Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, everyone. I would like to welcome all of you to the Credicorp Limited First Quarter 2023 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp website. Today's conference call is being recorded. As a reminder, all participants will be in listen only-mode. There will be an opportunity for you to ask questions at the end of today's presentation. [Operator Instructions]

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

[Milagros Ciguenas, Investor Relations Officer]

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

Before we proceed, I would like to make the following Safe Harbour 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 obligation 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 2023.

Gianfranco, please go ahead.

[Gianfranco Ferrari, Chief Executive Officer]

Thank you, Milagros. Good morning, everyone, and good afternoon to those in Europe. Thank you for joining us on today's earnings call. As you all know, the first quarter of the year presented significant challenges for Peru's economy. The social unrest at the beginning of the year, coupled with the damage and disruption of Cyclone Yaku in the north and central parts of Peru, impacted GDP growth in the first quarter.

We now expect GDP to grow by 1.8% in 2023. Today, we will discuss the impact that these events had on our business, the actions we took in response, as well as our outlook for the full year. Before going to our results, I would like to take a moment to comment on the important progress related to our commitment to drive long-term stakeholder value and to taking a leadership role in corporate governance in Latin America.

We recently held our Annual General Meeting where our shareholders voted to strengthen our governance structure through the election of two new board members, increasing the knowledge on traditional banking, open finance and digital initiatives, and the representation of women on our board to one third.

This move not only underscores our commitment to diversity and inclusion, but also our conviction to the importance of balanced representation in decision making. Our shareholders also ratified, maintaining a majority of independent board members, ensuring objective and unbiased guidance.

2022 was also a year of significant progress towards integrating sustainability at the core of our business strategy, as outlined in our recently published 2022 Annual and Sustainability Report. This reporting process began with implementation of new materiality analysis, which confirmed that our 2020-2025 strategic goals and initiatives continue to coincide with what our stakeholders consider relevant.

The report not only presents our consolidated results, but also emphasizes Credicorp's role as a catalyst for change within the countries where we operate. Finally, we are happy to share that we finished the formulation of our corporate environmental strategy, whose implementation will start this quarter.

The strategy covers the generation of capacities for the measurement of the carbon footprint of our portfolio, the promotion of transition financing and the management of environmental risk, among others. As we move forward, our commitment to sustainable growth and responsible business practices will remain at the center of all we do.

Now, moving on to the next slide, I will provide an overview of our financial and operating results before Cesar goes into more detail. Our results for the quarter demonstrate the resilience of our businesses and the expertise of our management teams as we navigated a very challenging environment.

Additionally, we were pleased to have recently announced a dividend of $25 per share after prioritizing the needs of each of our subsidiaries and taking into consideration our plans for continued sustainable growth. Our net income grew 18.1% and ROE was 18.7%, driven by strong income in universal banking and insurance.

Our balance sheet is strong and our liability management practices are prudent will positions us well to navigate the current economic environment and pursue initiatives that align with our value creation goals. However, due to the challenging environment in the first quarter and the shift in our loan mix towards higher risk retail customers, we have seen provisions and the cost of risk increase as we anticipated, returning to pre-pandemic levels. We've tightened origination standards in specific retail segments and adjusted our risk appetite accordingly at Mibanco.

While the microfinance business faces some near-term challenges, it remains an important long-term opportunity for us. Despite this recent events, Peru's macroeconomic fundamentals remain robust. The country's debt to GDP ratio is low and international reserves are at an important level.

As we move forward, we remain committed to managing risks and leveraging our strengths to drive sustainable growth and profitability. Finally, last quarter I noted that we would be giving you an update after the strategic assessment for the investment banking and wealth management businesses was completed.

After 2022 characterized by political uncertainty in the region, deteriorating global macroeconomic dynamics and new industry trends, we've made some important adjustments to the investment banking and wealth management business strategy. Moving forward, our strategy will be focused on profitable and sustainable growth.

We have designed a three-year program that comprises income generating plans, the reorganization of our main lines of business and a rigorous governance methodology to monitor results and make timely adjustments. We will focus our growth on the more stable fee generating businesses such as wealth and asset management, along with capital markets, transactional capabilities for our clients as opposed to volatile investment banking and trading businesses.

Eduardo Montero, Head of Investment Banking and Wealth Management, will go into more detail on these strategic adjustments at our Investor Day. Now I'll hand the call to Cesar, who will go into more detail on our operating and financial results as well as the current outlook.

[Cesar Rios, Chief Financial Officer]

Thanks, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable overall operating and financial results. It is important to note that we are reporting the insurance business and the IFRS 17 for the first time.

The net impact of this change on consolidated net income is not material. Nonetheless, reclassifications of items in the P&L has impacted the formula used to calculate our efficiency ratio. Please refer to the release or appendix two of this presentation for more details. We have restated first quarter '22 figures for comparative purposes in our analysis.

As I discuss the highlights of the quarter, I will focus on the year-over-year results, which are not impacted by seasonality. NII grew 28% on the back of solid structural loan dynamics and a competitive funding base. Structural loans rose 9.7%, measured on average daily balances driven primarily by retail banking at BCP and Mibanco.

Asset quality metrics continue within range, but impacted by negative GDP growth in Peru in the first quarter of '23. The structural cost of risk increased 128 basis points due to an increase in delinquency driven by negative GDP growth in the first quarter, which impacted the full year expectation and the consumer and credit card segments in retail banking at BCP and social unrest and climate events which adversely affected Mibanco's portfolio by weakening payment performance and heightening probabilities of default.

Allowances for loan losses were equivalent to 5.6% of restructured loan book. Operating expenses increased 13.5%, driven mainly by expenses at BCP and disruptive initiatives, while operating income increased 21% through BCP and Mibanco in particular. The efficiency ratio improved 296 basis points and stood at 44.3% under IFRS 17.

Finally, the recent banking crisis in the US has led financial institutions to focus intently on adequate balance sheet management. We manage our business with sound governance and prudent risk appetite levels. I will provide details on some key metrics later on.

Next slide, please. Two main factors contributed to supportive conditions in emerging markets this quarter. First, the market expectation that the Fed has reached its terminal rate. And second, economic data from China showing that the loosening of COVID-19 restrictions has boosted economic growth. Metal prices have remained high. Prices for copper, Peru and Chile's main export product returned to levels around $4 per pound after a brief drop in mid-March. Gold, another of Peru's main export products, reached its highest level since August 2020. A weaker global dollar has also supported high commodity prices. In this environment, Latin currencies have appreciated.

Next slide, please. In the first quarter of '23, the Peruvian economy contracted around 0.4% year-over-year after by prolonged social protests mainly in the South and heavy rains and floods which hit hardest in the north. These factors mainly impacted non-primary sectors via private consumption and private investments. In the primary sector, growth in copper production from Quellaveco has attenuated the impact of these events.

In this context, Peru GDP is expected to grow around 1.8% this year. Peru's Central Bank has held its policy rate stable over the last three months and reaffirmed its commitment to combat inflation before cutting rates. Current conditions suggest that ongoing climate events may moderate and we are closely monitoring the possibility of a global El Nino later this year. GDP growth in Colombia is expected to slow and stand at 1%, while Chile's GDP growth is expected to be zero.

Finally, on the regulatory front in Peru, the Ministry of Finance published the regulation to create a minimum pension. It stipulates that funds in accounts that have been reached the minimum retirement balance will only be available to affiliates once they have formally retired.

Next slide please. Notwithstanding a complicated context, BCP delivered a strong profitability regarding key quarter-over-quarter metrics. NII increased slightly despite a drop in loan volumes. The reduction in volumes reflects seasonality and more importantly, a country wide downturn in economic activity due to social and climate events.

Our NII's resistant reflects a disciplined approach to pass-throughs and our ability to leverage a transactional funding base to mitigate raising funding costs. The aforementioned was partially offset by a drop in fee income after inter-city transfer fees were eliminated. Transaction levels fell due to adverse local effects and if the transactions dropped as volatility level off. Provisions fell quarter-over-quarter but remain high. This decrease was driven by wholesale banking, which registered a drop in credit exposure.

Expenses fell due to seasonal effects, while we continue to invest in business transformation and disruptive initiatives. On a year-over-year basis, growth in net income was skewed by 40.1% increase in NII, which was bolstered by raising interest rates and 9.7% increase in structural loans measured in average daily balances.

Retail banking grew 14.1%, led by consumer, mortgages and SME segments, while wholesale banking expanded 5.3% led by working capital loans. The aforementioned growth was partially offset by a 230.6% increase in loan loss provisions over a very low base driven by credit card and consumer segment.

Higher provisions respond to a deterioration in payment behavior and a downturn in macroeconomic outlook. Operating expenses grew 14.9%, fueled by growth in administrative and IT expenses and by an uptick in investments in disruptive initiatives.

Consequently, BCP's efficiency ratio stood at 36.8%, which reflects an improvement of 300 basis points. In this context, ROE reached 25.2%. At BCP, Bolivia, our risk appetite remains low due to uncertainty on macroeconomic front. Since the beginning of the year, US dollar reserve and Bolivia central bank has dropped materially and banks have daily limits on US dollar withdrawals. Regardless, BCP Bolivia's net income remains stable.

Next slide, please. Yape continued his journey to monetization and has launched six functionalities in the last 15 months to develop its three main ambitions to become Peru's main payment network. Yape now offers top ups, QR payments, POS and Niubiz and Izipay and the local market acquired leading platforms. Checkout through the webpages of affiliate establishment and since January a functionality to pay basic services. To solve Yapero's financial needs, Yape launched microloans in August of last year and to be present in ' Yapero's daily lives began offering Yape Promos in September. These six functionalities have improved client experience.

Over the last year, the number of active users jumped from 5.1 million to 8.8 million and the monthly transactions volume rose from 69 million to 160 million. The number of clients that generate income hit 3.9 million in March 2023 and income per active user reached PEN1.6. Our client expenses, which stand at PEN4.9 per active user per month is still outpaces our revenue. Nonetheless, Yape is well on its way to reaching break even in 2024.

Next slide, please. Mibanco registered a drop in profitability this quarter. On a quarter-over-quarter basis, despite a slight growth of 1.6% in structural loans NII dropped 3.8% due to funding cost pressures, the loan portfolio has been impacted by social unrest and climate events, and Mibanco has provided a special credit support to 6.8% of its loan portfolio, where the severity of impacts varies by region and risk profiles. Mibanco's provisions reflect the best estimate we can offer at this time with the information available.

We have been tightening our approach to loan origination, which reflects early adjustments made to the risk appetite in the second half of last year. Operating expenses fell 42% quarter-over-quarter, driven by seasonality. From year-over -year perspective, net income grew 1.3%, driven by a 16.9% increasing structural loans and disciplined pass-through of rates. This result was offset by higher filing costs.

Provision expenses rose 116%, driven by the same factors as those outlined in the quarter-over-quarter analysis. Operating expenses grew 5.2% year-over-year, fueled mainly by IT expenses. Fee income grew at a slower pace. The efficiency ratio rose to 54.1%, while ROE stood at 3.3%. Mibanco Colombia is facing a number of challenges high inflation, which drives up costs, high funding costs and recent regulation that will reduce interest rate caps by a weighted average of five percentage points.

We believe that the microfinance market in Colombia has untapped potential and are adjusting the strategy to reflect current market conditions. Next slide, please. Before explaining Grupo Pacifico's results, it is important to remember that as of the beginning of this year we are reporting under IFRS 17. Under this standard reporting items have changed and 2022 numbers have been restated for comparative purposes.

The overall impact on net income is not material in consolidated terms, but some reclassifications impact our efficiency ratio at the record level. Please refer to our earnings release and the appendix of this presentation for specifics. Now let me explain Grupo Pacifico results from a year-over-year perspective.

Grupo Pacifico registered a significant year-over-year increase in profitability due to an uptick in insurance underwriting results in the life business and expansion in net financial income. The latter was attributable to growth in interest income and to a base effect associated with bond impairments in the first quarter of 2022.

In this context, Grupo Pacifico's net income increased 107.4% in terms of our insurance business lines. In the life business, the insurance underwriting results improved 133.6%, driven by an upswing in income from insurance services through pension and life credit products. The pension segment benefited from higher fees under SISCO VI, while credit life improved via price adjustments and growth in bancassurance placements hand-in-hand with an uptick in loan volumes.

These dynamics were partially offset by an increase in reinsurance results, mainly via pension products. In the property and casualty business insurance underwriting results were 30.9%. This decrease was driven by higher expenses through insurance services due to growth in claims through property and casualty risks and car insurance. In this context, Grupo Pacifico's return on equity stood at an unusually high 36.5% this quarter.

Next slide, please. The investment banking and wealth management business, while still facing complex market conditions has registered a slight recovery in recent quarters. On a quarter-over-quarter basis, earnings rose driven primarily by the asset management via new money from traditional and alternative funds and by the wealth management business through an uptick in assets under management.

From a year-over-year perspective, assets under management dropped 17.7%, driven by fund outflows, mostly in Chile and by a decrease in the market value of funds. Despite the decrease in assets under management, business income increased 40%, driven mainly by capital markets, which reported gains on the proprietary fixed income portfolio in Colombia and by the wealth management business.

As Gianfranco mentioned, this line of business has adjusted its strategy and will focus on fee income generating initiatives that target more stable businesses and optimizing the cost base to return to ROE levels in the high teens.

Next slide, please. Now we will look at credit card consolidated dynamics. On a quarter-over-quarter basis, our structural loan fell 0.7%, driven by a seasonal contraction in wholesale banking at BCP.

Core income fell 1.2% fueled by a drop in gains on FX transactions and fees. The contraction of the former reflected a decrease in exchange rate volatility in Peru, while the decrease in fees reflected the elimination of inter-city transfer fees and a drop in transactional activity in Peru.

Net income reported little variation. The net interest margin increased nine basis points quarter-over-quarter. NIM reached 5.84%. Risk adjusted NIM increased to 4.54%. On a year-over-year basis structural loans grew 9.7% measuring average daily balances driven primarily by retail banking at BCP and Mibanco.

Core income rose 18.8%, fueled by growth in net interest income, which rose 28.2% on the back of high interest rates and expansion in the structural loan book.

In this scenario, NIM grew 136 basis points, while risk adjusted NIM increased 50 basis points. The aforementioned was partially offset by a 4.3% drop in the net gains on FX transactions given that the base of the first quarter of '22 was high due to FX volatility and by a 1.1 decrease in fee income due to the same factors seen in the quarterly analysis.

Next slide, please. Let's look at the dynamics of a structural non-performing loans. On a quarter-over-quarter basis growth in structural non-performing loans was driven by an increase in the overdue loan volumes in wholesale banking, which has already been provisioned given that our models anticipate deterioration.

In the impact of social and climate events and macroeconomic deterioration Mibanco's portfolio where the overdue and refinanced portfolio increase and an increase in the non-performing loans in retail banking, which was concentrated in the high risk segments and offset by the sale of judicial portfolio and write-offs.

On a year-over-year basis, the structural non-performing loan volume increased over a low base and due to an uptick in refinance loans in the real estate and tourist sectors served by wholesale banking. It is important to note that these loans are backed by collateral that covers more than 100% of each debt. The evolution of non-performing loans in retail banking and Mibanco was driven by the same factors as those seen in the quarterly analysis.

In this context, the structural coverage ratio is stood at 110%. To analyze our structural coverage ratio, it is important to review the NPL portfolio mix in terms of secure and collateralized products. Please refer to appendix two for more details.

Next slide, please. Regarding provisions on cost of risk, we have consistently informed the market that our cost of risk will increase this year as we return to pre-pandemic levels in each segment and shift our loan portfolio mix towards more retail and higher risk higher yield profiles.

Growth in both of these components was driven upward by unforeseen events, namely social upheaval and adverse climate occurrences, both of which contributed to a downturn in the macroeconomic outlook for the year.

Going to a specific quarter-over-quarter dynamics provision remained high and rose slightly driven by retail banking, which exhibited a downturn in payment behavior in a specific segment and was impacted by new macroeconomic expectations and Mibanco where social and climate events in Peru weakened claiming payment behavior and increased probabilities of default. Those movements were partially offset by lower portfolio exposure in wholesale banking.

On a year-over-year basis, provision increased over a low base at both BCP and Mibanco. Additionally, growth at BCP was led by the consumer and credit card segments after payment behavior deteriorated particularly among higher risk clients. The uptick at Mibanco followed the same pattern outlined in the quarter-over-quarter analysis.

These dynamics were partially offset by an improvement in payment behavior in wholesale. In this context, the structural cost of risk stood at 2.1%. We are closely monitoring our asset quality metrics and have implemented a strict origination guidelines for specific segments within consumer, credit cards and SMEs-Pyme and continue to adjust Mibanco risk appetite which began in the second quarter of last year.

Next slide, please. Operating expenses grew 13.5% year-over-year, driven primarily by core businesses at BCP and disruptive initiatives at the credit core level. At BCP, core business costs fueled the uptick in expenses. If we analyze the core business, excluding IT, general expenses increased after debit and credit card use rose, which led to an uptick in expenses for fidelity program and to manage operating volumes.

In terms of IT expenses, the increase was driven by cloud use as we step up software development to increase transactional and service capabilities. We have also attracted more specialized IT digital talent in line with our digital and data analytics strategy. Expenses for disruptive initiatives doubled year-over-year to ensure that we continue to lead the market in the long-term.

Operating leverage remained strong at BCP as stand-alone. Operating expenses at Mibanco remain under control, but growth slightly outpaced the expansion registered for income. The efficiency ratio at the credit card level has been impacted by the application of IFRS 17 and 22 figures has been restated for comparative purposes. Our efficiency ratio stood at 44.3% this quarter down 296 basis points compared to last year and driven by higher income at BCP and Pacifico.

Next slide please. Now let's look at the structural balance sheet risk management framework. At Credicorp, we manage these risks through a structured governance and prudent risk appetite. Our internal guidelines are more stringent than those set by local regulators. We perform annual stress testing to assure that we operate with a solid capital base. We closely monitor a variety of liquidity indicators.

It is important to note that internal LCR apply more stringent criteria than that required by the regulator. We actively manage the duration of assets and liabilities and monitor duration behaviors at BCP. The duration of our asset portfolio in Soles is around two years, very close to the duration behavior registered by our liability portfolio.

The duration of liabilities in dollars, however, is longer than that of assets as a matter of prudence. To manage interrelated risks, we maintain financial margins at economic value sensitivities within the limits established by stress simulations. Our balance sheet manages dual currencies and we hedge FX positions daily to maintain targeted gaps. We maintain a high quality investment portfolio which is liquid and contains a high proportion of central bank and sovereign instruments.

For liquidity and liabilities indicators, in some indicators, we focus on BCP stand-alone balance sheet as it concentrates materiality. 66% of assets, 70% of total liabilities. Mibanco, BCP Bolivia and ASB have a smaller and less complex balance sheets and Pacifico has by design a structurally close match books and adjustments are captured in IFRS 17.

Next slide, please. First quarter profitability was fueled by better results as universal banking and by a strong results in our insurance business. Consequently, ROE this quarter expanded by 170 basis points year-over-year to stand at 18.7%. All-in-all, these results are a testament to our resilience and ability to adapt to challenging circumstances. Now I will move on to the outlook. We maintain our '23 outlook. However, given the implementation of IFRS 17, we are restating our efficiency ratio guidance range.

Regarding GDP growth, our current estimates stands at 1.8%. Our structural loan portfolio measures in average daily balances continue to register growth. We expect the expansion to stand above the lower end of our guidance. We expect NIM to stand within guidance.

Regarding cost of risk, we now expect 2023 figures will situate closer to the upper end of the range due to the impact of social unrest and weather events in the first quarter. Our efficiency ratio calculation is being restated to reflect changes to credit cost, P&L lines under IFRS 17.

Accordingly, previous range is equivalent to 47%, 49% range under the new IFRS 17 efficiency ratio and we reaffirmed this range. Finally, we still expect ROE to stand around 17.5%.

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

[Operator]

We will now begin the Q&A session. [Operator Instructions] Our first question is from Ernesto Gabilondo with Bank of America. Please go ahead.

[Ernesto Gabilondo, Bank of America]

Thank you. Hi. Good morning, Gianfranco and Cesar, and good morning, everybody. Congratulations in your first quarter results despite the headwinds of the social unrest and the weather conditions in Peru. So my first question would be on the political and economic outlook. How do you think about the lower probability for Peru to celebrate early elections in April 2024? Which do you think would be the implications for the economy and for your business? And also related to the economy, how do you see the threats of the potential formation of El Nino?

[Gianfranco Ferrari, Chief Executive Officer]

Yeah. Good morning, Ernesto, and thank you for your words. That's a tricky question. So I will go with what our base case scenario is. As a matter of fact, because of legislation, it's basically impossible to have elections by next year, by April of next year, because of the -- of the time scale you would need.

Having said that, our base case scenario is that the current government will finish its mandate, its constitutional mandate, which is by 2026. That's our base case scenario. Again, tricky question. You know how the political environment changes, can change in Peru. Because of that, we believe, we strongly believe that Peru is today in a much better position than it was six months ago.

Remember that six months ago was, I don't know, early November, we had a disastrous government at that time. Today, the new administration is even though they maintain their political vision, they are much more professional. And the -- they're working on promoting private investment.

And that's not only the central government level, but also the regional government level. As you may recall, the regional governments change the beginning of this year and that's that happens every year. There's a change in regional governments. The investment, the public investment in those regions are a little bit slow at the beginning.

So again, on the political side, we on top of the political stability or tranquility we see today, we do believe that there is a much better environment today. So we expect the private investment to pick up a little bit by in the rest of the year.

Regarding the El Nino effect. Still, I would say, it's too soon to tell. We're monitoring the El Nino reports, both international reports and local reports, so as to evaluate what can be done. We're working with our clients both on the corporate side and also on the retail and microfinance side and trying to help them and educate them in how to reduce the potential impact they may have in their core businesses.

[Ernesto Gabilondo, Bank of America]

Excellent, Gianfranco. Thank you very much. Just a second question on your ROE guidance. So you are maintaining the 17.5% for the year. However, well, the first quarter came almost at 19%. So I'm just wondering if your new guidance is conservative or do you see some risks ahead?

[Gianfranco Ferrari, Chief Executive Officer]

Yeah. Well, actually, the risks are the ones you just mentioned. We still have a question mark regarding El Nino, even though political, the political environment is more stable today. Again, it's not that we have a very strong government and we can play a longer -- provide a longer term vision.

Recall that we -- our guidance is at around 17.5. It's not 17.5 on the spot. So that's the reason we're maintaining it. And as Cesar mentioned that the insurance business provided exceptional ROE this quarter. We don't expect that ROE to keep that ROE going forward. We expect the insurance business to go back to what ROEs we posted last year.

[Cesar Rios, Chief Financial Officer]

Probably it may add a couple of technical details. As you remember, we have seasonally a low level of expenses at BCP during the first quarter. That happens every year. And this is impacting our results. As Gianfranco mentioned, we have a Pacifico and an exceptionally good quarter.

[Ernesto Gabilondo, Bank of America]

Perfect. Super helpful, Gianfranco and Cesar. Thank you.

[Operator]

The next question is from Rene Perez with Scotiabank. Please go ahead.

[Rene Perez, Scotiabank]

Hello. Good morning. Congratulations, everyone. Can you hear me?

[Gianfranco Ferrari, Chief Executive Officer]

Yes, perfectly. Good morning, Rene.

[Rene Perez, Scotiabank]

Yes. So we wanted to ask on the effective tax rate. So moving forward, how should we think about this line and should it remain at levels that we saw during this quarter? Thank you.

[Gianfranco Ferrari, Chief Executive Officer]

Cesar, would you take that one?

[Cesar Rios, Chief Financial Officer]

Yes. I think it's the composition of our income this quarter that is playing this, I will say, low tax rate. And it's the relative importance of investments at BCP that has some advantages and the relative weight of the profits of Pacifico that also has a lower tax rate. This, I will say, not usual proportion of main sources of income has decreased our tax rate during the quarter.

[Rene Perez, Scotiabank]

Very helpful. Thank you, guys.

[Operator]

The next question is from Olavo Arthuzo with UBS. Please go ahead.

[Olavo Arthuzo, UBS]

Hi. Good morning, everybody. Thank you for taking my question. Actually, I have just two very quick questions straightforward. The first one is related to the insurance result, because I just wanted to understand if we could like see these levels reported in the first unsustainable that we could consider for the following quarters. And my second question is related to the payout ratio of the bank. If we could, what could we expect along this year? And if you could also add for the next year a potential indications it would be very helpful. Thank you very much.

[Gianfranco Ferrari, Chief Executive Officer]

Good morning, Olavo. We got your first question. I'll try to answer it and then I'll ask you to repeat the second question, because it wasn't very clear. We didn't get it very clear because of the communications. As I mentioned, we don't expect the insurance business to report a similar ROE results going forward.

We can go into the details why we have had such high ROE this quarter. Having said that, we expect the insurance business to keep the ROE we posted last year, which was in the high teens, low 20s. So we do believe that because of what we've been pursuing as a strategy in the insurance business, focusing much more on retail insurance specifically on bancassurance, we expect that ROEs of high teens, low 20s is sustainable going forward. If I answer your question, could you repeat the second one, please?

[Olavo Arthuzo, UBS]

Yes. That was very helpful. Sorry, I believe that you guys can hear me now. So the next question. My second question was related to the payout ratio, because I just wanted to understand for the following quarters and for the next year, these two dynamics for the payout ratio close to 11% and the ROE requirement guidance. I just wanted to understand what could we expect here for distribution this year? And also if you could add to this the expectations for dividends for the next year, it would also be helpful?

[Gianfranco Ferrari, Chief Executive Officer]

Sure. I'll ask Cesar to answer the specific question. Just a quick reminder, the policy we follow regarding dividends is we retain what out of profits we retain whatever is needed to capitalize, specifically the banks so as to finance or fund from the capital standpoint, fund our growth, our expected growth for the upcoming years. Plus, if we see any inorganic opportunities, growth opportunities, that's like the philosophy we follow in general terms. I'll ask Cesar to compliment me.

[Cesar Rios, Chief Financial Officer]

Yes, actually I couldn't add too much on that. And if you make very simple calculations thinking an ROE of 17.5%, the portfolio growing probably at half of that, we can think in the short-term as a result of that and not considering any potential acquisition, probably 50 some payout ratio, but totally subject to the basic conditions that Gianfranco stated previously.

[Olavo Arthuzo, UBS]

Yes, I just wanted to confirm the calculation. Thank you very much, guys.

[Gianfranco Ferrari, Chief Executive Officer]

Welcome.

[Operator]

The next question is from Geoffrey Elliott with Autonomous. Please go ahead.

[Geoffrey Elliott, Autonomous]

Oh, hello. Thanks very much for taking the question. I just wanted to clarify on the loan growth guide, because the earnings release says single-digit in the fourth quarter, is it high single-digit or it's a single-digit for structural loan growth, but the slides continue to say 6% to 10%. So which of those two is it? And then what has driven the tweak in the [Technical Difficulty]. Thank you.

[Gianfranco Ferrari, Chief Executive Officer]

Yes, probably a sound clarification in the expression, but the concept is similar between 6% and 10% with information that we have now. We are thinking above the minimum, probably not at the maximum due to the events and the fourth quarter that already have impacted the size of the wholesale portfolio and guided us to be a little bit more cautious regarding growth in retail segments.

[Geoffrey Elliott, Autonomous]

Got it. Thanks very much.

[Operator]

The next question is from Nicholas Walker with Goldman Sachs. Please go ahead.

[Nicholas Walker, Goldman Sachs]

Hi. Thank you for the chance to ask questions. My question is on asset quality. We saw structural NPLs up slightly in the quarter. Do you expect further deterioration given the recent social and climate challenges in Peru or can asset quality remain mostly stable. And then just with that, you know, we saw the cost of risk at 2% at the high end of the guidance. And you mentioned that for the full year it can be customers can be at that high end. But do you think it could be a little bit higher in the coming quarters? And is it possible it could be above that range? Thank you.

[Gianfranco Ferrari, Chief Executive Officer]

Good morning, Nicholas. I'll ask Reynaldo to answer that question.

[Reynaldo Llosa, Chief Risk Officer]

Yes. Hi, Nicholas. In terms of the NPL performance, we see some stability on the number. As Cesar explained it, most of the increase in this quarter was due to a specific case in wholesale banking. So I would say that number should remain stable during the rest of the year, even it could decline a little bit. And in terms of the cost of risk, it is hard to tell right now, but our guidance is on the higher end on the number. We don't expect to go somewhat larger than the 2% that is already precise on the presentation.

[Nicholas Walker, Goldman Sachs]

Okay, great. Thank you. And then just on the efficiency ratio, we saw 44.3% in the first quarter, well below the range. I think it's possible that efficiency ratio can be below your guidance range or if no what should lead to that ratio increasing?

[Gianfranco Ferrari, Chief Executive Officer]

Nicholas, I think, the 44.3% is driven mainly by seasonal effects that happens every year at BCP, as I mentioned previously, and the exceptionally good results at Pacifico. We maintain the guidance at the most likely scenario for the whole year.

[Nicholas Walker, Goldman Sachs]

Great. Thank you very much.

[Operator]

The next question is from Tejkiran Magesh with WhiteOak Capital.

[Tejkiran Magesh, WhiteOak Capital]

Hi. Thanks for taking my question. I have two questions. One, on the comment you mentioned that the situation right now at Peru is much better than six months ago. So could you remind us in terms of how many of your branches were affected back then and how many of them are back in operations? Is there residual any still logistics issues you're facing in terms of your operations?

[Gianfranco Ferrari, Chief Executive Officer]

Sure, so maybe I'll answer the last part of the question first. All of our branches are normally operating today both at Mibanco at BCP, I would say that in Puno, which is the most affected region in Peru, where Mibanco has a relevant presence. We might be operating at, I don't know, 70%, 75% of our capacity. And that's -- from a trade-off standpoint, is totally marginal, the effect. At the worst moment of the political and social unrest -- about 25% of the branches at Mibanco were shut down or operating on an hourly basis and something similar at BCP again in the southern part. But today, we're operating at normal activity whatsoever.

[Tejkiran Magesh, WhiteOak Capital]

Okay. Thank you. My second question is on a bit more around Yape. So you outlined the achievements Yape has done in payments and the new product launches that we have in mind. Could you also disclose or tell us what sort of market share in the payment system would Yape be having in Peru?

[Gianfranco Ferrari, Chief Executive Officer]

Yes. Great question. You have to define what the payment market is in Peru because still, I would say, 85% to 90% of payments in Peru -- the retail payments in Peru are done in cash. So as of that huge market, Yape penetration is still small. That's why we see a lot of potential. If you go back to a more specific market, which is the digital wallet market, there are no official figures, but our calculations are that Yape represents around 75% to 80% of that market.

[Tejkiran Magesh, WhiteOak Capital]

In the POS segment and the online checkout segment, how would it be, and that's my last question? Thank you.

[Gianfranco Ferrari, Chief Executive Officer]

Yes, on the POS, it's a relative small participation with Yape even though it's growing at least double-digits. However, I'll take advantage of your questions and invite you to the Investor Day in New York, we will have a specific presentation on Yape and a lot of information -- actually more information that the one you're asking. So that would be a great opportunity to share more specifics on Yape.

[Tejkiran Magesh, WhiteOak Capital]

Looking forward to it. Thank you so much and congratulations on the quarter.

[Operator]

The next question is from Alonso Aramburu with BTG.

[Alonso Aramburu, BTG]

Yes. Hi, good morning, and thank you for the call. Following up on Yape and the disruptive initiatives. I mean when we look at expenses, the disruption expenses doubled year-over-year. And last quarter you mentioned Tempo in Chile as one of the sources of that growth. Can you comment on Tempo and what's your road to profitability there, given that you mentioned that Yape is on track to be breakeven by next year?

[Gianfranco Ferrari, Chief Executive Officer]

Yes, so I would say Tempo is maybe after Yape, the largest disruptive initiative we have in terms of ambition and also on budget. I shouldn't share the next initiatives we're having at Tempo, but the path to profitability is by adding features to -- yes features to the value prop, Tempo had in Chile and the first one -- the first relevant one should be launched by the third quarter of this year.

So and you have to bear in mind that Tempo was launched after Yape. So it's a relatively younger initiative. Plus in Chile, we don't have the muscle we have in Peru through BCP. So as we speak, we're quite happy with Tempo results, but it's still -- again, it's in a less mature stage. And unfortunately, I cannot share the next launches for this year.

[Alonso Aramburu, BTG]

Thank you, Gianfranco. Is Tempo already generating revenue just to get a feel?

[Gianfranco Ferrari, Chief Executive Officer]

Yes, sure it is generating revenue. Actually, it started generating revenue before Yape, Obviously, still cash flow negative.

[Alonso Aramburu, BTG]

Okay. Thank you.

[Operator]

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

[Andres Soto, Santander]

Good morning and thank you for your presentation and the opportunity to ask questions. My first question is regarding the microfinance business. This quarter, you posted a weak ROE. How long do you think it's going to take for the operation in Peru to return to more, closer to historical profitability levels And when you look at your Colombia operations for microfinance, I remember in the past, you consider the possibility of making further acquisitions in order to increase the scale, given the challenges now in terms of both funding and regulatory environment, are you still thinking as these as a good opportunity in terms of capital allocation?

[Gianfranco Ferrari, Chief Executive Officer]

Yes, sure two questions and two answers to those questions, the first answer is on a more longer-term vision, we are very happy with the results on the microfinance business, we've just calculated -- the ROE for the last -- over 10 years, actually, and it's over 21%, I believe so quite happy with those results. And we strongly believe and keep believing -- that we have a competitive advantage, not only in Peru, but that the model is exportable to other parts of LatAm.

Regarding Peru, yes, we have had a very bad first quarter. We expect, because of the solution unrest sorry and the social unrest impacted heavily in Mibanco. We expect that next quarter to pick up in terms of ROE. So that the year should be much better than what we've seen in the first quarter. Regarding Colombia, Colombia today is a very -- as you mentioned, complicated environment, rates on deposits have gone up.

Grade caps in general, have come down, so margins are much slimmer today, and we are basically in a wait-and-see position today in Colombia, not only -- I would say not only regarding the potential acquisitions, but also in slowing down our growth. On a longer-term vision, we're still positive on what can be done in Colombia. But obviously, the current environment is not a positive one to be as active as we've been in the past.

[Andres Soto, Santander]

Thank you, Gianfranco. And talking about the investment banking and wealth management business. You said you expect with this three-year plan to attain a high-end -- high-teen, sorry, type of ROE. What is needed to reach that level? Is it a matter of scale? And would you consider making acquisitions in this segment or is some other efficiency and on the contrary, you are planning to scale back a certain part of the business? And if I add just one point to that question, if you can remind us what is -- in the past, you had at the holding level, you have a rainy day fund, which you may have considered for doing M&A. If you can update us on what is the number that you are seeing after paying dividends for the holding company? Thank you.

[Gianfranco Ferrari, Chief Executive Officer]

Yes so regarding the investment banking and wealth management a lot of matter which will be much more specific on the Investor Day. But basically the question is both, actually. So, we've seen some businesses which we have no competitive advantage and the cost to income or the efficiency ratios on those businesses are way off the mark.

And so the idea is to focus on the more stable businesses and where we have competitive advantages in the markets where we play. And in that sense, we will be active not only in making more efficient and more successful our businesses, but also looking for inorganic growth. And obviously we will pull out of some of other businesses in order to reduce operating costs and on top of that, and maybe more important, complexity.

We built a company expecting tailwinds in the region. And actually, what we expect in the upcoming years is headwinds. So we have to adapt. Regarding the fund, today we are rebuilding that fund after paying dividend, the dividend that we mentioned at the beginning of the call, we will still have around $200 million at the corporate level.

[Cesar Rios, Chief Financial Officer]

Net position.

[Gianfranco Ferrari, Chief Executive Officer]

Yes, net position that's a good point. Because remember that we have around $0.5 billion in debt issued at Credicorp vision that during the COVID -- during the pandemic, but that's basically squared with a short-term investments.

[Andres Soto, Santander]

That's very clear. Thank you, Gianfranco.

[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.

[Gianfranco Ferrari, Chief Executive Officer]

Thank you and thank you all for your questions. I begin my comments by noting the difficult environment we've been navigating in Peru, marked by the wave of social unrest in the South and the adverse weather events in the Northern and Central coastal area. I'd like to give you a better understanding of how we remain close to our clients and support our communities during difficult times.

We have not only contacted our clients to evaluate impact and offer suitable financial relief alternatives, but also provided help through the mentions to the affected region. As of the end of March, BCP and Mibanco had granted payment relief to almost 60,000 clients. Furthermore, our businesses contributed to the affected regions through the nations and our employees participated in voluntary programs to bring emergency kits and nonperishable food to vulnerable families.

Our work on this front is not done as we foresee continued uncertainty ahead on the political and climate fronts. Despite this, political risks have clearly diminished and Peru's macroeconomic landscape has improved compared to six months ago. In this context, Credicorp is well positioned to capture and create value for all our stakeholders based on the significant opportunities ahead. Our dedication to financial inclusion and allocations, essential elements in poverty reduction remains firm supported by the solid fundamentals of our country.

We're committed to investing in digital transformation, promoting innovation and attracting and developing talent to fulfill our long-term promise. As we pursue these goals, we'll be prudent in managing risk and controlling our spending. We'll closely monitor our targeted efficiency ratio and ROE to ensure that we achieve our financial objectives. By striking a balance between innovation and financial discipline, we'll be well positioned to deliver sustainable growth and value to our shareholders over the long run.

Again, thank you for your trust in us, and we look forward to seeing many of you in New York on June 20. Goodbye.

[Operator]

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