Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, everyone. I would like to welcome all of you to the Credicorp Ltd, First Quarter 2022 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp's website.

Today's conference call is being recorded. [Operator Instructions].

Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Ciguenas. You may begin.

[Milagros Ciguenas, Head, IR]

Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer; Reynaldo Llosa, Chief Risk Officer; Diego Cavero, Head of Universal Banking; and Cesar Rivera, Head of Insurance and Pensions.

Before we proceed, I would like to make a following safe harbor statement. Today's call will contain forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligations to update or revise any forward-looking statements to reflect new or changed events or circumstances.

Gianfranco Ferrari will start the call discussing our strategic initiatives, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance and provide an update on our outlook for 2022.

Gianfranco please go ahead.

[Gianfranco Ferrari, CEO]

Thank you, Milagros. Good morning, everyone. Thank you for joining us today. Please turn to Slide 3 of our earnings presentation. We were pleased to recently have the opportunity at our Digital Day to introduce to many of you our holistic approach to continuing to challenge and transform ourselves to maintain our leadership position in Peru and beyond as we expand regionally.

Our first quarter results underscore the effectiveness of our strategy as we capture market opportunities, capitalized on synergies and leverage our brands and scale to deliver to strong on operational milestones, financial metrics and enhance shareholder value.

Despite the current political turmoil, the successful execution of multiple initiatives across our LOBs enabled us to maintain solvency and to increase our declared dividend to PEN 15 soles per share for the 2021 fiscal period.

Today, we are also adjusting our 2022 outlook for Credicorp. Cesar will discuss this in more detail shortly.

Now please turn to Slide 4. As you all know, when I came to the role of CEO earlier this year, it was after having spent many years working hand-in-hand with the prior leadership, established the foundation of what are the key strategic initiatives that we remain focused on today. Two years ago, we announced important additions to our governance and operating structures to ensure that sustainability would remain and become even more a core part of how we do business.

In fact, it is one of the 3 key priorities of our long-term strategy that is guiding the future of Credicorp's businesses and the impact that we want to have on society. At our Digital Day took place in mid-March, we outlined the governance structure and core initiatives that would also ensure that the early successes in digital transformation we achieved at BCP would be replicated and enhanced throughout the company, all while intensifying our focus on internal and external disruption and innovation to meet and anticipate the needs of our expanding customer base.

Finally, everything we do is based on the relationships we have with our customers and our ability to deliver on the trust they are putting in us. As such, attracting, retaining our skill and talent is fundamental to the success of all of our initiatives. Working under a framework guided by these 3 key priorities will allow us to unlock Credicorp's full disruptive, scalable and market expansion potential.

Please turn to Slide 5 to review these initiatives in more depth, starting with the acceleration of our digital strategy. As I just mentioned, we've expanded our governance structure by adding 2 new governance bodies at the Credicorp level; the Innovation Committee and the BAP Innovation Table both led by Francesca Raffo, our Chief Innovation Officer. This is designed to enhance our disruptive and entrepreneurship culture while adding an extra layer of support to foster creativity and innovation while optimizing the return on investment in innovation.

Fundamentally, our digital strategy is aimed at facilitating our ability to live our purpose, to contribute to improving lives by driving the changes that our countries need. Execute on our values and achieve our sustainable growth objective of expanding our total addressable market and strengthening our operational drivers.

Our innovation initiatives are taking place both internally, through innovation laboratories where we're disrupting ourselves and expanding our tech capabilities and data-driven approach at each of our subsidiaries, and externally through Krealo, the Corporate Venture Capital Center.

Please turn to Slide 6. To successfully meet our transformation and growth objectives, we are committed to continuing to retain and attract the best talent, all while managing their potential, development and succession with a comprehensive value proposition that strikes the balance between human and business perspectives.

In 2022, our Talent strategy parallel to our business transformation strategy. This includes focusing on developing an attractive talent with technological and digital capacities while accelerating initiatives for gender equality.

We know this is a competitive environment for talent and are committed to evolving our model to offer current and potential employees a proposal that focuses on their personal development, flexibility and well-being, including specifically addressing executive compensation and a hybrid remote work-from-home approach. This is generating new opportunities and modalities for us by facilitating borderless hiring.

Moving on to an ESG update on Slide 7. During the quarter, we were especially active within the environmental and social front and we continue to progress along our ESG journey. On the environmental front, we doubled down our Eco-factoring product reaching $4 million in disbursement during the first quarter of the year. We also launched green products such as financing imports and acquisition of electric vehicles at BCP Bolivia and continue to develop capabilities on sustainability issuance at Credicorp Capital.

During the quarter, we financially included 275,000 people through our digital wallet. We also accelerated our gender quality initiatives with our Credito Mujer product at Mibanco, Peru supporting more than 6,000 women. While at Mibanco Colombia, we issued the first social bond with a gender focus raising $20 million to fund microloans for Colombian women entrepreneurs.

On governance, 2 of our subsidiaries were recognized by MERCO for their good corporate reputation and were ranked among the top 20 best companies in Peru. You will note that we have included a new section in our earnings report outlining our ESG priorities and approach. We will be updating our progress on a quarterly basis.

We were pleased that the progress we're making on our sustainability journey is being recognized by the market. Not only did MSCI upgrade Credicorp's ESG rating to the Leader's category this past December, but Sustainalytics also improved Credicorp's ESG Risk Score risk in February 2022.

Finally, I invite all of you to review our 2 recent publications on sustainability. An update on our 2020-2025 Sustainability Strategy and Execution and our 2021 Annual and Sustainability Report.

Now let me turn the call to Cesar Rios, who will provide a brief overview of our operating and financial performance for the quarter. Cesar, please go ahead.

[Cesar Rios, CFO & Head, Finance]

Thank you, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable overall operating and financial results. As I've discussed the half-life of the quarter, I will focus on the year-over-year results, which are not impacted by seasonality effects. The structural loans grew 12%, driven by BCP and Mibanco while low-cost deposits grew 3.9% and account for 60% of our funding base. Core income also grew 17.7% compared to the previous period.

Net interest income was boosted by a more favorable asset mix, higher interest rates and an ongoing funding cost control. Fees and gains on FX transaction registered an uptick in line with higher transactional levels and market volatility, respectively.

Other income was negatively impacted by results registered in net gain on securities which was associated with the Pacifico and Credicorp Capital's fixed income investment portfolios. Cost of risk remained typically low, while the loss ratio in the insurance business continues to improve.

Finally, as I mentioned during our Digital Day, we expected operating expenses to continue to rise as we accelerate our digital and innovation strategy.

In summary, our profits were more robust this quarter. We maintained its solid capital base, and BCP and Mibanco contributed significantly to securing a consolidated ROE of 17%.

Please move to Slide 8 where I'll provide a brief overview of the macro dynamics in our markets. Monetary authorities around the world responded to global supply chain disruption and mounting inflation by increasing their interest rates. This led rates on funding to rise across countries. The Peruvian economy has remained resilient despite the negative inflationary and social impact generated by rising commodity prices.

The Central Bank in Peru has been decisive in controlling inflation expectation and has raised their reference interest rate to achieve a neutral real interest rate of 1.5% plus expected inflation down the world. In parallel, excise taxes have been substantially reduced for some fuels and a number of crude stuff has been temporarily accelerated from sales tax to mitigate the impact of higher prices for imports.

Additionally, the minimum salary was recently increased, while expectations are slowly improving, has appreciated 4.5% year-to-date. The exchange rate has dropped from PEN 4 at the end of the year to around PEN 3.82 per dollar to date.

In the context of higher commodity prices for items such as sub-commodities, fertilizers, crude oil, copper and natural gas, the balance of payments has only been marginally affected, and Peru is expected to grow 2.5% in 2022.

Peru, Colombia and Chile are all experiencing a challenging political environment while political -- economic indicators are still resilient. The Colombian economy is expected to grow 5.5%, although inflation remains high and interest rates continue to increase quickly. In Chile, the constitutional assembly is developing a group of measures that if approved are likely to have a negative impact on the business climate and on GDP growth potential.

Nevertheless, recent polls indicate that little certainty exits regarding the outcomes of poll to approve a new constitution. The Chilean economy is expected to grow 1.5% this year. These macro dynamics have a mixed impact across our business, more significantly, although rising interest rates increased our margins at BCP, they increased the funding cost for our micro finance businesses.

Moreover, high long-term interest rates negatively impact the value of our fixed income investment portfolios across the board and generate challenges for our investment banking and wealth management businesses. While clients' payment performance remains strong, we are closely monitoring the dynamics I just described.

Now I will discuss the performance of our lines of business. Next slide, please. BCP continues to register a strong profitability on a year-over-year basis -- the 18.6% growth in core income was fueled by net interest income, which was driven by a rising interest rate and a 14% uptick in structural loans measured in average daily balances.

In Wholesale Banking, the structural loans grew 19.7% due to a base effect given that in the first quarter of '21 corporate clients amortized short-term facilities.

In Retail Banking, the structural loans grew 8.8% driven by Consumer and SME-Pyme segments where we are penetrating new subsegments by leveraging data analytics and our digital capabilities.

Digital sales represented 34% of the total number of units sold this quarter. Additionally, fee income increased 15%, driven by higher transactional levels, particularly through POS and Interbank transactions. Gains on FX transactions increased by 38.4%, which represents a typical growth, but nonetheless, reflects our capacity to leverage intelligence capabilities in a volatile FX market.

Finally, operating expenses grew 19% due to higher investments in our digital strategy, an increase in transactional cost due to an uptick in transaction volumes and growth in variable compensation. In this context, the return on average equity stood at 23.5% this quarter. Quarter-over-quarter, the results were impacted by seasonal effects. This was particularly true for the expenses.

Next slide, please. I hope you all had a chance to hear Raimundo discuss Yape at our Digital Day. As mentioned, Yape's goal is to become Peruvian's go-to app to achieve this, Yape is evolving into a SuperApp with 3 main ambitions.

The first ambition is to become the main payment network in Peru competing with cash. To accomplish this, Yape focused on low ticket payments that are usually made in cash. As of March, Yape had 5.1 million monthly active users who made 13 transactions a month, on average that amounts to PEN 4.1 billion during the month. Yape's long-term target is to top 10 million active users that transacts more than PEN 100 billion annually.

Yape's second ambition is to represent in its user day to day. Yape started this journey with the launch of top-ups in November 2021. In the first quarter of 2022, the number of top-ups grew 133% capturing 5.3% of a market of gross merchandise levels of 1 billion a year. In this context, Yape's long-term objective is to become Peru's #1 marketplace for products and services.

Finally, Yape seeks to solve every Peru's financial needs. Yape launched a pilot feature that allowed a small group of BCP clients to acquire nano loans through the app. The long-term goal is to lever as Yape to provide financial products and services to more than 2 million users.

Next slide, please. At Mibanco, the hybrid model continues to play a crucial goal in boosting results by offering centralized assessment and alternative distribution channels. This has led to record breaking levels of structural loan disbursements on a year-over-year basis. The 28% growth in core income was fueled by an increase in net interest income, which was in turn driven by a 12.6% uptick in structural loans and growth in yields.

Additionally, commissions were bolstered by growth in bancassurance sales. The evolution in core income was partially offset by growth in operating expenses, which rose in tandem with an uptick in operating activity after the pandemic subsided.

Improvements in the macro environment and in client payment performance led to a 24% reduction in provisions.

In this context, the return on average equity stood at 17.1% a quarter end. On a quarter-over-quarter basis, Mibanco's earnings fell 18%. The slight increase in core income coupled with a drop in operating expenses due to seasonality was largely offset by the return to more typical levels of provisions which grew 163% this quarter.

At Mibanco Colombia, portfolio growth and quality were strong. Nonetheless, profits fell quarter-over-quarter in a context marked by more typical provision levels.

Next slide, please. Pacifico insurance underwriting results continue to recover as COVID-19 claims subside and P&C claims normalize in a more typical operating context on a year-over-year basis.

At the Life business, net earned premiums increased due to price adjustments and high origination. This dynamic was complemented by a reduction in claims as the sanitary situation improved.

The P&C business, net earned premiums increased primarily due to price increases and higher origination in the medical assistance line and to the positive evolution of digital channels in personal lines. Claims increased mainly in the commercial line due to economic reopening and loosening of restrictions of movements. These dynamics led to total loss ratio to situate at 69.3%, which stands closer to pre-pandemic levels.

On a quarter-over-quarter basis, there was a decrease in net earned premiums. The Life business, net earned premiums were impacted by FX rates and a contract cancellation in the alliance channel.

In the P&C business, the drop reflected a seasonal increase in policy renewal last quarter. This drop was largely offset by a decrease in large claims.

In summary, total underwriting results continued to improve this quarter. It is important to note that Pacifico results were negatively impacted this quarter by an impairment charge due to a downgrade in some of its fixed income investments. All in all, Grupo Pacifico's return on equity stood at 12.8%.

Next slide, please. The Investment Banking and Wealth Management line of business is challenged in the current environment, market volatility and political uncertainty are negatively impacting the pro-corporate finance and capital market businesses.

Furthermore, income in the Asset and Wealth Management businesses reflects the impact of last year's fund outflows. In 2021, lower management fees were offset by anticipated redemption and third-party upfront fees at offshore platforms, which buffer the impact of withdrawal. These contracts with the scenario in 2022 where the impact of lower volumes materialized and market value of assets under management also deteriorated.

In this context, reported income dropped both year-over-year and quarter-over-quarter. In year-over-year trends, asset management results were affected by outflows from Peruvian Mutual Fund and less profitable mix of third-party and local funds and a drop in fund market values, which were negatively impacted by higher rates and volatility.

Also, our proprietary portfolio registered gains in the sales of securities in the first quarter of 2021. The reduction in quarterly income was primarily driven by lower income from the Wealth and Asset Management businesses. Corporate finance income was affected by seasonality volumes as transactional activity seems to be higher in the last quarter of the year.

Total assets under management remained stable quarter-over-quarter, but fell 6% year-over-year. We are launching different initiatives and campaigns to recover volumes and penetrate new segments to bring in net new money.

Next slide, please. I will explain net interest income and net interest margin dynamics within the consolidated results. Our net interest income increased 19.3% year-over-year driven by an increase of 12.7% in interest income and a reduction of 7.9% in interest expenses.

The interest income rise reflects an increase of 62 basis points in the average asset yield with minor changes in total volumes, which was the result of: a more profitable asset mix in which structural loans measured and average daily balances increased 12.4% while lower yield asset classes such as government program loans and liquid assets decreased.

And yields increasing cash and equivalents and in the investment portfolio, which primarily reflects a gradual increase in the local currency rate of 375 basis points since August of last year. The short-term market interest rate of foreign currency increased only 25 basis points this year, and as such, has little effect on the foreign currency asset yields.

Our structural loans stock average yield is still impacted by disbursements of 2020 to 2021 in a low yield and by shorter-term loans for wholesale clients and the fact that growth in the wholesale banking outpaced the expansion in retail bank in this quarter. The reduction in interest expenses reflect the base effect generated by a nonrecurring liability management charge in the first quarter of '21 and subsequently, lower interest rates on bond, which was partially offset by an increase in interest expenses on time deposits. The fact that 60% of our funding base is comprised of low-cost deposits has been key to keeping recurring interest expenses under control.

All in all, our NIM increased 71 basis points year-over-year to reach 4.44 this quarter. Given that we do not have relevant volume of floating rate assets, going forward, our sensitivity to increasing interest rates will depend on 4 factors: First, our balance sheet structure is mainly concentrated and growing in local currency and in a structural loans in particular. Second, the magnitude of rate hikes, which has been substantial in short and long-term rates in local currencies and has a target to accelerate it in foreign currency.

Third, the pass-through of market rates, where more sensitive products are situated in liquid assets and short-term wholesale loans and to a lesser degree in consumer loans. And finally, the duration of our portfolio with liquid assets, short-term investment, short-term wholesale loans on the asset side and time deposit and short-term funding on the liability side have a duration lower than or equal to 1 year and consequently repriced faster.

Next slide, please. Year-over-year, core income increased 17.7% due to a strong growth in each of its components. Fee income increased 7.3% and was bolstered by cashless transaction adoption, which reflected an uptick in consumption to POS transaction at establishment and Interbank transactions, which grew 84.8% and 67.9% year-over-year, respectively. It is important to note that growth in consumption was driven by small establishments. Net gains on FX transactions increased 45.8% year-over-year in a context marked by growth in transactions and higher FX volatility. We have leveraged our pricing and distribution capabilities.

Quarter-over-quarter, core income increased 0.4% due to growth in net interest income, while fee income on FX transactions front due to seasonality.

Next slide, please. I will now move to Credicorp's structural loan portfolio and quality dynamics. Year-over-year, structural loan grew 13.7% driven primarily by wholesale banking and retail banking at BCP and Mibanco. The increase in structural loan volumes and an improvement in client payment behavior led to a structural NPL ratio to drop during the period. It is worth noting that Mibanco's NPL volumes continued to evolve favorably and that new disbursements have better risk profiles.

On a quarter-over-quarter basis, structural loans fell slightly due to an exchange rate effect and seasonality. This contraction, coupled with an increase in a structural overdue portfolio, led the NPL ratio to increase 24 basis points. NPL volume growth with clients in the SME-segment with Reactiva loans that were in grace period and which have not reprogrammed loans initiated the payment cycle. This led to an increase in delinquency that is within the expected levels.

Year-over-year, provisions contracted in retail bank was mainly due to improvements in payment behavior [Technical Difficulty]. Thank you. Sorry for this technical problem.

I am going to retake -- at this point. Year-over-year, provisions constructed in retail banking, mainly due to improvements in payment behavior and at Mibanco due to less risky profile of recently originated loans. Provision expenses grew quarter-over-quarter after registering historically low levels in the fourth quarter of 2021.

In this context, the structural cost of risk stood at a normally low 0.79%, where the coverage ratio trend towards pre-pandemic levels. Next slide, please. Operating expenses grew 14.2% year-over-year, which reflected an increase in administrative expenses and employee salaries and benefits. Growth in administrative expenses reflects an increase in the transactional cost which was driven by higher transaction volumes and are keeping the pace of our digital transformation and disruptive initiatives.

The salary line was up this quarter due to an increase in variable compensation in a context of higher anticipated earnings this year. As a result, Credicorp's efficiency ratio deteriorated 50 basis points year-over-year. Mibanco's efficiency ratio improved 900 basis points, boosted by a hybrid model that has enabled it to increase operating income by 25.6% while keeping growth in expenses in check at just 10% year-over-year. If we exclude OpEx for investments in disruptive initiatives such as Yape and Krealo, the efficiency ratio stands at 42.5%, which represents a difference of 200 basis points from the reported figure.

Next slide, please. In summary, with an ROE of 17% this quarter, we continue to consolidate our return to profitability. This positive evolution was driven primarily by our banking businesses. By generating robust and consistent results and maintaining a strong solvency across our businesses, we will be in the position to gradually increase dividend payments. Last week, we announced a regular dividend of PEN 15 per share to be paid in June, which reflects a dividend payout equivalent to 39% of our 2021 year as we continue to generate results, secure capital strength and plan upcoming capital investments, we may evaluate distributing a complementary dividend in the last quarter of this year.

Now I will explain our revised outlook. Next slide, please. Given the current geopolitical situation and the measures adopted by the Central Bank, we have typically revised our guidance for 2022. Our GDP growth estimate remains unchanged at 2.5% for this year. Retail loan has experienced an uptick, especially in the consumer, SME and micro finance segments. We now expect the structural loan portfolio to grow between 9% and 11% measured in average daily balances. The pace of growth in interest rate increases and our loan shift more towards retail, we expect NIM to accelerate and situate between 4.6% and 4.9% this year.

With regards to insurance underwriting results, we believe that a significant portion of COVID-19 related impacts have been absorbed this quarter and additional impact should be smaller. We are carefully monitoring the part of higher inflation on our clients' payment performance and the risk profile.

With the information that we have today, we feel comfortable maintaining our cost of risk guidance between 0.8% and 1.1% for this year that reflects the different performances across segments. Higher-than-expected income not only through net interest income, but also to fees and gains on FX transactions have led us to adjust our guidance range for efficiency ratio to between 44% and 46%.

Based on this result, we expect to achieve an ROE in the vicinity of the high end of the initial guidance range of around 17.5%.

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

[Operator]

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

[Ernesto Gabilondo, Bank of America Merrill Lynch]

Congratulations on your results and your ROE guidance regardless of the political uncertainty? So my first question is on the macro outlook. Can you provide us some color on the recent political uncertainty, if there could be a potential regulation affecting the financial sector? [Technical Difficulty]

[Cesar Rios, CFO & Head, Finance]

Okay. Sorry Ernesto for the technical problem. Good morning, Ernesto. Good morning, everyone. Thank you for your words, Ernesto. A difficult question to answer. As you might be reading in the news, there's a lot of political turmoil. A lot of balls that are being juggled at the same time. However, nothing specifically on the financial system as we speak. That doesn't mean that going forward, there might be any regulation. We don't see anything specific as of this time.

[Ernesto Gabilondo, Bank of America Merrill Lynch]

Okay. Perfect. So then my second question is on the loan growth expectations. Considering the high inflation and the higher interest rates, what do you think is the level of interest rates in which you could start to see an impact in loan growth or maybe some specific products such as mortgages, which have long-term activity and are at fixed rate.

[Gianfranco Ferrari, CEO]

Cesar, can you take that question please?

[Cesar Rios, CFO & Head, Finance]

Yes. Ernesto, thank you for the question. I think our guidance has already captured this part of the framework. What we are seeing is a very good pace of growth in microfinance and consumer segments in which we are also being able to have some pass-through of interest rate by the long-term operations in general are already challenged in mortgages, in long-term corporate and middle market clients, you already see a combination of the impacts of higher rates and political uncertainty in the deterrents further investments. So different dynamics in consumer, Pyme and medium-term operations.

[Operator]

The next question comes from Jason Mollin from Scotiabank.

[Jason Mollin, Scotiabank]

My question is mainly on the outlook for profitability. You talked about guidance for the group in a pretty constructive range. In this quarter, we had 17% for Credicorp. And the contribution tells a lot of the story with the bank, BCP generating over 23%, ROE, the largest contributors, BCP, Mibanco at 17%. Pacifico -- Grupo Pacifico at almost 13% and then Prima at a pretty good ROE of almost 20% with PEN 24 million contribution. How should we think about the evolution of these subsidiaries contributing to the longer-term ROE?

Clearly, I would imagine it's BCP, but do you imagine big changes in the 17% ROE we're seeing at Mibanco the 13% at Pacifico has been, I think, an improvement, of course. So -- and Prima to see what's going on. If you can give us a sense of the contributions to the outlook, the profitability outlook, that would be helpful. Your expectations in general terms.

[Gianfranco Ferrari, CEO]

Jason, I'll take maybe a more conceptual answer, and then Cesar, if you want to add something, please feel free. Actually, we see it as a portfolio. So the end goal is to, as we've talked before, to reach an overall ROE in the high teens. And obviously, depending on the performance and the environment for each of the subsidiaries, to obviously always trying to improve the ROE, but in the end, to aim to that goal.

Having said that, what we expect is the banks, specifically BCP and Mibanco -- moreover, Mibanco and BCP coming back to pre-COVID ROEs, that's in the mid-term. But I would say, mid-term, by year-end. And in the insurance business, it's very related or influenced by COVID.

This quarter, still in the insurance business, there was some relevant profit impact on the insurance business. We don't see any further impact in terms of type of the impact going forward, so ROE also in the insurance business should improve. I don't know, Cesar, if you want to add anything else?

[Cesar Rios, CFO & Head, Finance]

Yes, probably in the same line, only putting a little bit more color. In the case of BCP, as Gianfranco mentioned, in which we are going to have probably higher margins and higher cost of risk and ending up having profitability, probably superior to 20%. Mibanco is improving. In the short term, they are going to have some challenges due to the cost of funds. But overall, the profitability is improving, and we expect to return to levels similar to pre-pandemic. In the case of Pacifico, as Gianfranco mentioned, we are having a good dynamic this quarter. We have been impacted for a couple of factors, still COVID and some impairments, but down the road, we see the business improving profitability in the high teens with a significant input from bancassurance and digital sales. And I think these are probably the biggest business. In corporate banking, investment management, we see some challenges in the medium term due to the close correlation between these results and market dynamics.

All in all, these operated businesses are going to grow in profitability and sustain that. And we need to consider also the short-term impact of the disruptive initiatives that caused, in the short term, around 3% of our cost to income, but we are building and creating business for the future.

And finally, the impact of the withholding tax. That is expected to grow in line with growing dividends. In all, we feel comfortable with the guidance that we are providing with a short-term perspective midterm and in the general ballpark figure that we provided in the Digital Day for the midterm.

[Operator]

The next question comes from Tito Labarta from Goldman Sachs.

[Daer Labarta, Goldman Sachs Group]

My question is on your cost of risk guidance. I just want to understand how long do you think you can sustain the cost of risk around these levels? I noticed you didn't change the guidance, but we did see some deterioration, particularly in the SME portfolio, GDP growth is slowing, and your coverage ratio -- the structural coverage ratio is in line with historical levels.

So I guess one is the outlook for asset quality from here in NPLs. And then with that, on the cost of risk. I know you have the guidance for this year, but just thinking about it on a longer-term basis. When do you get back to more normalized levels on the cost of risk?

[Gianfranco Ferrari, CEO]

Reynaldo, would you take that one, please?

[Reynaldo Llosa, Chief Risk Officer]

Yes. Thank you, Tito, for your question. I mean this year, as we mentioned, it is expected by the beginning of the year we will have these below pre-pandemic levels for the rest of the year.

Having said, we feel comfortable with the level of provisions today. And we'll get back to normal by the second semester of 2023. I think we'll have to see how the economic conditions of the country develop in the following quarters.

Having said that, in terms of average, we are still above pre-pandemic levels. And I want to emphasize the difference between the coverage ratios in the different portfolios. You see in the presentation, Mibanco has a coverage of 143%. And remember, that's our portfolio with almost no collateral. And BCP, it has 117%, which is also above Credicorp's pre-pandemic levels, which was around 110%. And we have important collaterals in our nonperforming portfolio there.

So I would say that we feel quite comfortable with the actual levels. I mean we have still some space for further provisioning without affecting the profitability of this year and the following years.

[Daer Labarta, Goldman Sachs Group]

Great. That's helpful. And just a follow-up, I guess, on the asset quality outlook. We did see some deterioration in the SME portfolio. Other segments still kind of improving. Do you expect particularly, I guess, these other segments to improve any further? When do you expect some deterioration there? And also on the SME portfolio. I think there was some FX impact on there, but how do you see outlook for that portfolio as well?

[Reynaldo Llosa, Chief Risk Officer]

In terms of the SME portfolio, you see an increase in non-performing loans. But there has been a special effect during this quarter, it's that we write off the SME portfolios, we write off the whole position, including the government backed programs and our own portfolios. So this is a process that takes some months. So we are delaying some of the write-off for the SME portfolio, both in BCP and Mibanco, waiting for the actual authorization of the government to actually write-off the loan. So there is like some receiving numbers in terms of what you have seen in our report.

Having said that, I mean, we feel comfortable with the performance of the SME portfolio today. I mean, it's below our expectations. Remember that a lot of the loans of the government projects are starting to be paid by the clients and we expected some deterioration of the portfolio.

In terms of the other portfolios, I would say the wholesale book would be payable. And the personal loans probably will start to pick up a little bit just because we are starting to underwrite a little of the segments or the new segments, which come along with our strategy of [indiscernible] in the real markets on personal loans.

[Operator]

The next question comes from Olavo Arthuzo with UBS.

[Olavo Duarte, UBS]

Actually, my question is very in line with the one made from Tito about the delinquent increase in the wholesale and the SME segment. I just wanted to hear from you what do you expect or what can we expect for the next quarter alone this year for the behavior of the delinquency rates for these 2 portfolios.

And further, I just wanted to hear from you as well about renegotiated loans and selling of credit portfolio. I just wanted to understand because I couldn't find any mention about the selling of credit portfolio or renegotiated loans in the release. So I just wanted to hear from you what are the expectations for the bank going forward related to these potential renegotiation of more loans and selling of credit portfolio?

[Cesar Rios, CFO & Head, Finance]

I'm watching Reynaldo. He was having some troubles in hearing you. I think I got your question. So let me answer it and if that wasn't your question, maybe interrupt me and do it again.

What I got is two things. One is the overall portfolio going forward. And the second one is how the Reactiva program is going. Is that correct?

[Olavo Duarte, UBS]

Yes, yes, it's good.

[Cesar Rios, CFO & Head, Finance]

Okay. Reynaldo, did you hear me?

[Reynaldo Llosa, Chief Risk Officer]

Yes. I would say, at an average, I mean, the portfolio will probably be stable for the following months or for the rest of the year. I mean we'll have some pickups in some segments and probably we'll see better results in the wholesale portfolio.

So I would say, in average, things are looking good and the performance of all the books are better than we initially budgeted by year-end of 2021, when we had a forecast made. That's why you've seen -- I mean, our costs are a bit below our guidance in this first quarter.

In terms of Reactiva, as of today, I mean, numbers are better than we expected. We had a general number of around 20% default in the Reactiva loans, and that's in the low 2-digit number as of today. So I mean, government bonds are performing well also and we are trying to help our clients to pay those debts as well, because we have a general policy of making sure that clients pay both the government-backed loans as well as our own portfolio loans.

[Operator]

The next question comes from Geoffrey Elliott with Autonomous.

[Geoffrey Elliott, Autonomous Research]

The rate environment has clearly shifted much faster than I think any of us would have expected a few months ago. And at this point, it seems very much like it's a positive for you in terms of net interest margins. But can you give us a sense of when you think that benefit starts to decrease as rates go higher. And I'm talking both about the point that was mentioned earlier in terms of credit demand, credit quality, but also, is there a point where you think you could start to see deposit repricing accelerate or deposits shift out of noninterest-bearing and into interest-bearing. And I think we'll consider it as positive for now, but is there a level, if rates continue to go up, if inflation continues to accelerate, where you'd start to see it as less of a positive?

[Gianfranco Ferrari, CEO]

Cesar, can you take up?

[Cesar Rios, CFO & Head, Finance]

Yes. Geoffrey, thank you for the question. Probably, I will come back to the main factors that impact our repricing capability. And I think it goes back to the structure of our balance sheet, in which we don't have actually variable loans as a significant part of the portfolio, it is also really minimum, the most part at fixed rate. So we need to take to the market the rate increases. What we have had is, in solid, we have a significant increase in short-term interest rates and in long-term interest rates from the third quarter of last year to now, but in dollars, that are relevant, particularly for the wholesale portfolios. As you know better than us, the real increase has started to happen only this year. So what we are looking in our books is a combination of solid really impacting our books and dollars only very moderately at this point.

We are passing through the interest rate, but with care and carefully, because we have parts of the portfolio in which we can reasonably translate the interest rate without affecting the demand, but there are other parts of the portfolio, there is a lot of competition, particularly in the long-term loans, mortgages. As I mentioned, middle and long-term, corporate and middle companies in which we have challenges with the demand. All in all, what we are seeing, and I have repeated a little bit myself, is a good combination of pass-through and volumes in short-term facilities and a challenging environment of longer-term facilities as a general rule.

We think that we are going to have this high interest rate in solid for this year and probably half of next year. But after some point, we expect to have to see a decrease in solid interest rates because the nominal rate is too high to be sustainable.

The long-term goal of the Central Bank is an inflation of 2% and our real rates are around 1%, 1.5%. So we should see an increase in this rate, and probably starting at the middle of next year, a decrease in rates. We don't hamper too much economic growth. I don't know if this helps you.

[Geoffrey Elliott, Autonomous Research]

That does. And I guess from your comments on expecting rates to go down again, it sounds like you're quite optimistic. On the inflation outlook kind of going from 2% to nearly 8% in Peru over the last year, clearly, the truckers are unhappy. We know that. But is there anything that you're seeing that makes you think inflation might be getting more entrenched, stickier, harder for the Central Bank to reverse?

[Cesar Rios, CFO & Head, Finance]

Allow me only to make a slight comment. In the international rate, I agree with you. In the local rates, probably we have a difference. It's that a significant part of the inflation is not demand driven, but supply driven for the price of the commodities, the things that we import, and this was a key driver of inflation in our case. It was not a demand driven inflation for most part.

[Operator]

The next question comes from Alonso Garcia with Credit Suisse.

[Alonso Garcia, Crédit Suisse]

My question is on capital and dividends. So you announced a dividend last week of PEN 15 per share, which represents a payout of around 32% based on last year's earnings, which is below what you paid on 2018 and 2019 earnings prior to the pandemic, even though you are still above your internal minimum CET1 level of 11%, and the fact you are expected to accumulate capital going forward. So my question is, what led you to take a more conservative approach this year? And if we could expect a second payment later in the year? Or if you are seeing other uses for your capital, maybe some opportunities on M&A or something?

[Cesar Rios, CFO & Head, Finance]

Yes. Alonso, as we've always stated, it's a quite simple equation in order to distribute dividends. So out of the profits we made the prior year, we retain whatever is needed to keep our growth in terms of portfolio at the bank safely. On top of that, if there is, as you said, an M&A opportunity, which as we speak, there's nothing relevant on the table, we keep some excess cash for that. And on top of that, everything is distributed. So that's the policy we've been following for a few years now. We've stated that, again, several times. And to be more specific on the second special dividend of the year, we might do it. We haven't decided anything yet. Maybe giving you a more long-term vision regarding divident, but maintaining the same policy is that we will try to slightly increase dividends as we move forward over the following years.

[Alonso Garcia, Crédit Suisse]

Okay. So it's mostly related to the stronger outlook you see for loan growth, right?

[Cesar Rios, CFO & Head, Finance]

That's correct, that's correct.

[Operator]

The next question comes from Yuri Fernandes with JPMorgan.

[Yuri Fernandes, JPMorgan Chase & Co.]

Congrats on the guidance and the results I have a quick one on the OCI impact on your equity. We saw some increase, I guess, PEN 200 million, PEN 300 million this quarter. And my question is what you expect here? Because markets have been very volatile, FX, rates. So I would like to understand the moving parts here of this OCI for your equity growth. And my concern here is the tenure, like when we look to the tenure in Peru, since March, it moved up a lot. So my question is, should we expect like your OCI accounts should keep being impacted during this year? And if this is important for your dividend payment, because I guess you mentioned a potential additional dividend payment later this year. So just trying to understand how this could have some impact on your payout later in the year.

[Cesar Rios, CFO & Head, Finance]

If I got it right, you're talking about the sovereign bond portfolio, right?

[Yuri Fernandes, JPMorgan Chase & Co.]

Yes. I'm talking about your shareholders' equity. Like when you look to the shareholders' equity, you see like the OCI that talks a lot of things, right? I guess, treasury, it's a big portion of that. And there was a negative hit this quarter.

[Gianfranco Ferrari, CEO]

Sure. Cesar, you can take that one.

[Cesar Rios, CFO & Head, Finance]

Yes. Okay. To establish the levels of equity dividends, we follow the path that Gianfranco explained, and you have the current profit of the period and unrealized gain of losses. And in this regard, in some of the groups of the company, we have a negative effect due to the rate increases as you mentioned. We have had a relative impact in the first quarter, and probably we are going to have some impact in the next one, but nothing that we think could change fundamentally our policy or solvency ratios down the road. But you are right, the interest rates are rising, and this affects the prices of our long-term investments in the several books that we have, in BCP, in Pacifico and Credicorp Capital through ASB, in particular.

[Operator]

The next question comes from Carlos Gomez with HSBC.

[Carlos Gomez, HSBC]

I have a question more on the political side. I mean, in the current discussions, what is the probability that we will have changes in the constitution? And as you mentioned, there has been no discussion about changes to bank regulation. But where are we on the changes to the pension funds or to the mining sector?

[Cesar Rios, CFO & Head, Finance]

Thank you, Carlos. We can play the roulette in order to answer your first question. If you recall, and I met with most of you in March, the change in constitution at that time in March ending was, as I mentioned, not over the table, but the probability was very low. We still believe that the gravity is low. Maybe what has changed from March to today is that the discussion is on the table again. Having said that, our base case scenario is that it wouldn't change because it shouldn't pass through Congress. That's our base case scenario.

As we mentioned regarding financial system, actually, what has changed is that there has been some regulations promoting more competition, which I believe is healthy for the whole system.

Regarding pension funds, I mean yesterday, it was approved that another withdrawal from pension funds could be released. In our opinion, that's a huge mistake. Actually, the pension fund, the overall system has been, I would say, structurally damaged not because of this low, but because of what has been happening over the last few years. Hopefully, a thorough and structural pension fund reform comes into place, but as we speak, a lot of damage is being made to the pension fund system. And regarding the mining sector, a lot of noise, but we haven't seen anything regarding any legal changes as we speak.

[Carlos Gomez, HSBC]

Okay. So no changes for now?

[Gianfranco Ferrari, CEO]

Yes.

[Operator]

[Operator Instructions]. The next question comes from Andres Soto from Santander.

[Andres Soto, Santander]

My question is related to the profitability of the nonbanking subsidiaries. And particularly looking at the insurance and pension management system, I was curious by your comment [indiscernible] that you look at this as a portfolio. And I imagine, based on what is going on in the country, regarding pension withdrawals and the need for a structural reform, as you just said, probably the profitability that you get from this business in the pension management system is not sustainable. But at the same time, what I see is the insurance one. In the past, we say that the structural ROE of that unit was 12%. Now it is at 13%, even with impairments and some COVID impact. So what should we be thinking about the profitability for insurance over the medium term? And is that going to be enough to offset the impact of any structural reform on the pension fund?

[Cesar Rios, CFO & Head, Finance]

Yes. Two answers to that -- actually, there were 2 questions in one. Regarding the insurance business, we expect high teen returns, I would say, in the short run. For even this quarter, it will take out the impairment on the investment. The core of the business has been very healthy. So we do expect the insurance business to be in the high teens -- to end in the high teens even this year. So we're very positive on that. As always in the business, a lot of little initiatives, including digital initiatives, but most importantly, a lot of focus on bancassurance that is helping a lot the insurance business.

Regarding pension funds, as I just mentioned, I'm more worried about the pension fund system than the specific results on Prima. We -- when I say we, it's not us at Credicorp, but our politicians, they are pulling at risk the whole pension system for millions of Peruvians going forward, and that's a real concern for us and that's where we need to focus and try to be proactive and propose this in trying to come up with again, a structural reform that can really build a pension system that is sustainable for the next decade.

[Operator]

The next question comes from Alonso Aramburú with BTG.

[Alonso Aramburú, BTG]

I wanted to follow up one more time on the pension fund withdrawal. Just wanted to ask you, Gianfranco or Cesar, this is a fixed withdrawal, right? So what sort of impact in the short term? And I agree with you, it is certainly not great for the system over the long term. But in the short term, you probably will get an increase in the policy, which would be probably good for your funding costs. So maybe you can give us some color as to what could be the impact in the short term of those funds exiting the pension fund and potentially entering the banking system.

And the second question related to private investment in general in Peru. I believe you have a GDP estimate of 2.5% for this year. Where do you see private investments? And what are you hearing or talking to the company that you work with -- what are you seeing in terms of private investment moving forward over the next few quarters?

[Gianfranco Ferrari, CEO]

Alonso, I'll take the first one and maybe Cesar or Diego, I don't know who can take the second one.

Yes. So in the end, overall, the net excess liquidity, because of this withdrawal of the pension funds, because those funds end up in deposits, and we have a very strong position in retail deposits. So as I mentioned before, Alonso, we are more concerned about what's going on structurally going forward than what's going to happen either for Prima in the negative side or for BCP in the positive side. But going specifically to your question, we get a benefit because of those withdrawals end up in the banking system, as we all know, because of the market share we have in retail deposits, we got an important chunk of that. I don't know, Cesar or Diego can answer the second one.

[Cesar Rios, CFO & Head, Finance]

Only probably I can add one small comment to your answer, Gianfranco, probably with a more macro view, what we expect is that this extra liquidity is going to propel a little bit more inflation and local interest rates, what is going to be the short-term impact.

[Alonso Aramburú, BTG]

And regarding the private investment, Cesar?

[Cesar Rios, CFO & Head, Finance]

Regarding private investments, I think we are going to have a couple of factors, because with these impacts over the pension fund, you are really taking 1 key player out of the table in terms of funding long-term local bonds, because the private pension funds, instead of buying long-term facilities, they are forced to sell to fund the withdrawals and adds an extra layer of uncertainty regarding the goods. So in terms of private investment, I would say, all in all, is a negative one impact.

And also in terms of business sentiment, I would say that most corporate large investments are being held and they are in the wait and see mode while current investment for maintenance are going forward. We don't expect private investment to grow this year.

[Operator]

It appears there are no further questions at this time. I will now turn the call back over to Mr. Gianfranco Ferrari, Chief Executive Officer for closing remarks.

[Cesar Rios, CFO & Head, Finance]

Thank you, all, for joining us in this conference call. Wrapping up, despite the escalating political turbulence and instability we have been experiencing in Peru, we managed to deliver a solid quarter with strong profitability at Credicorp. These results underscore the consistent execution and strong progress made on each of our 3 strategic priorities discussed during this call: our sustainability journey, our focus on advancing on our digital strategy, and our goal contract on retaining the best talent. Credicorp's earning power and the recovery experienced over the recent quarters have also helped us to maintain strong solvency across our businesses and deliver the PEN 15 per share cash dividend announced last week to our shareholders.

Recent global and local dynamics of high inflation and increasing interest rates generate near and midterm tailwinds, particularly for BCP, but also represents a challenge in terms of funding costs for our microfinance business.

Moreover, increasing long-term interest rates negatively impact the value of our fixed income investment portfolio. And volatile capital markets generate challenges for our investment banking and wealth management business.

Looking ahead, we are closely monitoring macro dynamics and their impact on the disposal income and payment performance of our customers. As we have done in the past, we will manage those variables that are under control, while navigating market and political volatility.

While our reports have resulted and we expect them to continue to result in strong performance, unfortunately, the country is missing out on the opportunity to drive higher growth, lower unemployment, reduce poverty, and attract higher foreign investments.

For our part, we are guided by our purpose of contributing to improving lives by accelerating the changes our country needs. It is infinitely clear to us that achieving this goal is closely tied to increasing financial education currently.

With this power, those that are looked inferior: women, the elderly, people that live in rural areas, as well as those at the lower socioeconomic and educational level can achieve better level of security through saving, greater income generation, and economic independence.

To this end, we are committed to accelerating our financial inclusion agenda to facilitate greater financial education and access to the financial markets where we operate.

A key element of this strategy is the launch of products and channels that involve anywhere and every day market.

Again, thank you all for joining us. With this, we conclude the call. Have a great day.

[Operator]

Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.