likely even surpass market growth on a sequential basis for the next three quarters. So given the effect on the wholesale and the continue improvement in customer satisfaction, you believe that this is feasible, correct?

[César Ríos, Chief Financial Officer]

That's correct.

[Jorg Friedemann, Citibank]

Perfect. Thank you very much.

[Operator]

We'll take our next question from Domingos Falavina with JPMorgan.

[Domingos Falavina, JPMorgan]

Thank you, everyone for the opportunity. My question is just with regards to the sale of a loan book. You mentioned, you had a sale of nonperforming loan book, but you didn't mention the size. If you could just provide some more color. If you did, I'm sorry I missed it, but how much did you sell in nonperforming loan? And how did that impact your NPL ratio?

[César Ríos, Chief Financial Officer]

The sale of non-performing loans are written out from our book. I mean, those are basically loans that are fully provisioned, and that has a minor impact on our ratios as well.

[Domingos Falavina, JPMorgan]

Sorry. But like last year, I think you mentioned S/ 177 million in sales. This year, I didn't get the number.

[César Ríos, Chief Financial Officer]

No. I didn't mention it. I would say it's not significant in terms of the impact on the overall ratios.

[Domingos Falavina, JPMorgan]

Okay. And if I may ask a second one, on the gains that you mentioned also on mark-to-market of securities that helped net interest income, how large were those?

[César Ríos, Chief Financial Officer]

Excuse me. Could you repeat the question?

[Domingos Falavina, JPMorgan]

Yeah. You had some gains on the sale in mark-to-market of securities, which helped your line net interest income. So how relevant was that like a one-off? How big?

[Alvaro Correa, Deputy Chief Executive Officer]

I think what's in line with the general gains are the forward markets registered in the first quarter. Please let me -- allow me to review the figures, but I think it's not that material. On securities, in the page 12, we have S/ 23.6 million year-over-year as an explanation of the change year-over-year.

[Domingos Falavina, JPMorgan]

Okay, perfect. A delta of 23. Thank you very much.

[Operator]

[Operator Instructions] Our next question comes from Ernesto Gabilondo with Bank of America.

[Ernesto Gabilondo, Bank of America]

Hi, good morning. And thanks for taking questions. My question is a follow-up on loan growth and competition. Excluding the mining sector and the impact on Las Bambas, the underlying growth continues to be strong in Peru, but the loan portfolio continues to be at single-digit growth. So is there a level of GDP where we can start to think about loans growing slightly above double digit? Do you think this is the reason? Or do you think the tough competition environment is making loan growth to remain at these levels? Can you elaborate on who are the main competitors that are offering lower interest rates at Mibanco and the Retail Banking? And if you continue to see strong competition in wholesale loans? Thank you.

[Gianfranco Ferrari, Deputy Chief Executive Officer]

Let me start. This is Gianfranco Ferrari. Let me start by the two last questions. Regarding the Mibanco competitors, even though Mibanco is the largest player in the SME business, that's in terms of the whole country. However, if you go -- if you drill down the competition, very fragmented, and we've seen each region, there's strong regional competitors within the region. (Technical Difficulty) Sorry. I believe the line went out. So I was telling you that at the Mibanco, at the SME-Business, there were specific issues. Regional competitors are being more aggressive, and they have a relevant position within the region. To us, we had an issue in terms of our pricing strategy at the current level, which we already resolved.

On the wholesale business, specifically on corporate, competition is very harsh. It's a highly concentrated market. We're basically three performers and various banks competing there. But again, the competition and spreads are tightening. That's regarding your last two questions. Regarding your first question, we don't foresee double digits or growth for the whole portfolio or the whole loan book in Peru. The correlation between the loan growth and GDP growth has been in the past higher than today. And obviously, as the banking penetration increases, the elasticity should go down.

[Ernesto Gabilondo, Bank of America]

Thank you.

[César Ríos, Chief Financial Officer]

I need to complement that. The correlation that we found is usually 1.4, 1.5 nominal GDP in this range.

[Ernesto Gabilondo, Bank of America]

Okay. Perfect. Thank you. Just a second question related to the M&A activity. We have seen small acquisitions happening in the Latin American regions, such as Ultraserfinco in Colombia and Krealo in Chile. So I just want to hear your thoughts on why are you expanding into new regions and increasing your dividend payout ratio? So are you finding difficulties to maintain the same growth in Peru?

[Alvaro Correa, Deputy Chief Executive Officer]

Yes. This is Alvaro Correa. A general comment would be that it is difficult, as you mentioned, to find additional targets in Peru. And we are -- we have very stringent limits by the regulator, and I don't know if you know but yesterday, it was approved by law that will prevent from openly go after additional targets on the financial sector and any sector as a matter of fact. So there are limits in Peru. And we are very disciplined on what to do elsewhere as you mentioned two recent acquisitions. They are small, but they allow us to get into markets and learn about those markets and see if there are other opportunities to grow there.

[Ernesto Gabilondo, Bank of America]

Perfect, thank you very much.

[Operator]

We'll take our next question from Andres Soto with Santander.

[Andres Soto, Santander]

Good morning. My question is related to your digital -- to your investment in digital transformation. Your guidance implies a deterioration in efficiency throughout this year versus 1Q. In the last call, you explained some of the traditional costs is related to digital transformation. I'm wondering how much flexibility you have in this planned expenditure, specifically if NII happens you remain weak this year, will you prioritize your ROE target or your investment in digital transformation? Thank you.

[Gianfranco Ferrari, Deputy Chief Executive Officer]

So before giving back the -- a fuller answer to Francesca, I would like to highlight that we have a clear seasonality in our expenses. So the guidance for the year doesn't have any strict correlation with the first quarter results.

[César Ríos, Chief Financial Officer]

Regarding your last question, which is relevant from a strategic standpoint, we will always skew our long term rather than short term, so digital over ROE -- over short term-ROE for sure.

[Andres Soto, Santander]

That’s very clear. Thank you very much.

[Operator]

Our next question comes from Jason Mollin with Scotiabank.

[Jason Mollin, Scotiabank]

Hi. Thank you. Looking at your current guidance, you now see as you mentioned the outlook for a lower BCRP reference rate now at 2.75% year-end versus the 3.25% earlier in the year. Can you update us on the sensitivity of Credicorp's net interest margin to a 50 basis point change in the policy rate? And more specifically, if you can comment on the sensitivity of NIM at BCP and at Mibanco. Thank you.

[César Ríos, Chief Financial Officer]

BCP is more sensible to variations in the marginal rate due to the strong low-cost deposit base. But in the short-term, the effect is very moderate because we realize this profitability to the repricing of the loans. So, for this year, the impact of lowering 50 basis points in the reference rate is minor. But if the trend continues, we will be potentially more significant in the 2020.

In the case of Mibanco, due to the funding structure of Mibanco, actually lower reference rate does impact negatively because they fund probably 70% of the portfolio at market rates and the pass-through to the loan book is delayed over the time. In average, at Credicorp, the net effect is negative but to have a lower reference rate but minor during the year due to the repricing process throughout the year.

[Jason Mollin, Scotiabank]

Thank you. Maybe a second question related to this and related to some of the questions on economic growth, and you spoke about the headwinds for GDP growth in Peru and a downside bias to the current economic growth forecast. Does this mean that we should think about management seeing a downside risk for earnings in your guidance for this year at this point?

[César Ríos, Chief Financial Officer]

At this point, we are maintaining the guidance as stated in page 21 adjusting only the reference rate as we mentioned previously.

[Jason Mollin, Scotiabank]

Okay. So, if -- I mean, right now, the GDP growth is still at your -- is still based -- your guidance is based on this GDP growth of 3.7%?

[César Ríos, Chief Financial Officer]

Yes. Probably one issue to consider is that when we established the business plans last year, we were considering a GDP growth of 3.7% while other significant players in the market and the Central Bank were establishing a reference -- a GDP growth of around 4%. So, we have some cushion there.

[Jason Mollin, Scotiabank]

That's helpful. Thank you.

[Operator]

We'll take our next question from Alonso García with Credit Suisse.

[Alonso García, Credit Suisse]

Good morning. Thank you for taking my question. So last year, beside the usual seasonality of expenses in the last part of the year, the expenses related to Transformation strategy were also very heavily skewed towards 4Q 2018.

So, could you please share with us how much of expenses relate to that strategy were already executed in 1Q 2019? And how should we expect the rest of expenses to be distributed during the remainder of the year? Thank you.

[César Ríos, Chief Financial Officer]

Usually, we have, as we mentioned before, a strong seasonality. And as you correctly stated, the transformation has even a higher seasonality due to the way that the consultancy, billing, and IT expenses are billed to the end of the year.

[Alonso García, Credit Suisse]

But do you have a sense on how much you have invested already this year? And how should we expect the remainder to be distributed during the other three quarters?

[Francesca Raffo, Head of Central Transformation]

In terms of how much we invested, regarding César's comment on seasonality, we were around -- 15% of our annual budget has already been spent, especially in IT. And we have not changed our plans yet in terms of expenditure. We plan to achieve our targets and move on developing our capability.

[César Ríos, Chief Financial Officer]

As a whole, considering expenses and investment in transformation, the total disbursement this year should be around 60% higher than the previous year, not all the impact in P&L due to the composition of investments. 60% in total, cash disbursement with a significant proportion of investments.

[Alonso García, Credit Suisse]

Okay, perfect. Thank you. And finally, regarding some -- I just wanted to check any regulation for liquidity in Peru in terms of LCR and then net sales funding ratio? I mean what is in place currently in the country? Or what is the timeline for those regulations to apply? And how comfortable you feel with your compliance of these metrics? Thanks.

[César Ríos, Chief Financial Officer]

Could you repeat, please? I couldn't really understand.

[Alonso García, Credit Suisse]

Sure. Regarding the liquidity regulation in Peru, LCR net stable funding ratio, what is in place currently in Peru? Or what is the time line for these regulations to be implemented? And how comfortable you feel with these ratios currently? Thank you.

[Reynaldo Llosa, Chief Risk Officer]

This is Reynaldo Llosa. We manage our liquidity with internal – our internal models, which are more rigid and strict than regulatory ratios. And as of today, I mean, we are fully compliant with 100% regulatory regulations. I would see no impact in terms of how we manage liquidity today in our bank.

[Alonso García, Credit Suisse]

Perfect. Thank you.

[César Ríos, Chief Financial Officer]

In our internal methodology includes systematic analysis in classic ratios, well above the regulatory.

[Alonso García, Credit Suisse]

Perfect. Thank you very much.

[Operator]

[Operator Instructions] We'll take our next question from Miguel Tola with CAPIA.

[Miguel Tola, CAPIA]

Good morning, everyone. And thanks for taking my question. My question is really – well, I have two questions related to AFP Prima. The first one counts for the asset-based fees based on the litigation won by Integra. Are you going to change the mix that is right now 0.18 by the flow and 1.25 for the balance? And just to get – on the counting of the assets under management model? And the second one, counts for the other income and expenses figures in the income statement, about the increase of 290%. Can you tell us a little bit more about that income? Thank you.

[Reynaldo Llosa, Chief Risk Officer]

Regarding to the first question, I think forward-looking business strategies, I'll take it internally. We don't – we wouldn't disclose this to publically. The second question other income 290% growth. The second question, please?

[Miguel Tola, CAPIA]

Oh, the second question counts for the other income and expenses increase from year-over-year. That's about like 290%.

[César Ríos, Chief Financial Officer]

Yeah. This is related to the profitability of the reserves that AFP Prima has as a percentage of the total portfolio managed. It's around 0.8%. The first quarter was a profitable quarter, and we registered in the books the net effect of that.

[Miguel Tola, CAPIA]

Okay.

[César Ríos, Chief Financial Officer]

The fourth quarter of 2018 was not favorable in terms of market returns. For this reason, we registered a loss of S/ 6 million in this account.

[Miguel Tola, CAPIA]

Okay. Thanks.

[Operator]

There are no additional questions at this time. I would now like to turn the conference back to Mr. Alvaro Correa, Deputy CEO, for closing remarks.

[Alvaro Correa, Deputy Chief Executive Officer]

Excuse me, I see Carlos Gomez – have to make a question here.

[Operator]

We'll now take our next question from Carlos Gomez with Credicorp.

[Carlos Gomez, Credicorp]

Thank you very much for taking my question at last minute. I just wanted to ask about the Credit Card business. It's growing much faster than the system as a whole. Should we be concerned about the rate of growth? Do you feel that the industry is healthy? There has been some problems in this industry in the past. Do you think it is – given they are giving the cards properly. Today or are you concern anyway? And the same thing I would ask about the Mortgage business? Thank you.

[César Ríos, Chief Financial Officer]

Yeah. Sure. The Credit Card business, the level of penetration of the Credit Card business in Peru is we do believe is still – it has a lot of potential of upside potential. We do – we've been – with our strategies based on risk-adjusted returns, as Mr. Reynaldo Llosa was mentioning before, our businesses have been very good over the past quarters. We are within risk appetite, and that's the reason why we've been more aggressive recently.

On top of that, we've started maybe three months ago to sell credit cards through the digital channels. As of today, over 10% of the total credit cards are sold through digital channels. Therefore, we see – and that has a positive impact not only on customer satisfaction but also in distribution costs. And that enables us to start different segments of the market.

[Gianfranco Ferrari, Deputy Chief Executive Officer]

What was the question about mortgages?

[Carlos Gomez, Credicorp]

Certainly. Asset quality.

[Gianfranco Ferrari, Deputy Chief Executive Officer]

Yeah. Basically, the reason is the same reason. At one point in time – so the bulk of the Mortgage business is related to housing, financing to real estate financing. At some point in time, due to the construction problems that we have as a country maybe a couple of years ago, we were much more conservative at that point in time. What we've seen over the last few quarters is that the market has picked up again. And we are financing much more of those projects.

Therefore, our portfolio has been growing, and as a matter of fact, we've gained -- even though we're the leaders by far in that market. We've gained market share over the last year. And we expected something similar for 2019.

[Carlos Gomez, Credicorp]

Thank you very much.

[Operator]

Thank you. There are no additional questions at this time. I would now like to turn the conference back to Mr. Alvaro Correa, Deputy CEO, for closing remarks.

[Alvaro Correa, Deputy Chief Executive Officer]

Thank you. Let me please do a summary of what we consider the most relevant messages for our shareholders. We continue to be positive about growth. Although there is correlation with GDP growth as has been mentioned. And that's because we expect favorable trends in private investment going forward, especially on the mining sector.

But we also foresee a slow activity on the public side as long as the political environment continues to be surrounded by corruption probes. And -- but we expect 2019 to be a decisive year for that last matter.

With regards to, the four business units, a general comment is that we have seen stable growth in the top line for all units and segments on a year-to-year basis. And improvement in efficiency ratios with the exception of Mibanco, which is as has been mentioned, investing in building capabilities for future growth.

We've also seen improvement, overall, in the cost of risk of the different subsidiaries. All in all, we're happy to be running a very healthy business here. In universal banking, at BCP, as we mentioned, the quarter was marked by a drop in -- on corporate loans. But that's due to year-end seasonality basically.

But there's a very positive trend for all segments on a longer-term perspective. And we've seen, as we mentioned, improvement in portfolio quality and cost of risk, both in the retail business and in the wholesale business.

At BCP Bolivia, there's a positive evolution as well on loan growth. The cost of risk is going down. And -- but we see some pressures on the cost of funding. In micro finance, at Mibanco, we will continue to see loan growth, but we will also continue to see margins under pressure, due to increasing competition.

The good news in Mibanco is that the portfolio quality is on the right track. Management took action and set new standards for loan acquisition and collection practices.

One thing that is worth mentioning is Encumbra. Encumbra, as you know, we -- a few years ago, we decided to go Greenfield in Colombia. We have learned a lot about the market. We have fine-tuned the model to a point where we feel comfortable with pursuing a faster growth path in that strategic market.

In the insurance and pension business unit, at Pacifico, we expect further growth, especially on the life insurance lines. We're happy with the evolution of the medical services performance, and we have also seen a positive evolution on the car insurance bottom-line.

But we have to focus on the SOAT and medical assistance business lines. The trend ratio has been not at the levels where we expected. Overall, the insurance strategy is geared towards capturing the untapped mass market.

And there, I want to highlight the increasing focus of Credicorp in bank assurance both at the BCP and Mibanco, where we have set aggressive targets in the years to come. At Prima, we definitely expect additional regulatory changes at the pension system going forward.

There are several initiatives on the table that will most likely mean additional pressure on fees. And therefore, we have to prepare the company for different levels of income. And that's focusing on efficiency. In investment banking and wealth management, we are at the final approval phase for the acquisition of Ultraserfinco.

So we have to focus on that and on the integration of that business with what we already have in Colombia. And for the regional model, we were in the process of redefining the operational platform and operational model to bring standardization and efficiencies.

And a final comment would be, and as Francesca highlighted in the case of BCP, all business lines are at different stages on the path for transformation, agility and overall changes in mindset, something that we truly believe will prepare us for the challenges of a more competitive world.

And with that, I would like to close this conference call. And want to thank you very much for being with us today. Thank you. Goodbye.