Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2018-Q2

[Operator]

Good morning, everyone. I would like to welcome all of you to Credicorp's Second Quarter 2018 Conference Call. We now have our speakers in conference. [Operator Instructions] With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; and Mr. Reynaldo Llosa, Chief Risk Officer.

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

[César Ríos, executive]

Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the second quarter of 2018.

Before we review Credicorp's performance in the second quarter of 2018, I would like to highlight some important matters that characterize the scenario in which we have operated in the last few months. As tailwinds for our businesses, first, Anglo American approved Quellaveco, a major mining project in the south of Peru for a total investment between $5 billion and $5.3 billion. Moreover, according to the Ministry of Finance, Quellaveco could have a positive impact of 40 basis points in real GDP growth in 2019.

Two other important projects that have been announced are Mina Justa, a greenfield, and Toromocho, a brownfield, each of them for a total investment of $1.3 billion. These announcements indicate that business sentiment is positive and reflect a recovery in private investment in the country. Second, economic growth was stronger than expected.

As a headwind, copper price decreased.

With regard to the political environment, in the last few weeks, there has been noise related to allegations of corruption among high-level members of the judiciary system after a series of audios were leaked. This could be an opportunity to improve the new judiciary system.

Furthermore, in the presidential address on July 28, -- sorry, the 28 -- 2018, President Vizcarra mentioned the possibility of calling for a referendum to address the following issues: reelection of members of Congress, reforms regarding financing for political parties, a reform of the judiciary system and a return to a bicameral parliamentary system.

Additionally, he stated that PEN 4 billion will be invested in the El Niño reconstruction program in 2018. Overall, business confidence has improved in the last 3 months after a period of decline when threats of presidential impeachment loomed.

Please let's move to the second page of our presentation. Here, I would like to discuss the evolution of local economy in the second quarter.

In Chart #1, you can see that Peru's GDP growth, as well as domestic demand, have been improving. As such, real GDP grew around 4.5% year-over-year in the first half of 2018. In April and May, economic activity expanded 7.8% and 6.4% year-over-year, respectively, due to a strong boost from the fishing sector. Our estimates suggest that in the second quarter of the year, GDP expanded almost 6% year-over-year, and 1/5 of this expansion was attributable to the fishing activity. Given that the economic activity reached a peak during the first half of 2018 and that we foresee moderate growth rates for the rest of the year, we expect Peru GDP to expand 4% for the full year 2018.

Finally, in Chart #2, you can see that the financial system is on the positive side of the cycle, in line with economic activity. The orange line shows that loans on the Peruvian financial system according to the Central Bank expanded 9.2% year-over-year as of June 2018, which represented the highest growth rate in the last 2 years. It is important to know that in the same period, quarter-end balances at Credicorp grew 9.7% year-over-year.

Please turn to Slide #3. Regarding our lines of business, I would like to mention some important aspects that marked their performance in the second quarter. In the case of Universal Banking, BCP continued to reduce its cost of risk and posted a slight acceleration in loan growth. Although the core business performed well, its results were affected by losses on sales of securities due to market conditions. BCP Bolivia continued to post a relative good level of loan expansion. This subsidiary, however, faced pressures on margins due to competition.

With regard to microfinance, Mibanco's productivity continues to improve, which has led loan growth that tops its peers. It's important to know that as part of its financial inclusion mission in the first half of 2018, Mibanco's banked 70,600 clients. This represented a 46% increase over the figure posted for the first half of 2017. Moreover, Mibanco has increased its client base on the liability side through deposits to post 33% growth year-over-year. Credicorp increased its attributable stake in Mibanco to 97.7% after acquiring minority interest of approximately 4.5% in the second quarter.

Finally, Mibanco record a slight increase in provisions, which we will explain later on. In the case of insurance and pension funds, with regard to Pacifico, life insurance continues to post good profitability. Health insurance and medical care services have continued to improve. However, car insurance is still operating in challenging conditions in terms of volumes and profitability. In the case of our pension fund business, market volatility affected the profitability of funds under management, which had a negative impact on the profitability of Prima's legal reserves. In investment banking and wealth management, asset management is posting noteworthy growth due to a sustained increase in assets under management, but Credicorp Capital has been negatively affected mainly by the market conditions that have hurt their trading portfolio, which led to a reduction in the net gain on sales of securities.

Next slide, please. In this chart, you can see the most important figures and indicators of Credicorp's performance in the second quarter. Credicorp reported net income of PEN 978 million, which was 5.8% below the first quarter results, but 6.3% above those of the second quarter of 2017. Although the core business performance continued to improve, as is evident in our main indicators, market volatility affected the value of investments and led to a contraction quarter-over-quarter of approximately PEN 100 million in net gains on sales of securities at BCP, Prima and Credicorp Capital, as we mentioned previously. The results represented a return on average equity and average assets of 18.1% and 2.3%, respectively. Overall, in terms of loan portfolio, all key figures and indicators posted improvements quarter-over-quarter and year-over-year. And net interest income, NIM, and risk-adjusted NIM followed the same trend.

Moreover, with regard to operating efficiency, the year-over-year evolution, which eliminates seasonality, shows a relatively stable cost-to-income ratio.

Finally, in terms of capital ratios, our BCP Stand-alone BIS tier 1 and core equity Tier 1 ratios decreased quarter-over-quarter and year-over-year due to a strong growth in risk-weighted assets, in line with loan expansion. However, it's important to mention that BIS and Tier 1 ratios would have decreased to a lesser extent and core equity Tier 1 ratio would have increased slightly had we not included in risk-weighted assets the undrawn credit facilities advised but not committed to clients, as required by the regulator at the beginning of the second quarter of 2018.

Next page, please. Solid core business performance in the second quarter is also reflected in year-to-date results. Net income increased 11.4% and translated in a return on average equity and average assets of 18.5% and 2.4%, respectively, above the level registered in the first half of 2017. Let's review the main figures and indicators for the second quarter.

Next page, please. Interest-earning assets. As you can see in Chart #1, quarter-end balances of interest-earning assets posted a slight contraction of 2% quarter-over-quarter due to the reduction in investments but increased 2.5% year-over-year.

Loans, the most important asset, grew 2.2% quarter-over-quarter in quarter-end balance and 9.7% year-over-year. Therefore, loans increased their share of interest-earning assets from 63.7% in the first quarter of 2018 to 64.4% (sic) [ 66.4% ] in the second quarter.

Furthermore, in terms of currency mix of the loan book, this quarter, loan growth was driven both by local and foreign currency portfolios, unlike in the past quarters, when loan growth was led by foreign currency loans where markets are generally lower, those -- than those associates with local currency loans.

In Chart #2, you can see the quarter-over-quarter evolution of average daily loan balances posted in the first and second quarter of this year. The comparison shows: first, loan expansion was again mainly driven by Wholesale Banking, both Corporate Banking and Middle-Market Banking. Second, a variable mix by segment in loan expansion. As such, in the second quarter of 2018, Retail Banking and Mibanco, which are high-yield segments, accounted for 41% of the loan growth posted in this quarter, while in the first quarter, they represented only 25% of total loan expansion.

Next page, please. In terms of funding, the change in Credicorp's funding structure has allowed it to maintain funding at a relatively stable level despite rising interest international rates. First, as you can see in Chart #1, Credicorp's total funding volume fell 1.9% quarter-over-quarter, mainly due to the decrease in the Central Bank repos, which were replaced primarily by deposits. As a result, the funding structure by soles showed an increase in deposit shares of total funding which was 76.1% in the second quarter. It is important to highlight that the demand and saving deposits represent 61% of total deposits.

Second, with regard to the funding mix by currency, it has remained relatively stable, and thus, it had no material impact in the funding costs.

Third, as you can see in Chart #2, Credicorp's funding costs in local currency have decreased due to the change in funding structure explained early in the context of reductions in the Central Bank's reference rate. However, the funding cost of borrowing currency has increased in line with the trend in international rates. All those factors combined resulted in a relatively stable total funding cost.

Next page, please. Net interest income. Net interest income grew 0.9% quarter-over-quarter, 4.8% year-over-year and 3.2% year-to-date, which represents an improvement when compared to the results posted in the previous quarter. This performance shows the positive effect of growth in interest income after a slight acceleration in loan growth and reflects continued expansion in interest expenses due to our relatively stable funding costs. Interest income, as you can see in the charts at the top, increased 0.8% quarter-over-quarter and 3.6% year-over-year, mainly due to growth in interest on loans, which offset the decrease in interest on securities.

Next page, please. Cost of risk. As you can see in the chart at the top of the page, cost of risk fell quarter-over-quarter and year-over-year to situate at 1.22%, which was similar to the level reported in 2010 when Retail Banking segments represented approximately 41% of total loans and prior to the acquisition of Mibanco. This compares favorably with 48% posted in the second quarter of 2018.

The reduction in the cost of risk was in line with: first, efforts to fine-tune on risk-adjusted pricing methodologies and the risk rating model as well as specific changes to credit policies at Mibanco, SME-Pyme, consumer and credit card segments over the last 2 years. Consequently, there was some improvement in the risk quality of the new vintages of these segments. It is important to note that although these segments combined represent approximately 30% of Credicorp's loan portfolio, they account for 82% of average of total provision for loan losses made in the last 4 years. Thus, the risk-quality improvement has been the main driver of reduction in provisions for loan losses.

Second, the slight and gradual recovery seen in the macroeconomic scenario. In this context, the forward-looking nature of the expected loss under IFRS9 methodology captures in advance the improvement in the risk level of these segments. As a result, year-to-date, the cost of risk reached a level of 1.33%, which was 74 basis points below the level posted in the first half of 2017 and 48 basis points below the buying cost of risk, excluding the effects of the El Niño phenomenon and the Lava Jato case in the first half of 2017.

At Mibanco, the NPL ratio increased both quarter-over-quarter and year-over-year due to growth in internal overdue loans, which was attributable to a slight portfolio deterioration in line with a minor decline in collection effectiveness and delinquency reduced in the vintage for these key programs offered to clients affected by the El Niño phenomenon which have begun to mature. It is noteworthy that Mibanco has already addressed the collection effectiveness issues. Finally, a performance bond, part of our off-balance sheet exposure, was called in. This exposure became a derisked loan that was classified as a refinanced loan right at the beginning. So it went directly to the NPL portfolio. This exposure belongs to a client in the construction sector and is 100% provisioned.

Next page, please. Risk-adjusted NIM. As we have already discussed, efforts to improve risk management and pricing methods are now reflected in the stable risk-adjusted NIM. Overall, despite the strong economic downturn in Peru and an aggressive competition that pressured margins, Credicorp's risk-adjusted NIM has been relatively stable, running from 4% to 4.5% over the last years.

Finally, in the chart at the bottom, risk-adjusted NIM concentrated at 4.48% in the second quarter of 2018 and 4.36% for the first half of the year. This represented an increase of 26 basis points quarter-over-quarter, 39 basis points year-over-year and 31 basis points year-to-date. This was mainly driven by the significant improvement in the cost of risk.

Next page, please. Operating efficiency page. On a year-over-year basis, which eliminates seasonality, the efficiency ratio remained relatively stable in a context in which operating income and operating expenses grew at similar rates, although operating expenses accelerated the pace of growth due mainly to higher expenses at BCP related to its transformation and strategic initiative. Operating income also accelerated due to improvement across of income items such as net interest income, fee income, net earning premiums and gains on FX transactions.

In year-to-date terms, the efficiency ratio deteriorated 50 basis points compared to the level registered in the first half of 2017. The deterioration is due to higher growth in operating expenses than in operating income. In particular, operating expenses expanded year-over-year due to mainly an increase in the acquisition cost of the insurance business and, to a lesser extent, growth in salaries and employee benefits as well as in administrative and general expenses.

In the analysis by main subsidiary shows: first, the significant year-over-year reduction in Mibanco's cost-to-income ratio. This was in line with the improvement in productivity of loan officer. It is important to know that Mibanco has posted ongoing reductions on its cost-to-income ratio since the second quarter of 2007 -- 2016.

Second, BCP Stand-alone's efficiency ratio has improved year-over-year despite a context of growth in expenses related to the transformation strategy.

Third, it is important to mention that at most of the subsidiaries that posted a deterioration in operating efficiency ratio, the drop was due to a decrease in income. Nonetheless, operating expenses has been well managed and have posted a very limited growth.

Next page, please. In this page, you can see our guidance for the full year. With regard to macroeconomic estimates, as we explained at the beginning of this call, we are increasing our estimates for real growth in GDP, domestic demand and private investments, but decrease our estimate for growth in public investment. Additionally, we expect that the depreciation of the sol against the U.S. dollar to increase somewhat.

Considering the improvement in the macroeconomic outlook and results achieved to date, we are increasing our estimate for loan growth in average daily balances, which is expected to be between 7% and 9%. We are reducing our estimates for cost of risk, which is expected to be between 1.3% and 1.5%.

We maintain our estimates for NIM. However, we expect a stability or a slight deterioration in the efficiency ratio.

Finally, we maintain our estimate for return on average equity despite the 18.5% return on average equity posted in the first half of the year, given that in the first half, net income attained was PEN 2.1 billion, but equity fell PEN 1.9 billion due to the dividends paid, the IFRS9 adjustment at the beginning of the year, the construction in unrealized -- contraction in unrealized gains and a drop in retained earnings for the acquisition of Mibanco's minority interest.

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

[Operator]

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

[Ernesto María Gabilondo Márquez, analyst]

Three questions from my side. The first one is on loan growth. So your new guidance is between 7% and 9%. But after a 9% growth and better economic activity that we're seeing in the country, do you think this new guidance seems conservative at some point? Or are you concerned that the recent political noise in the country is making you to be less optimistic? Then my second question is on NIM and the NII growth. So we see a slight NIM expansion on a quarterly basis. We're seeing an improvement in the cost of funding, a higher exposure to Mibanco and the retail business. And we're seeing more stable margins in the Wholesale Banking. So I think in terms of NIM expansion, it's behaving well. However, when we look to the NII growth, it's still below loan growth. So how do you see the correlation of NII and loan growth in the next quarters? And finally, in terms of the cost of risk, it's at historical lows, and I think that made you to improve your guidance to 1.3%, 1.5% for the year. But what could be the expectation to reach the 1.5%? Again, is it will be more by increasing the loan portfolio growth? Or do you think there is something related to the political outlook that it's concerning you to be reaching the 1.5%?

[César Ríos, executive]

Thank you, Ernesto. Regarding to loan growth, besides the factors that you already mentioned, we have also a comparison effect because we grew more at the last quarter of last year, so we have a comparison issue when we compare year-over-year. And the second point related to NIM and the stability of the NIM, I think we are balancing the acceleration in the growth of the high-yielding business with a smaller portfolio and -- a smaller investment portfolio and a very competitive environment for corporate loans. Related to the cost of risk, what we expect is to have continued improvement, slightly probably, in the underwriting quality of the core portfolio, that and acceleration in the growth and the relative share of the growth in the high-yielding segments like credit cards, consumer and SMEs that the new methodology implies that when you increase the loans in this core portfolio, you, from the beginning, start to book provisions based on the expected loss. So you don't wait for the incurred loss. So when you originate these kind of loans, you -- from the beginning, from the origination, you will start building provisions based on the risk quality of these portfolios.

[Operator]

Our next question comes from Jorg Friedemann with Citibank.

[Jorg Friedemann, analyst]

This is Jorg. I have 2 questions. The first I know, with regards to asset quality, I understand what you mentioned with regards to the cost of risk and the expected loss methodology under IFRS9. But I was just wondering if, on the case of Mibanco, when those better vintages will reflect better NPLs, because the NPL ratio has been deteriorating sequentially since the end of 2016. So when does it stabilize following what you are seeing in terms of better vintages? And on the wholesale and SME, which were negatively impacted in this quarter by specific cases, so do you have additional concerns? Or do you think that, going forward, these portfolios should behave well? And my second question would be related to net interest margins. I understand that you are facing a tougher environment in terms of competition on the wholesale, and you are also seeing lower reference rates that could, at some extent, pressure margins. However, have behaved very well with what you highlighted in terms of funding costs. How sustainable those margins are in this, the better mix in the funding -- better funding mix and credit mix could compensate these headwinds that you are seeing, both in terms of competition and also in terms of lower rates in the country? And also if you could just give us an additional, if I may, an additional overview about the transformational projects and how this affects OpEx in the mid-term? So how long would you envision OpEx above inflation? I really appreciate.

[César Ríos, executive]

Okay. Thank you, Jorg. First, regarding to Mibanco, Mibanco has been growing above the level of its peers. And as I mentioned during the presentation, they have had a slight deterioration on a specific part of portfolios and a decrease in the effectiveness of the collection that has been addressed. But we -- but because we already have some vintages with this high-profile risk on the books, we expect to have provisions above the levels of the first 2 quarters for the remaining part of the year. In relation to NIM and the environment, if you allow me to split a little bit the answer between income and expenses. As you mentioned, we expect a strong competition in the wholesale segment. We expect, probably, a stable rate in our retail core portfolios, but a bigger share due to the relative growth of these core portfolios. Now we have an investment portfolio that is below the levels at the end of the first quarter. So we are going to have less income for this part of the book. And in relation to cost of funds, because we consider that the cost of funds in soles is going to be relatively stable, but the cost of funds in dollars are going to increase, probably the average cost of funds is going to increase. The whole combination leads us to think that we are going to have a NIM in the ranges that we have already stated. You already mentioned a question regarding the transformation process. The transformation process is working well, but it is an acceleration process. So we should expect during the remaining of the year and the next year an acceleration in the expenses related to these initiatives. And for the nature of the projects, we are going to obtain the best financial resource over time. At the same time, we are improving operational results, acquisition capabilities through the process.

[Ernesto María Gabilondo Márquez, analyst]

That's perfect, and very well explained. Just a quick follow-up on the first question with regards to Mibanco. I understood the pace of provisions. But in terms of the NPL ratios, given the better vintages that you are observing, when we should see the NPL ratios stabilizing? Because they continue to go up.

[César Ríos, executive]

Yes, just remember that, that NPL ratio is considered part of the effect of the El Niño phenomenon, which we are starting to see this time of the year. And basically what we are working today, we'll probably see the results by the last quarter of this year. Then we will probably see more stable NPL ratios.

[Operator]

Our next question comes from Marcelo Telles with Crédit Suisse.

[Marcelo Telles, analyst]

I have 2 questions. The first one is a more top-down one. I mean, in your guidance, you reiterated your, like, sustainable ROE at 19%. But in this quarter, you were a little over 18% ROE in an economy that has definitely accelerated, as you mentioned, almost 6% growth in the second quarter versus the same period of last year. So what do you think it would take for you to be able to maybe improve, or not deliver, let's say, an ROE above 19% down the road, especially considering your historical profitability level has been well above that? I understand competition is probably fiercer nowadays than back then. So why not expect a higher sustainable return on equity in the medium to long term? And my second question is a more specific question. Regarding the fact that your NII lagged -- your NII growth actually lagged behind the growth in the loan portfolio, I think you mentioned in your press release, you talked about the negative impact of some -- the unwind of some swap positions. I was wondering if they were, indeed, meaningful and if you could quantify that so that we have a better view what the NII outlook is going to be in the coming quarters.

[César Ríos, executive]

Okay. Probably, regarding to the ROE during the first half of the year, and probably I am going to review some quarters I already stated previously is that we have a balance sheet issue in the sense that during the first quarter, we have approximately PEN 2.1 billion of income generation, but we have several charges against that reduced the total shareholders' equity. We have the dividends. We have the impact of the acquisition of Mibanco, because when we already have booked the goodwill, the additional acquisitions, the difference between price paid and book value should be charged against retained earnings. We have the impact of the valuation of the investments during the second quarter, and additionally, we have an initial adjustment at the beginning of the year for the adjustment of IFRS9. So the combined effects were a lower shareholders' equity during the first part of the year. So when we talk about a sustainable ROE of 19%, we are talking about an acceleration over the time because, given the levels of average equity, now, the average equity, the return on equity should be around 18%. The 19% is on an acceleration that considers over the time an improvement in efficiency that counterbalance depression of target that we ambition in a growing market over the years.

[Marcelo Telles, analyst]

Just as a follow-up. Do you see that -- sorry to interrupt. Do you see any chance that, actually, in the long run, your ROE could actually be higher than the 19%? Regardless of all these issues that you mentioned, do you think there is the possibility that your ROE could at least get more maybe a little bit closer to the ROEs you had some years ago, it was about 20%?

[César Ríos, executive]

Well, of course, it may be. We are giving our best estimates now, but you should remember that our level of equity is significantly higher now than the level of equity 4 years ago. The bank 4 years ago, BCP Stand-alone, that is significant for Credicorp's overall performance, operated with average equity, core equity Tier 1s level of about 7% and 8%. Now we are operating with average core equity Tier 1s more in the vicinity of 11% and with a peak of 12% during the years prior to the declaration of dividends. That's a significant improvement in the level of equity. Now additionally we have a war chest considering future acquisitions that around PEN 1,100 million, PEN 1,500 million that has an impact on ROE also.

[Marcelo Telles, analyst]

And regarding the NII question?

[César Ríos, executive]

Yes. If you remember, we presented in Page #10, the risk-adjusted NIM. So we manage the business more focused on the risk-adjusted NIM than the NIM for the cost of bringing a loan by itself. Of course, we manage, detail each line. But the overall result is that we are already pursuing. And when we decrease interest rates, the counterbalance is less risk in the specific parts of the portfolio. You can see in the Page #10 of the presentation that between the first quarter of 2017 to now, we have had an increase in the risk-adjusted NIM. And that's the view that we try to manage.

[Operator]

Our next question comes from Thiago Batista with Itaú BBA.

[Thiago Bovolenta Batista, analyst]

Yes. I had just one question about the medium-term loan growth. A little bit softer improvement in the loan growth in Peru, which did, let's say, [indiscernible] given the political situation in the country, but looking at the medium term, how do we reach what will be the normalized level of loan growth for Peru or for Credicorp? And which segment do you believe will lead the expansion? My question is to try to estimate if it's possible to see in a couple of years, loan growth of, let's say, 50% or around 10% is the new normal for Peru.

[César Ríos, executive]

Okay. Now, we have differing estimates, International Monetary Fund, Central Bank, internal estimates, that situates the loan growth probably in the vicinity of high single digits. And for the next year, probably something that's slightly below that. There is the possibility to have around 10%, but I think it would be the high-range scenario. Saying that, the growth probably is not going to be uniform among segments. For the last quarters, the micro segment has been growing faster, and there has been some challenges in the corporate segment, for example.

[Operator]

Our next question comes from Andres Soto with Santander.

[Andres Soto, analyst]

My question is related to your insurance business. We have seen a significant increase in the acquisition costs this year, which has not only affected the insurance business, but also putting pressure on your consolidated efficiency ratios. In your press release, you mentioned some accounting effect there. And I would like to understand if we can expect any reversion in these negative trends over the next few quarters. And more generally speaking, if you can guide us -- please comment on your current views on the insurance business, in general, and over the medium term and how does it fit within the overall Credicorp portfolio?

[Alvaro Correa Malachowski, executive]

Andres, this is Alvaro Correa. Yes, I can explain. There are a couple of reasons why the acquisition costs went up. One is related to more activity, higher sales on premiums on the -- some high commission business, like, for instance, annuities or the Renta Flex, which is a special product, a new product that we are selling starting a couple of years ago, and also credit life-related business. So that increases commissions on one side. So it's a matter of mix, really. And the other one is related to an item that we used to charge for each policy in the past with -- and the regulator basically forbid it at the end of last year to continue charging that concept. Therefore, what happened is that we add it up to the premiums. But the impact on the accounting is that we no longer charge a one-off fee at the time of a sale, but we basically charge it on the premium, and we basically accrue it over the period of 12 months. So what is going to happen at the end is that after 12 months, this will be compensated. But in the first half of the year, you see the impact of this change. With regards to the medium-term perspective for the insurance business, there, as César mentioned at the beginning, the part of the motor insurance business is under some pressure today. We're making some changes on how we -- it's not an underwriting issue, really. We have pretty good levels of cost of claims. But it is a matter, basically, of expenses at the company. We have to be more efficient. So we are applying a very stringent efficiency program in the different companies under the insurance umbrella. So that has to change over time. We are very optimistic about what's happening in the life insurance business. It's growing very well. The health business is improving dramatically, both in the health insurance as well as in the health services. Both are doing really well. And property and casualty in general had, as you know, a bad year last year because of the El Niño effect. This year, we had some casualties that affected the short-term results, but it's going to improve. That's our perspective. It's going to improve over time. So basically, we are expecting better returns in the months and the years to come.

[Andres Soto, analyst]

And what is your ambition in terms of what this business should be delivering in terms of ROE. It is currently at 11%, clearly underperforming the rest of the Credicorp units. It is reasonable to think that it can get closer to the consolidated levels of Credicorp?

[Alvaro Correa Malachowski, executive]

What I can answer is that something that we expect to achieve in the short run is to go above the level of 15%. And I would expect a sustainable ROE of around 17%. Yes. Well, you have to take into account the impact of the unrealized gains on the equity of the company. So that sometimes distorts the results on return on equity. So if you take that aside, we're expecting around 17% for the whole business.

[Operator]

Our next question comes from Jason Mollin with Scotiabank.

[Jason Mollin, analyst]

Yes. I have 2 somewhat related questions. I wanted to get more details on your distribution strategy. We saw that the -- I guess, it's at the BCP level, Agentes is up over 400 year-on-year, 265 increase in the quarter. If you can talk a little bit about the strategy for distribution. And then, in that context, related to that, you mentioned that the transformation strategy is underway. You gave us some data in the press release about the use of digital channels, et cetera. Maybe you can expand a little on that and give us an idea on how that's working.

[César Ríos, executive]

I think this is at the very core of the transformation effort. In terms of BCP at the beginning, at the very core of the transformation effort are the development of capabilities to distribute digitally different products. We are working actively in that. We have several products already working and some of the labs. The result should be an increase in the percentage in numbers of units and dollar amounts of the processor to digital channels. Probably sustainability of alternative channels such as call centers, ATMs, agents and probably a decrease in the number of traditional branches, but we are examining that very carefully with an holistic distribution capacity approach -- a holistic distribution capacity model in which we consider different segments, different ways to reach clients combining all the different channels: digital alternatives, traditional branches.

[Jason Mollin, analyst]

And where -- when you showed that chart of the digital usage, how far can that go? Or what are the expectations? When I look at the chart, it's showing obviously dramatic increase over the last years, but how should we think about the usage of digital channels as a percentage? I guess, I'm looking here at this chart -- I guess, it's close to 50%. Is that -- I'm reading the color right in this chart?

[César Ríos, executive]

We expect that this percentage increase over time. Then, coming back to the last question, we expect a significant increase in the sales, in the capacity to sell products not only in the transactional dimension that is stated in the chart that you are referring to.

[Operator]

Our next question comes from Carlos Macedo with Goldman Sachs.

[Carlos Macedo, analyst]

A couple of questions. First question, you mentioned IFRS9. Now you're provisioning according to expected loss. What does that say about your NPL ratio? Is it something that we should expect to decline? I mean, the cost of risk now is about as low as it's been. And I understand the issues around writing off loans in the SME book. But what should it say -- what does it say about your forward NPL ratio? Second thing, bringing Marcelo and Thiago's question together, 19% sustainable ROE. If your payout's around 30%, it means you can grow your loans around 12%. Is that reasonable in the medium term in a sustainable way? Or if this loan growth is going to be closer to 10%, shouldn't you maybe be paying out more, maybe like 40% or 50%? Should we expect the payout to increase? How should we think about those questions given the guidance that you gave for sustainable ROE and the medium-term growth prospects, long-term growth prospects that Peru has?

[César Ríos, executive]

Okay. I am going to make initial remarks regarding to NPL. Probably, Reynaldo can add something additionally. You have 2 different effects here. You have the P&L effect and the cost of risk. And as we mentioned previously in the NPL, you have balance sheet effect that's related, for example, to loans that are already provisioned but we cannot discharge from the books because it has a judiciary process, a legal process underway. And the procedures usually takes 5 years. So we intend to sell periodically part of the portfolio. So in the -- when we accelerate the growth in segments, which has real estate collateral, we should expect an increase in this ratio over time. If we are not able to sell parts of this portfolio, it doesn't imply an increase in the risk profile. Actually, this portfolio has less cost of risk than other parts of the core portfolio, but this has this lagging effect that lasts for many years in your books.

[Reynaldo Llosa Benavides, executive]

Yes. But in terms of our forward implications on when these NPL ratios should start to stabilize, we probably would see more stable numbers by some time in the end of the this year. I mean, we -- all what César was explaining is it's true that the reason why this NPL ratio has been growing regardless the positive effect of the cost of risk, but we will probably see more stable numbers on the NPL ratio. Besides, we are also in an effort to try to sell some strands of this portfolio -- of this collateralized product portfolio. So, probably, we'll see better numbers in terms of the NPL ratio by some -- by the end of the year.

[César Ríos, executive]

Regarding to the long-term ROE, probably repeating some data. We expect a growth of the core portfolio for this year in the range between 7% and 9%, probably within the last years in the high single digits. The margins are going to be pressured. I think we should, everybody expect that. The cost of risk is stable. And we have an aggressive efficiency program underway that should balance out everything and help us achieve a sustainable ROE around 19%.

[Carlos Macedo, analyst]

Great. But this is -- I mean, given that growth, maybe high single digits, maybe low double digits, could you -- could this imply that, maybe, to keep the -- because otherwise, your ROE will go down from just having a lot more capital than you need. Does that mean that eventually you might raise the dividend payouts to something like 40%, 50%?

[César Ríos, executive]

I think that, yes, it can imply that, because if you have a sustainable ROE of 19%, and you are growing risk assets at the turn of 8%, 9%, something in this vicinity, you conceptually have the remaining part to all our corporate purposes. It can be dividends. It can be acquisitions. We already mentioned that we have an inorganic growth strategy on our plate, and we are working on that actively.

[Operator]

Our next question comes from Yuri Fernandes with JPMorgan.

[Yuri Fernandes, analyst]

I have a question on deposits, and I guess it's clear that margins should be under pressure. I just would like to know more details on if deposits or cost of funding may be part of this pressure? Because looking here, like your deposits, they are growing slightly below the total loan book. But more particularly, like, they keep them in the books, they are growing much less than that. So my question here is, how is the competition for the liability side? Like if you also see cost of funding maybe increasing so deposits can accelerate? And my second question is regarding the secured portfolio. I guess, you already addressed this in the presentation and in one of the questions, but can you provide more details on what happened with this mark-to-market? And if you expect any future impact on the coming quarters similar to what we saw in the second Q?

[César Ríos, executive]

Yes, okay, regarding the deposits. For many years in Peru, when the loan has been growing slowly due to this acceleration, where the growth has not been growing because of acceleration in the GDP, the deposit has been growing less than the loan portfolio. This has happened in the country. And so structurally, the loan-to-deposit ratio has increased slightly over time. So we should expect probably the same over time. Not a dramatical change, but a small increase in loan-to-deposit ratio in the entire system. Of course, there are a lot of competition for the deposits, but I would like to distinguish 2 different kinds of deposits. The core deposits are non-interest-bearing, demand deposits, saving deposits that we maintain and even increased slightly our market share participation. That is a very strong base. And in these deposits, you compete not in terms of pricing but in terms of distribution capabilities, products, the servicing capabilities of the bank. In the terms of the other part of the deposit is going to be driven by market conditions. Basically, the reference rate in soles and in dollars. What we expect in the short term, increase in foreign currency interest rate is stable for the remaining of the year in local currency, and the next year, we expect an increase in the reference rate in local currency. So this is in relation to deposits. I cannot -- and the second question was related to the investment portfolio, what we had. During the first quarter, we have an above-average results, selling -- realizing gains, selling securities. And in the second quarter, we have below-average results. Probably were 2 different types of results. In terms of BCP, we have already realized losses selling securities for the trading portfolio. In case of the other subsidiaries, we are more mark-to-market and probably we are going to see a reversal during the remaining quarters in the measure that the interest rate comes down for the bonds that we have on books that are mainly Peruvian and Latin American securities, medium-term securities.

[Operator]

Our next question comes from Isaac Nontol with Prima AFP.

[Isaac Nontol, analyst]

I have only one question from my side, and it's related to the insurance business. Has Pacifico already adopted or is allowed to adopt the new mortality table published March 2018 to receive some adjustments in the -- during the next quarters?

[Walter Bayly Llona, executive]

No, not really. We already implemented the new tables. And as a matter of fact, we have been using very conservative forward-looking tables in the past. So the adjustments were not that high. And what you see now is probably what you will be seeing in the next quarters.

[Operator]

At this time, I would like to turn the conference over to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.

[Walter Bayly Llona, executive]

Thank you very much. And as usual, thank you all for joining us on this call. I've got relatively little to add to what has been presented and discussed in the Q&A session. But this first half of the year, we have been positively surprised by the resilience of our economy, notwithstanding the political changes, the impeachment process and the continuous political instability. Nevertheless, it is important to realize that this very positive GDP growth in the economy has a somewhat relevant statistical effect in the -- to the extent that we are comparing it with a period that was affected by El Niño. In reality, the economy does not feel like a 6% GDP growth which has the number that has been statistically presented because of the factors that I mentioned above. The year-to-date results, which can be summarized in the return on equity of 18.5% and growth in net income of 14.4%, for the first 6 months demonstrate another solid period of results for Credicorp. The strategies of all our businesses are advancing in an orderly fashion. We continue to invest in several fronts in all our businesses and prepare our people, our infrastructure, our systems for the future. We are very confident that our financials will continue to show very positive results notwithstanding short-term volatilities or short-term effects on any particular quarter. The fundamentals of all our businesses are solid, and we are positioning all of our businesses for growth in the future. And we are very confident in our ability to continue to deliver very solid long-term results for our shareholders. Again, as I mentioned, very little to add. It's been a quarter without any substantial one-off effects. But everything in all the parts of our organization is working in an orderly fashion. And again, just to summarize, we are confident to be able to continue delivering the results that we have had for the past 10, 15 years in the years to come going forward. With this, I finish our presentation. And again, thanking you all for joining us in this conference call. Thank you, and good-bye.

[Operator]

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