Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2021-Q2

[Operator]

Good morning everyone. I would like to welcome all of you to Credicorp Limited Second Quarter 2021 Conference Call. We now have all of our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. [Operator Instructions].

With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Cesar Rios, Chief Financial Officer; Mr. Reynaldo Llosa, Chief Risk Officer; and Ms. Milagros Cigüeñas, Investor Relations Officer.

And now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

[Cesar Rios, CFO]

Thank you. Good morning and welcome to Credicorp's conference call on our earnings results for the second quarter of 2021. I hope you and your families are healthy.

Official data indicates that the economy grew around 20% in the first half of 2021 and came close to hitting pre-pandemic levels. It is noteworthy that the construction sector grew 15% with respect to the first half of 2019. In addition to statistical rebound, recovery in the past few months has been boosted by a favorable external environment where copper prices remain high and our main trading partners have resumed growth.

Regarding to the sanitary situation, mortality rates have fallen considerably after reaching a peak at the beginning of the second quarter. This improvements has been driven by a noteworthy uptick in the vaccination rates in June and July. Currently, around 37% of the adult population have received at least the first dose. Although this rate lags behind that registered by some peers in the region, the government's role is that all adults and children from 12 to 18-years will be vaccinated by year-end. All in all, we still expect that Peru GDP to rebound around 9% in 2021 due to a strong commodity prices and expansive monetary policy and fiscal policies.

Political uncertainty in Peru has generated a negative impact on financial indicators. The exchange rate has depreciated more than 12% year-to-date, and the dollar has reached a record high despite the Central Bank's move to sell almost $6 billion year-to-date in 2021. An active intervention in FX markets via multiple instruments. Furthermore, foreign rates in domestic currency has exceeded bit at the table has also climbed to levels above the peak register in 2020.

Despite the pandemic and political shocks, Peru continues to outperform peers in the region in terms of macroeconomic indicators. Our net international reserves currently represent 35% of GDP, our annual inflation rate stands at 3.8% and our public debt, which represents 37% of GDP is among the lowest in the region. Additionally, our banking system maintains high liquidity.

Current political instability is rooted in decisions taken by the new government. Beginning with the move to appoint a highly controversial cabinet with limited technical chops questions regarding the direction that monetary policy will take as well as who will lead the sector continues to loom.

Announcements have been made indicating that higher levels of state intervention are on the horizon via new public credit facilities fee regulations increased regulation for private health insurance, and structural changes in the private pension system.

The Secretary's ability to implement his radical agenda may meet with significant obstacles and resistance. First Peru Libre has only 37 seats of 130 in Congress and with allies can contribute only five more votes. Second, it is worth noting that in the first round of elections, Pedro Castillo' secured only 19% of valid votes, which represents 10% of registered voters, and in the second round won by an extremely narrow margin of 44,000 votes less than 0.2%.

Additionally, a recent data survey conducted between the second and the fourth of this month indicates that Castillo's approval rating is 39%, one week into his term one of the lowest initial ratings registered by a Latin American President in recent history. In the same survey, only 5% of those polled indicated that the Constitutional Assembly should be the government's top priority. In fact, the assembly is ranked sixth among seven priorities some believe, where the reactivation of the economy, improvements in the health system, and improvements in the quality of education were ranked first, second and third, respectively.

Going into Credicorp results, let me highlight our quarter-over-quarter evolution. The loan portfolio rose 4.4% in the quarter in balances driven primarily by an uptick in structural loans in the wholesale banking and SME business segments. Net interest income grew 8.7% driven by an increase in structural loans, a drop in funding expenses and the fact that a one-off expense was recorded last quarter for liability management operations. In this context, NIM resumed growth and stood at 4.01%. Provisional expenses fell after client behavior register positive performance across sectors, which lead the cost of risk and a structural cost of risk to situate at 1.02% and 1.22% respectively this quarter.

Core non-financial income which is composed fees and FX transactions grew 8.4% due to a construction considerable uptick in transactions. This evolution was offset by a contraction in non-core non-financial driven mainly by BCP, which sold long-term bonds at a loss to reduce the interest rates and stability of the available for sale portfolio.

Insurance underwriting results continue to be impacted by COVID-19 related claims and include but not reported provisions in the lines of business. So they perform works, whoever the train has improved. The efficiency ratio improved 30 basis points boosted by income recovery. Net income at Credicorp totaled PEN699 million in the second quarter of 2021, which represents an increase of 5.9% quarter-over-quarter. Our return on equity continues its upward trend and situated at 11.3% at quarter end.

In the first half of the year, ROE is stood at 10.9% within our guidance range. Our balance sheet remains strong with ample liquidity by adequate capital wages.

I will briefly describe the results of the lines of business level, but provide further detail in the section of consolidated performance. Universal Banking drives our recovery. BCP’s Stand-Alone contributed PEN726 million in earnings, registering a return on equity of 18.1%. Core income registered notable growth at 80% quarter-over-quarter which was mainly driven by an uptick in the structural loss, a contraction in the funding costs and growth in transactions.

BCP’s sold available for sale long-term bonds at a loss to reduce interest rates instability and partially offset the negative impact to our U.S. dollar loan position. This has strategies resolved, partially offset core non-financial income growth. The main driver of an uptick in profitability this quarter was the 83% quarter-over-quarter contraction in provisional expenses which reflected an improvement in client payment lows.

Efficiency deteriorated 10 basis points quarter-over0quarter, mainly driven by higher digital marketing and mileage stability program expenses in line growth in vehicle sales and debit and credit card usage.

BCP Bolivia’s ROE is stood at 8.2% which reflects a decrease in the appetite for risk and relative stability in the loan portfolio in a context marked by larger scale government-mandated loans program. Results were impacted by provisional reversal due to the inclusion of guarantees in the consumer portfolio, which was partially offset by new provisions to cover delinquencies. The provisions levels were equivalent to 4.72% of the total loan portfolio.

Mibanco reduced to clear recovery this quarter. Net interest income growth due to an uptick in origination of lower risk structured loans, a drop in the funding costs and a reverse of interest income provisions made previously for our program portfolios. This positive evolution in need was partially offset by regulatory restriction on fees. Loan provisioning normalized in a context of an improvement in payment performance and growth in transactions. However, we are closely monitoring the 12% of this structural portfolio that we sustained within grace periods or past due.

Colombia's results improved due to an uptick in disbursements over original volumes passes low due to social tensions. The focus is currently on maintaining adequate risk management workforce productivity and efficiency at the commercial level.

Regarding insurance and pensions, this quarter Pacifico’s contribution continued to be impacted by higher COVID-19 related and IBNR provisions in the life business. Losses in this business has negatively affected a return to profitability at the group level. It is important to know that at quarter end claims and IBNR provisions began to fall in line with a drop in COVID-19 mortality. In property and casualty, growth in net premiums was offset by an increase in claims after mobility restrictions were lifted and activity levels rose. The corporate health insurance and medical services were affected by higher claims quarter-over-quarter with an increasing healthcare demand as the economy reopens.

Our three months assets under management contracted 2.2% quarter-over-quarter, which reflects fund withdrawals for a total of PEN1.8 billion as of June under government-mandated taxes facilities in May. These were present 15% of total funds that are available for withdraw. We expect assets under management to continue to contract in the short term given that the ASP withdrawals can be made for the year. Despite these fees has remained stable due to growth and contribution for our fees.

In Investment Banking and Wealth Management, the quarterly evolution indicates assets under management contracted minus 0.5% which was primarily attributable to Peruvian-based fund outflows from the asset management business due to political uncertainty. In Wealth Management. Assets under management remain basically a stable after local transmigrated abroad and to an offshore platforms.

The contraction in asset management was accumulated by a devaluation in local currency. Income contribution expanded 15.8%, driven primarily by positive assaults in capital markets and wealth management. The gains at peak was fueled mainly by growth in the sales of securities and upfront fees from entering third-party funds to international platforms.

It is worth noting that Investment Banking and Wealth Management lines of business continues to consolidate its regional presence and 76% of its assets under management are held outside Peru. The recent integration of funds to offshore platforms represents an opportunity to growing investment options for clients.

Now, I will discuss Credicorp’s consolidated performance. Quarter-over-quarter, loan portfolio was 4.4% in ending balances and 2.2% in average daily balances. This evolution was driven primarily by an uptick in the structural loan origination and wholesale banking to campaigns in the fishing and agricultural sectors. Expansion was also fueled albeit to a lesser extent by growth in SME business, mortgage and consumer loans and by the evolution of the exchange rate.

The mix of interest earning assets improved, marked by 7.8% quarter-over-quarter construction in the investment portfolio after BCP sold sovereign bonds and reduced exposure to long-term interest rate risk. The deposit needs improved and reflected an uptick in low cost demand and savings deposits in foreign currency that was partially offset by withdrawals of time and severance indeminity deposits. Additionally, the funding needs in foreign currency grew to low interest borrowing and through the execution of the remaining may hold redemption from a liability management operation. The consequent funding structure coupled with lower interest rates lead the funding costs full and expand at 1.18%.

Both payment behavior and the structure portfolio profile evolved favorable this quarter. In Retail Banking, on time payments from loans due is stood at 95% driven by an uptick in the SME-Pyme segment. Quarter-over-quarter the high uncertainty portfolio which is composed of reprogrammed loans that are still within grace period, and overdue loans increased a slightly unrepresented 10% of structural a loss. It is important to note that this increase was driven by loans that were less than 15 days delinquent, which are considered the most recoverable.

At Mibanco, on time payments improved in a context of lower explorations of rolling transactions and income due to economic reactivation. The high uncertainty portfolio contracted from 19% to 12% this quarter due to a positive evolution of payments. The government program goals for government, which are primarily underway and active in Peru began to expire in June 2021. By the end of the month, the balance was 7% lower than their record high in the fourth quarter of last year.

The Retail Banking government program portfolio represents 65% of the total government program portfolio. By the end of June 54% of the retail portfolio was still within grace period, 30% have made the first payment, 14% has been reprogrammed and 2% has become overdue.

In the chart on the right-hand side, you can see the profile for wholesale banking and for Mibanco. It is important to note that the new government reprogramming facilities expire next year. So the real deterioration levels will not be fully evident until 2022. It is important to know that the government guarantees back a substantial percentage of these portfolios.

The NPL ratio for restructured loans in the wholesale banking registered no variation after the deterioration of a small number of middle market clients plus offset by an increase in loan volumes. In retail banking the ratio evolve positively in the individual segment, but was slightly attenuated by an increasing overview SME loan.

Thus at Mibanco positive payment behavior and higher write-offs drove an improvement in NPL. As a result, Credicorp’s structural NPL dropped from 6.05% to 5.38%. The downward trend in the structural costs of risk was not worth. This improvement was driven by BCP’s standalone, where the ratio dropped 46 basis points situating at 1.11% in a context marked by an decrease in the probability of default.

In this scenario, Credicorp’s structural cost of waste contracted 69 basis points from 1.92% to 1.23%. In year-to-date figures the structural costs of risk is stood at 1.51%. At the end of June, the provision stock was equivalent to 7.7% of Credicorp’s structural loan portfolio.

Credicorp’s structural NIM increased 14 basis points quarter-over-quarter to stand at 4.32%. Recovery was attributable for more profitable assets needs, which was generated by growth in a structural loan origination, an improvement in the funding mix and a decrease in interest expenses. The positive evolution in NIM was mainly driven by BCP. We suggested NIM increase 64 basis points this quarter and reach 3.38%. This metric is recovering faster by means in line with a normalization of provision of our losses.

Core income, which is composed of net interest income, fees and FX transaction was equated close to pre-pandemic levels. The increase in net interest income was primarily attributable to growing structural loans and a decrease in the funding costs. Fee income grew alongside an uptick in transactions on foreign transit at BCP and in brokerage fees at Credicorp Capital. Their first transactions also increased in the context of high demand for dollars.

Non-core non0financial income this quarter results reflect a management decision to reduce interest rates and stability in the investment portfolio at BCP as indicated earlier. Additionally, we executed an active derivative trading strategy at BCP and Credicorp Capital, both of which bring very positive results.

Insurance underwriting results continue to be severely impacted this quarter, which was mainly due to an increase in COVID-19 claims in the life business and to a lesser extent to higher claims in the property and casualty of business after mobility restrictions were lifted. On a quarter-over-quarter basis regarding net earnings premium, there was a slight contraction in life business associated with a decrease in sales of products in annuities and seasonal effect for renewals insurance for high risk occupations.

In property and casualty, there was an uptick to renewals in the medical assisting line and an increase in cost due to new sales and renewals. In the life business, COVID-19 claims reached at peak in April before beginning of March somewhere accompanied by ongoing decline in IBNR provisions in a context of decline in mortality during the quarter. If the sanitary situation continues to improve, we expect this trend to continue.

It is important to know that on a year-to-date, net earnings premiums grow in the life business through Cisco 5, which expanded the affiliate base for fees and contemplated a more favorable fee structure. This is pension fund related business. The risk of a third wave appears imminent. Nonetheless, vaccination rates and doubling masking mandates may mitigate impacts this time around.

In the first-half of 2021, Credicorp’s efficiency ratio improved to 150 basis points year-over-year. Improvements were driven mainly by the positive evolution of income in the micro-finance and insurance and pension lines of business. Mibanco’s interest income well have due to growth of structural loans and a decrease in the cost of funding, while expenses remain under control.

Pacifico’s income was boosted in the first half of this year due to repricing and the fact that it on a higher proportion of the SISCO V tender.

Credicorp just shows an operating leverage of 6 percentile points, an accounting [ph] income acceleration controlled growing expanses. Year-over-year growing operating expenses during the first half this year reflects our commitment to digitalization and was generated primarily by cybersecurity and IT. Regarding distribution footprint resizing, it is worth noting that BCP is standalone and Mibanco reduced a number of total branches by 9% and 2% respectively year-over-year.

In terms of liquidity, even after controlled flows of foreign currency, BCP’s Stand-Alone and Mibanco have maintained high levels of liquidity well above regulatory and internal limits.

Regarding capital, each of our subsidiaries maintains adequate capital level, which ensures solvency. The slight increase in the core equity Tier 1 of BCP Stand-Alone and Mibanco was attributable to an uptick in retained earnings, which was driven by recovery of core subsidiaries this quarter.

At BCP, we continue to work on key digital initiatives to achieve our objectives for experience and efficiency and ensure our competitiveness in the long-term. Alongside initiatives to accelerate digital investments, we seek to improve time to market and operating stability without losing sight of cyber risks.

The number of new software releases more than doubled year-over-year this semester and the downtime for key channels fell 54% in the same period. Our aim for year-end is to fully comply with all these payments of the FFIEC cybersecurity assessment tool at the baseline evolving an intermediate level and fulfil 90% of all its payments at the advanced level. To-date, we have fulfilled 82% of this project.

Client satisfaction was negatively impacted by an uptick in the demand for services, which coincided with a reduction in on-site service capacity with the pandemic. We moved swiftly to replenish our service capacity by leveraging digital services improve the client journey. Consequently, we have recorded satisfaction levels and are now shooting to exceed expectations.

The effectiveness of our efforts to secure digital initiatives is reflected in the evolution of the pool of digital clients, which represented 55% of the total client base this quarter and continues to see growth. Exponential growth in digital transactions coupled with an increasing digital service in recent years led to repeat and resize our distribution model. Consequently, we reduced our branch network by 9% in the last 12 months.

At Credicorp level, we are developing different FinTech initiatives and ecosystems to boost the group's potential. Later this year, we will be able to give you a much more detailed overview. Right now, I would like to comment on our progress with key specific initiatives. Yape now reached the 6.6 million user mark by June 21 and have added 1 million new clients to the banking system since 2012,

Transactions grew fivefold. With regard to the figure reported for the same period last year. Recent integration with a Niubiz anticipate opens the ecosystem to payments to console sales, which will propel an additional increase in transactions indicators, such as frequency of use, cost of acquisition at NPS continues to grow. And we expect that this will be the case moving forward.

In the second half of this year, Yape will provide an interesting monetization pipelines. We will share more information on this point as new features are released. Yape is now better prepared to operate independently at BCP and the decision making of results, culture and operating levels. Nonetheless, we'll have no intention of divesting in this business in the foreseeable future.

Tenpo is the only thing with a digital wallet solution in Chile. Within a year of its lunch. Tenpo is the second largest solution in terms of number of users with a client base of 537,000 affiliates, with an inter mounted low level of safe transaction that is stand at 30%. High volumes and an a strong NPS performance indicator of 68%, we expect positive trends to continue. This represents an opportunity to continue growing our customer base as we consolidate in this market.

Finally Tyba a digital initiative that began in Colombia to offer low ticket investments have hit the 293,000 users mark this quarter with $89 million in assets under management. Tyba is still have significant room to grow in Colombia. Additionally, Tyba was lunched this quarter include where we expect it to grow faster as we leverage our lending position in the market an extensive knowledge base.

Now, let me talk about our sustainability learning. We have stated that honing our social focus is the core objective of our sustainability program. Our efforts has speeded up and in the first half of 2021, we progress towards several milestones.

On the environmental front, we are pushing the group to mitigate and reduce carbon emissions to 3 prongs, carbon neutrality, environmental policy, and environmental management. It is worth noting that a new BCP was recognized by the Ministry of Environment for reducing the carbon footprint and was the first plant in Peru to won the Level 3 awards.

With the support of industry experts, we have made progress in assessing our ESG risk management framework. Additionally, we have launched an ecofactory line with a sustainable textile complex.

On the social from Yape and Mibanco drove our financial inclusion efforts on 1 million citizens and 35,000 SMEs were drove into the banking course. Financial education programs are BCP and Pacifico have also reached millions of people. We implemented a program where female board members meet and exchange views with female senior executive with eye on strengthening networks, increasing the disability of female talent and addressing gender equality challenges. We have also established directional goals to improve our gender imbalance, and adding clearly agenda perspective in our succession plans for senior executives.

On the government front, we have included sustainability goals in corporate level incentive programs and have made further improvements on the compliance front. By year-end, we expect to report progress and relevant ESG initiatives and adhere to international reporting standards.

We expect our overall our ROE for 2021, to remain within guidance given that favorable results in the banking businesses are expected to offset the recent favorable scenario in the insurance business.

Peruvian real GDP growth is decelerating and our estimate for the end of the year is within the range. The loan portfolio growth in average daily balance is expected to decelerate even the uptick in the second-half of 2020 was generated by Reactiva deposits [ph]. Current uncertainty may impact low denomination at year-end.

Net interest margin achieved an inflection point that recovery will be gradual. As such we expect NIM in 2021, to situate at the lower end of the guidance. The cost of risks wherever has improved faster than expected given the positive evolution of client payments. In this context, we expect to reduce the costs of race below our guidance range this year.

Regarding efficiency, the 43.9% ratio cost in the first half of 2021 is slightly below our guidance. Nonetheless, we expect the levels to increase albeit with an expected range higher year-and expenses have reported.

The outlook we are sharing today is for 2021. Although uncertainties remain on an extended horizon after evaluating different scenarios, we reaffirm our long-term businesses strategy. We are carefully monitoring the evolution on specific variables and are poised to make tactical changes to adapt to challenging situations. We will continue accelerating by regeneration to the digital strategy in each of our businesses, which coupled with our sustainable journey will ensure that we sustain growth efficiently.

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

[Operator]

Thank you, sir. [Operator Instructions] Our first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

[Ernesto Gabilondo, Bank of America Merrill Lynch]

Hi, good morning, Gianfranco, Cesar. And good morning, everybody. Thanks for the opportunity. My first question is related to the insurance business. We saw there are operating trends in general, net interest income growth for the first time in three quarters, and important recovering fees and significantly lower provision charges. However, we saw this wider loss in the insurance results.

So, considering that the region is going through a third wave of COVID-19, and that the delta is affecting younger people not vaccinated. How do you see the outlook for Pacifico’s insurance business in the next quarters?

[Walter Bayly, CEO]

Thank you, Ernesto. This is Walter Bayly. I will let Alvaro Correa answer that question. Alvaro, please?

[Alvaro Correa, Deputy CEO]

Hello, Ernesto, this is Alvaro. Well, there are a few things that are happening after this trend that we saw in the second quarter of the year, which at the end was -- I mean, for this second wave, it was like a 50% or so higher impact on results than the first wave. So the question that you're raising is what is going to happen in this potential third wave? There are a few elements that we have to take into consideration, one is the vaccination process is getting better. And since the government has decided vaccinating people from older to younger, that coincides somehow with the population that is insured.

So basically, what we're expecting is that the impact for the country would not be as high as the second wave, and the impact on the insurance business won't be as high as in the second wave as well. So that's something that we are expecting, really.

But again, this is something that we do not – where we do not have specific guidelines so far.

[Ernesto Gabilondo, Bank of America Merrill Lynch]

Thank you. And then, my second question is on the political outlook, how you see the possibility of Velarde accepting another period as head of the Central Bank? And if you think reaffirming his position could reduce volatility in the sector?

And also related to the political outlook, do you think that the proposal to change the private pension system is still on the table? Or, do you see a more moderate stand from the new administration?

[Walter Bayly, CEO]

Sure, I will answer those questions, Ernesto. I think the basic scenario here, regardless of whether Julio, who is a very well respected central banker, the question is whether we will have an orthodox central bank or not. Our expectation at this stage is that yes, we will continue to have a central bank that will act accordingly to more orthodox policies. And once those are confirmed, of course, volatility should be reduced.

Regarding the pension system, it has been on the table for quite a while to redo the pensions, private pension fund system and the public system as well. That is a necessary thing to do. The private pension fund system has been, I think, severely damaged. The amount of withdrawals that have happened and the fact that currently the current legislation allows people from 60-years the amount in which you can start withdrawing funds has been reduced. And that is, of course, counter to what has happened all over the world, where due to the low returns of the portfolios because of low interest rates, the age at which individuals can achieve their pension has been increased. We have gone counter that cycle.

So, at this stage, the private pension system does not have enough money to provide for adequate pensions. So our reform is urgently needed. It is a difficult task for any government in any Congress. It is on the table. But we do not have expectations that this is something that is going to happen very quickly, or very easily.

I don't know if I answered both your questions, Ernesto?

[Ernesto Gabilondo, Bank of America Merrill Lynch]

Yes, perfect. Thank you very much. And then, just the last question related to your digital transformation. We're starting to see niche countries of the region the creation of digital banks. So given all your FinTech initiatives, such as Yape, Tenpo, Tyba or the digital transformation inside BCP, do you see the possibility at some point to consolidate all of these initiatives in a digital bank in the future?

[Walter Bayly, CEO]

I will pass this question on to Gianfranco. Gianfranco, would you care to take it, and I can complement afterwards?

[Gianfranco Ferrari, Deputy CEO]

Sure. Good morning, Ernesto. Yes, the answer is yes. We are considering the possibility of launching a digital bank. We talked in earlier conference calls, the vision we have is that we have to make a few different bets in order to be successful. Some of the bets we've already made are being successful, and in some we failed. However, going specifically to your question, we may pursue our -- I would say a dual strategy. One is with a vision of launching a digital bank based on what we already have, while at the same time, keep the current initiatives or ventures growing. And the ones that are successful expanding them to other countries.

[Ernesto Gabilondo, Bank of America Merrill Lynch]

Excellent. Thank you so much.

[Operator]

The next question is from Yuri Fernandes with JP Morgan. Please go ahead.

[Yuri Fernandes, JP Morgan]

Hello. Good morning. I will limit myself to one question regarding loan growth. I guess you provided this guidance likely converging to the lower end of the guidance for the year. But looking ahead, what should we expect? Because my concern here is that about 70% of your loans are business-related loans. When you add to the SMEs, the wholesale about 70% of your loans in Peru, they are business-related. And the concern here is that this is political uncertainty may drive maybe you decrease your risk appetite and also your clients like lower demand from them. So how should we think about loan growth not only for this year, but for 2022, for 2023, even like this higher interest? Should loan growth in Peru be below like nominal GDP? Like, what should expect now?

And if you can provide some data in June or July, that may be can -- I don't know, show some trend of deceleration that would be helpful as well. Because in the second Q, I guess that was a good quarter right for growth. The question mark is what's going to happen in the second-half in 2022? Thank you.

[Walter Bayly, CEO]

Thank you, Yuri. I will give a brief answer and maybe Cesar you can compliment. Yes, you are right to the extent that the private sector is not aggressively investing, growing and spending, obviously, loan growth will be subdued. The long-term trend in Peru is that loan should grow at 1.5 times nominal GDP. I think that to the extent that this political uncertainty continues to be a cloud above us. We will be of course, on the lower end of that long-term trend. So that is reality and that is what we are preparing ourselves for.

Having said this, Cesar, would you care to comment a little bit more on loan growth?

[Cesar Rios, CFO]

Yes, Walter. Thank you, Yuri. Yes, only to complement, I will think in terms of individuals. The research field demand for consumer and mortgages in line with a private spending that's probably going to be fueled temporarily with a number of government imposed initiatives. And in the wholesale segment, being said that is going to be probably less investment, it’s going to be also some substitution effect from less initial in international markets, and probably a little bit less appetite from international banks. So, at least in the short-term, we think that we can have these sources of growth.

[Yuri Fernandes, JP Morgan]

Thank you very much.

[Operator]

The next question is from Tito Labarta with Goldman Sachs. Please go ahead.

[Tito Labarta, Goldman Sachs]

Hi, good morning. Thanks for taking my questions. Maybe first a follow-up on the political environment. Any update or what you're hearing on the caps on interest rate, regulation on fees and any forced lending anything like that, any color you can provide there?

[Walter Bayly, CEO]

Good morning, Tito. No, no further news. The three issues that you mentioned are the ones that of course pose a certain amount of difficulty or risk for the financial sector. You well mentioned, we do have a law that sets caps of interest rate and that is reviewed every six months by the Central Bank. So at this stage, there have been no comments to make any changes on that.

There has been a little bit noise on fees, but nothing. We do have rather stringent regulation on fees already. So in the short-term we don’t anticipate anything further. And no mentioning about forced lending, though we have heard there's been a lot of noise from the government, and to the extent that Banco de la Nacion should be an active participants, particularly Bemis [ph] and SMEs but that of course could create distortions in the short-term.

In the long-term, we have in the past competed with public sector banks. And in the long run, they usually are not the toughest competitors. They tend to have difficulty attracting talent, are usually not very good on the commercial front. And, usually technology is not the strength of government-owned financial institutions, particularly in Peru.

Thus, in the long-term, it is no concern. Though, in the short-term because of price considerations, it can create certain amount of distortions in the market. We all remember what happened in the Brazilian banking system during the Lula administration, when the series of government-owned financial institutions and their mandates and political mandate, started aggressively lending in several sectors of the banking industry. And that, of course, in the short-term creates distortions.

So we're not concerned in the medium-term or long-term, but in the short-term, there could be distortions. Nevertheless, Banco de la Nacion is not prepared today from a risk management perspective, from a commercial perspective, to go and aggressively be an active participant.

It is important to keep in mind that in Peru, about 45% of all the lending done into the SME micro lending is done by public sector financial institutions, basically, the Cajas Municipales. So, we are watching this closely. But at this stage, we do not have a lot of serious considerations. Did I answer your question, Tito?

[Tito Labarta, Goldman Sachs]

Yeah, Walter, that was very helpful. Thank you. A separate question then on cost of risk, better though this quarter. I know, you provisioned quite a bit last year. How do we think about that for the rest of the year?

[Walter Bayly, CEO]

Sure, I will pass that question along to Reynaldo and/or Cesar. Can you start Reynaldo?

[Reynaldo Llosa, Chief Risk Officer]

[Technical Difficulty] reporting the performance on all our portfolios, a lot better than we expected. And we see these trends continuing during the second-half of the year and broadly during 2022. Having said that, there's still some small portion of the portfolio, which is still benefiting from grace periods, so that might have more impact on the performance of the portfolio.

But we are feeling very positive up to date with the performance of both wholesale and retail portfolios, as well as the trends we are watching and Mibanco. Bolivia, is benefiting from regulatory rules that give the client the opportunity of having very long grace periods. So, I would say that would be probably the most challenging things for Credicorp in 2022.

[Walter Bayly, CEO]

Thank you, Reynaldo. Cesar, is there something you would like to add?

[Cesar Rios, CFO]

Only something very slightly that in line with Reynaldo, we expect a positive behavior in probability of the tools and costs of waste, but probably a little bit uptick in deteriorated portfolio as the deterioration that was expected they started to materialize, but materially was already provisioned as the recruitment portfolio started to come due.

[Tito Labarta, Goldman Sachs]

Thank you.

[Operator]

The next question is from Jason Mollin with Scotiabank. Please go ahead.

[Jason Mollin, Scotiabank]

Hello, everyone. Walter, Gianfranco, Alvaro, Cesar, Reynaldo, Milagros and team the presentation was excellent. All my questions, you addressed all of them actually, as well as in the previous questions. But I can ask one on given the consumer demand that you talked about from government support, and perhaps companies that are not in the best position that could need some liquidity here. How are you managing the risk here? And how do you see that impacting your market share going forward? Do you think that Credicorp’s businesses will actually be looking in this environment to give up the weaker credits so weaker clients and will retrench and that would result in lower market share?

[Walter Bayly, CEO]

Thank you, Jason. Thank you for the kind words. No, at this stage. We do not anticipate, of course, as it was mentioned by Cesar during the presentation, we have made a thorough review of our long-term strategic positioning. And we do not think that at this stage, there's anything that merits any changes in our long-term strategy or view of what we want to become, and where we want to play. Nevertheless, under such a change in environment, tactical responses are something that one has to be ready to tackle.

And, of course, we're watching the development of each of our different market segments, product market segments. But at this stage, we have no intention of not continuing active participation that we have in all the product and segments in which we are currently present.

So, in short, the answer is no. We do not have any objective of reducing any portion of our portfolio or market share going forward. And as Cesar mentioned, maybe what could provide somewhat of a growth opportunity is the fact that the domestic capital markets because of the lack of liquidity and the pension funds, and the lack of international capital markets, maybe there could be some more lending for top corporates available in the corporate sector.

I don't know Gianfranco would you like to add something?

[Gianfranco Ferrari, Deputy CEO]

Good morning, Jason. Because as always there's a fine balancing act between risk and business opportunities. On top of what Walter said, we still have a long-term strategy leveraging on technology in order to reach new segments of both the population and SMEs at BCP, I'm talking. So even though maybe the macro environment might not be so positive, we are still positive on the opportunities in getting more businesses and in tackling new segments of businesses.

[Jason Mollin, Scotiabank]

Maybe I could just ask you guys have mentioned that some of the competitors I think that in the micro lending, some of your competitors have had a tough time with funding. And that is a segment that there are a lot of question marks about the addressable market and how that will evolve. Could it actually result – could you guys see some gain in market share in that segment in the near-term, if competitors are not going after the clients or not able to? Or any color that would be helpful.

[Walter Bayly, CEO]

Well, go ahead, Gianfranco.

[Gianfranco Ferrari, Deputy CEO]

Yeah, so maybe the answer is twofold, Jason. I mean, we talked about it before, the finance business is a high cost business. As the banker, at this stage, we’re developing a hybrid model in which we leverage, even though it's still a high touch business based on RMs we’re leveraging on technology and tech tools, in order to be much more efficient. As a matter of fact, if you measure the cost to asset ratio, that Mibanco is way under its competitors. So we do see an opportunity there.

Then I switch to BCP, in the past, we haven't been successful to do those low ticket clients in the SME business, basically, because of the distribution costs. Again, we already have a distribution channel, a full digital distribution channel, which we're piloting today. And we do see opportunities to tap that market through that channel investing. So also in the long run I do see opportunities to gain market share in the SME business in the low ticket clients.

[Jason Mollin, Scotiabank]

Thank you very much.

[Walter Bayly, CEO]

Thank you, Gianfranco. Jason, let me add to that, that particularly on the SMEs and micro finance side, as you will know last year we did a very aggressive provisioning. And, we did a capital increase to allow the bank to continue to operate under capital standards, that we feel comfortable. Under pressure from the other participants in the micro finance, particularly the Cajas the government set up a program that allowed injection of capital. So far, that program is still not active. And we have not seen the level of provisioning or a statistical evidence that the cleanup in the portfolios of some of the Cajas has happened. And we're all operating in the same market with the same customers.

So that leads us to believe based on that data, that the day of reckoning has yet to be acknowledged in those portfolios. And when that happens is probably when those opportunities that you mentioned, will probably start to appear and allow us to become even further, more of a leader in that market. We answered your question?

[Jason Mollin, Scotiabank]

Yes. Thank you very much.

[Walter Bayly, CEO]

Thank you, Jason.

[Operator]

The next question is from Alonso Garcia with Credit Suisse. Please go ahead.

[Alonso Garcia, Credit Suisse]

Good morning, everyone. Thank you for taking my question. My question is regarding the interest rate cap. I mean, back in April, the Central Bank said they would cap at 80% for the May to October period. So now, three months later, I wanted to hear how you adapted to the new regulation, if you had to do some adjustments to your strategy for certain segments of the portfolio or if not really?

And moreover, how did you see your competitors adapting to new regulation? And if you think probably you’re competitive positioning against then changed in some way following the implementation of these regulations? Thank you.

[Walter Bayly, CEO]

Sure. Thank you, Alonso. I will answer regarding Mibanco and Gianfranco can after I finish tackle the issue of BCP and the consumer side. On the Mibanco side, yes, we have had to withdraw from a certain portion of the customers that because of distribution costs and cost of risk that were not profitable with the interest rate cap.

It was not the most profitable segment, but that is reality. So we have abandoned that market, we are not aggressively pursuing those loans. It was, as I mentioned, not the most profitable segment. It was even probably just breakeven segment, but it was very core to our purpose of financial inclusion. So it is a shame that we're unable to be more aggressive there. But having said that, I don't think it will have an impact on the P&L.

So that is the answer from the micro finance side. And Gianfranco, would you tackle from the consumer side?

[Gianfranco Ferrari, Deputy CEO]

Sure. Just a quick comment on what Walter just mentioned and we've said it before. From the client perspective, the most expensive loan is the one unit and you cannot get, in a country where we're still lacking in financial inclusion is a period of legislation that the ones you mentioned has been installed.

Regarding the consumer business, yes, we've adopted. The heat more than anything, the type of interest rate, it becomes from the delinquency fee. The whole consumer business has been hit. And the study is quite similar to what Walter mentioned for Mibanco. So we're pulling off of some of the low segments in consumer finance, specifically in credit cards, which is a business segment, which for us wasn't as relevant as our competitors, both in terms of market share and in terms of profitability.

[Alonso Garcia, Credit Suisse]

Thank you. And if I may second question on the OpEx side. I mean, for the first-half of the year expenses are up 3.9%, so slightly ahead of inflation. But for the current quarter alone expenses increased strongly both quarter-on-quarter and year-over-year. So you attributed to the income marketing campaigns. So I just wanted to check, what drove this uptick in the marketing campaigns? I mean, was it driven by pressure from competition, maybe from other banks, or many FinTech companies? And based on this, what should we expect for OpEx growth for the full year? Thank you.

[Walter Bayly, CEO]

Thank you for your question. Cesar, could you tackle this one, please?

[Cesar Rios, CFO]

Yes, Alonso. Thank you for the question. In addition to the factors that you already mentioned, that I am going to detail a little bit is also the seasonality. As you remember, BCP particularly, we have a low level of expenses in the first quarter and a higher one in the fourth. So when you compare the second with the first quarter, you are capturing the seasonality effect.

Another two factors were I will say the normalization of the variable compensation, given the fact that now we are close to I will say normal levels of profitability and rates thus, the pool of a variable compensation.

And finally, we have a jumpstart and have improved a lot, the digital marketing initiatives in Yape, and other BCP approach, we are starting to a gain awareness to expanding awareness that also in actual client engagement. And this is a perfect correlation with the level of sales of digital products, and is part of the internal strategy.

[Alonso Garcia, Credit Suisse]

Perfect. Thank you very much.

[Operator]

The next question is from Carlos Gomez with HSBC. Please go ahead.

[Carlos Gomez, HSBC]

Thank you for taking the question. I wanted to ask you about the relationship with the new economic authorities. I mean, I remember in a previous conference calls you make a judgment that we were going to have any administration, that's what happened. Would you say that the current economic team is going to last for the duration of this administration? Or should we expect further changes? And would you say that you have already engaged in dialogue with them? Thank you.

[Walter Bayly, CEO]

Thank you, Carlos, for your question. You're asking for a very speculative answer. Obviously, we have absolutely no clue as to whether this current administration or administration at the Minister of Finance will be there for the next five years. That's a tough call. So we don't know.

We have not engaged yet in conversations with the Ministry of Finance. There have been a couple of meetings with some with [indiscernible], and some of the other groups, not individual meetings.

I think the scenario that we are seeing at this stage is one that was described to me as having a good level of macroeconomic orthodoxy, both at the Central Bank and at the Ministry of Finance, meaning that we will have a Central Bank that will be watching monetary policy with a good eye on keeping inflation under control.

And the Ministry of Finance, we will have a team that will make sure that the deficit and we run a relatively balanced situation. So we would have macroeconomic orthodoxy from a monitoring fiscal point of view. And a lot of initiatives from the micro point of view that are quite unorthodox. That is the scenario that at this stage, we are seeing. But of course, these are just speculative ideas on my side. We have no further evidence. There's still a lot of uncertainty going around. Did I answer your question, Carlos?

[Carlos Gomez, HSBC]

I think you answered the question as best as can be answered at this point. If I can follow a little bit in completely different area, you mentioned, that was very clear that there was a decline in the level of service to your clients that you addressed with more resources. At the same time, you have reduced the number of branches by 9%. Isn't that a contradiction in reducing your retail network, when perhaps there is more demand for your services? Thank you.

[Walter Bayly, CEO]

I understood the comment you made regarding the fact that we're reducing the branches. Yes, that is reality, that is happening both at Mibanco and at BCP. And that is, of course, because customers are utilizing more actively digital channels to interact with either institutions.

But I did not understand the first part of your question, we are reducing the level of services. I didn’t understand.

[Carlos Gomez, HSBC]

No, at some point during the presentation, you mentioned that the satisfaction of your clients has dipped a little bit and you had to put more resources to restore it.

[Walter Bayly, CEO]

Yes, okay. Got you. Yes, well, we are constantly measuring the level of customer satisfaction. And, yes, that results in a whole series of initiatives to how do you counter that. But less and less, the quality of the service provided is related to the amount of branches. We measure, which are all the different pain points in which our customers and points of contact that our customers have. And I’d reiterate that less and less that has relevance to do with the actual branch, it has to do with some of the digital channels, the phone, maybe even the way our bank statements are sent via email. It's a whole bunch of different points of interaction and pain points our customers have that are not related with the branches.

So we think there's no contradiction at all with the fact that we are gradually reducing our physical footprint with the fact that we want to continue improving our customer satisfaction.

[Carlos Gomez, HSBC]

Thank you very much.

[Walter Bayly, CEO]

You're welcome.

[Operator]

The next question is from Andres Soto with Santander. Please go ahead.

[Andres Soto, Santander]

Good morning, everybody. And thank you for the opportunity to ask questions. My first question is regarding the potential new regulation that will potentially come under Castillo administration. When I look at his proposals in terms of more active role of government-owned bank, setting caps differentiated by sectors in the economy, et cetera, this looks a lot to me, like what you guys have experienced in Bolivia. So I would like to hear your thoughts given that you have experience in this market. If you see a parallel between the Bolivia right now and what Peru is moving to? And given that the ROE that you got in Bolivia back in 2019 pre-pandemic is 8%, can we assume that this 8% could be a reference for Credicorp ROE and the more radical version of our Castillo administration?

[Walter Bayly, CEO]

That's a strange question. Okay, let me tackle this. We do not think that the scenario that we are looking as the most likely scenario is anything related to what you have just described. I have already mentioned or made a lot of comments regarding more active participation of government entities in the lending arena. And I will make those comments again, what has been mentioned is that Banco de la Nacion will take a more active role in lending to the small SMEs and micro companies.

That is, of course, is a possibility that in the short-term could create distortions. But in the medium-term, it is of no concern. Competing against public sector entities has the past proven to be not the most difficult task. But in the short-term, it could create distortions to the extent that you have an institution that the lens at rates that do not reflect cost of risk, or return on equity.

Having said that, implementing that strategy as distortive, as it can be in the short run is not easy for Banco de la Nacion. Banco de la Nacion is an institution that is struggling with some of the changes in its core applications. And its systems does not have a lending experience, nor does it have a commercial muscle to go ahead and aggressively compete with about 20 or 30 different financial institutions that are out there aggressively competing in the market. So yes, it's a possibility. It's a long shot. It does not keep me awake at night.

Interest rate caps again, we have already commented on that. The responsibility to regulate that has been given to the Central Bank, which will review this on a six month period. The regulation that we have today is one that has complied adequately with the law, while trying to minimize the impact on financial inclusion to the extent that we have a Central Bank that continues to have that view, and we believe that will be the case. We think that further damages to financial inclusion, if happened could be marginal, more than dramatic. We have not had any discussions, nor there has been any noise in creating pockets of lending, forced lending.

And the scenario that you pointed out that Peru becomes Bolivia is not our basic scenario, and I will give it a 15% probability. And if that 15% probability happens, our return on equity would come down. Yes, at what level? I have absolutely no idea.

I don't know if I answered your question on this.

[Andres Soto, Santander]

No, that's clear, Walter. And talking about another country where you guys have experience which is Columbia. And when you look at Castillo’s proposals, all of them are fiscally expansionary and will increase deficit and will require additional taxes. Are you guys concerned about the possibility of increased taxation over the medium-term, potentially specifically targeted towards the banks?

[Walter Bayly, CEO]

Yes, I think this is something that is going to happen all over the world. During the health crisis that we have -- are still living the tail, hopefully the tail ends, all the governments in the world have embarked rightly so on very aggressive fiscal spending. And all the countries in the world need to get back on a more sustainable fiscal path that will require additional taxes, which are further compounded with a movement all over the world.

Let's call it to tax the rich, pay that the rich individuals or the rich companies. So yes, we think that there is a very likely scenario in all over the world, including Peru, that taxes will increase. Yes, that is a very likely scenario.

[Andres Soto, Santander]

Perfect, Walter. And moving to a totally different topic. When you described the outlook and the uncertainties and the potential lower growth for the second-half of this year, and even next year, and I look at your capital, and you obviously have an excess capital position. I would like to hear your thoughts regarding these. What is your current assessment or your capital level? In the past, you spoke about $850 million, if I'm not wrong. And if the investors can expect this money to be return to them either as a buyback or extraordinary dividends?

[Walter Bayly, CEO]

The short answer is yes. The scenarios that we see going forward and which we are discussing in this call, probably call for less growth, less growth in the country, less growth in the lending needs and less growth in risk weighted assets, while we continue to generate decent returns on equity. Thus, the scenario is that we will be generating excess cash which will clearly be distributed to our shareholders. We are going in the next board meeting to take a proposal which has to be reviewed, approved and discussed at the board level what to do with the current excess capital that we have. And, we will communicate as soon as that is of course decided upon.

But in summary, yes, we do think that we will be able to generate profits that will exceed the funding requirements, the capital requirements of our subsidiaries. Thus, we will be able to retake or resume growth paths in our dividends as we had prior to the crisis starting.

[Andres Soto, Santander]

That's very helpful. Thank you, Walter, for your answers.

[Walter Bayly, CEO]

You’re welcome, Andres.

[Operator]

The next question is from Thiago Batista with UBS. Please go ahead.

[Thiago Batista, UBS]

Yeah. Hi, guys. Thanks for the opportunity. I have two small questions. The first one is about the funding. If, because of all the uncertainties in Peru, if the bank has seen already migration of the bonds to U.S. dollar, and if this is true, how we conciliated it with the material reduction, probably close to the all-time low in the level of cost of funding for local currency? So if we're seeing this shift to U.S. dollar deposits and how this conciliated with the very low level of funding costs?

The second one is about the Yape. You mentioned that the digital wallet achieved already about 7 million clients or close to it. Do you have a sense if there's a big overlap between Credicorp’s clients and Yape clients? And how do you believe will be the monetization process of Yape?

[Walter Bayly, CEO]

Okay, thank you. Those are good questions, Thiago. I will pass the -- I will let Cesar answer the first question regarding funding dollarization. And then, Gianfranco, you can tackle the question about Yape, Yape customers and monetization. So I'll pass on to you, Cesar.

[Cesar Rios, CFO]

Thank you, Walter and Thiago. Talking about funding, what we have seen is significant increase in low cost funding, particularly at BCP level. And in general terms, you have seen the increase of these a low cost funding in forms of the savings and a non-interest bearing deposits for the wholesale business as a result of the liquidity provided by the government, but also the government mandated release of funds from a pension funds.

And we have maintained during all this period very high levels of liquidity that has maintained almost including more than we were expected previously. And we have seen some migration from soles to dollars but not for very significant degree from the current strong populations to now it has been strong immigration funds from Peru to outside. But the staggering level of deposits in the system has been maintained. And in the case of BCP, we have even gained market share.

Trying to reconcile this with the cost of funds, this compensation explain the reduction of cost of funds because most of our funding come from these very low cost sources. And when you blame with the proportion of long-term funding, in average, we reduce our cost of funds.

In the short-term, as a result of the increase in the reference rate of the Central Bank of course announced last night, this is a net positive for us because the cost of funds in the short-term are continue to be at very similar level for a significant part of our restructure. While at the same time, we are going to be able to reprice in this proportion, this 25 basis points through the rest of the year. The very liquid part of our investment portfolio, and the short-term part of our loan portfolio. So we are still seeing a low cost of funding with this a small increase of reference rates in the Central Bank and increasing our margins in the short-term.

By the way, this side note from the Central Bank is very positive, because at the same time they maintain ample liquidity and support for the financial system, they are giving a clear sign that they are watching over the inflation and setting expectations.

[Walter Bayly, CEO]

I don’t know if this answer helps to you.

[Thiago Batista, UBS]

No, clear. Very clear.

[Gianfranco Ferrari, Deputy CEO]

Let me go on the Yape question. Out of the 7 million clients Yape has, I would say it's 20% to 25% are related to Credicorp. The remaining clients from our institutions, you have to bear in mind that already six or seven financial institutions are part of Yape so their clients can -- if there are clients they can download the Yape.

But more important, we already have over 2 million users that are not necessarily related to any financial institution. So, Yape card, which is a virtual debit card. But more important than that is that the overlap in terms of usage, we've talked about it for several years now. We have a vision of war on cash. And the more alternatives we provide our clients, the more -- or the less usage of cash, we'll see from our clients.

So the amount transacted through Yape in June, was like five or six times what was being transacted a year ago. At the same time, the amount transacted in debit card and credit card grew over 20%, as compared to 2019. So I would argue that there's basically no cannibalization or marginal cannibalization among those products. And when you compare the amount that tickets, the average ticket transacted through the Yape compared to a ticket transacted through mobile banking, is like mobile banking is like 10 times larger. So the vision there is that Yape is definitely a very strong complement to the payment methods we have in the past.

On top of that, Yape has already reached 1 million QR codes distributed among micro businesses. So Yape, if you may recall, Yape started as a P2P application. Now, it's obviously a P2P also P2B through this QR code feature like QR core. But in addition to that, Cesar mentioned, Yape QR code is already exposed through the point of sale of those [indiscernible], which basically represent, I will say 99% of the amount transacted through point of sale.

Regarding your question on monetization, obviously, that's one line of monetization. And we get through the QR codes and we anticipate, and for this quarter, we're launching a top-ups and we're launching micro loans.

Top-ups, obviously, we get a fee from the telephone companies. But the vision is more than -- vision of monetization is a vision of how to increase, how to further increase the usage of Yape, the number of transactions per client. And in terms of micro loans, we are already lending, providing micro loans based on the Yape information, but not through the Yape app.

So the UX is not good today. However, their response rate is quite interesting. We really expect that their response rate should increase dramatically when it's through the app. So we're very positive on these new two features that should be launched this quarter.

[Thiago Batista, UBS]

Very clear. Thanks for the answer.

[Operator]

The next question is from Ingo Lupatelli with Autonomous Research. Please go ahead.

[Ingo Lupatelli, Autonomous Research]

Hi. On the increase in expenses coming from marketing and IT, how should we think about it moving forward in the second-half and also in 2022? So, how much is transitory versus should we expect an increase or this level to continue? Thank you.

[Walter Bayly, CEO]

Thank you, Ingo. Cesar, could you help me with this one?

[Cesar Rios, CFO]

Yes. If we focus on these specific lines, Ingo, probably they are going to increase. But what we are striving to do is to transform the cost structure of the bank, particular at BCP and the same in Mibanco. So, you are going to see the increase of certain lines related to IT. While, at the same time for example, as reflected in the reduction of the traditional footprint we are going to control costs in other parts and jointly strive for improvement on the efficiency ratio of both – all the organization of BCP.

So, I think we are striving to improve efficiency ratio by changing the composition with specific lines, aligned with a digital transformation.

[Ingo Lupatelli, Autonomous Research]

Perfect. And on the marketing expenses, how should we expect this to continue?

[Cesar Rios, CFO]

In this particular line, it’s in the same line for example, Gianfranco mentioned efforts to launch new products, new facilities in Yape. This entails to be much more active in the market. Probably at the beginning spending more in third parties, when we have more flow, internal flow we are going probably to change a using internal traffic to gain awareness. That is part of the same strategy to launch [indiscernible] for the clients, improve engagement when you have more traffic is starting to expose your products using a gradually this unless a third-party or more costly alternatives.

[Ingo Lupatelli, Autonomous Research]

Perfect. Thank you for the answers.

[Operator]

And now, I would like to turn the conference back to Mr. Walter Bayly, Chief Executive Officer for closing remarks.

[Walter Bayly, CEO]

Thank you. The results of this first-half of 2021 are very much in line with what we have been anticipating to the market. Namely the 2021 is the year in which we rebuild our margins, our volumes and our profitability. This of course, after a very difficult 2020 in which the focus was to adequately generate the required credit provisions to reflect the damage in our loan portfolios for the biggest drop in GDP in Peruvian modern history.

Even though, this first-half results, which show an analyzed return of 11.3% R, as mentioned before, well in line with anticipated results. There are differences within the different business units of Credicorp.

I will briefly comment on the three main subsidiaries. Clearly, Pacifico is the unit whose results are way under what we had anticipated. The second wave of COVID infections and mortality greatly exceeded our expectations, and those of the first wave. As you know, Pacifico is the clear market leader in life insurance, which includes credit life, and life insurance associated customers of the private pension system.

Our life insurance business has been and once normalized will continue to be a driver of growth and profitability. Thus, short-term results do not change our long-term view going forward. We anticipate our life insurance business to return to profitability this third quarter, as the impact of the second wave of infection has already decreased in a very relevant way.

As Cesar mentioned, of course, the possibility of a third wave is real, but vaccination efforts have recently accelerated and already reached 35% of the most vulnerable population with at least one dose. Thus, a potential third wave should result in lower mortality.

BCP standalone results are for the second quarter in a row very positive, achieving returns of equity above 18%. Structural loans have started to grow, though at a subdued rate. NIMs have started to recover while cost of risk is coming down.

We continue to be extremely focused on all different digital initiatives, which continue to advance very successful. As anticipated, we have accelerated the pace at which we invest and spend in these initiatives. Mibanco’s results are also encouraging and recovering very well as we are already exceeding our anticipated return on equity, estimated at high single digits by year-end, and we already have 10.3% as of June. Volumes have started to grow, while cost of risk is coming down.

Productivity is climbing ahead of our clients, as one-third of the number of monthly disbursements have already been done without the intervention of the loan officer. Finally, the evolution of NIMs is also positive.

We are very encouraged by yesterday's timely decision of the Central Bank to very modestly increase our local currency reference rate. This modest increase gives a message that our Central Bank is watching closely the evolution of inflation, while still maintaining an extensive monetary policy. This move is also a message to the FX market.

To conclude, all variables under management control are evolving favorably, and believe we are well-positioned to exceed our expected results this year. We are faced with an unstable political scenario. But it is good to remember that unfortunately, political stability has not been the norm in Peru.

Our macro fundamentals in the fiscal monetary and financial system continued to be strong. And while our democratic system of checks and balances is and will be tested, and challenged, we are cautiously optimistic on the final outcome.

The coming year will be full of challenges and not without volatility on the political front. We will nevertheless, as we have in the past, weather this political volatility and continue to be focused on our mission and purpose.

With this, I finalize our conference call. And again, we thank you all for your continued interest, and for joining us in this call. Thank you very much.

[Operator]

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