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Credicorp Ltd
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Good morning, everyone. I would like to welcome all of you to Credicorp Ltd. First Quarter 2020 Conference Call. We now have all of our speakers in conference. [Operator Instructions]
With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Reynaldo Llosa, Chief Risk Officer; and Mr. Cesar Rios, Chief Financial Officer.
Now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.
Thank you. Good morning, and welcome to Credicorp's Conference Call on our Earnings Results for the First Quarter of 2020. Thank you for attending today. I hope you and your families are healthy and faring well in the challenging environment generated by COVID-19.
We are experiencing an unprecedented phenomenon. Despite these trying times, we could not be more thankful for and impressed with the drive, engagement and collaboration of our teams. Employees at all of our operating units have rolled up their sleeves to respond as needed to the pandemic. And as an organization, we are protecting and supporting our employees, clients and communities.
Our top priority has been our employees. We are focused on guaranteeing that our thousands of employees remain healthy and continue to work in optimum conditions. Our more than 19,000 frontline employees have received protective equipment and are working in secure environments. Additionally, incentives and performance indicators for employees and branches currently prioritize client service over sales. 95% of our employees at the office level are working remotely from home. Finally, we have implemented programs for employees to ensure the physical, emotional and financial stability of the Credicorp community.
As a customer-centric organization, we are aware that many of our clients are experiencing significant duress. More than 1.5 million of them are benefiting from initiatives to alleviate financial pressure across Peru, Colombia and Bolivia. Currently, we are offering a number of measures through our operating units, including debt and insurance premium reprogramming, cost-free cash management services, COVID-19 health and life insurance coverage and partial reimbursements of premiums on car insurance.
Moreover, clients are taking advantage of our digital channels. We have managed the continuity of each of our financial services and health businesses, which are basic services that shore up the economies where we operate. We have taken preventing physical and cybersecurity measures and focused on capacity management to ensure operating continuity across channels. At the same time, we are actively managing liquidity and solvency to maintain our solid financial condition in each LBO (sic) [ LoB ].
Finally, having faced several crises in our 130 years history, we have demonstrated and will continue to show clear commitment to supporting our communities. During this crisis, 160,000 impoverished families in Peru will benefit from BCP's donation drive, "Yo me sumo", which collected PEN 126 million; PEN 100 million from BCP, PEN 10 million from Mibanco and PEN 16 million from other companies and thousands of individuals. Moreover, frontline national emergency workers, including health professionals, police and the Peruvian Armed Forces now have life insurance policies, thanks to a donation of PEN 5 million from Pacifico.
Finally, we have been working in close coordination with the health and finance ministers, giving support during crisis response to design measures for subsequent execution through our health and banking network. This includes providing health services to public sector patients through our health network and distributing government cash payments to our banking network, all of which benefit thousands of families.
Next slide, please. In this challenging context, our clients have been able to rely on the strong relationships we have built and have been benefiting from our digital networks. During the lockdown period, volumes, both in loans and deposits, have materially increased. In the second half of March, corporate and large enterprises, as defined by the superintendency, increased their short-term funding needs in this segment. BCP's loan growth, which was situated at 15.7%, outpaced the expansion of 12.3% posted by multiple banking. This dynamic boosted BCP's total loan portfolio growth to 11.9% compared to 9.6% of the multiple banking level.
Part of the fresh liquidity obtained by the aforementioned segment has been maintained at the bank as demand deposits. And from February to April, our wholesale deposits increased by almost PEN 3.6 billion. 80% of these funds were held in demand deposits. Our retail client deposits increased almost PEN 3.6 billion, where growth to approximately PEN 4 billion in savings deposit was offset by a decrease in other types of deposits. This context has also been an opportunity for our clients to benefit from our digital channels. Yape welcomed 580,000 new users from January to April this year. And as of April, the monthly amount transacted through this app has grown fourfold in 1 year. Moreover, our BCP digital channels have registered a material gain in their share of our distribution network due to an uptick in use during lockdown.
As of the end of April, our digital sales of individual savings accounts increased from representing 2% of these product sales to reflecting 27% of the same in just 1 year.
Additionally, the digital channel's share of our retail transaction was situated at 70% -- 73% versus 48% last year. Finally, the digital channel's share of collections and service payments in Wholesale Banking was situated at 60% this year compared to 32% last year.
Next slide, please. Peru's government has stepped up to face this crisis. President Vizcarra took quick and stringent measures to control COVID-19 contagion through a country-wide lockdown. The lockdown duration is data-dependent. As of today, it's expected to last 56 days until May 10. To its credit, Peru has seen some of the strongest macroeconomic fundamentals of all emerging markets and has maintained a stable credit rating and outlook over the past few years.
The government has instituted an ample package of measures to mitigate and stimulate the economy for the equivalent of approximately 16% of GDP. The ability to implement measures of this magnitude is directly correlated with the prudent macroeconomic policies that has been carried out for decades. The economic measures taken have primarily focused on containing immediate economic damage due to loss of income at the individual and company levels.
We believe that these measures are moving in the right direction as this provide -- as they provide support for companies and households that have suffered extreme duress. In particular, the government has targeted the business sector to 2 government-backed programs: Reactiva Peru, a liquidity program to provide PEN 30 billion in funding to small and medium-sized companies; and the enterprise support fund known as FAE by its Spanish initials to provide up to PEN 4 billion in financing for small and microfirms. We will discuss this briefly in the next slide.
An additional measure of note is a loan that targets access to private savings and allow patient affiliates to withdraw up to 25% of the pension funds up to a total of PEN 12,900 by deducting the withdrawal of PEN 2,000 previously approved by the government.
Finally, the Central Bank has lowered its reference rate 200 basis points to 0.25%, a historic minimum, and has provided liquidity for 6 and 12 months to ramp operations for a total of almost PEN 17 billion since the beginning of March. Central Bank has also implemented measures to mitigate the exchange rate volatility. Additionally, the superintendency has authorized credit extensions for up to 6 months with no effect on client credit ratings.
Next slide, please. The COVID-19 contagion will lead the world to experience the greatest economic hardship seen since the Great Depression. In Peru, economic indicators such as electricity demand and public investment registered significant declines at the end of March and April. Last Sunday, the government declared that it's rolling up a stage-based economic reopening in 4 phases from May to August. 27 economic activities in 4 economic sectors will restart their operations in May as part of the first stage.
Nonetheless, there is still considerable uncertainty regarding the magnitude of the GDP contraction that will be seen in 2020. Our estimate suggests that 2020 GDP may contract between 7% and 13%, depending on the degree of economic recovery registered in the second half of 2020. It is important to note that the government's swift economic response will help [ stem ] effects on the financial system down the line. Without these measures, the negative impact would surely be greater.
In particular, Reactiva Peru, the government-backed liquidity program for PEN 30 billion, represents around 4% of GDP and will help mainly small and medium-sized companies obtain fresh working capital and continue to operate. The coverage level for these loans varies between 80% to 98% of loans between PEN 30,000 and PEN 10 million. Loans have terms of up to 36 months with a grace period of up to 12 months.
In parallel FAE program, enables banks and microfinance entities to provide small and microbusinesses loans for up to PEN 4 billion with coverage levels between 90% and 98%. This amount represents about 9% of the loan portfolio for SMEs systemwide. Even though the environment is constantly shifting, the effect on loans in the financial system has yet to be determined. Our estimate suggests total loans in Peru may experience anywhere from 4% contraction to a 2% expansion in a context marked by government loan support as discussed earlier.
Next slide, please. Now let me explain where we stand, financially speaking, to face this crisis. As a conservative and disciplined financial group, we operate through stringent management standards. This has provided a solid platform to weather the storm of COVID-19.
In terms of liquidity, the regulator monitors the 30-day liquidity coverage ratio. And as shown at the graph, BCP has maintained levels well above the regulatory minimum. However, for management decisions, we use a more stringent indicator, relying on liquidity coverage ratio of 15, 30 and 60 days, whose standards are aligned with Basel III. In this context, we have maintained our high-quality liquid assets at adequate levels.
Regarding capital, each of our subsidiaries maintain adequate capital levels, which ensures their solvencies. As of March 2020, the core equity Tier 1 of BCP was situated at 11.9%. In the case of Mibanco, the core equity Tier 1 as of March 2020 is 14.5%.
Next slide, please. We are managing exposure at each asset class and client segment. Current volatility has impacted the financial assets in our investment portfolio. It is important to note that 90% of our investment portfolio is comprised of fixed income investments, which primarily consists of investment-grade sovereign bonds. Moreover, only 11% is considered part of the trading portfolio. As such, most value changes do not impact results but directly affect equity.
Regarding our loan portfolio, we would like to share some of our metrics for exposure by segment and economic sector. It is important to note that we have developed and widely disseminated a complete set of short-term liquidity facilities to support our clients as the COVID-19 scenario evolves. This dynamic and consistent approach will mitigate credit risk.
First, 47.6% of personal loans at BCP Stand-alone and 17% of its SME-Pyme portfolio were paid on time in April. In the second half of March, we offered Skips, which consists of different programming options that change interest -- that charge interest, sorry. Later in April, we developed and offered debt freezing facilities, which consists of 2 frozen installments financed at 0 interest rate. It is important to highlight that as of April, we had already reprogrammed the following loan portfolio shares: 38% of the Mibanco portfolio; 71% of BCP SME-Pyme portfolio; and 50% of BCP Individuals portfolio.
Finally, as a complementary measure for business clients, we are participating at Reactiva Peru program, where BCP has been awarded a significant share of the accounts auctioned. The bank is currently in the process of disposing these funds. To identify BCP Stand-alone exposure in economic sectors that are really exposed in COVID-19 environment, we estimate that 20% of our wholesale portfolio and 25% of our retail portfolio, SME-Pyme and business is highly exposed. In this analysis, high exposure sectors include retail, vehicle, real estate, poultry, airlines, tourism, microfinance, transport and restaurants.
Next slide, please. When analyzing Credicorp performance, it is important to understand the drivers that will impact Credicorp result through 2020. First, the macro environment I just described, coupled with the special interest-free and cost-free solutions offered to clients and the market decline in business activity during the lockdown, will impact our sources of income. Second, it is important to note that we are using IFRS in light of the coronavirus uncertainties foundation report to estimate provisions.
We are using judgment and adjusting our approach to determining expected losses in different circumstances. We are not applying our existing expected losses methodology mechanically. Finally, we are measuring expected losses based on reasonable and supportable information.
Consequently, in the first quarter this year, we have registered our best estimate, which assumes a severe impact at the macroeconomic level that will be partially offset by reprogramming facilities and by government mitigation measures. It is important to note that IFRS and local reporting standards materially differ under local regulation. Therefore, programming does not change client risk classification, and deterioration is recognized later on when losses are incurred.
Finally, in order to manage expenses, we are freezing recruiting and salary increases, adjusting variable compensation and working to preserve our talent. We are also putting the breaks on nonstrategic projects and looking to identify savings in the context of short-term decreasing business activity.
Next slide, please. Going on, on our first quarter 2020 financial highlights, you will see that result has been offset mainly by forward-looking provisions. In upcoming slides, I will explain our metrics, but at this point, I would like to highlight both our loan portfolio and net interest income has performed resiliently, posting 11.4% and 8.3% year-over-year growth, respectively. The COVID-19 outbreak has negatively impacted our results and mainly manifested to a decrease in nonfinancial income, material forward-looking provisions and one-off expenses, all of which offset profitability in the first quarter 2020.
Next slide, please. To explain BCP Stand-alone's quarter results, I will start by reviewing loans, asset quality and the evolution of deposits. Despite the lockdown during the second half of March, BCP's average daily loan grew 8.4% year-over-year. This was driven by Retail Banking, which grew 11%; led by Consumer and Credit Cards, which increased 14%; and Mortgages, which expanded 12%. It is important to highlight that measuring quarter end figures, the loan portfolio grew 12% year-over-year and 5.4% quarter-over-quarter.
In the current context, corporate clients saw fresh liquidity at a higher spread, which was mainly retained at the bank as liquid deposits. Growth in retail loans decelerated due to COVID-19. As I have explained, although asset quality has remained stable, we have shore-up provisions based on changes in macroeconomic expectations and an increase in the probability of default. This measure led the cost of risk to increase 230 basis points year-over-year to situate at 4.44%.
Retail Banking NPL ratios deteriorated quarter-over-quarter, mainly in SME-Pyme and Credit Cards. But since provisions posted a higher increase, the coverage ratio of BCP Stand-alone has situated at 118% compared to 105% in the last quarter of 2019.
Total deposits grew 16% year-over-year, led by noninterest-bearing demand deposits and saving deposits, which grew 23% and 16%, respectively. During this quarter, total deposits grew 8% in the context of COVID-19, where corporate clients drew down and held liquidity and both individuals and businesses spend less and maintained larger balances in their accounts.
Next slide, please. Now I will comment on BCP Stand-alone's quarter P&L figures. This quarter, the downward trend in interest rates became steeper. The negative impact of this driver on NIM has been offset by a more favorable funding structure as the liability management measures were executed in the last 2 quarters of 2019, and a new less expensive short-term funding has been taken. This has allowed the net interest margin to remain stable at 4.7% year-over-year. Higher provisions, however, led the risk-adjusted NIM to drop to 1.5%. Both core and noncore nonfinancial income decreased in year-over-year and quarter-over-quarter terms.
Regarding core items, the reduction of 10% quarter-over-quarter in both fee income and net gains on FX transactions reflects 2 weeks of lockdown out of 12 weeks in the quarter. The decrease in business activity, including a 43% drop in monetary transactions in April, the implementation of cost-free solutions to clients and an increase in digitalization adoption, will generate greater negative impact in nonfinancial income next quarter.
The efficiency ratio deteriorated 7 basis points year-over-year, mainly due to a deceleration in income generation, while expenses grew in line with seasonality and include PEN 15 million in COVID-19-related operating expenses. Finally, BCP includes a PEN 100 million nondeductible charge for COVID-19 donation in other expenses. Overall, BCP's results are offset mainly by provisions and the one-off COVID-19 donation.
Next slide, please. Mibanco's quarterly performance was impacted by forward-looking provisions. This quarter, Mibanco posted 7.3% growth year-over-year in loan measured in average daily balances. Mibanco's portfolio is primarily composed of the small and microbusinesses and constitute Credicorp's most exposed portfolio. Skips at Mibanco still require that clients interact with loan officers to execute our programming. As such, as of March, the operating unit has reprogrammed 22% of its total portfolio.
Regarding asset quality, Mibanco posted a slight year-over-year improvement in its NPL as a result of origination and collection measures taken in recent quarters. Nonetheless, COVID-19 forward-looking provisions have led the cost of risk to increase 315 basis points and situated at 6.7%. Consequently, Mibanco's NPL coverage ratio situated at 157% this quarter compared to 138% in the first quarter last year.
Mibanco's NIM increased 50 basis points to situate at 15.2% this quarter. This was attributable to an optimization in the funding structure and the cost of funds. Additionally, changes in insurance fee recognition reduced nonfinancial income. Finally, due to higher cost of risk, risk-adjusted NIM fell 240 basis points year-over-year to situate at 9.5% in this quarter. Mibanco registered a slight deterioration in its efficiency ratio year-over-year, which was mainly attributable to an increase in Mibanco's headcount to effectively manage and strengthen relationship with clients.
Administrative expenses were down this quarter, driven by the implementation of cost savings programs and some delays in execution. Finally, a nondeductible charge of PEN 10 million for COVID-19 donation has been recorded in other expenses. Overall, Mibanco performance was negatively impacted mainly by provisions.
Next slide, please. Now I will comment on the main drivers and results related to our insurance and pension funds businesses. This quarter, Grupo Pacifico's net income improved year-over-year due mainly to an improvement in the underwriting results of the property and casualty businesses, and to a lesser extent, an improvement in the Life business. This was the result of a decrease in net claims for car insurance after circulation decrease, and there were fewer reported cases during lockdown.
Regarding the Life business, we registered an increase in total net earned premiums of the Credit Life product after sales increased through our alliance channels. Health insurance and medical services registered a decrease in activity, and therefore, reported lower claims during lockdown. All of the aforementioned resulted in an improvement of 620 basis points year-over-year in the loss ratio.
Our investment portfolio has good credit quality and is concentrated mainly in fixed income assets. In terms of liquidity and solvency, Pacifico maintains comfortable liquidity and debt-to-capital ratios.
There are 2 one-off COVID-19-related charges that impact Pacifico results this quarter. First, as a financial relief measure for clients, we are reducing 50% of the car insurance premiums for the months of March and April to individuals that are up to date in their payments. The impact as of March is around PEN 8 million in premium reimbursements. Second, Pacifico donated PEN 5 million in life insurance policies to cover health service professionals, policemen and Peru's Armed Forces, who are directly exposed to the virus during the quarantine.
In terms of pension funds business, the negative contribution to Credicorp net income is mainly attributable to a decrease in the profitability of the reserve funds given market conditions. Commissions will be negatively affected next quarter given that pension fund contribution will be waived for April. Additionally, assets under management will fall since the government decree of withdrawal facility for some affiliates. And afterwards, the Congress approved a law which enables affiliates to withdraw up to 25% of the pension funds with a ceiling. As a result of these specific material changes in the system, we expect our income before reserve funds profitability to be reduced by 11% this year.
Next slide, please. Now I will comment on the drivers and performance of the Investment Banking and Wealth Management businesses. Total assets under management posted a reduction of 9.6% quarter-over-quarter, 5.1% year-over-year. In wealth management, the result was mostly affected by a mark-to-market effect in March as an important client outreach effort attenuated withdrawals. In the case of the asset management, a slight decrease in assets under management was seen in the last 2 weeks of the quarter due to withdrawals from transactional funds mainly at Fonval Colombia.
Regarding income contribution, based on the year-over-year analysis, the results are as follows. In the wealth management businesses, the slight fall is mainly due to lower deposit balance and lower income from family office in Peru. However, income in Colombia and Chile increased due to the diversification of the product portfolio. In the asset management business, given that alternative funds and distribution of third-party products income rose above expected, the negative effect from March was offset.
In the corporate finance business, the contraction is attributed to an unfavorable situation for the execution of operations, including those that were already identified within the first quarter 2020 pipeline. The capital market business was the most severely impacted by the reaction of the markets to the global crisis, significantly affecting the results in trading positions at Credicorp Capital.
In this context, trading portfolio was reduced by 60% to mitigate volatility effect in March. In addition, the proprietary investment portfolios of local and international fixed income from ASB registered losses. However, the sales business achieved higher-than-expected results in equities driven by an increase in the volumes traded. Likewise, as market recovered, the losses have started to reverse in April.
Regarding other businesses, the reduction was mainly from the treasury business due to a negative exchange difference originated by positions in foreign currency. Finally, it's worth mentioning that although the long-term strategic portfolio has not generated losses in P&L, the unrealized losses were PEN 77 million as of March.
Next slide, please. Now I will summarize Credicorp's consolidated performance. Now in a context of market volatility and low asset prices, by the end of March 2020, the investment portfolio share of our interest earning assets increased to 20% from 19% in December. The loan portfolio grew 11.4% year-over-year in quarter end balances and 7.8% year-over-year measured in average daily balances, boosted mainly by BCP.
In terms of funding, deposits grew 15.3%, primarily due to demand and saving deposits, which grew 22.2% and 14.9%, respectively, mainly at BCP. Additionally, wholesale financing grew 7.8% after funding was provided to corporate and medium-sized companies. In this context, Credicorp's funding cost fell 25 basis points.
Next slide, please. As explained earlier, Credicorp's cost of risk posted a significant increase of 268 basis points quarter-over-quarter, mainly due to COVID-19 forward-looking provisions, which were mainly concentrated in BCP Stand-alone and Mibanco. It is important to note that the change in economic expectations affected all of our line of businesses, but mainly Retail Banking and microfinance. Additionally, 34 basis points of the increase in the cost of risk was related to a deterioration of a specific business segment at BCP Stand-alone, namely SME-Pyme and Credit Card, which was offset by an improvement in the cost of risk at Mibanco.
Our nonperforming loan portfolio has posted growth that was significantly lower than the expansion seen in provisions due to debt facilities that Credicorp subsidiaries have offered to clients to cope with these difficult times, which translated into an improvement in the current operation. Credicorp's net interest margin reached 5.35%, remaining relatively stable year-over-year, increase of 5.4% in interest income, which was driven by an increase in interest on loans and a decrease of 2.5% in interest expense due to more favorable spending structure and was offset by the large increase in average interest earning assets.
As mentioned earlier, the decrease in NIM at BCP Stand-alone quarter-over-quarter, which was driven by a decrease in market rates, was offset by an improvement in Mibanco's NIM after a new pricing strategy was implemented to improve loan rates. Finally, risk-adjusted NIM deteriorated 197 basis points quarter-over-quarter to situate at 2.33%. This was primarily driven by the aforementioned increase in provisions.
Next slide, please. The 18.8% year-over-year contraction in nonfinancial income was mainly attributable to noncore items. Fee income and net gains on FX transaction, both core items, dropped after transaction activity in the banking business decreased during lockdown. Fee income and net gains on FX transactions decreased 10% and 14% quarter-over-quarter, respectively, and driven mainly by BCP Stand-alone and Mibanco. The net gain on securities loss, PEN 120 million, after the global COVID-19 crisis generated a market downturn that impacted proprietary investment portfolios.
In terms of efficiency, the cost-to-income ratio deteriorated 100 basis points year-over-year, mainly due to the deterioration in microfinance. Most of the deterioration in microfinance is due to the inclusion of Bancompartir and more personnel expenses while decelerating operating income at Mibanco. Grupo Pacifico also reported a slight deterioration, which was attributable to car premium partial reimbursement. This was mitigated by an increase in net earned premiums in the Life business.
Next slide, please. In sum, the consolidated profitability at Credicorp primarily reflects the negative impact of BCP, which was, in turn, attributable to charges related to COVID-19. To wrap up our performance this quarter, we continue to register resilient growth in loans, deposits and net interest income with 11.4% and 15.3% and 8.3% year-over-year growth, respectively. Our customers have ramped up the use of digital channels in the new context, and as such, our digital capabilities expand as a competitive advantage.
The COVID-19 outbreak negatively impacted our results primarily through a decrease in nonfinancial income and increasing forward-looking provisions and the existence of one-off expenses, all of which offset profitability in the first quarter of 2020. Credicorp is well positioned to face this crisis in terms of both liquidity and capital. We reduced dividends at all subsidiaries to strengthen operating units' capital base.
Given the level of uncertainty regarding the global economic impact of COVID-19, we are suspending guidance as of today. When we have a better sense of the impact of this phenomenon, we will provide guidance.
Next slide, please. We are aware of the level of uncertainty we are facing. And at the same time, we feel confident about our capability to adapt our businesses and organization in a changing environment. In this context, we are reviewing our strategic initiative on a constant basis.
In BCP, we are focusing on engaging with customers to understand their situation post COVID-19 and financial needs; implementing Reactiva Peru program; adjusting risk management measures; and designing medium-term restructuring initiatives. We are starting sales capabilities, coupled with dynamic pricing and accelerating customer digital adoptions and rethinking the new operating model. In Bolivia, we are engaging with customers, adjusting risk management measures and fostering the use of digital channels.
In microfinance, we are working on engaging with customers, assessing new needs and risks and executing refinancing initiatives, implementing FAE program to provide fresh working capital and support our clients' short-term liquidity needs; accelerating the path to the hybrid decision-making model, leveraging the use of data and analytics; redefining the new remote operating model; and finally, finalizing Bancompartir merger by the third quarter of 2020.
In insurance and pension funds, we will work on restarting insurance sales force coupled with digital capabilities; adjusting Pacifico's new operating model; managing the liquidity and profitability of the pension investment portfolio in context of expected withdrawals; actively participating in pension system reform.
In Investment Banking and Wealth Management, we are focusing in developing business opportunities in wealth management and asset management by offering a diversified portfolio; developing the corporate finance pipeline; improving our efficiency by reprioritizing operation expenses and investments; finalizing the integration of Ultraserfinco by the first half of 2020; defining our support functions and technological platforms to improve the customer experience and enable future growth.
At the corporate level, to further strengthen our long-term performance and competitiveness in the markets we operate, a project has been launched this month to develop a strategy aimed at integrating ESG more deeply and consistent in our business planning and activities. To take advantage of the new opportunities, specific initiatives at Krealo have been selected in order to be accelerated.
With these comments about our quarter performance, I would like to open the Q&A, please.
[Operator Instructions] We'll take our first question.
Ernesto Gabilondo from Bank of America. My question is on provision charges and cost of risk. After more than doubling your provision charges in 1 quarter, with the expected loss from COVID-19, do you think you have reached the peak of provisions? Or do you think it will be more tangible next quarter? And how much of the provision charges of the quarter are considering the client applications in SME-Pyme, Mibanco and Individuals?
And what level of your [ DSP ] from minus 7% to minus 13% is considering the expected loss model? As you have mentioned, we will not follow the expected loss mechanically, but I think it will be very helpful to understand the assumptions that you are considering to go -- to be the provision charges.
This is Reynaldo Llosa. Yes. Definitely, this has been a tough quarter. And to our best estimate, at the end of March of this year, we have estimated some loss of provisions. As Cesar has mentioned throughout his presentation, this is a forward-looking estimate. Our numbers, our baseline for them was a weighted average on GDP of around 5.25%. We will need to update our projections in the following quarter. Having said that, there are a lot of other initiatives in terms of reprogramming and all the initiatives of the government, sponsored by the governments, which would probably give us a better outlook of what will happen with provisions throughout the year. But definitely, this is going to be a tough year.
Okay. And then my second question is on loan growth. We note an important acceleration due to the currency depreciation but also, I think, from some withdrawals from companies anticipating to have liquidity. However, I would like to know your strategy in the short term. Are you going to focus in your own client base? Or are you also going to provide credit to new clients?
Also any color in which portfolios do you expect to be more selective and which ones will be the ones delivering the growth will be very helpful.
[Audio Gap]
We'll take our next question.
This is Jason Mollin from Scotiabank. My question is related to Slide 7, asset exposure and mitigation. I thought that was very helpful the way you showed the most exposed -- the chart with the most exposed to the less exposed, that showed Mibanco and SME on the top and the wholesale on the bottom.
If you can talk about giving us -- if you can talk a little bit about the expected loss in those most exposed and less exposed. And I guess is that average what -- it wasn't that easy to hear. But is that kind of -- previously, is that kind of where you're coming out with your expected loss, cost of risk in the quarter?
And also on this slide, if you can just give us some details on the Reactiva Peru program. And you did mention that you have an important share through BCP and Mibanco. Is that similar to your market share in those markets? And how do those auctions really work?
Well, in terms of the expected losses levels for the specific segments, we don't have a rough number. You can understand that for this specific estimation in terms of the end of the first quarter, we were basically considering the impact it would have in the macro level. So we have worked very closely with all the segments in trying to estimate a general impact in the portfolio. And we are not able, at this time, to provide a specific level of the credit loss for each of the portfolios.
And in terms of the participation or market share on Reactiva Peru, I would say it's somewhat of our average market share.
We'll take our next question.
Hearing no response, moving to the next question.
Jorge Kuri from Morgan Stanley. Can you remind us your sensitivity on net interest margins to movements in rates? And is there a particular expectation that you have for NIMs by the end of this year? And I guess we also would appreciate the details, what your expectation is for reference rate at the end of the year.
The reference rate is already at the minimum historical level at 0.25%, and the interest rate has already been passed through in the new transactions. So we wouldn't expect a significant change in reference rates during the year. Even say that probably the markets are going to be capturing in the new transactions, in the new origination and a higher expected probability of default. But I will say both in soles and dollars, we are in a low level in terms of reference rate, and probably we are going to have some expansions on margins but based on probability of the call, not reference.
Sorry. I didn't really mean adjusted risk margins. I mean just net interest margins. Not sure I understood the point about probability of defaults.
No. Yes. What I am trying to tell you is the reference rate is already in historical lows both in soles and dollars. So the new marginal rates are going to increase based on a probability of default. So the margins are going to increase slightly based on these new originations. You should also consider that the new originations are going to be particular in retail banking and a slower pace than historically has been happening due to the decreased demand in the short-term period.
If I may ask a second question, can you talk about what you can do on the expense side to try to provide some offset to the downturn on revenues both in 2020 and 2021?
Yes. We are already working in a number of measures, as I mentioned previously. We have adjusting variable compensation. We are freezing most of the companies of the group probably with the exception of the Investment Banking in terms of hiring and salary increases. Some of the expenses are going to be naturally adjusted based on the level of activities, particularly during the second quarter. And additionally, we are working very disciplined -- in a very disciplined way identifying expenses that are not absolutely necessary in the short term, but we are maintaining investment, developing core capabilities, particularly in terms of digitation and intelligent decision-making.
This is Gianfranco. Maybe just to -- and just to -- I have a few words on what Cesar just mentioned. You are all aware that we've been working in a -- we're heavily developing our digital capabilities. Obviously, due to this crisis, the demand on digital channels have stepped up dramatically and another lever of -- that we are currently analyzing is how to rethink our distribution channels. And the main objective there is not to reduce expenses but to provide a better service to our clients. But obviously, a consequence of that would be that our footprint in several branches should be trimmed down in the next couple of years.
We'll take our next question.
Marcelo Telles, Crédit Suisse. I just want to follow up on your front loading of provisions, the more than PEN 700 million in the quarter. Can you just tell us what was the GDP assumption that was considered in the models for that provisioning. I understand you still expect between minus 7% to minus 13% GDP this year. Is that something that was already spent into the model just to understand how much has already been factored in of that [ worse ] scenario?
Yes. On the margins on -- yes, on the margins provisioning, we use a weighted average [ fall ] on GDP of around 5.3% for the year.
Okay. All right. That's very clear. And for next year, is there any -- in terms of the duration of the crisis, I mean, how does the duration, let's say, take into account what kind of recovery was taken into account for, let's say, 2021 from economic growth standpoint?
Probably, if I can comment on that, as Reynaldo mentioned, we have used for the close of March a weighted average of the -- of 5.3% GDP. Now we think that the GDP is going to decrease more, but we expect a significant uptick in 2021 in the tune of probably 5%, 6% increase next year after a decrease in this year in the range probably between 7.5% to 11% as basic scenarios for this year. These things have been impacted because, during the month -- the last weeks, the lockdown has been extended, and this impacts directly in GDP levels.
We'll take our next question.
Yes. I have just one follow-up again on the expected loss. So you mentioned that you did provisions with GDP of 5%, a decline of 5%. Now you have something close to 7% to 11% of decline. So is it possible to say that you need to do more provisions in next quarter? Or at least, if you need to define a provision today, you need to do a high amount of provisions again in the next Q?
Well, basically based only on the macro cap estimations, obviously, we will need to do some extra provisions. We expect that to happen. Having said that, there are a lot of things we are doing on the other side, as I mentioned and Cesar mentioned, in terms of reprogramming and government-based initiatives that would probably let us compensate in some terms the levels of provision we would need to do in terms of this more scheme -- or more dramatic macro environment.
We'll take our next question.
My question is related to understanding a bit further how the IT transformation program continues in such an environment. I think more and more, it will be needed, but at the same time, you have to work on the cost containment strategies. So just for us to understand if there is any change in the development of the program. And in parallel with that, to understand how much of your transactions have been originated in the digital channels and how much continues to be originated throughout the physical channels.
Maybe I can take this question. Thank you for your question, Carlos. On the contrary, actually, as I mentioned before, which was obvious and I would say, each and every bank in the world has happened the same, the digital demand has spiked. And actually, we're investing and more importantly as of this time, developing faster applications in order for our clients to interact more through digital channels with us.
As Cesar mentioned at the beginning of the presentation, I believe, at the company, what happened in Yape that even though transactions across channels at the beginning of the crisis were reduced by over 50%, in Yape, the amount of assets increased. So we're doing -- what we've seen is that the trend of our clients using more digital channels have increased dramatically over the last couple of months. And therefore, our plan to keep investing in the -- digitalizing both front end and back end of the bank, it has become more important. The way in order to scope with that investment -- additional investments is how to reduce cost in digital channels, for us how to be more efficient because we are digitalizing also interaction with our clients.
No, perfect. Just a follow-up there. And by the way, this is Jorg Friedemann from Citigroup. Sorry for not introducing myself. But just a follow-up to understand in terms of costs what you believe will happen going forward with the IT transformation program if it is accelerated. Or on the other hand, to contain costs, is there any parts of the project that can be freezing (sic) [frozen] for a while?
Yes, probably, I can make -- sorry. Go ahead.
Go ahead, Cesar.
Yes. As I mentioned before, we are taking a number of measures that are going to contain costs focusing on variable compensation, reducing nonstrategic initiatives and being very fast and focused on developing digital capabilities. We see that the direction, the strategy is correct, but this crisis has -- tell us clearly that we need to go deeper and faster and more focused. So we are redirecting costs and overall reducing the expenses but redirecting cost to improve the capabilities and go faster on developing digital capabilities.
As a result, you are going to see less overall cost, but we are going to go deeper and faster developing these capabilities, not only thinking in the year 2020 but into the future. The crisis has shown how powerful are these tools, and the clients really need these tools to interact with us in a more efficient way.
That is very clear. I really appreciate. Just a final follow-up there if you allow me. How many branches are open nowadays? And I know that you are in full lockdown. How many branches you expect to open after May 10? And how many were opened by the end of March?
Let me answer that question, Cesar. The original plan was to stay flat in terms of number of branches for this year for 2020. The plan was to basically to open, I believe, it was 10, 12 branches this year and obviously close a similar number. Again, we -- as of today, we haven't decided how to really shift this plan, but my educated guess would be that by year-end we should have a lower number of branches. And currently, and this is because of the crisis, we are operating with 70% of our branches. The remaining 30% remains closed, but it is because of the crisis.
We'll take our next question.
This is Carlos Gomez from HSBC. I want to ask about the evolution of your equity. If we look at your consolidated shareholders' equity, it declined 11.6% in the quarter. We imagine that is because of the valuation of securities. Can you give us an update as to how that has evolved after the end of March, if you have recovered somewhat or it remains at those levels?
And also, if you could reconcile the capitalization figures that we see on Page 42. So you have the Tier 1 at 11.9% and -- sorry, the Tier 1 at the level which is 10.3%, which is 1.6% lower than the CET1. I know there is an explanation about how the calculation is made, but that still is a bit -- it is common practice, right?
Okay. I take this one. The decrease in shareholders' equity at Credicorp level is mainly due to 2 factors. First is the declaration of dividends. There's a significant amount, is around PEN 2.4 billion that has already been registered as a liability and is going to be paid today. And the other factor is the decrease in unrealized gains. The unrealized gains decreased during March and has been recovered in a meaningful way in April.
And you have another question that I couldn't take notice of.
Yes. Initially -- and this comes from before, is the difference between the CET1 and the Tier 1. In almost any bank, the CET1 is less than the Tier 1. In your case, the Tier 1 is below the CET1. Could you reconcile that difference?
I don't have these figures at this moment. Sorry, I can come back with you with the specific answer. Sorry.
[Operator Instructions] We'll take our next question.
My name is Piedad Alessandri from Credicorp Capital. I wanted to ask about Bancompartir and Colombia separation. If you could give me a bit of your view on Colombia's separation and your future plan for them.
I can answer this one. This is Walter Bayly. The second part of the question, we have no future plans at this time. At this stage, we'll focus on our existing operations and businesses that we have. There's a lot of work to do, and this is not a time to change focus from where we are focused today.
We are clearly not at the end of the crisis yet. We do not feel there is an inflection point. Thus, we're extremely focused on what we have today. Our operations in Colombia have been working, aggressively refinancing their customers and are doing a similar protocols to what we do domestically, obviously, with some differences. That's all I can mention about it.
And regarding Bancompartir?
I was mentioning about Bancompartir.
We'll take our next question.
This is Sergey Dubin from Harding Loevner. My first question is with regard to your Skips and, as you call it, reprogramming of the loans. Are you saying that these -- are these loans considered basically performing? Are they, in any way, factored into your NPL ranges at all? And also on Page 7, you show, for example, that you reprogrammed 50% of your BCP loans for retail, but it looks like it's only really 25% of retail that's highly exposed. So my question is how are you deciding what to reprogram and what not to reprogram. That will be the first question.
Yes. Basically, in terms of the initial aid we have given to our clients, we are basically concentrated on all those clients that require some kind of support during the crisis. That was -- we were basically both reactive and proactive in giving some kind of short-term facility, either a freezing of 2 installments or the Skips in between 1 and 3 months or the next 1 or 3 payments.
Having said that, our challenge here is the next phase, which will be to be in contact with all those clients and approach them in terms of their needs of further reprogramming initiative that will require -- adjust their installment program to their ability to [ phase ] their loans during the crisis.
And in terms of the exposed portfolio, yes, I mean that's the macro numbers in terms of the exposed clients but everybody has been, to a certain degree, affected by this crisis. So as I was mentioning, we have been actively, reactively and proactively addressing these reprogramming initiatives in the short term through the Skips and freezing initiatives.
Okay. And then the follow-up question, you talked about your level of provisioning, which is correlated to your assumption of GDP contraction. It sounds like it was 5.3%. So -- but we also have this Reactiva Peru program that kicks in and helps. There's a government take, 80% to 98%, of the risk. So how do you -- so the 2 questions there is, first, I didn't really understand the explanation how these auctions work, if there is multiple banks involved. And obviously, everybody wants to get part of this program. Does it mean that it's allocated based on market share? Or if you can really explain that better, that would be helpful.
And then the second question is, with respect to your credit loss assumption, how do you factor -- obviously, you have your own models, but you also have this government support, which is fairly significant. So how do you factor those supports in your credit metrics and credit loss assumptions?
Yes. In terms of the assumptions...
Go, go ahead Gianfranco.
I was going to explain the -- sorry, the way the funds are assigned, what the Central Bank has done is these are not -- the Central Bank does auctions. Based on the coverage by the government, the Central Bank has set a fixed rate for the filing -- for the banks. And banks participate in those auctions, and therefore, they get the amount.
The one that auctions the lowest rate for that branch is the bank that gets the amount auctioned. After that, each bank provides that funding to its clients. And the tax is the rate that was offered by the bank in the auctions. And Reynaldo, please complement me in terms of the risk part.
Yes. To be clear, I mean the auction is based on what bank operates the least final rate to the client in different banks, depending on the cycle of the loan as well as on the level of coverage by the government in their guarantees.
In terms of the impact of Reactiva Peru, we think it's going to be a positive impact, of course, but we will see that number effect probably on our estimation of provisions in these following quarters. We haven't computed that effect yet in the closing numbers for the first quarter.
Okay. Got you. And then the very last follow-up, I didn't hear your response. So these reprogram loans that you have, these are still considered performing loans, correct? They haven't really been classified as an NPL in any way, right? So the NPLs are pretty much the same as they were.
Yes. Yes, they are considered performing loans.
That's correct, our base of all the performing loans.
We'll take our last question.
Yuri Fernandes from JPMorgan. I would like a follow-up on margins. I understood from what you mentioned that margins, they could move up in the next quarter as well as pricing some loans up given the high risk, but if you -- I don't know if I got this properly, like, that margins should go up because you have like Reactiva Peru that should cut a little bit the needs, even though it's a good program. You have like wholesale likely growing more than retail. And also the lower rates, I think like low rates, that should be somewhat negative on your security book.
And finally, I guess, renegotiated loans, you are doing some renegotiations for credit cards and other products with 0 interest rate. And about 50% of your repayable was renegotiated. So my point is how can we see margins go up. And regarding the renegotiations, should we expect a big pressure on NIMs in the second Q?
Yes. Let me go from parts. And probably, my answer was relating to, I will say, the standard portfolio not including Refinancia Peru because you are right. Refinancia Peru is going to come with very thin margins. In average, the interest rate has been around 1% with cost of funds of 0.5%. So in average, you are right. If you consider Refinancia Peru, the average is going to go down definitely with this -- for this factor.
Relating to the other parts of the portfolio, what is going on is that new refinanced loans, part of the loan has been refinanced at an interest rate of 0. And probably we are going to make some kind of impairment charge between some interest rate and the 0 for these installments, in particular. But the other parts of the portfolio tend to be refinanced in rates similar to the original rates, but you extend longer terms.
And the new origination that is going to be smaller than it has been in the previous quarters are going to be originated on higher -- with higher spreads. Down the road, during this year, we should see this aspect. But you are right, if you consider the effect of Refinancia Peru, the average blended is going to go down for this factor. I was referring to the more structural portfolio.
No, super clear, and I don't know -- super clear. A final one just if I may. On Reactiva Peru, is there any similarity on the debt? Like do like a client need to pay Reactiva Peru before they pay previous lines of the bank?
The idea of Reactiva Peru is to provide new fresh working capital and they intended not to repay or prepay another debt but to provide fresh working capital to clients. That's the intention of the program. If you combine all the measures, you have a very comprehensive package. You -- and facing the uncertainty, you offer the client Skips and freezing. After that, you provide Reactiva Peru to have fresh working capital and down the road based on specific circumstances, probably there's going to be new refinances but more tailor-made based on the performance in the following quarters.
Yuri, do you listening?
Yes, I'm here.
Yes. Just to add on what Cesar mentioned about Reactiva, it's correct that the idea is to provide fresh working -- new working capital. However, there are no -- the only limitation regarding paying previous bank financing facilities is not to prepay any credit.
In the case, if the client didn't survive down the -- if the client didn't survive down the road, like which credit has seniority? Your loan that was done before or the Reactiva Peru that you need to collect this, I don't know, any kind of money that was remaining?
So how it works is that -- obviously, the 80% to 98% of the Reactiva Peru loans is backed by the sovereign risk and then we have to collect whatever can be collected from the client on a pari passu basis. If the financial institutions have any collateral that was placed as a -- pledged as a collateral for a previous loan, that collateral is not shared.
We do have one more question.
Yes. [ Often ] previous discussion. So essentially, the way you decide how much is auctioned and how much to allocate, how much lending to do at 1% rate is based on your stress test of your clients, right? So if you see that the client is very -- in a best position and it's better to extend 1% or even 0% loan to them as opposed to them [ to default ], then you would do that because that would save potential with the client and save you from recording NPL even though you may sacrifice interest income essentially, right? So that's how you decide how much to dial up or dial down this participation of the program. Is that correct?
That's -- your assessment is correct. The objective for us regarding the Reactiva Peru program is to provide most of the benefit to our clients and obviously, the risk profile of our clients due to this new working capital facility at extraordinary rates and conditions improve the risk profile of our portfolio. So -- and so far, what we expect is that -- and the Reactiva Peru has already -- over 2/3 of the program has already been auctioned, but we expect this to satisfy demand of almost of all our clients.
Okay. And the same goes for FAE. As you mentioned, that's for micro businesses. Is that the same mechanics that banks participate in the auction? And then obviously the loan limits may be different. But is it essentially the same idea, the same -- it works the same way as Reactiva, right?
The FAE is targeted small to the micro finance. As you may be aware, there's a high correlation with formality and the micro business. So the typical client of micro finance, institutions didn't qualify for Reactiva because of the lack of formality. So the FAE, the target is basically informal clients. But despite that, the process is similar.
Okay. Understood. And then the very last question was a discussion on interest rates and NIMs. You said that -- so obviously rates have dropped by 200 basis points in the last -- a few months ago. It looks like, if I'm interpreting your disclosures correctly, that you guys have essentially -- when the rate drops, your net income increases, right? Is that correct? They basically stay low in terms of funds that...
Under normal circumstances, it doesn't happen because you have already some funding at very low rates like demand deposits and savings that we paid low rate. So in normal circumstances, what you have is lower interest rate less margins because you can have a smaller -- smaller margins.
What I had mentioned is that due to the change in the risk profile, we are both going to originate loans with wider margins in order to reflect higher probabilities of default, but normal circumstances, lower rates means lower margins because you already have a funding very close to 0.
Okay. So you just have to price the loan higher essentially than we would have otherwise. And so would everyone else in the banking system, right?
Yes.
We'll take our next question.
Sorry for jumping in late, but I had a follow-up. So let's just give an example here. If there is a PEN 40 million loan to a client and you lend an additional PEN 10 million from government lending lines. He defaults, and there is only PEN 40 million in collateral. Who gets the PEN 40 million? You or the line that goes to the government?
And my second question, if I may, is also a follow-up on NII. When you do not charge interest on the renegotiated line for [ 2 months ], do you recognize 0 NII in that quarter? So second Q now is going to be 0? Or do you reprogram the entire loan and you start recognizing in a different accrual method where your second Q is not as impacted?
Probably I take the second question.
Yes, go ahead.
Yes. I'll take the second question. What we are doing conceptually in the case of 0 interest rate is to originate a new loan to pay the older installments and originate a new program in the case of BCP is in several installments and in the case of Mibanco, in most of the cases, is a balloon.
And what you are going to do in the second quarter is to recognize some kind of impairment between certain interest rate and the 0 rate that you are going to charge. This recognition is going to be all through the time offset but because you are going -- at the end, you have no and a specific loss in onetime but a lower interest rate that is 0 [ to a tie ]. I don't know if this helps.
It does help very much. So you don't have to [ beat ] in the second Q. It's clear. And in the other one about the collateral?
Yes. Let me take that one. So yes. If the collateral was pledged before the granting a loan, that collateral is not sure. Let's say it wasn't pledged, but there are assets that can be taken as a collateral or as a way of collecting, then you will share on a pari passu base.
Obviously, regarding risk, the bank has 80% to 98%. Right away, the credit defaults, I believe, at 3 months, and after that, we have the responsibility of collecting for both ourselves and the government.
We will be taking our last question now.
Carlos Gomez again from HSBC. I have another macro question. You said that you expect the government to start releasing prescriptions at the end of the month. However, for anybody who follows the numbers in Peru, unfortunately, we continue to see an increase in cases and an increase in deaths. What is your realistic expectation as to when the lockdown will be eased? And have you already included that in your 7% to 11% expectation for GDP decline?
Yes. What we are assuming so far -- sorry. What we are assuming so far is that the economy now is working at around 45%, 50%, with the initial releases going to go after 70% and after that, gradually to up to 100%. What is difficult to estimate is how effective is going to be the comeback of specific activities not only based on regulation but based on behavior of the customer, lifting in tourism or restaurants.
So when we are talking about this ample range of GDP expectations, we are considering the first case starting reopening that follows the schedule and in the most pessimistic figures of 13% that is a more gradual or lesser active reopening process. But as you can notice, the range is very wide and has been moving based on decisions taken in terms of extension of the lockdown and methodology of the opening the economy.
Now I'd like to turn the conference back to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.
Thank you, and good morning to all of you. These are clearly unprecedented times. Some of us have gone through several domestic and international crises, and they all have been somewhat different. The key aspects to understand better -- to better understand the current and forward-looking scenarios and what make this current situation different in my mind out are the following: One is that health and humanitarian concerns are the drivers; second, it is extremely difficult to predict, as Cesar was saying, the ramp-up of production after a quarantine, which will not necessarily be in a straight line, but we have setbacks along the way; three, the capacity of government to execute public health and public work policies has limitations; and last but not least, this crisis impacts practically all sectors of the economy.
The strength of our balance sheet, liquidity and franchise is tremendous and gives us the resources not only to weather this crisis but to emerge from it earlier and stronger, thus, allowing us to capture opportunities in a post-crisis scenario. Our conservative nature and balance sheet strength has led us to front load an important portion of the impact in our credit portfolio. That line of action has proven to be effective over and over and will definitely be our line of action in the months to come.
As mentioned by Cesar also, going forward, we are reviewing our strategies, projects and initiatives in each line of business to prioritize and adapt to the new scenarios. There is still work-in-progress here.
To finalize, we thank our shareholders for your support and personally are extremely thankful to all of the Credicorp collaborators which have once again demonstrated tremendous commitment to our customers and institutions. Thank you very much for this call, and we look forward to meeting with you in the months ahead. Thank you, and goodbye.
Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.