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Credicorp Ltd
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Ladies and gentlemen, good morning, everyone. I would like to welcome all of you to Credicorp Limited First Quarter 2021 Conference Call. We now have all of our speakers in conference. [Operator Instructions]
With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Reynaldo Llosa, Chief Risk Officer; Mr. Cesar Rios, Chief Financial Officer; and Ms. Milagros Cigüeñas, Investor Relations Officer. And now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin, sir.
Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the first quarter of 2021. I hope you and your families are healthy.
As you know, the current sanitary situation in Peru, as well as the political landscape, are key factors of uncertainty. The sanitary situation in Peru and metropolitan Lima has not improved in recent months, as is reflected in data on excess mortality. Peru's vaccination rollout, which began in February, has progressed at a slower pace than the other of countries in the region. Nonetheless, the government has announced there will be an acceleration in the organization process in the coming months. In this challenging context, we continue to put the well-being of Credicorp's employees first, as we focus on ensuring operating continuity and offering financial solutions to clients and employees alike. Our ultimate goal is to serve society, as we continue to create value.
On the political scene, candidates Pedro Castillo and Keiko Fujimori will face off in the second round of presidential elections on June 6. The latest polls show candidate Pedro Castillo in the lead. Mr. Castillo, from the political party Peru Libre, has proposed a number of measures. According to the party's government plan, it intends to shift away the current market-oriented economic model to one that prioritized a so-called popular economy with markets. Under this model, the state will play much more active roles in businesses. Peru Libre's plan also includes holding a constitution assembly to write a new constitution and nationalizing so-called strategic cycles.
Mrs. Fujimori, in contrast, favors maintaining an economic model that supports national and foreign investments and advocate a restricted and secondary role for the state in the economy. Mrs. Fujimori also believes that the current constitution should remain in effect. It is still early to predict the outcome of this election. Polls can shift considerably in the Peruvian context, which is marked by high levels of voter indecision. In any scenario, the new executive branch will need to generate consensus to be able to implement changes. The recent elected congress is highly fragmented and composed of 10 political parties.
Other relevant elements of Credicorp's operating context in Colombia, the executive branch recently withdraw the bill for tax reform that is submitted to congress, which represents the 15th of its kind since 1991. A new bill will be formulated. In Chile, elections will be held on May 15 and 16, primarily to determine the members of the constitutional [indiscernible]. Next slide, please.
Regarding Peruvian economic activity, recovery continued in the first quarter of 2021, despite localized lockouts. Our estimate suggests that GDP grew around 4% year-over-year in the first quarter of 2021. This is the first positive register in 5 quarters. In addition, in seasonally adjusted terms, GDP in the first quarter of 2021 stands very close to the pre-pandemic levels. Electricity demand also continued to recover in the first quarter of 2021 and surpassed our data slightly, pre-pandemic levels.
Due to political uncertainty, [ sovereign] Peru interest rate has increased, primarily for medium- and long-term maturities. The Peruvian Sol has also depreciated to hit a record low. The global economy continues to improve, but interest rates and FX levels remain volatile. Commodity prices continue to be robust, and the price of copper, which is relevant for Peru, reached a peak of $4.43, almost a 10-year peak. We expect Peru's GDP to rebound to 9% in 2021, underpinned by high copper prices, as well as extensive monitoring and fiscal policies. Next slide, please.
Now I will comment on the evolution of the financial system and the regulatory environment. According to data from the Central Bank, loan growth in March stood at [ 9.4%] year-over-year at a constant exchange rate, driven by the influx of Reactiva loans. If we exclude the effect of Reactiva loans, total loans declined 7% year-over-year.
Regarding economic policy and the regulatory environment, I would like to highlight the following: first, the congress approved a new private pension fund withdrawal. Under this plan, both current contributors and new contributors will be able to withdraw up to PEN 17,600. It is important to note that the Ministry of Finance has announced it will propose taking the law to the constitutional court.
Regarding new regulations, Congress also approved the withdraw of 100% of CTS accounts until December 2021. As of February, CTS deposits totaled PEN 21.8 billion system-wide. Moreover, the government approved rescheduling of Reactiva loans for a total of PEN 19.5 billion, along with [indiscernible] loans for PEN 2.1 billion, both until July 15. The rescheduling process includes a new grace period of up to 12 months.
Lastly, the executive branch has announced it will bring the law of interest rate caps and fee restrictions before the constitutional court. Several private institutions have presented legal actions that may also be taken before the constitutional court. Key restrictions have already been implemented, while recent guidance from the Central Bank has set an interest rate cap of 83.4% for small consumer and micro business loans from May to October 2021. We will continue to closely monitor these developments to evaluate their impact on Credicorp's operations. Next slide, please.
Now I will comment on Credicorp's performance in the first quarter of 2021. Credicorp's net income totaled PEN [ 651 ] million this quarter, which represents an increase of 215.8% year-over-year and reflects the fact that in 2020, we set aside significant provisions to mitigate the impact of the pandemic. Despite an adverse environment due to COVID-19, we continued to recover and posted a return on equity of 10.6% this quarter. The upward trend in earnings in recent quarters has been driven mainly by a decrease in provisions and reflects the favorable evolution of asset quality and uptick in fee income. This was offset by a decrease in the net interest margin and an increase in the life insurance claims.
Regarding our quarter-over-quarter evolution, I would like to highlight the loan portfolio remained flat in terms of quarter-end balances, as growth posted in consumer loans, mortgages and Mibanco was offset by contractions in corporate banking and credit costs. Net interest income grew 2.6%. This result includes PEN 88 million in expenses related to a liability management operation at BCP Stand-alone, which will generate savings going forward in a context of lower-cost funding, with these results [indiscernible] remained flat at 3.73%.
Provision expenses fell due to the ongoing improvement in client payment behavior, which led to a cost of risk of 1.63% and a structural cost of risk of 1.92% this quarter. Within nonfinancial income, fee income contracted 4.9%, which was mainly attributable to a decrease in transactions due to seasonality and localized lockdowns. The net gain on securities also posted a decrease of fixed income securities from ASB proprietary portfolio registered a drop in value in a context of higher interest rates. Insurance underwriting results were severely impacted by a considerable increase in COVID-19-related claims and incurred, but not reported, provisions in the life business. Expenses remain under control. Finally, our balance sheet remains strong with ample liquidity and adequate capital ratios. Next slide, please.
In terms of the performance of our lines of business, each of our subsidiaries is in a different stage of the recovery. In terms of subsidiaries, I would like to highlight BCP's Stand-alone drop recovery with an earnings contribution of PEN 725 million, which represented an 18.4% return on equity. Mibanco's recovery is sluggish, with an earnings contribution of PEN 14 million and a 2.7% return on equity. Pacifico's business was the most impacted by the pandemic this quarter and registered PEN 96 million in losses. Investment Banking and wealth management, in turn, reported an earnings contribution of PEN 37 million, which was close to pre-pandemic levels.
I will now explain the key dynamics in each of our lines of business this quarter, which led to mixed results. After that, we will review in detail our consolidated performance, line by line. Next slide, please.
Going into Universal Banking, this line of business drives the recovery this quarter. After registering the most difficult quarter in history in the second quarter of 2020, BCP's Stand-alone remain on track to earnings recovery, posting an earnings contribution to Credicorp of PEN 725 million and a return on equity of 18.4% this quarter. Net interest income decreased 10.4% year-over-year, which was driven by a decreasing market interest rate, a contraction in the structural loans, and the presence of government loans. These impacts were partially offset by growth in low-cost deposit actions to take advantage of lower rates through liability management strategies and the increase of the investment portfolio.
Provision expenses decreased 65.5% year-over-year after the majority of grace periods expire and clients register improvements in payment behavior. In this context, cost of risk was 1.37%, and a structural cost of risk was 1.62%. Fee income increased 6.2% year-over-year, given that the first quarter last year was impacted by fee exceptions. On a quarter-over-quarter basis, however, fee income fell somewhat, due to a decrease in transactional activity [indiscernible] localized lockdowns and the initial impact of government-mandated fee restrictions. Net gains on securities increased PEN 73 million year-over-year, after posting losses in the first quarter of 2020 due to a general decline in capital markets in the context of the first wave of COVID-19. On a quarter-over-quarter basis, results were mainly driven by sovereign bond sales in the banking book portfolio. Finally, operating expenses remain under control. This reflects a normalization of the levels of variable compensation and the impact of other cost controls. Regarding Bolivia, the business resumed positive earnings contribution, given that the last quarter of 2020 was impacted by new government regulations and reprogramed loans. Next slide, please.
In Microfinance, Mibanco's recovery is [ taking long]. After resuming growth in earnings during the second half of last year, the bank registered PEN 14 million in earnings contribution this quarter. Mibanco's clients [indiscernible] primary macro businesses felt the impact of lockdown measures more than larger [indiscernible] clients at BCP. Nonetheless, Mibanco's progress in implementing a hybrid business model has helped partially offset this effect. As a result, origination decelerated, and the loan portfolio grew 0.5% quarter-over-quarter. There were new needs for credit facilities as grace periods expire and delinquency increase.
Net interest income contracted year-over-year. This reflected the advent of lower interest rates and the fact that, through 2020, [ we targeted] lower-risk clients saw an increase in the average ticket and registered a decrease in yields. It also includes the net effect of interest reversals of previously reprogrammed loan-reprogramming loans and amortization on impairment on 0 interest rate loans made last year. Recently, the average ticket trend is moving in the opposite direction, as the average ticket decreases and origination [indiscernible] increased. These trends, coupled with a decrease in the cost of funds, led net interest income to grow 4.4% quarter-over-quarter.
Provision expenses increased 17.6% quarter-over-quarter, which was driven primarily by the deterioration in portfolio quality and by alignment with [indiscernible] information as competitors' delinquency increased. Nonfinancial income contracted 52% quarter-over-quarter, given that last quarter, we recognized extraordinary fee for credit life insurance commissions relating to the reprogramming loans for the full year 2020. [indiscernible] operating expense levels, Mibanco's results reflect the positive impact of the gradual implementation of the hybrid distribution model. In Colombia, Mibanco posted positive results for the first time since the acquisition of Bancompartir in 2019. Loan origination is already at pre-pandemic levels, and commercial productivity has been improving. Additionally, overdue loans improved from 5% to 4.5% quarter-over-quarter. Next slide, please.
Regarding insurance and pensions, Pacifico's life business generated stable earnings in the first half of 2020, but began to reflect the weight of pandemic in the third quarter of last year. In the first quarter of 2021, a second wave of COVID-19 ripped through the country, severely impacting the life business. Consequently, Pacifico posted a negative earnings contribution of PEN 95.5 million this quarter, driven by PEN 260 million of claims and IBNR reserves for COVID-19. Year-over-year and quarter-over-quarter, the evolution of earnings was driven by an increase in life claims and IBNR provisions, which was partially offset by a decrease in claims in the property and casualty business due to mobility restrictions, and an increase in net income from the medical service business due to higher demand.
Regarding the pension business, Prima's assets under management expanded year-over-year, reflecting the recovery of capital markets, offset by the fund withdraws of PEN 7.2 billion in 2020 and PEN 2.5 billion in 2021, due to government-mandated facilities. On a quarter-over-quarter basis, assets under management contracted 3.2%. Fees contracted 5.5% year-over-year due to a decrease in affiliate contribution, but showed an improvement quarter-over-quarter due to growth in average salaries and in the number of active contributors. Next slide, please.
Regarding our investment banking and wealth management businesses, assets under management and income grew year-over-year, given that the steepest decline in the capital market was seen in the first quarter of 2020. On a quarter-over-quarter basis, I would like to highlight total assets under management increased 3.3%, mainly driven by net new money in the asset management business. The effect of new subscriptions was partially offset by the evolution of asset values, which were affected by an increase in interest rates.
Regarding recurring income contribution, the contraction was driven by a [indiscernible] turn in capital markets and corporate finance. In capital markets, fixed income securities from the proprietary portfolios registered a drop in value in a context of higher interest rates. In corporate finance, income was affected by seasonality, posting lower levels of corporate transaction execution. These results were partially offset by growth in income in wealth management, which was primarily associated with higher gains from brokerage investment [indiscernible]. Asset management income growth, driven by traditional and alternative funds, as well as by the distribution of third-party products and growth in the treasury [indiscernible], which was affected by the devaluation of long-held [indiscernible] investments. Next slide, please.
Now I will discuss Credicorp's consolidated performance. On the asset side, Credicorp's interest-earning assets grew 26.9% year-over-year, driven by government program loans and investments. The structural portfolio dropped after wholesale clients had less need for liquidity, which led to an increase in cancellation of short-term loans. On a quarter-over-quarter basis, I would like to highlight interest-earning assets decreased 2.9%, driven by the investment portfolio at BCP Stand-alone. This quarter, we increased positions in the short-term investment portfolio and managed exposure in the medium-term banking book in a context of rising interest rates.
Our loan portfolio contracted 0.3% quarter-over-quarter in average daily balance, which was mainly due to a drop in the wholesale banking [indiscernible] portfolio and, to a lesser extent, to prepayments in some Reactiva loans. This was partially offset by the expansion posted in retail banking and at Mibanco Bolivia. The 1.3% quarter-over-quarter expansion in retail banking loan portfolio was driven by mortgage, consumer, and SME [indiscernible] segments. This evolution was partially offset by a construction in SME business, which was high levels of liquidity, and in credit cards, which registered low balances due to a drop in big-ticket purchases and higher constraints in the risk appetite for consumer segment. Mibanco's loan portfolio expanded to 1.9% loan origination in this segment, decelerated in February due to mobility restriction, but growth resumed in March. Next slide, please.
Regarding funding structure, total deposits grew [ 24.3%] year-over-year. Expansion was driven by an increase in demand and saving deposits, due to an injection of liquidity through government program facilities and higher saving rates among individuals. The aforementioned, coupled with lower interest rates and active liability management, led to an improvement in the funding cost.
Regarding funding management this quarter, I would like to highlight total funding increased driven by [indiscernible] low-cost deposits in a context of high market liquidity. BCP Stand-alone executed a new liability management [ track sanction] exchange to [indiscernible] bonds and bonds, a 2026 bond at 6.875% and a 2027 bond at 6.125%, for a new subordinated bond of $500 million at 3.25% that matures in 2031. This transaction, which will allow us to capture savings going forward, figures related charges in financial expenses for PEN 88 million in March 2021. The structural funding costs dropped to 1.35% this quarter. If we include funding relative to government programs and charges related to liability management operation, the total funding cost situates at 1.43% this quarter. Next slide, please.
The evolution of both payment behavior and portfolio quality improved in retail banking, but the situation of Mibanco was less favorable, as clients in this segment have been more impacted by the second wave of COVID-19. At BCP Stand-alone, retail clients sustained strong payment performance. On-time payments on loans was 95% in March, as higher volumes of reprogramed loans expired. Non-reprogramed, up-to-date loans increased this quarter to represent 76% of structural loans, and the high uncertainty portfolio, which is comprised of [indiscernible] loans and are within grace periods, and those that are overdue reduced to 5%, compared to 9% last quarter. At Mibanco, on-time payments on loans due remained at 93%, in a context marked by an increasing expiration of grace period quarter-over-quarter.
Analyzing the structural portfolio figures we note, first, non-reprogrammed, up-to-date loans posted a noteworthy growth this quarter, to represent 57% of restructured loans, compared to 49% at the end of 2020. Second, the overdue portfolio increased this quarter from 6% to 9% of restructured loans, as clients' facilities expired and clients were impacted by lockdowns. Finally, the [ high-uncertainty] portfolio was reduced to 19% of structural loans, compared to 24% last quarter. In this portfolio, 10% of the structured loans were still within grace periods, which will be expired mainly by June 2021.
Regarding portfolio quality ratios, the majority of Credicorp's structural NPL ratios increased this quarter. The retail banking portfolio [ of ] BCP Stand-alone improved its structural NPL ratio this quarter, so a decrease in overdue loans in the consumer and credit card segments, reflecting its positive payment behavior. An increase in write-offs and loan growth also fueled a drop in the ratio. Deterioration in NPL for wholesale banking was attributable to specific clients in the middle market segment.
In Mibanco, the NPL ratio deteriorated this quarter due to higher delinquencies after a large tranche of grace periods expired and client payments began to reflect the effect of the lockdown in February. As a result, Credicorp's structural NPL increased to 6.05%. Finally, the NPL coverage ratio decreased to 142.9% this quarter, reflecting also PEN 767 million of write offs. Next slide, please.
Now I will explain cost of risk dynamics. Provision expenses continued to follow a notable downward trend, which was attributable to an improvement in client payment behavior, an uptick in transactional activity at BCP Stand-alone, mainly in retail banking segments. At Mibanco, provisions increased this quarter due to 2 factors: an upswing in delinquency after grace periods expired and external alignment, given that our competitor delinquency levels [ grows]. As a result, Credicorp's structural allowance for loan losses or the total restructured loan ratio fell this quarter to 8.5%.
Regarding the evolution of the structural cost of risk quarter-over-quarter, BCP Stand-alone ratio registered a significant contraction of 95 basis points as situated at 1.62%, while Mibanco's ratio increased 73 basis points, to situate at 5.45%. As a result, Credicorp's structural cost of risk contracted 72 basis points and situated at 1.92%. Finally, Credicorp's total cost of risk contracted 50 basis points quarter-over-quarter, posting a level of 1.63%. Next slide, please.
At Credicorp, NIM remained flat this quarter at 3.73%. This was attributable to the fact that the increase in net interest income was offset by growth in average interest-earning assets. NIM includes a negative impact of 7 basis points from charges related to the liability management transaction at BCP Stand-alone. Structurally, NIM dropped 12 basis points this quarter, affected by a less favorable mix in interest-earning assets and lower origination rates at BCP Stand-alone. Finally, risk-adjusted NIM increased 34 basis points this quarter, in line with lower provisions. And BCP Stand-alone's NIM contracted 37 basis points quarter-over-quarter, following the same dynamics seen at Credicorp level. Mibanco NIM increased 17 basis points quarter-over-quarter, given that the structural loan dynamics continue to recover despite the lockdown imposed by the government. And interest rates on new loans increased in line with a drop in the average loan ticket. Next slide, please.
Nonfinancial income expanded 24.7% year-over-year, driven by 9.3% growth in fee income, given that the first quarter of last year was impacted by fee exceptions, and growth in the net gain on securities, given that the first quarter of last year reported losses in line with the steepest decline in value in the capital markets due to the onset of the pandemic. On a quarter-over-quarter basis, nonfinancial income contracted 10.2%, which was driven by a decrease in net income securities, as significant gains were booked in the last quarter of 2020. This drop was driven by loss registered in fixed income security from ASB's proprietary portfolios, due to a drop in value in the context of higher interest rates. These losses were offset by gains on sales of sovereign bonds and BCP Stand-alone's banking book portfolio, the decrease in fee income at BCP after extraordinary fees were registered in the fourth quarter of 2020 for reprogramed loans during the full year 2020. Next slide, please.
The insurance underwriting result was severely impacted this quarter and posted a loss of PEN 65.2 million. The main driver of this result was the life insurance business. On a year-over-year basis, the increase in the loss ratio in the life business was driven by excess mortality related to COVID-19. This was partially offset by growth in net premiums from [ Cisco 5], after higher fees were obtained through the new option for ASP mortality risk coverage, and price adjustments were made in the credit life business. In the case of property and casualty, the loss ratio improved after the claim levels dropped across businesses, due to mobility restrictions.
The material quarter-over-quarter increase in IBNR provisions from COVID-19 is due to 2 factors. Mortality was driven by the retired population in the first wave, and by members of the economically active population in the second wave. Credit exposure in the second group was consequently higher. Provisioning in the context of the pandemic has been challenging and initially involved our best estimates, given that there is a lag between the moment in which cases occur and when they are reported. Our learning curve has increased significantly since the beginning of the crisis, and such as, we have adapted our IBNR models to reflect the potential impact of increased mortality. The statistics show that mortality rates are beginning to decrease, and IBNR should follow that trend. Next slide, please.
Credicorp's operating expenses remain under control. The year-over-year deterioration in Credicorp's efficiency ratio, which situated at 44%, was driven by a decrease in income, due to lockdowns and charges for BCP Stand-Alone's liability management transactions. Excluding these charges, Credicorp's adjusted efficiency ratio was 43.06%, which represents a year-over-year improvement of 32 basis points. Expense controls at BCP Stand-alone was reflected primarily in a reduction in variable remuneration expenses. Mibanco, in turn, has made significant progress in implementing its hybrid distribution model, which is more cost efficient. Next slide, please.
In terms of our liquidity, the regulator monitors the 30-day liquidity coverage ratio, and BCP Stand-alone and Mibanco have maintained levels well above the regulatory minimum, both in soles and in dollars. However, the management decision 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 high levels.
Regarding capital, each of our subsidiaries maintained adequate capital levels, which ensures the solvency. A slight reduction in core equity Tier 1 at BCP Stand-alone is related with the reduction of unrealized gains, which in turn is related with increasing long-term interest rate in soles. Mibanco's core equity Tier 1 decreased this quarter, given that in local accounting, the effect of capital increase of PEN 400 million reported last year was canceled out by the effect of constituting a similar amount of voluntary provisions last quarter. This offset was registered in the first quarter of 2021. Next slide, please.
We have advanced on our digital journey and are accelerating digital initiatives about the business and Credicorp levels. At BCP Stand-alone, digital clients have fueled growth. This trend has accelerated over the last year and will continue to be key going forward. Digitalization has grown at Pacifico, where almost 64% of its clients are now able to self-serve for different types of transactions. At Mibanco, the hybrid model has boosted the productivity of loan officers and improve efficiency. At Credicorp level, we are in the process of building an ecosystem that focuses on the needs of SME clients. We aim to provide these businesses with a consistent and integrated offer to a platform with unique user experience standards and high connectivity. This will enable us to process data and transactions efficiently. Our goal is to innovate to provide clients with solutions to develop and grow, increase customer loyalty, and generate new sources of income. Next slide, please.
In March, Credicorp published its first sustainability report at the holding level with details of its 2020, 2025 sustainability program. As part of the exercise, the company developed a new purpose. Vision and values is now guiding the implementation of its strategy and decision-making. Additionally, Credicorp has defined 3 pillars oriented to sustain long-term value creation and alignment with the United Nations Sustainable Development Goals: create a more sustainable and intrusive economy, improve the financial health of citizens, and finally, empower our people to [indiscernible]. We invite our investor community to navigate through our sustainability report, where you will be able to find details of our ESG business strategy, our analysis of risks and opportunities, our governance structure, and our commitment to the future. Finally, as always, we are glad to receive any feedback you may have on our sustainability approach, as we believe it will contribute to advance further in [indiscernible]. Next slide, please.
Regarding our 2021 guidance, as of today, we maintain our expectation for GDP growth between 8% and 10% for this year. Loan portfolio dynamic has been weak, and as such, we expect loan growth to be at the lower end of guidance. Net interest margin was sluggish in the first quarter of 2021. The recovery of this indicator throughout the year will depend on the structural loan dynamics. On the other hand, cost of risk has improved faster than expected, and if current conditions hold, we expect this trend to continue. The efficiency ratio posted in the first quarter of 2021 is under control. Our ability to maintain the efficiency ratio within guidance will depend on income dynamics.
All in all, we maintain all our return on average equity guidance. There are other factors that may impact our results this year that I would like to mention. First, regarding the new law that sets interest rate caps and restricts some fees, while we estimate that this will have a limited impact on Credicorp P&L, however, we are concerned about the negative impact of these measures on financial inclusion in Peru. Second, regarding life insurance claims and IBNR provisions going forward, we have fine-tuned our model to better estimate potential losses. If the mortality curves start to ease in Peru, we expect these IBNR provisions to reach the maximum level in the second quarter this year. Finally, as we communicated to the market previously, we have postponed our decision of dividend payments until certain things on the local scene are [indiscernible].
With these comments, I would like to give the floor to Walter Bayly, who would like to add some remarks before starting the Q&A session.
Thank you, Cesar. Good morning to all of you. I would like to summarize the key results of this first quarter conference call and will make some additional comments before opening up to Q&A portion of the call.
ECP delivered a strong quarter [indiscernible] 18.4% annualized [indiscernible]. We are still not seeing growth in the loan portfolio, and loan growth will probably be sluggish throughout the year. These strong results were largely driven by lower cost of risk. Mibanco's [indiscernible] recovery was negatively impacted by the lockdown measures, which curtailed loan origination. The situation did stabilize, and I am confident that Mibanco can still deliver high single-digit return on equity this year.
Pacifico's results were severely impacted by the second wave of COVID-related deaths. This was exacerbated by changes in the methodology utilized with more accurately calculated incurred but not reported claims. We should see the tail end of this second wave in the second quarter. The impact should nevertheless be less severe, in that the statistics indicates that the second wave is already declining. And the revision [indiscernible] allowed us to anticipate [indiscernible] claims. A third wave cannot be ruled out before year-end, but the severity should be less, given that the vaccination process is already underway, with approximately 5% of the population already vaccinated.
But the relevant risk factors today are not related to the performance of any of Credicorp's units and are centered around the legislation and politics. As Cesar mentioned, Congress recently passed and enacted legislation around interest rates, which benefits no one. This legislation has limited impact of BCP, who is traditionally more focused on [indiscernible] consumers. This legislation is more relevant to Mibanco, who will have to redirect its loan origination sales force to other segments. This could even be marginally more profitable, since entry-level microfinance loans were have the most profitable, but are core to our purpose and mission of financial inclusion. This piece of legislation, which is being challenged at the [indiscernible], will have a very negative impact on financial improvement.
Other legislation worth mentioning is an additional distribution of from [indiscernible] from the private pension system. This will represent approximately PEN 11.4 billion, or 24% of assets under management. But of course, the largest risk factor is around the upcoming second round of presidential elections. The outcome is still unclear. With important segments of the population still undecided, they could change the results [indiscernible]. We will have a clearer picture as the election date comes closer. But it is very worrisome that one of the candidates has made public statements regarding his party's intention to shut down or eliminate institutions such as the [indiscernible], which are pillars of our democratic system. Furthermore, Peru Libre's government program mentions the states taking over oil, gas, mining, and other sectors of the productive side. Such initiatives have been tested in Peru in the past and in labor countries, with very negative results from production levels, employment, investment, and overall economics [indiscernible].
Members of Congress have already been elected, and we will have a very fragmented Congress. And whoever becomes President will have a hard time enacting new legislation. To the extent that the new administration governs within the boundaries of democracy, the checks and balances of our system should be [indiscernible]. Having said that, this political and economic volatility is extremely negative and comes at a moment when Peru is struggling to recover from the worst economic and health crisis in this history. Peru's population is very much impacted by the health and economic crisis, and hopefully, we will be able to continue down the path over the past decades that has proven successful in reducing poverty and improving the quality of life in Peru.
With this, I finish my comments, and we'll open up the Q&A session.
[Operator Instructions]
Our first question comes from Ernesto Gabilondo with Bank of America.
I have a couple of questions, so I will ask the first one. I will let you to answer, and then I will do my second question. So the first one is on the political outlook. I just want to know your thoughts on what could be the risk for the financial sector if Castillo is elected president.
Yes. It is very unclear, Ernesto, what that -- what [indiscernible] would be passed regarding the financial sector. There is nothing specific in the economic program, so there's very little that we can comment.
Okay. Perfect. And then my second question is on your cost of risk, which came at 1.6%, so below your guidance of 1.8%, 2.3%. Do you think that now the cost of risk would be more in the low end of your guidance?
Ernesto, this is Reynaldo. Yes. I mean, the performance of the portfolio, in general, has been quite good, better than we expected by the end of last year. So I mean, your forecast is probably correct. We expect that the performance continues in these good trends on the low side of our guidance.
Our next question comes from Brian Flores with Citi.
Just a quick follow-up on the guidance. You mentioned [indiscernible] between 1.8% and 2.3%. So do we expect higher provision for the coming quarters? And then, if you could talk about what we should expect the expenses, given that in this quarter, they [indiscernible] maybe 6% [indiscernible].
I couldn't hear very clearly. Right.
In terms of cost of risk, we haven't changed our guidance. There are still some uncertainties on the future. There is a quite important side of the portfolio, which is still on reprogramming facilities without payments, so we haven't changed our guidance as to this point. Having said that, as I mentioned before, we are positive on the trend and on the performance of most segments of our market, so we are expecting to be, as I mentioned, in the lower side of our guidance for the next quarters.
Brian, I think you made an additional question, but I couldn't hear you clearly.
Yes, sorry. The additional return to expenses [indiscernible] of around 6% year-over-year. So how should we think about this line for this year particularly?
If I hear you and understand well, we think our expenses are under control. And what we saw during the last year was a reduction of variable compensation. Variable compensation now is going to be adjusted more in line with the current results and to normalized levels. At the same time, we are enforcing a number of initiatives to control other expenses and increase efficiency, particularly, for example, in Mibanco. So in terms of cost, we think that we are going to be very much in control, that the combined ratio, the cost-to-income ratio is going to be more affected by the trends of income that, as we stated during the initial remarks, are somewhat challenged in terms of margins.
Our next question comes from Thiago with UBS.
Yes, I have one question about Mibanco. Mibanco used to have an ROE of close to 20%, or even above 20% before COVID. Do you see this level again considering a more normal Peruvian [indiscernible] scenario? Or there are any -- or any driven change in the markets that should prevent the ROE to return to this 20% level?
Thank you for your question. I will take it. This is Walter. Yes, expect we have -- we feel very comfortable that Mibanco will be able to return to the 20% fast return on equity next year. This year, our target, as I mentioned in my comments, is to have probably the [indiscernible] maybe in the high single digits. The size of the portfolio, the profitable portfolio at Mibanco suffered a lot. The duration of that for the full year is about 13 months. So a couple of months with very sluggish loan origination, due to the lockdowns, really shrank the profitable portfolio in a substantial way.
So we think we can go back once the situation gets normalized in terms of our sales force being able to [ move ] freely, and we are also making a lot of efficiencies in the hybrid model, which is not exclusively dependent on the salesperson. So in short, yes, we can get to the 20-plus return on equity, not this year, next year.
Our next question comes from Jason Mollin with Scotiabank.
My question is a general question about the current context of the uncertainty that you mentioned, particularly given the political scenario, how -- and you've dealt with this kind of political uncertainty in the past. How should we think about what Credicorp can do to prepare now, just with this uncertainty? Are there actions to be taken in terms of shoring up positions, U.S. dollar positions? Are there things you're doing now to prepare for a less market-friendly environment. Can you hear me?
Cesar?
Yes, could you hear me?
Yes. Cesar, are you there?
Yes. Yes. We are preparing, I will say, in 2 different prongs. One, in the short term, we are managing the FX position and the sensibility of our books to the volatility of interest rates. And in parallel, we are analyzing how we can navigate in a different scenario. But I would like to emphasize the experience of the institution and the management team in general dealing with uncertainty and complicated situation throughout the history of the company. We have manage challenging situations before and [ drive ] increasing the capabilities through this kind of time. So we are prepared in the short term, a number of measures, and we, in general, think that we have the capabilities to adapt and manage uncertainty down the road. It's very early to say what specific impacts they could have, but we rely on these strengths of the companies and the culture.
Let me add something to what Cesar just mentioned. Apart from the very obvious increase in liquidity, maybe some FX positioning and managing, less exposure to interest rates, we are long [indiscernible]. We are an institution that is basically [indiscernible], and that is what is what we are. Against that, we have certain levers that we can manipulate. But more importantly, we will -- we have, as Cesar mentioned, navigated in the past through very difficult political situations, and we think we can continue to do so. But we have, of course, done the obvious of increased liquidity, taking some FX positioning within the limits of what is reasonable.
I have seen Credicorp really manage some pretty challenging situations, so I understand that. Is there anything that's different this time than what we've experienced in the past and through in the last 25 years?
No, no. Really, when [indiscernible] got elected, we went through a similar situation. And this one is no different.
Congratulations on the results in the tough environment.
Our next question comes from Alonso Garcia with Credit Suisse.
I want to touch base on the interest rate caps. I mean, the Central Bank are announced a level of 83.4%, which was actually much higher than we had expected and much higher compared to rate caps in Colombia and Chile. So certainly, a more benign outlook for Credicorp, based on this rate cap. But could you please share your views on the potential impact or the potential percentage of your portfolio that would likely be impacted in case the rate caps in [ enlisted] at 83.4%? And also, if you could, discuss the timing -- the potential timing for implementation of this rate cap.
Yes. This is Gianfranco. Let me take this question. Good morning, everyone.
I tend to disagree with your comment on being a benign rate. You have to [indiscernible] that the level of formality of the economy in Peru. Therefore, the -- both the cost assessment, or the cost of risk plus the distribution costs, are very high in our market. The major impact is going to be in terms of financial inclusion. There are some studies that say that over 1 million people that are currently financially included, that have gotten a loan, will be excluded in the upcoming months. So that's actually the major impact.
Regarding BCP, about BCP and Mibanco, unfortunately, the small-ticket loans are going to be hurt the most. That's not relevant in terms of size of the portfolio. However, it's relevant, again, in our financial inclusion agenda.
Regarding your question on timing, as of -- actually, I believe it's Monday-- yes, May 11 this cap starts to be in place.
This is very clear. And just as a follow-up, is there like legal challenges to the straight cap in place, or it will be indeed put in place next Monday?
Yes. Yes. The answer is yes. Well, first of all, the executive power has mentioned that they will present, I don't know how to say it, a proposal, a requirement to the constitutional review in order to ask for -- asking for that this law is unconstitutional. There's another -- it's [indiscernible] that have also -- which is a private association -- has also [indiscernible] the same requirement. And there are some financial institutions that have already presented another type of legal requirement. So the answer to your question is yes.
Our next question comes from Yuri Fernandes with JPMorgan.
I have a question regarding FX deposits. We saw some increase [Technical Difficulty]
It looks like Mr. Fernandes' line cut out, so we're going to go to our next question, Brian Flores with Citi.
[indiscernible]. Can you hear me?
I couldn't hear.
Sorry, just wanted to follow up on the dividend payment. On the last conference call, it was mentioned that maybe in 2021, you will be [ reducing ] the capital base? Is this still the case or do you see some upside risk for dividend payments in 2021?
I couldn't hear.
I'm sorry. I think I understood the question. It was related to dividend payments, I think was the question. At this stage, we are -- we feel comfortable with the capital [ gains] that we have, and we are working to clear some of the uncertainties around the health situation and the political situation to be able to analyze paying dividends in the second half. I think that was the question. I'm sorry, the line is not very clear yes.
Yes, sorry, [indiscernible] very clear.
Our next question comes from Alonso Aramburú with BTG Pactual.
I wanted to follow-up on the interest rate [ capital income ]. Is it possible to quantify the impact of income from this law? And do you know if the challenges -- if the constitutional challenges presented to the tribunal, will this also impact the fee income, or the constitutional challenge only for the interest rate cut?
Alonso, it's for both. It's actually for both. In our case, I'm talking about DCP, the impact is much higher on the fee side rather than the interest rates. But I don't have the exact figure as of -- I don't know, Cesar, if you have some info there.
Yes. The impact in interest rate is actually very modest, impacting the number of clients significantly, as Gianfranco mentioned before, but the fee income impacts around 4% of the fee based on a yearly basis.
That is 4%.
Yes.
Okay. And do you know if the challenge will also challenge the constitutionality of the fees being imposed or being taken out?
Yes. Yes. No, the challenging is for the whole law, Alonso, both on the fee side and the rate cap. Yes.
Our next question comes from Andres Soto with Santander.
I would like to hear your thoughts regarding margins. Obviously, Credicorp is facing a low-rate environment, but asset mix has probably been a bigger factor in [indiscernible] recently, given the increased weight of securities versus loan in your asset composition. So can you please comment on your NIM on loan trends. And also, if you can exclude from that the effect of Reactiva on how your current levels compared with those before the pandemic?
Yes. I would say that even if you exclude Reactiva loans, we now are operating under a lower margin. That is the reflection of the low short-term interest loans that affect the investment portfolio, but also the short-term corporate and enterprise loans that are a significant part of the portfolio. So this is impacted, and it's going to be impacted as long as the interest rates are as low as it is now.
In terms of mix, we have, as was explained in the remarks, mainly by 2 factors in the case of BCP, lower demand in corporate loans, the companies are optimizing the balance sheet and are in general change liquid, so lower demand in corporate loans. And in the retail portfolio, we have an impact, particularly in credit cards due to 2 factors. One is the big-ticket discretionary expenses are a lower level, and this is going to be the case until the lockdown is in place, or restricted measures are in place, and some restrictions in risk appetite for the consumer segments. The other parts of the portfolio are growing a healthy pace.
And in the case of Mibanco, as Walter mentioned, we have a decrease in volumes that are recovering now. And also, we are transitioning from lower risk, lower margins to higher margins with a little bit more risk down the road. This mix are going to be visible down the road. But until the pandemic is still with us, the mix is going to be affected in the Prima sector and the credit cards, particularly.
Maybe just a quick comment -- additional comment on what Cesar just mentioned, is over the last, I would say 30 days, also the mortgage the mortgage performance in terms of new origination has slowed down, which makes total sense with the political uncertainty. The last quarter of last year, and maybe the first couple of months of this year or 3 months of this year were very positive in terms of the mortgage growth. However, as we speak, the state of originations has lowered quite a bit for the last 45 days.
And my second question is regarding other measures that -- laws that have been approved in Congress, one regarding new ASP withdrawals, a significant amount, almost $10 billion according to some estimates. And also, the one approving that withdraw from CTS's accounts, which obviously [indiscernible] Credicorp on the funding side. But besides these negative effects on your businesses, are there any opportunities that you see, given these high levels of liquidity that we are going to have in Peru as a consequence of these measures.
Let me take the question on CTS, and maybe someone else can take question on [indiscernible]. On CTS, you have a game of relativity. So the institutions that they're going to hit -- being hit the most are the [indiscernible] and other financial institutions that have -- their funding structure was -- or their long-term funding structure was heavily based on CTS. That's not the case, neither for Mibanco or BCP. So in terms of -- that's an opportunity for us we would see, especially in the microfinance business, several financial institutions that are going to have a problem, both in terms of liquidity and funding. And normally, what happens for us, because of the market share we have -- I'm talking about BCP -- is that we end up getting more deposits in terms of sales and current accounts.
I don't know who on you take the answer -- the question on pension funds. [indiscernible], are you there?
Hello, everyone. Yes. On pension funds, the challenge today with this new law is to manage investments in order to minimize the impact on values, and therefore, could not affect as much those customers who stay at the fund, and in turn, do the required payments without any major stress. As you know, there are investments in the local markets, but also in the foreign markets, and in order to keep the balance of the portfolios, probably both of them will have to be used. But that's the challenge.
The opportunity for Credicorp, I would say, has to do with what happens with those with withdrawals. People go and deposit that on the financial system, and that's typically something that benefits the most solid financial institutions, and especially over the last year was beneficial for BCP deposits. So that's the opportunity that I find in that event.
Perfect. Congratulations on the results.
Our next question comes from Sergey Dubin with Harding Loevner.
Yes. My first question is with regard to your guidance on the loan growth, are you assuming sort of a stable political scenario here? And how -- if there is a victory of Castillo in the elections, how could -- how should we think about the loan growth going forward? That's the first question.
And then my second one -- actually, let's listen to the first one first, and then I'll ask the second one later.
Okay. Yes, our guidance assumes, I would say, the continuation of the economic model. I think it's very early to project the impact of a change in the case of Castillo wins and -- Mr. Castillo wins. And we need to hear the specific measures that they implement or proposed as an elected officer, and not as a candidate.
Maybe just to complement that, there's a high correlation between GDP growth and loan growth. The history terms of that. Obviously, we still expect Peru to grow anything between 8% to 10%. Therefore, there should be a growth in -- an important growth in our portfolio. Obviously, political uncertainty generates some -- the economic agents to be much more conservative. That's the reason why I was mentioning that it's going on. But what is currently going on with mortgage -- in the mortgage portfolio, obviously, the [ corporates] are also very conservative today. So again, GDP is going to grow in a very strong pace this year. Therefore, loan growth should follow that trend, but the political scenario is still to be seen.
Okay. And then the second question is related to that in terms of -- I think you mentioned before, but I'd like to maybe elaborate on that. What is kind of -- what are specifics -- I know it's very hard to know because you still don't know what is being proposed or what's being -- what kind of rules are going to be put in place. But as a management team, directionally, what are you seeing in terms of worst-case scenario preparations? Like does it -- I think you mentioned something about reducing foreign currency exposure. Can you maybe elaborate on some of the steps that you may be taking? And also, what's the impact? Without specific numbers, how should we think directionally about the impact of these measures.
I take initially this. What we are trying to, in the very short term, and this is not a strategic response, but this is a tactical one, is to be long in the FX side and manage the exposure to medium-term bonds. But this is a tactical response.
So does that mean that you want to increase your FX holdings or FX exposure because you believe there is a current risk of currency depreciation?
Yes, within the established limit by the regulation. In any case, it will have a moderate impact in total results.
Our next question comes from Yuri Fernandes with JPMorgan.
I hope this time it works well. Congrats on the BCP special results this quarter. I have a first question regarding your liability, notably deposits in dollars. We saw some increase this quarter, right, in [indiscernible] deposits in dollars. How is that tracking lately for you in April and May? And if this trend continues, [indiscernible] some of the liabilities, how that impacts your margins? So that's my first question. And if possible, I'd like to make a second question later.
Okay. We have seen -- in terms of liquidity and general level of deposits, we have not seen any negative trend. We have seen some change in composition of the deposits, a slight decrease in sol deposits and an increase in dollar deposits, and we maintain our books regarding that. Given the ample level of liquidity and the relative low rate, both in dollars and soles, the short-term impact of these increases are minor. If we think in the very short-term, Fed funds return of, let's say, 9, 10 basis points or the Central bank, 25 basis points, the difference between one and another is real, but minor.
Super clear. And if I may, a second question regarding Bolivia. Can you talk a little bit about the challenge you face in the country, not for COVID, but even before COVID, we saw that the Bolivian unit was reaching like 11%, 12% ROE? That is lower than the group. So can you explain a little bit, like historically, what were the challenges [indiscernible] in Bolivia? Like what explains this RPE gap? Is the difference in scale? Is it different on [ penetration]? Is a rate gap issue in Bolivia? Like, can you talk a little bit about the business in that country?
Sure. Let me take that one. Actually, it's all of the above. Bolivia, doing business in Bolivia, and especially doing being in the banking sector in Bolivia is really challenging. There's a lot of -- or I would say, excess of regulation. There are both interest caps on the loan side -- on the lending side and also on the deposit side. There are also, like you have to have a specific portfolio in some sectors, a subsidized rate. And on top of that, recently, due to COVID, there have been a lot of limitations in order to both -- to collect, actually, interest and installments. So it is quite complicated to do business in Bolivia.
It is unfortunately -- it is unfortunate, because we do believe that we have a strong franchise in Bolivia, specifically in the mid-size and corporates. But actually, I would say it's all of the above. Bolivia is still a country that there's a lot of potential to do business, but the current political situation and economic way -- the economic policy of the current government, it makes it very complicated.
Our next question comes from Brian Flores with Citi.
Just a quick follow-up. You mentioned [indiscernible] liquidity of 4% [indiscernible] Item specifically?
Brian, sorry, I couldn't hear clearly.
So can you hear me better now?
Yes. Now it's better.
Okay. Perfect. Now just a quick follow-up on your comments on the [indiscernible]. You mentioned an impact of 4%. My question [indiscernible] specifically.
If I understood well, you want additional comments regarding the interest rate caps and fee restrictions. The percentage that I mentioned of 4% was related to the fee impact -- to the free restrictions impact from the fee income line, on a normalized basis. The interest rate impact, as we mentioned previously, is moderated.
Yes. But let me -- sorry, let me stress my previous comment. That might be a very short-term vision or answer. What concerns me -- what concerns us is that going forward, there is -- there's a huge potential for growth in lower segments of the population. This interest rate cap is going to have a huge impact on that, both on the business for the financial institutions, but more importantly, on the unbanked or under-banked today.
Our next question comes from Carlos Gomez with HSBC.
You may have already answered this, and I apologize, I joined the call late. I would like to know if you could comment on the allowed withdrawal for CTS and insurance employment funds, whether that could affect any of your business or units, and whether that can affect the bank system as a whole. Because I understand that's an important part of the funding for some smaller banks?
Second, on the -- yes, go ahead.
Yes. The CTS, we have system-wide around PEN 21 billion, around PEN 7 billion at BCP. As we mentioned, in a situation like this, we will expect an important withdraw of these funds. But what usually happened is that the deposits came back in another form, for example, saving deposits or short-term CDs. In the previous cases, BCP ended up gaining share in another form of deposits. But the impact in system-wide can be significant for the smaller institutions, [indiscernible], which has a significant part of this fund -- or the funding based on CTS at high interest rate. For them, it can be a significant pressure in terms of funding.
Do you expect these funds to ever return to the system?
Usually, the funds are recycled, but usually change in the forms of CTS that have restricted funds into more transactional funds, or certain parts goes to deposits of short-term fund -- investment funds, but in different institutions, is usually what happens in situations like this. The money is not going to disappear. The PEN 21 billion are not going to disappear, are going to be recycled among the institutions in the system.
We understand that. The question was more whether -- I mean, this is a form of long-term savings, and we wonder if, in the future, this will be rebuilt? Or is it something that the system will have lost forever?
No. If other measures are not taken, the funds are going to rebuild. But it's going to be a lengthy process because what is deposits is one-twelfth of the yearly income on a yearly basis with 2 deposits. So to reach these levels, it's going to take probably 3, 4 years in the extreme case that all the deposits are taken out. But that's an extreme case, not the basic scenario.
Okay. That's very clear. And if I can ask another question is regarding your insurance business. Obviously, you have had an impact in the short-term because of the higher claims, which is completely understandable. I imagine that you would continue to have it this year. I don't know if you have given some guidance. In the long run, I'm talking 3, 4, 5 years from now, do you see your insurance business changing for the better or for the worse because of the challenge and the experience of COVID?
Carlos, this is Walter. We recently had a very interesting conversation at the board at Pacifico. We questioned whether our portfolio mix deserved to be revisited, given the changes that have happened with COVID and whatnot. And the conclusion was, no, that precisely the portfolio that we have, which is highly skewed towards sales through the banks, the a [indiscernible] very a portfolio that is mostly individual, rather than corporation is a good portfolio. It has been extremely profitable in the past, and we are -- we think that, once the region normalizes, it will continue to be a profitable portfolio as it had been in the past.
At this time, we have no further questions, so I'll turn it back to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.
Okay. Thank you. Thank you all for joining us in this conference call. These are indeed challenging times. We hope that by the next conference call, the mood will be better and we will be able to continue the path of recovery of our profitability in our finances. This year has been very strange. We are working towards recovering the profitability and concluding with all our expansion programs and digital investments that we've made.
Again, thank you all for joining us, and see you [indiscernible] at the next conference call. With this, we conclude the call. Thank you all.
Ladies and gentlemen, that concludes this morning's presentation. Thank you for your participation. You may now disconnect.