Credicorp - Q2 2023
August 11, 2023
Transcript
Operator (participant)
Good morning, and welcome to the Credicorp second quarter 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key, followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star 2 on your touchtone phone. To withdraw your question, please press star then 2. Please note this event is being recorded. I would now like to turn the conference over to Milagros Ciguenas. Please go ahead.
Milagros Cigüeñas (Head of Investor Relations)
Thank you, good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer, and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer, Reynaldo Llosa, Chief Risk Officer, Cesar Rivera, Head of Insurance and Pensions, and Carlos Sotelo, CFO at Mibanco. Diego Cavero, CEO or Head of Universal Banking. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties. I refer to you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.
Gianfranco Ferrari will start the call commenting on the highlights of our strategy, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance, and provide on an update of our outlook for 2023. Gianfranco, please go ahead.
Gianfranco Ferrari (CEO)
Thank you, Milagros. Good morning, everyone. Thanks to all of you who were able to join us during our June twentieth Investor Day, where you heard directly from our leadership team on the progress of our businesses. It was also a highly valuable opportunity for us to hear from you. I'd like to take a few moments before discussing our Q2 results to recap some of the key takeaways. First, we're taking a disciplined approach to investing in businesses that we expect will begin in the midterm to further decouple our performance from that of the macro context. Two undertakings include expanding the share of retail business across our portfolio, as well as increasing our non-interest income through adjacent businesses. While generally, our disruptive initiatives have a long-term orientation, Yape stands out as a venture that plays a pivotal role in this strategy in the shorter term.
It has already shown very promising results, with income approaching cash, cash costs and is on track to reach breakeven by 2024. Thus, we intend to further invest in expansion, as well, as well as in other disruptive initiatives with the potential to generate value across our businesses. We heard a request, your request, to provide more information on Yape's trajectory and have increased our disclosure on the business. Our goal is to provide you with meaningful updates as Yape continues to evolve. Second, while we're proud to be the market leader, we don't take that position for granted. We're strengthening our competitive modes by becoming increasingly digital and harnessing the power of data. Our top priority is, and will continue to be, attracting and retaining the best talent so that we maintain our competitive edge.
We're committed to enhancing our governance and transparency while continuing to pursue social impact initiatives. We aim to exert a progressively greater influence on our clients and communities to strengthen their sustainability efforts while playing a crucial role in financing the energy transition. Let's turn to this quarter's results. While the political scenario in the second quarter improved, the impact of, from the social unrest, the disruption from Cyclone Yaku, as well as the added effect from the coastal El Niño, resulted in a stagnant first half of the year in Peru. Despite this backdrop, Credicorp turned in favorable results this quarter. Net income expanded 22.6% year-on-year, with ROE for the quarter, for the quarter at 18.6%, driven by strong results in the universal banking and insurance businesses, as well as a modest recovery in the microfinance business.
Loan volumes, however, experienced a slight drop as we managed on the retail side, and wholesale demand showed reflecting the economic climate. Even though we saw a decrease in low-cost deposits, along with a system-wide contraction, we continued our market leadership in capturing these deposits, thanks to our long-term standing client relationship, trusted brand, and extensive reach. Our strong balance sheet provides us sustained resilience to navigate the current weak macro backdrop as we continue to execute our value creation strategy. Cost of risk has increased primarily due to SME, and the most vulnerable sub-segments in individuals.... Mibanco's cost of risk is still high, but this diminished this quarter. This evolution reflects the impact of an environment of lower internal demand, high inflation, and high interest rates on payment capacity of clients.
We have strengthened credit risk management and remain focused on maintaining stringent origination standards and disciplined loan pricing. Our disruption initiatives continued to gain traction during the quarter, driven by the inclusion of a growing number of provisions. Having registered strong income at BCP and Pacifico this quarter, we have managed our cost-to-income ratio. Regarding macro perspectives for this year, Cesar will elaborate further. Social and climate events resulted in a tougher first half than we expected. At this time, our GDP growth forecast for 2023 is 1%, even though we foresee a rebound of around 2% growth in the second half, driven by stimulus measures taken by the government.
During the second half, second quarter, sea surface temperature anomalies associated with El Niño Costero motivated the cancellation of the industrial anchovy fishing session, and also impacted the agricultural sector. El Niño Costero phenomenon is expected to continue until the summer of 2024, as a consequence of the high probability of development of El Niño in El Pacífico Central. For the summer of 2024, the highest probability scenario today is that El Niño Costero will have a weak to moderate magnitude. As the situation unfolds, we will keep you up to date on the expert's outlook and its potential impact on our businesses. It is important to remember that Peru's macroeconomic fundamentals remain strong. After El Niño Costero transitory shock, Peru will be in a favorable position to converge to Latin America average income per capita level.
The speed of catch-up will depend on Peru's ability to promote and unlock private investment, which has been the most important growth driver in the past. Thank you, and let me now turn the call over to Cesar.
Cesar Rios (CFO)
Thanks, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable lower financial results. I will start with a brief comment on quarter-over-quarter dynamics, but will focus on the year-over-year evolution. On a sequential basis, a structural loan growth in retail banking at BCP and Mibanco was offset by a contraction in wholesale banking. On the funding side, the deposit mix continued shifting towards higher yield deposits. Low-cost deposits fell across the system and at Credicorp. Nonetheless, we maintain our indisputable leadership position in this funding source, with 41% market share. Asset quality metrics deteriorated, reflecting the impact of challenging macro dynamics in the first half of the year. From a year-over-year perspective, NII grew 21.5%, driven by raising interest rates and structural loan dynamics, and partially offset by higher funding costs.
Structural loans rose 5.5%, measuring average daily balances, fueled primarily by retail banking at BCP and Mibanco. We are managing our asset quality metrics with a challenging backdrop. The structural cost of risk increased 127 basis points to 2.3%, driven mainly by SME-PYME and individuals at BCP and by Mibanco. Allowances for loan losses were equivalent to 5.7% of the structural loan book. The insurance and the right results rose 53%, which reflected increased profitability in the life business, and a stable year-over-year result for property and casualty. Operating expenses increased 9.1%, driven mainly by core expenses at BCP and disruptive initiatives, while operating income increased 16.6%, fueled by BCP and Pacifico. The efficiency ratio improved 310 basis points, and it stood at 44.6%.
In summary, this quarter, positive results and an ROE of 18.6% over a sound capital base, were driven mainly by universal banking and insurance businesses. Having said this, a note of caution is in order. As I will explain when I present our updated guidance, we expect softer results in the second half of the year. Next slide, please. For the second quarter, the Peruvian economy is expected to have registered a slight contraction, impacted by El Niño Costero, which pushed growth rates in the agricultural, fishing, and manufacturing sectors into negative terrain. Growth in the mining sector, attributable to increased copper production at Quellaveco and the recovery of production at Las Bambas after a temporary shut down last year, partially offset this decline.
These dynamics, coupled with the impact of the first quarter marked by social unrest and climate events, could lead to a 0.5 decline year-over-year in economic activity in the first semester of 2023. This represents the most significant reported decline in 22 years, excluding the pandemic period. Domestic demand fell 2% year-over-year in the first half of 2023, driven by a sharp 10% decline in private investment and an sluggish 0.6% growth in private consumption. Price pressures are finally easing, and inflation expectations have dropped materially in LatAm. Central banks in Chile and Brazil have already started their rate cutting cycles, and Peru's central bank is expected to follow suit in the last quarter of this year. Regarding our outlook, Peru GDP is expected to grow around 1% this year.
GDP growth in Colombia is expected to slow to 1.6%, while Chile GDP growth is expected to be flat. As you know, we are closely monitoring the evolution of El Niño Costero weather phenomenon and its impact in our businesses. In its last official statement on July 21, ENFEN assigned a 40% probability that El Niño Costero will be weak during the summer of 2024, 36% it will moderate, and 11% that it will be strong. In her last speech of July 28, President Boluarte communicated the importance of private investment as a tool for economic growth and development, moving apart from the previous government stance. She announced, for instance, that $1.8 billion worth of infrastructure projects will be awarded in the second semester through ProInversión, the Investment Promotion Agency.
Peru's macroeconomic fundamentals remain robust, with low public debt and net international reserves equivalent to 33 of GDP and 29% respectively. This government's ability to unlock and mobilize private and public investments will be key moving forward. Next slide, please. BCP results were favorable despite this context. Regarding the key quarter dynamics, NII increased 0.9%, despite a slight 1% drop in loan volumes. This drop reflects a downturn in economic activity, primarily in wholesale banking and more conservative origination guidelines in retail. Our NNI reflects a disciplined approach to pass throughs and our ability to leverage a transactional funding base to mitigate raising funding costs. BCP fee income rolls on the back of higher transactional levels, particularly through digital channels and POS.
Provisions in consumer loans and credit cards remained at high levels as a recessive, high inflation environment in the first half of the year affected the payment capacity of vulnerable subsegments, which are more leveraged and have unstable jobs. Additionally, SME segment drove the uptick in provisions. On a year-over-year basis, growth in net income was spewed by a 29.6% increase in NII. This evolution was driven by raising interest rates and 5.2% increase in structural loans, which was driven primarily by a 10.9% uptick in retail banking loans through SME payment, credit card, and mortgages. Loan loss provisions increased 177.8% over a low base. Additionally, growth was driven by an increase in provisions and consumer loans, credit cards, and SME payments, which were affected by macroeconomic conditions.
Operating expenses grew 8.3%, driven mainly by IT and marketing expenses, and investment in disruptive initiatives. This increase was partially offset by a non-recurring tax expense reversal. Consequently, BCP's efficiency ratio dropped 420 basis points and stood at 37%, while ROE reached 24.2%. At BCP Bolivia, our risk appetite remains low. Since the beginning of this year, U.S. dollar reserves in Bolivia's Central Bank has dropped materially, and banks have daily limits in U.S. withdrawals. Regardless, BCP Bolivia Net Income remains stable. Next slide, please. Yape continues to progress towards monetization by pursuing its medium-term targets. One. To be the main payment network in Peru. Second, be present in the daily life of Yaperos, and finally, meet the financial needs of Yaperos.
Features launched in the last 18 months have allowed Yape to continuously grow its active user base, engagement, and income generation. Monthly active users reached the 9 million mark, and the average monthly transaction level for this group has risen from 14.9 to 23.5 in just 1 year. Currently, 5.2 million users generate income. Our main monetization drivers continue to bear fruit. In the past 6 months, monthly mobile top-up transactions grew 20% to total 11 million transactions at the end of June. In just 3 months, utilities payments have grown 4.8 times, and stand at the end of June at 2.2 million transactions. Through Yape Promos, the gross merchant volume grew 4.8 times to stand at PEN 25 million at the end of June.
Notably, in the last six months, monthly disbursements of microloans rose 18%. In the aforementioned context, unit economics are moving towards break even. The revenue per active user per month is growing and stands at PEN 2.5 soles, while the cash cost per active user per month stood at PEN 4.4 soles at the end of June. Next slide, please. Mibanco's profitability began to recover this quarter after a challenging start early this year. On a quarter-over-quarter basis, Net Interest Income rose 4.6% after a structural loan disbursement recovered from a difficult first quarter. Disciplined loan pricing bolstered NII and offset the impact of an uptick in the funding cost. Consequently, NIM increased 80 basis points and stood at 13.5%. Other Income rose 3.5% after the Bancassurance fee level rose alongside growth in disbursements.
Mibanco's provision expense dropped slightly after risk models were fine-tuned to better reflect client payment behavior, but remain high due to a deterioration in payment capacity. From year-over-year perspective, NII rose 1% to an uptick in structural loans and interest rate pass-through, which mitigated the impact of raising funding costs. Non-interest income rose 26.6% due to the same factors as rose, as those outlined in the quarter-over-quarter analysis. Mibanco's provision rose, fueled by a downturn in payment performance and a more challenging macroeconomic outlook. Operating expenses rose 5.9%, and the efficiency ratio stands at 52.4%. Finally, ROE rebounded to 9.5% in the quarter. Mibanco Colombia is facing high inflation, high funding costs, lower interest rate ceilings, and a deterioration in economic expectations.
We have adopted our strategy accordingly, we believe that untapped potential exists in the Colombian microfinance market. Next slide, please. ROE at Grupo Pacifico was high this quarter and stood at 32.1%, driven by the life business. Regarding quarter-over-quarter dynamics, net income deteriorated on the back of a lower net gain from associates. This evolution reflected a downturn in results for corporate health insurance over a particularly high base last quarter. Year-over-year profitability was up, driven primarily by the life business and secondarily by property and casualty. In the life business, the insurance underwriter results improved due to an upswing in income from insurance service through pensions, life, group, and credit life, which benefited from better prices and more favorable volume dynamics. Reduced expenses for claims also contributed to this improvement.
In the property and casualty business, the insurance underwriter results rose 5.1% through an improvement in medical assistance results, which was partially offset by a downturn in the result for cars. Next slide, please. As you know, our strategy is to focus on recurring businesses to improve ROE in the medium term. Nonetheless, the uptick in profitability in recent quarters has mainly been driven by non-recurring income. On a quarter-over-quarter basis, income was boosted primarily by the treasury department, which managed ASB cash surplus via structural portfolios and short-term investments. In terms of recurring businesses, assets under management, wealth management grew 4.2% and drove income growth, while the assets under management level in the asset management business remained stable.
Year-over-year, income increased 32%, driven mainly by the capital markets business, which reported gains on the proprietary fixed income portfolio in Colombia, and by the treasury department, which generated earnings via the same dynamics seen quarter-over-quarter. Regarding recurring businesses, wealth management, assets under management grew 9% and drove income growth, while assets under management, AUM's contracted 17%, driven by outflows in third-party funds, and income decreased slightly as these outflows generate lower fees. Next slide, please. We will look at Credicorp's consolidated dynamics. On a quarter-over-quarter basis, our structural loans measuring average daily balances fell 0.6% or increased 0.2% with FX neutral. Growth in BCP retail banking on Mibanco was offset by a contraction in wholesale banking at BCP. Our deposit base contracted 3.5% or 1.8% with FX neutral.
This evolution was driven by a drop in low-cost deposits, which was partially offset by growth in time deposits. On a structural year-basis, structural loans increased 5.5%, measured in average daily balances, fueled primarily by retail banking at BCP and Mibanco. Deposit balances dropped 2.7% or 0.2% with F.X. neutral. Low-cost deposits has fallen system-wide, but our market share has risen to 40.6% and currently represent 65.1% of our total deposits. Next slide, please. Now, let me explain core income dynamics. Core income rose 3.2% quarter-over-quarter and 15% year-over-year on the back of NII. NII grew 2.3% quarter-over-quarter and 21.5% year-over-year. This result was attributable to volume dynamics discussed early and to disciplined pass-throughs.
In this context, the net interest margin rose 18 basis points quarter-over-quarter and 110 basis points year-over-year, to stand at 6.02%. Risk-adjusted NIM increased marginally to 4.56%. We are analyzing the results for fee income and tax transaction. It is important to note that both lines have been affected by our strategy at BCP Bolivia, in which we have adjusted our fee framework for foreign transfers to offset the impact of FX transactions due to restrictions on foreign currency availability. If we exclude this impact, fee income increased 4.1% quarter-over-quarter, and an uptick in transactions while the result of excess transactions remained flat. On a year-over-year basis, excluding Bolivia, fee income contracted 3.3%, driven by lower fees in the pension business and the elimination of inter-city fees.
Next slide, please. Let's look at the dynamics of structural non-performing loans. As indicated earlier, adverse effect, events in the first quarter of the year, coupled with a contraction in internal demand, high inflation, and high interest rates, have notably impacted client payment performance and consequently, portfolio quality this quarter. In this scenario, on a quarter-over-quarter basis, growth in structural non-performing loans was driven by Mibanco, after loans reprogrammed in the first quarter fell delinquent. By SME-PYME, where low-ticket, riskier sub-segments reported poorer payment performance, and credit cards and consumer loans, where the debt service capacity of vulnerable segments fell due to over-indebtedness and unstable employment. The aforementioned was partially offset by a sale of a delinquent portfolio in the energy sector in wholesale banking, which had been previously provisioned.
On a year-over-year basis, structural non-performing loans volumes increased due to an uptick in refinanced collateralized loans in the retail estate and tourist sectors served by wholesale banking. The evolution of non-performing loans in retail banking and Mibanco was driven by the same factors as those seen in the quarter analysis, was partially offset by the sale of a delinquent retail banking portfolio during the first quarter of the year. In this context, the structural coverage ratio stood at 108%. To analyze our structural coverage ratio, it's important to review the NPL portfolio mix in terms of unsecured and collateralized products. Please refer to Appendix Two for more details. Next slide, please. Moving on the provisions and the cost of risk, we have consistently indicated that our cost of risk will increase as we shift our loan portfolio mix towards more retail.
Cost of risk have further increased as client payment capacity has been impacted by macroeconomic conditions. Provisions in consumer loans and credit cards at BCP and Mibanco remain at high levels, as a recessive, high inflation environment in the first half of the year affected the payment capacity of clients. At BCP, vulnerable sub-segments, which are more leveraged and have unstable jobs, were the most impacted, while at Mibanco, clients were severely hit by the first quarter events. SME-PYME segment at BCP drove the uptick in provisions quarter-over-quarter. In this context, the structural cost of risk stood at 2.3%. We are closely monitoring our asset quality metrics, have refined our client segmentation by risk profile, and have gradually implemented a stricter origination guidelines for individuals, SME-PYME and Mibanco.
Nonetheless, the impact of recent measures on asset quality metrics will take some time to fully materialize. We will review in this page, the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operating expenses grew 11.2% in the first half of the year, driven primarily by core businesses at BCP and disruptive initiatives at Credicorp level. At BCP, core businesses fueled growth in expenses through an uptick in IT expenses related to an increasing usage of cloud and client become more digital, more usage of IT applications, license and other software to enhance capacities and improve cybersecurity, and moves to attract more specialized digital talent. Marketing expenses mainly driven by advertisement to boost deposits and digital sales, and growth in loyalty program expenses. The aforementioned dynamics were partially offset by a non-recurring tax expense reversal.
Expenses by disruptive initiatives at Credicorp level increased 70% to ensure market leadership in the long term. Operating leverage remained strong, BCP stand alone. At Mibanco, operating expenses remained under control, but income grew at a slightly lower pace. Our efficiency ratio stood at 44.4% this first half, down 310 basis points compared to last year, and driven by high income at BCP and Pacifico. Next slide, please. Similar to the previous quarter, record quarter profitability was driven by strong results in our universal banking and insurance businesses. ROE this quarter expanded by 130 basis points year-over-year, and stand at 18.6%. Meanwhile, ROE for the semester was 18.9%.
Note that we have benefited from relative low effective tax rate this semester, due to the strong performance of our insurance business, and due to the fact that tax-exempt interest income accounted for a larger share of the revenue mix at BCP. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. Now, I will move to our updated guidance. Next slide, please. Our updated macro scenario for 2023 is now a GDP growth of around 1%, which incorporates the scenario of a weak to moderate El Nino Costero at year-end. Regarding loan growth, the social and climate events of the first part of the year, coupled with a sluggish internal demand, are taking a toll on our client borrowing capacity, particularly in our consumer loans, credit card, and SME segments at BCP.
Accordingly, we adopted a stringent origination guidelines in those segments. In addition, demand for loans in wholesale banking has weakened, which reflects a downturn in business activity. These dynamics led to lower expected structural loan growth, which now stands at between 1% and 4%, measured in average daily balances. Our NII guidance remain unchanged between 5.8% and 6.2%, as we higher than initially expected cost of funds will offset the positive impact of a higher yield from the loan portfolio, which was triggered by a reduction in wholesale loan share in the total mix. We expect the cost of risk to stand between 2.1% and 2.5%, largely driven by the impact of the macro conditions on BCP performance.
Note that BCP and Mibanco are likely to have divergent dynamics on this front during the 2nd semester, as Mibanco started its cycle of loan deterioration and credit restrictions before BCP. We achieved solid efficiency levels in a context marked by an acceleration in investment to develop future businesses. Our ongoing efforts to bend the expense curve are expected to partially offset the aforementioned income headwinds, and results in an efficiency ratio between 45% and 47%. Finally, maintain our ROE guidance of around 17.5%, but now acknowledge downside risk associated with asset quality deterioration and El Nino Costero. With these comments, I would like to start the Q&A session.
Operator (participant)
We will now begin the question-and-answer session. To ask a question, you may press star then one on your touch-tone phone. If you are on a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question will come from Ernesto Gabilondo with Bank of America. You may now go ahead.
Ernesto Gabilondo (VP and Senior Equity Research Analyst)
Thank you. Hi, good morning, Gianfranco, Francesca, and Cesar, and good morning, everyone. Congrats in your second quarter results. My first question is on your ROE guidance for the year. As you mentioned, it was maintained at 17.5%, although anticipating a softer loan growth and a higher cost to risk. Can you elaborate on which will be the other lines that can help to compensate the softer loan growth and higher cost to risk? What are the trends that you're expecting for loan growth and cost of risk next year? Thank you.
Gianfranco Ferrari (CEO)
Good morning, Ernesto, this is Gianfranco. I'll ask Cesar to, to go into the details for the answer.
Cesar Rios (CFO)
Okay. Thank you, Ernesto. Effectively, we are maintaining our guidance of around 17.5%. At the beginning of the year, we had probably a conservative approach, mentioning 17.5%. Now, I have already mentioned that we have some downside risk due to potential credit deterioration. This is as a general framework. It's important to note that we already have gone through half of the year with very positive results, with an ROE north of 18%, around 18.6%. Down the road, what we are expecting is effectively on a softer loan growth, with a composition that is going to be tilted to retail, but with lower yields than previously expected, because we are being more conservative in our origination approach.
This is going to be accompanied by higher cost of risk and the usual acceleration of non income sources effects, and transactional activity that is usually higher during the second part of the year. Finally, by the seasonal increase in expenses, that has two main components: the normal seasonality of the last part of the year that I previously mentioned, and the trend in the acceleration of IT and disruptive initiatives. All in all, we think that with these elements, we can be around the 17.5% previously mentioned.
Gianfranco Ferrari (CEO)
May- maybe just to add on what Cesar mentioned, Ernesto, also, when we provided the original guidance, the, the expected results at Pacifico were not the results we're getting. So with, as we mentioned, in the previous call and in, at the Investor Day, the, the, due to some specific events, Pacifico is having an outstanding year this year, and that may, that is going to offset, in part, what Cesar just mentioned.
Ernesto Gabilondo (VP and Senior Equity Research Analyst)
Perfect. Thank you. Just to follow up in terms of the Cost of risk, you are guiding between 2.1% and 2.5%. Looking into next year, would that be the same trend that we should expect, or you think most of the worst part will happen in 2023, and probably it should be normalizing when thinking about next year?
Gianfranco Ferrari (CEO)
... Reynaldo?
Reynaldo Llosa (Chief Risk Officer)
Yes, Ernesto, this is Reynaldo Llosa. We, as you know, we don't provide guidance for, for next year, and we will do it in, in the first, during the first quarter of 2024. Having said that, there, there's a lot of uncertainty in terms of the impact of El Niño, so we need to confirm that information in turn to have a better projection of the number. Also, we expect next year to have much better results due to all the things we are doing in terms of managing the risk on- in the, in the consumer and SME portfolios, both in BCP, in Mibanco. There are headwinds and tailwinds, and we will, we will have more information on, on, on that regard, by, by the first months of, of 2024.
Ernesto Gabilondo (VP and Senior Equity Research Analyst)
Perfect. Thank you very much. Just a second question related to the ROE of your subsidiaries. You have a nice chart in your report, showing all the ROEs per subsidiary. We can see that BCP standalone, Grupo Pacifico, Prima, ASB Bank, all of them continue to deliver ROEs above 20%. On the other side, when looking to BCP Bolivia, Mibanco, Credicorp Capital, we continue to see ROEs at most at 10%. What are the strategies you're implementing to improve the ROEs across the subsidiaries? I don't know if you have, like, a medium target in each of them.
Gianfranco Ferrari (CEO)
Yes. Thank you for your question, Ernesto. Let me go one by one. Actually, how we manage Credicorp Capital and ASB, is we manage them as a business unit. Correct me if I'm wrong, Cesar, but that business is at with an ROE of 17%. It is close to what the ROEs we're expecting for that business. Having said that, this first half, we had some non-recurrent positive impact that helps obviously the ROE. Going forward, we have established a transformation plan for that business, aiming to have an ROE of between 16%-17% by 2025.
Regarding Mibanco, both Mibanco Peru and Mibanco Colombia, the microfinance business is a much more volatile business. We're definitely in, in a downturn of the business. We're working, both in the short run and the long run. The short run, basically focused on, on risk, and the long run, we, we need to revisit the whole business model so as to go back to the ROEs of over 20% we have had in the past in that business. Finally, Bolivia. Bolivia is Bolivia. That's my answer. We're doing whatever the best we can do in Bolivia. The ROEs are... If, if you compare our ROEs to the banking system in Bolivia, they're quite good. There's not much more to do in that business.
Ernesto Gabilondo (VP and Senior Equity Research Analyst)
Excellent. Now thank you very much.
Operator (participant)
Our next question will come from Juan Recalde of Scotiabank. You may now go ahead.
Juan Recalde (Equity Research Analyst)
Hi, good morning. Congrats on the strong results, and thank you for the opportunity. My questions are related to Yape. First, the fee income generating monthly active users have been increasing as a percentage of total users. I was wondering if you can provide some colors on what are the drivers here, and how you are increasing monetization. The second question is related to the strong growth in payment volumes that we saw in Yape, and also related to the growth in the services payments. My question there is: How much of the TPV growth has been driven by the service payments, and what are the other drivers of TPV growth?
Gianfranco Ferrari (CEO)
Francesca, are you there?
Francesca Raffo (Chief Innovation Officer)
Yes. Hi, thank you for the question. Yape, as mentioned in the, in the, in investor deck, has plans on many, many monetization lines of business. The growth, in terms of, of TPV, is growth basically around P2P transactions, QR transactions in POS and merchants, and also online transactions. That's the, the main volume in terms of frequency, activity, and engagement. On the monetization side, growth is mainly around four in QR usage, where we, we, we see a, an MDR. Utility payments, that is beginning to grow. This is one of the newest transactions that we have, and also the online payments around digital measure. Having said that, we'll slightly explore lending, which is growing. We see an increase in number of transactions and also on average, amount of lending per customer.
The promotions that, Reynaldo mentioned, as an engagement tool, that there's also take rate, that is also growing. We are actually, exploring ticket sales, gaming, and different, venues for growth.hat are coherent with Yape's super app view in terms of whatever gains and whatever we can gain on activity and engagement.
Juan Recalde (Equity Research Analyst)
Thank you, Francesca, helpful. I had another question related to fee income, which was quite strong this quarter, helped by the Bolivian operations. How much of the fees in Bolivia are a one-off, and how sustainable are these levels?
Gianfranco Ferrari (CEO)
Cesare?
Cesar Rios (CFO)
Yes. I wouldn't consider that 1-off, I would consider more than temporarily. The distortion is an accounting thing. Let's say, what you are doing is charging a fee and recognizing in the other part of the equation, higher FX exchange. For that reason, I will say we have a positive margin, but it's reflected on an abnormally high fee and an abnormally loss in FX. It's a structural business that, in this moment, has more, more volume and, and a wider spread in these 2 variables. It's part of the business in Bolivia.
Gianfranco Ferrari (CEO)
Maybe on top of that, maybe on top of that one, what we're seeing in the fee income business is that what we've been investing for, I would say, decades now. We are, when I say we, is basically BCP Peru, were the transactional hub in Peru. That's obviously paying off. And what, what we're also seeing, and maybe Yape is part of it, is the amount transacted in non-cash alternatives is constantly increasing, beyond Yape, I mean, debit, credit, and things like that. Obviously, that is also a important driver for fee income generation.
Juan Recalde (Equity Research Analyst)
That's helpful. Thank you for the comments.
Operator (participant)
Our next question will come from Yuri Fernandes with JPMorgan. You may now go ahead.
Yuri Fernandes (Senior Equity Research Analyst and Executive Director)
Hi, guys. Thank you. Good morning. I had a question regarding your cost of risk. I understand you have expected losses, so now you are calling for a challenging outlook, lower GDP. My call is regarding 2024. I guess the scenario is still, you know, a little uncertain here, but is this 2.1%-2.5% cost of risk, the level we should expect for 2024? Basically, you are gonna to build those anticipatory provisions for the tough environment now, and maybe for the next year, we should see, you know, cost of risk running at a more normalized level.
Just trying to understand, if this is, you know, like, a new normal for, for the short term, or maybe no, maybe you're just doing this now because you're seeing challenging environment, and given you do expect the losses, things will improve at some point. That's the first one. I would like to check the box on the portfolio sale. I guess you put out that some of the wholesale NPL improvement was regarding a portfolio sale. How big was that? Just to understand how, how that affected your new NPL formation. Thank you.
Gianfranco Ferrari (CEO)
Reynaldo?
Reynaldo Llosa (Chief Risk Officer)
Yeah, in terms of the guidance for next year, what I can mention as of today, Yuri, is that, I mean, our, our estimations, our levels of provisions today, include the impact of El Nino, with the probability between weak and moderate. That is reflected on our provision level today, and that's included in the guidance for the year, for the year-end, or between 2.1 and 2.5. Regarding next year, as I mentioned before, it's too soon to tell, and we would be able to provide you more information in the following months, in next two quarters, probably. In terms of the sale of that specific case in the wholesale banking, it's around $30 million.
Gianfranco Ferrari (CEO)
That, that's how the sovereign bond, the sovereign bond in inter exchange we made, and even we.
Reynaldo Llosa (Chief Risk Officer)
No, no, no.
Gianfranco Ferrari (CEO)
No?
Reynaldo Llosa (Chief Risk Officer)
No. We're talking about the sale of Termotril.
Gianfranco Ferrari (CEO)
Okay. Sorry. Sorry.
Reynaldo Llosa (Chief Risk Officer)
It was a loan we had in our books, and we had an impact on, in terms of the NPL, of the wholesale book of around $30 million.
Yuri Fernandes (Senior Equity Research Analyst and Executive Director)
Did you recognize any gain on that? Like, did you need to provision and sell at face value, or did you have, like, an economic gain on that sale? Just trying to understand, like, the information, right? If this was a, a non-performing loan, probably you, you had some amount of provisions.
Reynaldo Llosa (Chief Risk Officer)
Yes.
Yuri Fernandes (Senior Equity Research Analyst and Executive Director)
You know, just trying to understand the moving parts on the economics here, sure.
Reynaldo Llosa (Chief Risk Officer)
Yes, we, I mean, as compared to the provision level, we had a profit. We estimated a higher loss than what we finally obtained by the sale. It had a positive impact on our levels of provisions for in the world.
Yuri Fernandes (Senior Equity Research Analyst and Executive Director)
Okay, clear. Thank you.
Operator (participant)
Our next question will come from Jeffrey Elliott with Autonomous Research. You may now go ahead.
Jeffrey Elliott (Director of Research and Senior Equity Analyst)
Hello, thanks very much for taking the question. The cost of risk has been 2.1% in the first half. You're guiding to 2.1%-2.5% for the full year. That seems to capture, particularly at the 2.5% end of the range, quite a big step up in provisions in the second half. I'm just trying to understand what sort of scenario it would take to get that big step up and get you to the high end of the range, and how cautious you feel like you're being now with that 2.1%-2.5%.
Reynaldo Llosa (Chief Risk Officer)
Yes, what I can mention is, remember that we haven't finished digesting all the impact that we've had in the first semester in our current level of provisions. That's incorporated in the projection of the second semester, all those loans that are at default but are not fully provisioned as by the end of the first semester. It included what I had just mentioned in the forecast of the impact that Nino would have under current information in terms of the portfolio, looking forward. That's why we are have increased the guidance in the cost of risk expected for the year as a whole.
Tito Labarta (Vice President and Senior Equity Research Analyst)
Okay. if El Niño ends up being more severe, then there's some further risk that it could go even higher. Is that fair?
Reynaldo Llosa (Chief Risk Officer)
Yeah, that's a fair statement, yes.
Tito Labarta (Vice President and Senior Equity Research Analyst)
Thank you.
Operator (participant)
Our next question will come from Tito Labarta with Goldman Sachs. You may now go ahead.
Tito Labarta (Vice President and Senior Equity Research Analyst)
Hi, good morning. Thanks for the question. Thanks for the call and taking my question. I have two questions. One is on your insurance results, you know, continue to deliver, you know, good results there. Just to understand, how do you think about the sustainability of that going forward? You know, we saw a bit of a decline this quarter. Should that normalize or, or can it remain, you know, above historical levels for, for some time? Any color you can give on that would be helpful. My second question, just if you can remind us the, the sensitivity of your margin to a lower rate environment. You know, your margin has been doing well so far, but, you know, do you think there... How much pressure could there be as rates go down?
Carlos Gomez (Senior Equity ResearchAnalyst)
You also show there that the risk-adjusted margin, which has been relatively stable, do you think that can continue to be stable, as we've seen recently? Thank you.
Gianfranco Ferrari (CEO)
Hey. Hi, Tito. I'll ask Cesar Rivera to answer the first question.
Cesar Rivera (Head of Insurance and Pensions)
Hello, Tito. Thank you. Well, maybe, it's important to explain or to comment something about the, the important results in the insurance business for, for these first 2 quarters. Maybe, one of the explanation is the, the higher investment results we obtained in our re- because the reinvestment rates we obtained in our investment portfolio and because the good performance of our investment portfolio in general. The second, the second reason of this higher results is the higher profits we have obtained in the disability and survivorship insurance. This is the insurance that, that is re- related of the affiliates to the AFP, the AFP, sorry. Because in the last bidding contest, we obtained an important portion for, for this contract and with an interesting increase in, in the, in the rates.
We have obtained an interest increase in premiums without the COVID claims, that we expected some part of COVID claims for this year. This has generated a high profit for this business. The third explanation is related with the high profits that we have obtained in the group life and medical life business. Due to the repricing we made in the previous years, considering the bad results we have obtained during the COVID pandemic. Considering that, considering that, and following the market trends and the competitive situation in the market, we expect some reductions in the collective group life business in the next months.
We will obtain good results for, for this year, but we expect to have a sustainable, ROI, around the low 20s for the, for the next and the following years.
Reynaldo Llosa (Chief Risk Officer)
Yes, Cesar, the three of these, could, could you answer the last, the second question?
Cesar Rivera (Head of Insurance and Pensions)
Yes. With an instant adjustment, I think our sensibility is around 25 basis points, the first year of the adjustment. A little bit higher than we mentioned probably couple years ago, when the interest rates start to rise because the portfolio has shortened. Our expectation is that we can, we can maintain a margin, a NIM similar to the actual one, with a combination of reduced rate and a change in the profile of the portfolio that moves towards a more retail product of the increase in retail banking in BCP and a more accelerated growth in Mibanco.
Tito Labarta (Vice President and Senior Equity Research Analyst)
The stable-ish NIM, you meant 25 bits, that's for about 100 bits cut in rates? Is that the right sensitivity? Also, you can comment on the risk-adjusted NIM also, particularly as you grow in retail?
Gianfranco Ferrari (CEO)
Yes, I will emphasize you, ish, because it's around, we are not talking about fine decimals.
Tito Labarta (Vice President and Senior Equity Research Analyst)
Sure. Okay, on the risk-adjusted NIM, and any comments, particularly as you go in retail?
Gianfranco Ferrari (CEO)
Yes. The, the Risk-adjusted NIM should improve the, the short-term level when we adjust accordingly the Cost of risk down the road. This is not a precise guidance, this is a trend, what I am mentioning at this point.
Tito Labarta (Vice President and Senior Equity Research Analyst)
Okay. Yeah. As, as the quality normalizes, you can see some improvements, but a bit more medium term, it sounds.
Gianfranco Ferrari (CEO)
Yes.
Tito Labarta (Vice President and Senior Equity Research Analyst)
Okay, great. Thank you.
Operator (participant)
Our next question will come from Carlos Gomez with HSBC. You may now go ahead.
Carlos Gomez (Senior Equity ResearchAnalyst)
Yeah. Hello, Good morning. First of all, thanks again for your improved disclosure on capital and on the digital initiatives. You started last quarter, but, I mean, it continues to improve, and we really appreciate that. It gives us a better insight about how things are going. Two questions. One, one is different from what you want to hear. You emphasized your detachment from the macro, but we would like to, to know what you think that growth can be in Peru in the long term, and your credit growth can be in Peru in the long term? The second one is on the digital initiatives, if you can tell us more about Tenpo and IO at this point. Thank you.
Gianfranco Ferrari (CEO)
Sure, sure. Hi, Carlos. Yeah, as of today, and again, correct me, Cesar, if I'm wrong, our, chief economist expects, Peru to grow 2.5%, 2024. Is that correct?
Speaker 15
2024, at this point, I think it's more around 2-
Gianfranco Ferrari (CEO)
Two
Speaker 15
... 0.1.
Gianfranco Ferrari (CEO)
Okay.
Speaker 15
Because we are considering a basic scenario with a combination of weak and moderate El Nino at the beginning of the year. Ra- the, the number of of your current mention is more representative without the impact of.
Gianfranco Ferrari (CEO)
Okay. Anything between 2-2.5% growth, Carlos, Just a quick comment on that. Peru needs to grow much faster. This comment goes beyond, beyond the impact on our business. If-
Carlos Gomez (Senior Equity ResearchAnalyst)
Mm-hmm
Gianfranco Ferrari (CEO)
... the, the level of poverty in Peru, was reduced dramatically over the last, I don't know, 20 years until COVID.
Carlos Gomez (Senior Equity ResearchAnalyst)
Yep.
Gianfranco Ferrari (CEO)
We went back, like, in 2 years, like, 10 years, in terms of that ratio. To go back, we need to grow as a country at least 4%. That's the challenge we have. Again, this goes beyond our business. Regarding Tenpo and IO, let me start with IO. IO is actually in a friends and family proof of concept with very good results, and we're gonna launch it, I believe in 2 weeks. We could talk much more about initial results in next call, but the initial results are quite good in terms of user experience. That's the only indicator we have today. Regarding Tenpo, it's performing quite well, again, in operating indicators.
We recently got... Tenpo recently got the approval from the Chilean Superintendency to issue credit cards. We're in that process, and that's the next relevant stage in the Tenpo original business case. As soon as we start to get more relevant information, we plan to. The Tenpo business becomes more relevant for Credicorp, we plan to do something similar to what we're doing with Yape regarding information disclosure.
Carlos Gomez (Senior Equity ResearchAnalyst)
Thank you. If I can go back to the beginning, you mentioned, yes, this is what Peru needs to, to grow, and one could agree. That's my question, is in the medium term, what is your realistic expectation running the business about what Peru can do over the next 3 to 5 years? Also, how, how does that translate into credit growth for you? Thank you.
Gianfranco Ferrari (CEO)
Yes. Long term in Peru is much less than 3-5 years. We have had 6 presidents in 6 years, so it's quite difficult. I don't think, and this is a personal opinion, I don't think with the current scenario, political, social, and econo- macroeconomic scenario, I don't think that it is achievable for Peru to grow 4%, 4% over the next few years. We need to do a lot of structural reforms that we don't see them being done in the near future. Regarding growth, portfolio growth, I want, I want, I'd rather don't provide an answer in that, because there's a lot of variables regarding the multiple of portfolio growth related to GDP growth. That's the main reason why, or one of the main reasons why we've started to try to decouple from GDP growth, so as to keep growing, at a much faster, multiple.
Carlos Gomez (Senior Equity ResearchAnalyst)
Very clear. Thank you so much.
Operator (participant)
Our next question will be a follow-up from Yuri Fernandes with JPMorgan.
Yuri Fernandes (Senior Equity Research Analyst and Executive Director)
Hey, hey, guys, it's me again. Hello, it's me again. I have a follow-up regarding costs here. Let's put the worst case scenario, right? This is not a, a moderate El Niño, this is a strong El Niño. You need to revise your cost of risk, you need to decelerate your low growth, and this impacts your profitability. Can you cut your expenses on the investment plan, like the famous 150 basis points on ROE headwind? I'm just trying to understand what you can do. Like, if there is a worst case scenario, what can you do on all your digital initiatives? Or if the bank will prefer to say, "No, hey, Yuri, we prefer to have ROEs below 16, below 15," whatever, but keep investing on technology and keep expenses high.
Just trying to understand if expenses could be, you know, involved for, for the company in the case there is a, you know, ice stream event. That's one. Regarding also El Niño, I, I remember in 2017, you had extraordinary provisions for the event, and later, I guess, reverted, like it was not as bad as you, as you expected. In the case things get, you know, clear that this is a moderate to a strong El Niño, if the company could do, you know, like voluntary, anticipatory, you know, provisions as you did again in 2017. Thank you.
Gianfranco Ferrari (CEO)
Yeah, regarding your first question, Yuri, maybe a quick previous comment, which we shared on the Investor Day also. Most of the investments we're doing in the digital ventures and the digital transformations, we are register them as expenses rather than as investments. The main reason there is that if obviously there's a high risk in this investment, we rather be conservative, and if something goes south, we, we, we don't wanna surprise the market. Going to your question, your specific question, there's some room. We're not planning to do that whatsoever. We are, because of the results we're having in the digital ventures and the discipline we're pursuing and the investment we're making, we don't plan to cut, as of today, obviously, we don't plan to cut any investments in that sense.
Obviously, the, if there, if there's a major, dramatic scenario, which we don't see, today, there's some room, to cut expenses. I don't think... Having said that, I don't think that the, that the expenses we can cut will offset all the negative impact we, we may have in a dramatic scenario. Again, I, highlighted the word dramatic scenario. Yeah, and I'll ask Reynaldo to answer the second, yeah, question.
Reynaldo Llosa (Chief Risk Officer)
In terms of our level of provisions, if we have information by the last quarter that, I mean, that we have a Niño coming, that is of higher impact of the moderate level, that that's what we have already considered in our projections, of course, we would start increasing our level, our level of provisions. Having said that, comparing to what we had in 2017, we have a totally different situations. Companies are more prepared in the wholesale segments, more exposed to the Niño phenomenons.
We have learned a lot in during the last crisis, the COVID situations and the social unrest and the political situation we had, to provide assistance and help to those clients in the retail banking that are exposed to these kinds of events. In terms of the level of deteriorations in those portfolios, we expect to have a relatively a lesser impact that than what we had in 2017, where the situation was totally different. That's in general our strategy, but we'll have more information on in the following months.
Gianfranco Ferrari (CEO)
And maybe to complement, Yuri, I would say that as a country, we're better prepared than what we were in 2017. And on top of that, and this is a spoiler to my closing remarks, we're almost all of the subsidiaries at Credicorp, we're closely working with our clients, both at the corporate level and at the retail level, in educating them and helping them to be much better prepared if an El Niño major effect will come.
Yuri Fernandes (Senior Equity Research Analyst and Executive Director)
Well, thank you, Gianfranco. I don't wanna sound super bearish here and just, you know, checking the box, what would be, you know, like, if this happens, what would be your message? Thank you for, for being candid and, and, and mentioned that, you know, you don't wanna cut expenses, but if there is a need, you may, you may do so. Thank you for, for, for the clarification.
Reynaldo Llosa (Chief Risk Officer)
Great.
Operator (participant)
Our next question will come from Sergey Dubin with Harding Loevner. Sergei, now go ahead.
Sergey Dubin (Senior Portfolio Manager and Equity Research Analyst)
Yes. Good morning, gentlemen. Thanks for the call. Three questions, actually. The first one, there was some news around some ongoing or resurfacing political unrest again in Peru in July. Has that died down? Is it continuing? Kinda, how do you see the trend there? Maybe that's the first question.
Reynaldo Llosa (Chief Risk Officer)
Sure. I'll, I'll take that one. Hi, Sergei.
Gianfranco Ferrari (CEO)
Good to hear from you.
Sergey Dubin (Senior Portfolio Manager and Equity Research Analyst)
Hello, Gianfranco.
Reynaldo Llosa (Chief Risk Officer)
... I don't want to downplay the, the, the, the, social noise that there was in July. As we mentioned in the, in the Investor Day, what we, we, we, what we see is like that we have a fragile stability today in Peru, a fragile political stability, I mean. The, the, the, the, the noise, the poli- the social noise we had in July, it was very little. There's nothing going on or ba- basically, or basically nothing going on today. Obviously nothing to compare to what we saw, last year by year end and in January and February of this year. Today we're again, going through a fragile, stability, and we hope that that stability improves as we, as we move forward.
Sergey Dubin (Senior Portfolio Manager and Equity Research Analyst)
Okay, great. My second question regarding cost of risk. I'm a little confused about this El Niño. It looks like from the presentation, it's gonna be a summer 2024 event, if I understood this correctly. You also talked about how your cost of risk for 2023 is already incorporating that. Can you help me with the timing of, are you expecting anything in 2023, or is that entirely 2024 event? That's first part of this question. The second part is, you mentioned that you expect cost of risk trends to diverge in the second half, with Mibanco kind of going down and perhaps BCP going up. Can you help explain why that is? Is that related to the steps that you're taking in terms of curbing the risk of appetite?
Any, any color around that would be helpful.
Reynaldo Llosa (Chief Risk Officer)
Okay. Hello? Yes, in terms of, of 2023, closing June numbers, we included everything that we expect for, for, for the year, incorporating some outlook of, of, of the level of growth that, that is impacted for, for 2024. That, that, that in general, it includes all the events that are under, under our control and that we foresee for, for, for this remaining of the year. In terms of, of Mibanco and BCP, as Cesar mentioned, Mibanco started with some specific measures before BCP, so that, the, the remaining provisions left for both institutions vary. I mean, the, the need for, for Mibanco provisions during for the rest of the year are relatively lower than that we will see in, in BCP.
That's that's what Cesar specifically mentioned.
Sergey Dubin (Senior Portfolio Manager and Equity Research Analyst)
Okay, this steps that you're talking about, that relates to what? I mean, are you, are you curbing-- are you, like, curtailing risk or curtailing loans to more risky segments? Could you, could you explain what, what it is that, that Mibanco has already did and BCP hasn't done yet?
Reynaldo Llosa (Chief Risk Officer)
Yes, that you are totally right. I mean, the, the things we have done in, in both banks have limited the growth of, of, of, of the portfolios. As, as you, as you've seen, it hasn't been a very good years in terms of, of loan growth, in terms of, of the first six months of the year. That are reflections of our stringent, more stringent, grade policies in, in both banks. That's, that's, that's what, what, what we've seen, and, and that's what we expect to have a better, a better outlook in terms of, of the, of the new loans. We still have in our portfolio some loans that, that were impacted by the, by the macro trends and, and the specific events that happened in Peru in the first quarter.
Sergey Dubin (Senior Portfolio Manager and Equity Research Analyst)
Okay. The third question is regarding NIM trajectory. I believe you mentioned in the beginning of the call that, you know, a bunch of Latin American central banks already cut interest rates, and you expect Peruvian central bank to cut their rates in Q4 of this year. Could you remind me what is the sensitivity of NIM to, I don't know, let's say 25 dips of rate cuts? Then how would you expect NIM to sort of shape up if you see a success of rate cuts in 2024?
Gianfranco Ferrari (CEO)
Sure. Cesar?
Cesar Rios (CFO)
Yes. First, as I mentioned previously, the sensitivity of an instantaneous 100 basis points reduction in portfolio is around 25 basis points the first following year. That's the sensitivity. Our guidance is to remain in the same level that we previously mentioned, but a combination of factors. We are going to grow the retail portfolio less than was previously expected, but at the same time, the wholesale portfolio has already reduced in some degree. The combination of these factors lead us to maintain our guidance in terms of NIM. The expected result of our decrease in reference rate is a gradual compression of the NIM that is going to be offset for the relative faster growth of the retail segment and Mibanco, as I already mentioned previously.
At this point, we are not providing guidance for 2024.
Sergey Dubin (Senior Portfolio Manager and Equity Research Analyst)
Okay. Just to make sure I heard clearly, 100 basis points cut in interest rate leads to 25 basis point NIM compression with a 12-month lag, like, or next year, essentially, right? Is that correct?
Gianfranco Ferrari (CEO)
... the instantaneous effect, without changing the composition of the portfolio, is that if you have the entire portfolio and you reduce at once 100 basis points, the impact through the year is 25 basis points, with a combination of maturities, sensitivity, and so on, forward and so on.
Sergey Dubin (Senior Portfolio Manager and Equity Research Analyst)
Okay, I understand. Okay. That, that's fine. Thank you.
Operator (participant)
Again, if you have a question, please press Star then One. Our next question will come from Andres Soto with Santander. You may now go ahead.
Andres Soto (Analyst)
Good morning, Gianfranco and team. Thank, thank you so much for the presentation. Most of my questions have already been answered, I would like to take the opportunity to ask for an update regarding the strategic plan for investment banking and wealth management. In the past, you, you commented that you, you wanted to implement a plan to increase scale, specifically in the wealth management business, that may potentially include the money activity. I would like to get a sense of how that's shaping up and, and when, when can we expect news about that?
Gianfranco Ferrari (CEO)
Yeah, sure, Andres. We shared, Eduardo Montero, actually, who runs our business, shared in detail at the Investor Day. Basically, the plan is to focus in wealth and asset management. We're in that process. We already, we're pulling off the most of the investment banking business. Part of it is we're closing basically the M&A businesses in Colombia and Chile. Obviously, it has to-- it's not a one-time asset. It's like you will have to pull off as we finish our mandates we have. We already transferred the lending business that we had in Peru to BCP.
Today, I, I would say that by year end, we will have positive results in terms of. We, we will have finished all, all, all the cost reductions we, we expected, and be very in shape to start growing, both organically and if there are op-opportunities, inorganically in, in, in that, in that business, going forward.
Andres Soto (Analyst)
Understood. Thanks again. Congratulations on the strong result despite this challenging environment.
Gianfranco Ferrari (CEO)
Thank you.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Gianfranco Ferrari for any closing remarks.
Gianfranco Ferrari (CEO)
Thank you for all, all for your, for your questions. As Cesar noted, our GDP growth expectation considers scenarios of weak to moderate El Niño Costero, as well as announced government reactivation plans. While the macro scenario will likely improve in the second half, we still expect to see a lag effect, which is reflected in our grade risk management approach and expectations for full year structural loan growth and cost of risk. Importantly, we've been managing efficiency better than initially expected, despite accelerating investments to strengthen our future businesses. All in all, we maintain our ROE guidance at around 17.5%, while noting potential downside risk mainly associated to asset quality deterioration and El Niño Costero. Looking ahead, we remain confident in delivering a longer-term ROE of approximately 18%.
This is underpinned by Peru's strong fundamentals and our emphasis on broadening non-interest income via disruptive investment to decouple from the macro, complemented by our potential to leverage our brand's strength, expand our client network, and seize structural growth opportunities as they re-emerge. These efforts are fortified by our strategic advantage in acquiring low-cost deposits and realizing efficiency improvements through transformational investments. Now, I'd like to give you a better understanding of how we are currently helping our clients and investing in a more prosperous future for Peru. We're working across our organization and leveraging synergies to develop and deliver educational content and support in the face of climatic threats, through both mass distribution channels and targeted individualized actions. Examples include Pacifico Seguros' Comunidad Segura program, aimed at promoting a culture of risk prevention through workshops and conferences for families, micro entrepreneurs, and community leaders.
Additionally, Pacífico and BCP are sharing recommendations on how to manage climatic events through their financial education podcast and popular webcast, while Mibanco is distributing educational content on prevention across multiple channels. We are implementing a strategic approach driven by the need to safeguard our portfolio, and more importantly, minimize the adverse effects on the lives and businesses of individuals in Peru. We firmly believe that these are the crucial investments that will yield long-term benefits and unlock the vast opportunities in Peru. Thank you all for your continued support. Have a great week.
Operator (participant)
The conference is now concluded. Thanks for attending today's presentation, you may now disconnect.