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Credicorp Ltd  (NYSE:BAP)
Q2 2019 Earnings Call
Aug. 09, 2019, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd Second Quarter 2019 Conference Call. We now have our speakers in the 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. At that time, instructions will be given as to the procedure to follow, if you would like to ask a question.

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

Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the second quarter of 2019. Before we review Credicorp's performance, I would like to highlight some important matters regarding recent events in the local and international economic environment. First, President Vizcarra has proposed a bill to institute a constitutional reform to call for general elections in 2020 rather than waiting to 2021. We know that the bill propose includes a precision in which President Vizcarra will not be able to run in the announced elections. This reform has to still to be approved by Congress, as such it is still too soon to forecast outcomes. A number of scenarios may play out and more losing are certain.

In any scenario, the decision process regarding this proposal will follow the guidelines established by the constitution. Despite political noise, the strong fundamentals of Peru remain. These fundamentals includes proving macroeconomic policies, trade openness and market-friendly economic model. We now believe that our 2019 GDP growth will be in our range of 2.5% to 3%. Second, in chart number one, the orange line shows the total loans in Peruvian banking sector expanded 7.2% year-over-year in June 2019. Consumer loans grew 14.1% year-over-year in the same period, which represents a three-year peak. However, data from the formal job market has not improved at a similar pace. In light of these, we continue to monitor for any early signals that nonperforming loans will increase.

Finally, we know that there is currently a global scenario of lower monetary policy rates amid risk of global growth. Central banks in both advanced and emerging economies have started to ease their monetary policies terms by lowering their reference rates. The Central Bank of Peru joined all the central banks and yesterday lowered its monetary policy rate 25 basis points. It is important to consider that the local and external environment evolution just described affects the financial system and our business performance.

Next page, please. Regarding our quarterly and year-over-year performance, there are important aspects of our lines of businesses that I would like to mention. In the case of universal banking, in the second quarter of 2019, average daily loan balances at BCP cost 6.5% growth year-over-year. The Retail Banking portfolio grew by 11.6% while the middle market expanded by 8.7%. The corporate banking segment however contracted by 1.5%. The loan mix and the currency mix favored the evolution of net interest margin, both in quarter-over-quarter and year-to-date terms. The cost to income ratio improved year-over-year and year-to-date, mainly due to an increase in interest income on loans. This helped offset increasing operating expenses, which was driven mainly by growth in salaries and employee benefits.

The cost of risk grew quarter-over-quarter and year-over-year due to an increase in the expected loss reported by specific retail banking segments. BCP Bolivia reported a good level of loan growth and a reduction in provisions. Both the efficiency ratio improved year-over-year and year-to-date in line with increasing net interest income and fee income. With regard to Microfinance. Mibanco posted a moderate level of loan growth in quarter-over-quarter and year-over-year terms. In terms of margins, the negative effect of downward pressure on interest income in highly competitive context was offset by an improvement in the funding structure by which the share of retail funding increase as such net interest margin posted a recovery quarter-over-quarter.

The cost of risk at Mibanco rose quarter-over-quarter as a result of the economic deacceleration. We are already taking origination and collection of measures to adjust risk performance. Mibanco began increasing its number of employees in the latter part of 2019, primarily by expanding the sales force to build capabilities and sustain business growth. It is important to note that this is the first time that Mibanco has increased its workforce since its acquisition. Prior to this date, the bank was able to grow its loan base without increasing the headcount. Mibanco is also building new channels to leverage data analytics and digital solutions, which has increased administrative and general expenses.

With regard to insurance and pension funds. The insurance underwriting results increased this quarter. This was primarily due to the evolution of the property and casualty business, which posted an increase in the net earning premiums level primarily through its commercial lines for aviation and fire. The underwriting results in the life insurance business however contracted due to competition, particularly in Renta Flex interest rates offered to clients. Corporate health insurance and medical services which we manage in association with UnitedHealth continued to improve. The pension fund business also improved after posting a recovery in the profitability of its legal reserves. This business efficiency ratio improved due to a decrease in its operating expenses and an increase in its fee income.

In investment banking and wealth management. In the second quarter of 2019, the proprietary portfolios continue to have a good one in a context of favorable market conditions. This was the case for fair value through profit and loss investments and fair value to other comprehensive income investments, which have no impact in the P&L. Regarding the wealth management business, assets under management has grown by 5% year-to-date. Finally, corporate finance activity continues to post lower results than those seen in 2018.

Next slide, please. In this table, you can see the most important figures of Credicorp's performance in the second quarter. Credicorp reported net income of PEN2,099 million, which was 0.2% lower than the first quarter results and 12.3% higher than the figure posted in the same quarter of last year. The results represented a return on average equity and average assets of 18% and 2.4% respectively. Overall, in terms of loan portfolio most key figures posted improvements quarter-over-quarter and year-over-year. Net interest income and net interest margin followed the same trend. Additionally, the year-on-year analysis of operating efficiency indicates that the cost to income ratio remains relatively stable. The cost of risk, however, increased quarter-over-quarter and year-over-year mainly in retail banking.

As we will develop later targeting risk segment has been part of our growth strategy. However, given the cost of risk deterioration in the financial system, we have been taking pricing orientation and collection adjustments while continuing with the strategy. Finally, in terms of capital ratios, BCP stand-alone, BIS and Tier 1 ratios decreased quarter-over-quarter due to growth in risk-weighted assets in line with long expansion. Core equity Tier 1, however, posted an increase both quarter-over-quarter and year-over-year.

Next page, please. Regarding the year to the results. Net income increased 9.1% and translated in a return on average equity and average assets of 17.9% and 2.5% respectively. Net interest income increased 8.3% while net interest margin rose 15 basis points. Finally, the increase in provisions led to a higher cost of risk. While risk-adjusted NIM remained stable. Let's review the main figures and indicators for the second quarter. Next page, please. As you can see in chart Number 1, our loan portfolio accounts for 66% of our interest-earning assets as of June 2018. Regarding the accumulated evolution of loans measured in average daily balances. As you can see in chart Number 2 total loans grew by 6.7% from first half 2018 to first half 2019. This expansion improved the loan portfolio both by business segment and Bankcorp's. Loan expansion was mainly driven by Retail Banking at BCP Stand-alone, specifically in the mortgage loan book, followed by the credit card and consumer segments. In terms of currency mix, loan expansion was mainly driven by local currency for BCP, retail banking and Mibanco portfolios. As we will discuss later, this improvement in the loan portfolio mix has a positive impact in net interest income.

Next page, please, First, in terms of funding. You can see in chart Number 1, Credicorp's total funding costs have slightly increased in the last quarter while remaining relatively stable during the last 3 years. Second, you can see in chart Number 2, that Credicorp's funding structure shows an ongoing increase in total funding, driven by a higher level of [indecipherable] and corresponding around repos with the Central Bank. Third; in chart Number 3, in the quarter-over-quarter analysis, you can see there is a decrease in the volume of demand deposits, which offset the increase in time deposits. There is significant competition for local corporate demand deposits as certain banks are pushing interest rates above Central Bank reference rates. In the year-over-year analysis, the increase in total deposits was mainly attributable to saving deposits, which grew 9.7% driven by opening accounts in kiosks.

Next page, please. Net interest income rose by 3.1% quarter-over-quarter and 9.4% year-over-year. Year-to-date net interest income grew by 8.3%. This performance shows first a positive volume and currency mix effect on interest income given that the pace of growth of average daily balances rose, mainly in the retail segments and primarily in local currency. This was partially offset by the increase in interest expenses, driven by a more expensive funding mix by source and quarters.

Next page, please. As you can see in chart Number 1, risk-adjusted NIM decreased 4 basis points quarter-over-quarter and 9 basis points year-over-year, reaching a level of 4.39% in both the second quarter and the first half of 2019. Regarding year-to-date evolution risk-adjusted NIM increased 2 basis points. Year-to-date evolution is a result of net interest margin increase of 15 basis points, partially offset by an increase in the cost of risk of 19 basis points. Net interest margin growth was driven by the loan portfolio mix improvement, while the cost of increase was mainly attributable to a specific retail segment in BCP Stand-alone and to a lesser extent to Mibanco's portfolio. As we mentioned early, penetrating risk in a more profitable segment, is part of our retail growth strategy, which resulted in a 11.6% BCP retail banking year-over-year growth in the first half of 2019 in average daily balances.

However, given the Consumer Banking portfolio deterioration in the Peruvian financial system, our retail portfolio cost of risk slightly grew more than expected. In this regard as part of our portfolio monitoring process, We have been taking pricing, origination and collection adjustment measures to improve risk adjusted NIM. In particular in credit cards and SMEP. According to the duration of this specific portfolios, the full impact of this adjustment will materialize during next year. Regarding microfinance. Mibanco portfolio has been affected by the economy deacceleration and we are making origination and collection adjustments to manage portfolio quality.

Next page, please. Regarding non-financial income. If we focus on the accumulative evolution as you can see in chart Number 1 non-financial income expanded 9.4% mainly due to the increase in the net gain in sales of securities, driven by higher gains at BCP Stand-alone following repurchases of Peruvian government months and here Atlantic Security Bank and Credicorp Capital by the positive evolution of their proprietary portfolio. To a lesser extent growth was related to an improvement in fee income and in the net gain on foreign exchange transactions. Both core items of nonfinancial income. The evolution of these items is driven by transactional activity in the banking business mainly at BCP Stand-alone.

Next page, please. In the year-to-date analysis of operating efficiency, the cost to income ratio improved in line with an acceleration in the pace of growth of operating income. In the following chart, you can see the contribution of each subsidiary to the variation in the efficiency ratio. First, Pacifico posted a decrease in its efficiency ratio which was primarily attributable to growth in net earning premiums, mainly driven by the fact that Pacifico won 2 out of 6 tranches in the last tender process for disability, revivalship and whole year expenses policy for the private pension fund system. However, it is important to mention that increasing net earning premiums was offset by growth in net claims, which are not part of the efficiency ratio but impacted the net income.

In the case of BCP Stand-alone, the improvement in operating efficiency was attributable to an increase in interest income in line with retail banking expansion, which offset the increase in salaries and employee benefits. And improvement in the efficiency of Pacifico and BCP was partially offset by the deterioration in operating efficiency and Mibanco which was primarily driven by an increase in personnel expenses in line with the long-term strategy to train the new sales force to cover growth in the client base. The relevant impact of other subsidiaries is plainly mainly by a deterioration in the efficiency ratio of Credicorp Capital as it posted a decrease in its derivative results. It is important to note that the derivative first of all was offset by the net gains on securities, which is not a part of the efficiency ratio. To a lesser extent, the deterioration of the efficiency ratio is also related to an increase in salaries and employee benefits of Credicorp Capital related to the increase in its sales counts.

Next slide, please. On this page, you can see our current guidance for full year 2019 and the released figures for the full year 2019. First, in terms of macroeconomic indicators, given that economic activity remains below its potential and was less dynamic than expected at the beginning of the year, we have lowered our estimate for full year GDP, domestic demand and private investment growth. In line with this, we expect the Peruvian Central Bank to ease its monetary policy and as such have lowered our forecast for the reference rate for year end 2019. This change in the economic outlook period to the dynamics we are observing, our businesses have let us to make some changes in our guidance for the full year 2019. In line with the aforementioned and we are reducing our estimates for loan growth, net interest margin and risk-adjusted NIM, while we are increasing our estimate of cost of risk.

Next slide, please. Finally, I would like to talk about Credicorp's strategy. In 2017, we defined the 3 pillars that will guide the way we organize and plan for the next 20 years. The first pillar Credicorp way is focused on identifying and documenting the best practice in each subsidiary to deploy then across the organization. The objective is to leverage our scale and synergies without losing agility. The second pillar concerns governance and focus on defining the operating model for the future. In this regard, we organize our subsidiaries into 4 business lines and implement organizational changes to enhance this new structure management.

The first pillar is growth. In recent years we have built capital in each of our subsidiaries to very comfortable level. This capital will sustain future growth. We are confident that all of our lines of businesses have considerable organic growth potential to ensure that we adequately identify and leverage opportunities. Each line of business has developed a strategic initiative to fuel sustainable growth. The yield transformation is also key in our growth strategy. Each of our lines of businesses has its own agenda, regarding digital matters as we will review in the following slides. Outside of our established business lines Krealo acts as Credicorp's open innovation arm to create, invest and manage fintechs. Finally, in terms of potential inorganic growth, we have set up a specialized team to analyze and value investment opportunity. This thing follows strict guidelines to determine which countries, sectors and businesses are the best fit for Credicorp and its investment focus. We have set up a reserve fund for potential acquisitions of approximately $500 million.

Next slide, please. As we have shared before, BCP's transformation program is focused on offering our clients an outstanding experience while gaining efficiencies. Looking at our key digital results, our digital sales in consumer banking have improved from 5.1% in the first half of 2018 to 9.6% in the first half of 2019. In terms of digital clients in consumer banking, our number of users stands at 34% for our total client base, which represent a 13% point increase over the figure posted at the end of 2016. Finally, off-branch transactions has increased representing 96% of total transactions, 58% were executed through digital channels and 38% through self-served channels. This figure shows an important evolution in 3 years.

As a specific digital success story, I would like to mention that our consumer loan digital monthly sales has doubled the disbursements in the quarter while achieving a fixed full cost reduction compared to the traditional branch channel. Moreover, the number of Yape users our peer to peer payments has grown significantly to more than 1 million users as of today. We are accelerating its growth by being focused in increasing its use. The 44% of Yape users paid using Yape at least one time in the last 90 days with an average use of 3.8x per user. Regarding scaling agile, we are implementing agile methodologies while improving the speed, employee experience and efficiency. As of today, we have 5 tribes and 2 centers of excellence in operation as well as 8 tribes and 2 centers of excellence on design. We expect to finish implementing our agile and scale program by mid-2020.

Next slide, please. Regarding Pacifico transformation program, we have focused on making Pacifico the number 1 of the insurance industry in 3 objectives growth, experience and efficiency. Towards this note, we have set 9 aspirational key targets for 2021. We are working on 6 enabled to advance in this journey. Consumer experience to open our unique and extraordinary experience to our clients, digital marketing to promote digital community, some brand reputation, focus on digital performance with positive business impacts. Smart processes, to focus on intensive technology use to increase productivity, efficiency and quality service. Agility, to guide the agile mindset adoption process in the company. Data and analytics, to strengthen decision making through big data and analytical models. Digital IT, to be digital architecture to scale digital solutions using DevOps to provide continuous and efficient delivery of value and strengthening cybersecurity.

In the process of going agile, we have 11 squads and 1 center of excellence working with agile methodologies. We are developing new roles and capabilities in the organization, which will enable us to scale agile. Regarding a specific story, we're currently working on. First, we have developed a self-service tool for our brokers ensuring that 59% of the information requirements have an automatic response. Second, we launched the Digital Life Advisory Model which seeks to improve customer experience while achieving efficiencies. As of June 2019, 62% of the applications are registered through this model. Finally, we are working on increasing self-managed transactions by customers and digital sales.

Next slide, please. In Mibanco, we define our transformation program as evolving our culture, changing our mindsets, innovating in a customer-centric business model using new technologies and ways of working to achieve our aspirational purpose. We are focused in making Mibanco number 1 in growth and experience and becoming a benchmark in the microfinance business model. All of these are set to meet our purpose of transforming lives while writing together our part of the story. We are working in 5 enables to advance in this journey. Consumer-centric, to offer an extraordinary experience to our clients but understanding their needs. Digital business model, to develop digital capabilities to improve customer experience and evolve into a cost-efficient business model. Collaborative organizational culture to ensure customer-centric attitude leadership and transformation commitment in our teams that are driven to support our core business and decision-making processes through advanced analytics. IT and digital risk, to build digital architecture to support our transformation process and strengthen cybersecurity.

We are currently adopting agile methodologies. We have 16 squads and 1 tribe in our digital channels. Going into specific stories regarding digital innovation, we have developed an app that facilitates credit evaluation and collection on the field. The sales force tool as an information and communication source, which aims to improve customer experience and sales force productivity. Moreover, we have built a strategic alliance with Uber and Emo Technologies. This is a new digital model focus in targeting any specific Uber's driver segments as potential clients and evaluating them using Emo big data mining skills. Positive results will open opportunities to new alliances to access all our new segments. Lastly, the use of advanced analytics models is boosting highly effective leads generation which improve the productivity and efficiency.

Next slide, please. Under our growth strategy, we set up Krealo in 2018 to build, invest and manage fintechs that provide digital products and services beyond the current initiatives and their way at our other subsidiaries. Deal with both the value proposition that Credicorp can offer to current and future clients across its subsidiaries. Krealo is focused on structure and strategies of company building and partnership through the creation of new fintechs or investing and building on existing fintechs in Peru, Chile and Colombia. In Peru, we have invested in Culqi in late 2018 to develop a broader solution in the payment ecosystem. Culqi online gateway has currently more than 5,000 registered users which process sales for a monthly amount of over PEN27 million. Culqi is currently pillar team is empowering solution for physical payments in several merchants and getting ready for our rollout in late 2019.

In Chile, we have acquired Multicaja Digital business in March 2018, including 2 operating businesses with over 800,000 online users, PayPal withdrawals and deposit services and top up services. Besides the aforementioned, the transaction includes a prepaid account company in process of obtaining regulatory approval to operate in the Chilean market. In Colombia, we found the Teva, a digital investing application based on anonymous account with a rollout by source solution with the objective of providing access to low ticket investment to customers. Teva is currently finishing it's NBP and is in the process of obtaining regulatory approval to launch the product in the Colombian market. Continuing upper regulatory approval, Krealo expects to have all 3 Mbps live in the respective markets by year-end. Moreover, we expanded our open innovation initiative through Krealo and we will reach $30 million in total disbursements for 2019.

Next slide, please. Finally, I wanted to give you some information about the recent acquisitions we have made in Colombia and the rationale for each of them. First, in February, we acquired Ultraserfinco to complete our existing Credicorp Capital business to become an undisputed leader in equity and fixed income trading in Colombia. Ultraserfinco has an attractive wealth management business with over $500 million in assets under management and more than 50 years of experience in the industry. Additionally, this acquisition complements geographically our client coverage since Ultraserfinco has a significant presence in managing. Second, we acquired Bancompartir in June, with the objective of expanding Credicorp's microfinance business in the region. Colombia has attractive macroeconomic fundamentals a significant potential for this model and a fragment microfinance market, which provides consolidation opportunities. With Bancompartir and Encumbra, Credicorp is well-positioned to become market leader. Bancompartir is Colombia's number 4 private microfinance bank with a nationwide footprint, comprised of 104 branches and covering 27 out of 33 departments. Finally, Bancompartir will leverage from Mibanco's capabilities to improve commercial productivity and risk management and financial performance. It is important to highlight that for both of these acquisitions, all together we will pay approximately $120 million.

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

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] We'll take our first question from Ernesto Gabilondo of Bank of America.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi, good morning, Walters -- sorry Gianfranco, thanks for the opportunity. My first question is on your expectations for loan growth per segment. We have seen the economy has been impacted by the temporary suspension of Las Bambas, the every Four-year-week investments seasonality in regional and local governments. We have seen the strikes in Arequipa. And in addition the political turmoil of celebrating presidential elections next year and the escalation of the global trade war. We believe somewhere or in some cases are temporary impacts. Well, yesterday's interest rate card could help a little bit to improve the economic activity. However, we think there could be likely some delays in some construction and large infrastructure projects and some impacts related to the uncertainty of the global trade war. So we have seen your downward revision for loan growth but how do you see loan growth per segment? Should we expect wholesale loans to be modestly growing and retail loans, been able to maintain its double-digit base growth? Thank you.

Cesar Rios -- Chief Financial Officer

Yes, this is Cesar. Thank you, Ernesto. I think we will expect that the trends are going to continue. Due to the mention that you have pointed out probably is going to be challenging to grow in the corporate segment but the retail segments continue with a very good dynamic and the adjustments that we foresee as I mentioned during the presentation adjustments in pricing in risk and probably the market is going to conduct something similar. So in terms of retail banking, we foresee a good trend in the following months but some challenges in the corporate segment.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

Ernesto, this is Gianfranco just to complement what Cesar has just mentioned. Specifically, in the retail segment, you have to bear in mind that actually the third -- the fourth quarter -- the last part of the third quarter and the fourth quarter are very strong in the SME business. This seasonality we've seen it over the last few years. Basically because of the year-end campaigns so we are positive there. And on the consumer lending business, we are leveraging on digital tools and new channels in order to tackle new segments of the population. So yes, we are positive in the SME and consumer lending and on the corporate, we will see that the portfolio is going to be flat or really a small growth due to what you mentioned in terms of investment.

Ernesto Gabilondo -- Bank of America -- Analyst

Thank you, Cesar and Gianfranco. And my second question is on your transformational plan. We know these expenses were under control during the quarter, below the 8% year-over-year guided and we notice that despite your revising downwards the GDP growth, loan growth, NIMs and expecting a higher cost of risk you're maintaining a change on your expectations for the efficiency ratio. So I just want to know if you are delaying some of the transformational projects or should we expect OpEx to trend up in the next quarters? And can you share with us some of your advances in the digital transformation? For example, what are you doing in terms of QRs and biometrics and Fintechs? And I don't know if Qulqi, Tempo and Teva will be the key businesses to follow? Thank you.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

I'm going to talk about -- this is Gianfranco again. I'm going to talk about BCP's formation. We haven't changed our plans. As I mentioned in the previous conference call, this is a long-term strategy. We are seeing that there is a lot of value -- we are bringing in a lot of value because of the transformation. We don't foresee any deterioration in the cost to income ratio and the main reason is that despite the fact that we won't stop any of our investments, we are getting benefits of the transformation so far. We are already closing -- we've already closed some branches due to the escalating agile or scaling agile probably. We're gaining efficiency there too. In terms of QRs and actually, this is a whole -- a more strategy on payments. The YAPE which Cesar has just mentioned started as a B2B application. Today is also a B2M application. We are -- as of today, we may have anything between 8,000 to 10,000 QR profit already deployed. Visanet is also deploying its QR and our ambition is to have 150,000 QR codes by the end of the year. We are doing further analysis on QR -- YAPE sorry and the collateral benefits we're getting in terms of deposits, usage of debit cards and so on are very positive. So we will continue investing specifically in YAPE. Regarding Fintechs, I would say it's a twofold strategy. One is the one, Cesar mentioned that is parallel in our building or buying companies. And in addition to that, we have BCP, also have a strategy in terms of either both buying, partnering and or testing new distribution risk models and things like that with Fintechs.

Ernesto Gabilondo -- Bank of America -- Analyst

Okay. Thank you very much.

Operator

Thank you. We'll take our next question from Jason Mollin of Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

Hello, everyone. Cesar, thank you for the detailed presentation. I want to ask about the BAP's guidance for return on average equity this year and return on average equity on a sustainable basis. To keep the ROE outlook of 17.5% to 18.5% for 2019, what's going to offset the changes in guidance, the lower loan growth, NIM and higher cost of risk? And today you also reiterate your sustainable ROE of 19%. BAP reported 18% in the quarter. BCP was an impressive 21.5%, Mibanco at 20%, Pacifico at 13.6%, Prima 33%. That accounts for almost all the earnings. Can you talk about that your confidence or BAP's confidence in this sustainable ROE outlook in particular with Peru's 10-year local bond yields? Now I think it's a 5-year low we reached in July of 4.3%. Maybe in that context just talk a little bit about how BAP management looks at the Group's cost of equity today versus the past. And in that comment on the strategic decision to use excess capital to invest in opportunities outside of Peru. So maybe putting that all together, I think the most important to me is understanding the views on the long-term ROE.

Cesar Rios -- Chief Financial Officer

Okay. I'm trying to address because there are several very relevant questions. If you see our result, we already have significant results that are not contemplated in the NIM nor in the efficiency ratio that are related to gains on sales of securities. We have booked significant amount in the P&L but I will also like to mention that from the close to 2018 to June, we have increased our non-realized gains in around $800 million. So we have had an impact in the balance sheet. We have increased the equity for this factor that temporarily has lowered our return on equity. Down the road, probably, these gains are not going to be substantial. The other important factor that compels how to affirm our sustainable ROE is that these reserve fund that this is starting to be deployed, has an impact of more than 100 basis points in the profitability so far. So taking into consideration, these factors, I think we have confidence that the short-term ROE is achievable and the sustainable ROE also when we deployed and start to get in profitability with these excess funds.

Jason Mollin -- Scotiabank -- Analyst

Maybe talk about the cost of equity. Do you think that BAP's cost of equity is lower today than it was? Do you think long-term rates will below? And therefore -- I mean the premium that BAP is generating over what I would consider -- what I estimate the cost of equity is substantial, if -- and I think over the long run, just a general comment would be -- perhaps returns need to come down if rates stay low for longer. Maybe some comment there.

Cesar Rios -- Chief Financial Officer

I think the cost of equity -- we clearly see 2 different forces. The reference rates are lowering and this will tend to lowering the cost of equity that probably due to the situation -- the environment, the risk premium will increase somehow. As a result, we probably think that the cost of equity is going to remain relatively stable due to the different forces. And regarding the impact of lower interest rates, we have conducted several analyses. Of course, our book are sensible but while we transition for a more retail portfolio, the portfolio is sensitive -- is less sensitive to the reference rates. The wholesale portfolios are very sensitive and translate to interest rate very rapidly. The retail portfolios tend to be much more resilient.

Walter Bayly -- Chief Executive Officer

Jason, hi this is Walter. The points you mentioned are very valid and the question is what is the cost of equity of Credicorp going forward? You don't take short term -- I mean long-term decisions based on short-term cost of equity movements. So the question, which is a very valid one which you're putting on the table is what do we expect to be the long-term cost of equity for Credicorp? Clearly, there is no clear answer for that but I think it is premature based on movements in the markets in the past month or even less than that to take long-term decisions. I don't think the world has changed dramatically from one day to the other because there were short term movements in rates and it is not clear the scenario is going forward. So we will be cautious. We have not changed our long-term view -- our long-term strategy. We continue to work on long-term decisions based on the cost of equity that we have always determined there on 11%, 10% -- around 11%. And until we see more permanent changes in the macro scenario both domestic and international which at this stage, again, I am not sure we have enough perspective to deciding that they are long-term changes we will not change. We do not have at this stage any indication that our sustainable return on equity, both of the short or long term are not reachable or obtainable and we continue to work under those premises. I don't know if we answered your questions?

Jason Mollin -- Scotiabank -- Analyst

Yes, that's very helpful. Thank you.

Cesar Rios -- Chief Financial Officer

You're welcome.

Thank you. We'll take our next question from Andres Soto of Santander.

Andres Soto -- Santander -- Analyst

Good morning and thank you for the presentation. My question is related to capital deployment. You mentioned before that you are setting aside $500 million for future acquisitions. In the past, you mentioned that microfinance in Colombia was a key target. We've seen the acquisition of Bancompartir and this is -- from that perspective this is a small acquisition. And so not clear to me going forward, what is going to be the focus in terms of M&A? If it's going to continue consolidated in the microfinance industry in Colombia, entering through the microfinance space in our countries or additional investments in the Fintech space?

Walter Bayly -- Chief Executive Officer

Sure. Again, sorry, this is Walter Bayly. I'll tackle your question. I think we have been extremely consistent in explaining to the market that; one, inorganic growth is a complement to organic growth, not the driver of growth at Credicorp; number two, that it is the best practices in the world to have a continued presence in exercising the M&A muscle of inorganic growth to do a series of complementary acquisitions. We have had a set up a rigorous process through which we analyze and determine where we want to be. We have made some very important decisions where we want to play and what we want to play. That's point number 1. Point number 2, the fund that -- reserve fund that we have determined which currently is around $500 million is not exclusively for the use of M&A. It is a reserved fund, which is there for a rainy day and potentially for inorganic acquisitions. It is not exclusively dedicated.

So if we decided not to pursue any inorganic growth that fund would not be zero. Third, yes, we think that microfinance in Colombia is a good alternative for us for several reasons; one, we believe that we have a domestic model which can be exported; second, as Cesar mentioned in his presentation, we think that the macro conditions and regulatory conditions are good for the development of microfinance in Colombia and furthermore, we see a fragmented market. We have been there for almost 3 years with the operations that we started from zero called Encumbra where we dedicated our time to understand the market and how do we need to adjust our current models to the Colombian market. After 3 years of being there, we felt it was right for us to take the next step, which we did and we acquired a more relevant position.

It will take us a year or year and a half or two before we can take another step because we need to incorporate what we have done, merge with our existing operation over there and do the work that we need to do internally. So this is not a 100-meter range. This is more a marathon. So we do not expect to do anything further in microfinance in Colombia for the brand rated where you mentioned. Again, we are going to be very disciplined in where we go, what we do. Number 2, the $500 million are not exclusively dedicated to inorganic growth; and number 3, we will take some time to digest and incorporate. We have not even paid for it yet to incorporate what we have just acquired. I don't know if I answered your questions?

Andres Soto -- Santander -- Analyst

That's very clear, Walter. And following up on the Bancompartir acquisition the microfinance space in Colombia is basically dominated by NGOs so they are not very focused on profitability. Bancompartir itself delivered 7% ROE. Not sure what is your target there? How much you believe you can improve this ROE? And a more specific question on the funding structure. I see that 25% of Bancompartir deposits are from the [indecipherable]. So they're selling shareholders. Is this money going to remain there? If not, what is going to be the funding for this company?

Walter Bayly -- Chief Executive Officer

Okay. The current status of the microfinance industry in Colombia is not similar to what we found in Peru several years back, where the market was basically in the hands of NGOs. Which to -- even though they do not have a for-profit driven, they are there to generate and be self-sustaining. So there is a bit of a lack of understanding of what non-for-profits drive them. We have been in the market and we think that it is compatible to be a full-profit organization but very focused on driving and improving the quality and the spiral of growth of those customers. So we see zero conflict and us having a return on equity-driven objective competing with NGOs. What return on equity do we expect? Obviously, above the cost of equity for Credicorp for which we had a couple of conversations before that but there are periods of time in which we need to adjust the model, etcetera. We think that this transaction though small will be accretive for Credicorp shareholders. And about the funding, it is a relatively small operation. They are self-funded and we are there of course if more support is required. But if anything, the capital strength and the perception of market strength of Bancompartir has dramatically increased when you have a relevant shareholder like Credicorp behind it. So we foresee no difficulties in achieving and obtaining the required funding going forward. That's a similar situation to what we found when we acquired [indecipherable].

Andres Soto -- Santander -- Analyst

Great. Thank you for your response.

Walter Bayly -- Chief Executive Officer

You're welcome.

Operator

Thank you. We'll take our next question from Alonso Garcia of Credit Suisse.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you. Good morning, everyone. I just wanted to ask on Mibanco. The ROE year-to-date is considerably down versus last year. I mean, I understand you had some asset quality issues last year that might be affecting this year and that you are growing your base of employees. My question is when these operations and profitability should subside? And what would be a reasonable, sustainable ROE for Mibanco once this is left behind? And also on Mibanco if you could elaborate on the competitive environment in microfinance in Peru and the level of indebtedness of clients in that segment, it would be appreciated. Thank you.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

This is Gianfranco. Regarding your first question, there are like 3 forces in the microfinance industry and within the Mibanco today. On the macro side, that competition is harsher today than it was years before, basically because the whole business is not growing as fast as before. That has led to a squeeze in margins. So that's 1 force. The other force is that the specific for Mibanco is that as Cesar mentioned before we have hired close to a 1,000 people over the last 12 months. The idea here is that we already achieved the productivity that -- we do foresee is that the right productivity in terms of balancing of commercial productivity and collection productivity for each RM. You have to bear in mind that at Mibanco our RMs have this dual role of commercial partner and the collection part over. So with the current model, we believe that we have already reached the productivity -- the balance productivity that can be achieved and obviously we're working in Mibanco in how to deploy new digital tools or digital mechanisms in order to further improve that productivity. And third, having said that, even though the cost to income at Mibanco has deteriorated this semester. If you compare the level of cost to income that Mibanco has compared to the main competitors in the microfinance industry, we are playing anything between 500 to 1,000 basis points lower. So we do believe that we have a competitive advantage there. The new RM we've hired over the last year. Normally, a new RM gets or achieves the right productivity level after 9 months. So the new vintages of -- maybe it is not the correct word but the new vintages of RM will start getting the benefits, I would say by the first quarter of next year. I'm sorry. And that will lead this -- should lead us to a similar ROEs like the ones we had before a couple of years ago at Mibanco.

Walter Bayly -- Chief Executive Officer

Yes, only adding to that, the increasing has been significantly in the last -- this year has been 1,200 people and we are paying the salaries of these people and the productivity is going to be full flow next year.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you. Just one final question, your working capital you mentioned -- I mean you have discussed the M&A front. However, despite these semi-activity that you have for the past months you continue to accumulate capital at a nice pace. You have now a CET1 of 18.8%. So my question is if based on this level of capital an extraordinary dividend is or could be potentially on discussion from here to year-end to maintain capital at optimal levels?

Walter Bayly -- Chief Executive Officer

Hi, this is Walter, as you potential -- as you mentioned, yes, it is potentially something we might do. We have not made a decision and obviously, has to be taken through the appropriate approval levels.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you very much. Understood.

Operator

Thank you. We'll take our next question from Gabriel Nobrega of Citibank.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

Hi, everyone, and thank you for the opportunity to ask questions. I actually have a question on credit quality. Looking at your provisions, we note that they increased significantly more than 40% year-over-year. However, your NPL ratios were relatively flat on a quarterly basis. While I understand that part of this could be due to the fact that you increased your write off a lot. Could you just share with us what you're seeing in terms of risk in your portfolio and is there are any segments that is wearing you more? And if also this is one of the main reasons why you were increasing your cost of risk guidance? Thank you.

Reynaldo Llosa -- Chief Risk Officer

Yes, this is Reynaldo. As you were mentioning provisions have grown quite a bit in this specific quarter as compared to the first part of this year. Having said that, we don't see any dramatic changes in the quality of our portfolio. We have seen a specific deterioration in some specific portfolios, specifically credit cards and some part of the SME segment and as such, this reflects -- this is reflected in our provision estimates. Having said that, our provision level today is within our risk appetite limits. So I mean what we are doing is basically taking the adequate measures in terms of underwriting portfolio monitoring and collections to change that potential shift in the quality of our portfolio. In terms of wholesale it's quite stable. We haven't seen any big cases in this specific quarter.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

All right. That's very clear. Thank you.

Operator

Thank you. We'll take our next question from Carlos Gomez of HSBC. Hello, Carlos, your line is live.

Carlos Gomez -- HSBC -- Analyst

Apology, that was mute. I have two brief questions. The first one is what is your expectation for loan growth in Peru over the medium-term, over the next 3 to 5 years? And second, since you are looking at M&A possibilities and you are at the front, did you look at the transaction in Paraguay? Thank you.

Walter Bayly -- Chief Executive Officer

This is Walter, Carlos. The answer to Paraguay is no loan growth. I think we have some guidance.

Cesar Rios -- Chief Financial Officer

Yes, we usually state that in the medium term. The expected growth is 1.5x nominal GDP. So if we have medium-term real GDP of between 3% and 4% that is I think is achievable and 2% inflation, we are going to have around 8%, 9% growth. And this is the sustainable growth of the market. Probably we can do something a little bit better increasing the penetration in low segments within new digital capabilities.

Carlos Gomez -- HSBC -- Analyst

Okay. And any kind of follow-up on Paraguay. That would not be a market for you or that would not be the type of institution you would like to look at?

Walter Bayly -- Chief Executive Officer

We have -- Carlos this is Walter again. We have never been very close to Paraguay. Our people in Bolivia do believe that there is a potential to do some trade transaction and that is as far as we will go at this stage. We do not know the country, we do not have customers. So we believe that that is not an intelligent way to go in a country which is just go and buy something. So if anything we want to know the country and we will do that through our Bolivian operation where they do have a certain amount of trade relations and maybe, several -- underline several many years down the road. We might do something but at this stage, it is clearly not on the table.

Carlos Gomez -- HSBC -- Analyst

Thank you very much. Pretty clear.

Walter Bayly -- Chief Executive Officer

You're welcome.

Operator

Thank you. We will take our next question from Yuri Fernandes of JP Morgan.

Yuri Fernandes -- JP Morgan -- Analyst

Thank you, gentlemen. I have a question on fees. It was a bit light this quarter especially like the banking fees was growing around 3% year-over-year and you mentioned in the report that the negative, it comes mostly on the retail fees on credit cards, accounts maintenance those kinds of things. So my question is what is happening there? Like why are you seeing a decrease in consumption of those products? Are you seeing our retailer clients moving to some other bank? Is this something like this? Or is there an explanation for the decrease on the fees on those products? Thank you.

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

Yes, two issues. One is that macro environment doesn't help case. There is a very high correlation in terms of -- you have to remember, we have a lot of -- we are a very transactional bank so a good bunch of our fees come from the transactional business. That's one issue. And the other issue is that clients and Cesar mentioned it, clients are migrating to digital channels, interacting more digitally. Normally those channels where we charge much less on those charges are -- those charge are all in those channels and that's the reason why you're seeing a reduction in fees. Obviously, the cost to interact with those clients is much lower when they interact through digital channels. So these are the two main reasons why the fee income business hasn't grown that much.

Yuri Fernandes -- JP Morgan -- Analyst

Okay. So just a follow-up. There is no decrease in the number of clients. And can you provide a number for the year? I know you have the guidance of efficiency. They're remaining flat for the year but any color on how much banking system grew this year?

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

Not really, but just on your first part of the question. As a matter of fact, due to both digital and the self-service channels we've deployed over the last couple of years, we are seeing on the contrary on what you just asked, we're gaining a number of client. Last year the number of new clients we got into the bank was something that we've never seen before over a million clients.

Yuri Fernandes -- JP Morgan -- Analyst

That's pretty clear. Thank you very much.

Operator

Thank you. We'll take our next question from Sergey Dubin of Harding Loevner.

Sergey Dubin -- Harding Loevner -- Analyst

Yes, hello. Just one question on your NIM trajectory. I understand what you said about BCRP cutting rates by 25 basis points. But at the same time, you have always talked about how your retail NIM is -- as you weigh your portfolio toward more of retail loans, as opposed to corporate, your NIM should expand. So I'm kind of wondering how I should quantify these various impacts. What's the impact from the decline in BCRP reference rate versus the shift to higher NIM loans? And do you see -- how do you see the NIM trajectory over, not just this year, but over 2020 and possibly even 2021? Thanks.

Cesar Rios -- Chief Financial Officer

Okay. Probably two different questions. If we make on various static sensitivity analysis, each 10 basis points of reduction in interest rates impacts the NIM in around PEN20 million. This is assuming an instantaneous impact. But the most important forces that are already in play are the change in currency and the mix of the portfolio. So we think that we can counterbalance the negative effects of lower interest rates with the change in portfolio and the change in currency composition.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. Can you elaborate on that a little bit? What does it mean change in currency and change in portfolio? Are you referring to -- the change in portfolio, you're referring to segments like retail versus corporate?

Cesar Rios -- Chief Financial Officer

Yes. Probably going step by step. In soles we usually have higher margins, that's in dollars and the long-term trend of our portfolio has been a change from U.S. Dollars to soles, and it has been drilling for the second factor that I am going to mention that is in the change in the composition of the loan portfolio from a more corporate portfolio to a more retail portfolio. The retail portfolio usually have not only a structural higher interest rates but are more resilient. Are less sensitive to short term movements in the interest rates. When you have an adjustment or 25 basis points in the corporate portfolio, the next disbursement is going to have a reference that is 25 basis points lower. For credit card is much more stable as is more driven in function of the risk of the client, the segment, the value offering. So in this movement from wholesale to retail, I think we can improve the risk-adjusted NIM over time.

Sergey Dubin -- Harding Loevner -- Analyst

Well, exactly. So, here is my question I guess. As your loan book, especially in the corporate side where price is downward from tomorrow or whatever basically, is because it's floating-rate loans. So your base is going to reset so the end of the year, most of your corporate loans, if not all of them will be reprised and then retail will probably take some time to reprise depending if their floating or fixed or whatever but starting from January 1, 2020, because as I understand it and you've been talking about before that you're continuing to shift your focus toward retail funding because the corporate spreads are very low. So that's exactly my question. How do you see -- assuming BCRP doesn't do anything on the rates and the rates stay flat, how do you see your NIM evolution for 2020?

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

This is Gianfranco already provided guidance on both NIM and risk-adjusted NIM and as you may see those are slightly lower than our previous guidance.

Sergey Dubin -- Harding Loevner -- Analyst

Right. But I'm asking for the next year. I'm not -- I understand the dynamic this year. I'm trying to understand where is that [Cross Talks] I'm just trying to understand the dynamic, the trajectory?

Cesar Rios -- Chief Financial Officer

The dynamics trends are what Cesar mentioned. Since we are shifting our portfolio toward more retail portfolio and we see in retail the portfolio is more skewed on Sols the NIM should be higher. However, the cost of risk is going to be higher too. Therefore, what we expect is that somehow a similar risk-adjusted NIM as we are expecting for the rest of this year.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. Thank you.

Operator

Thank you. At this time there are no additional questions in the queue. I would now like to turn the conference over to Mr. Walter Bayly, Chief Executive Officer for closing remarks.

Walter Bayly -- Chief Executive Officer

Thank you very much for joining us in this conference call. Negative headwinds regarding domestic GDP growth expectations is definitely the most important factor affecting our current and short-term forward-looking results? The obvious impact will be on one hand, the lower than expected loan growth and on the other hand some deterioration of credit quality. We believe neither of the above after the fundamental growth potential for Credicorp but are likely to impact short-term results. Domestic political volatility has been around for quite a while and we believe it's only impact is related to the already mentioned impact on lower GDP growth. With this overall context, Credicorp's quarterly results have been very solid and our indication of what we see going forward. And of the fundamentals of Credicorp namely strong franchises, strong capitalization, solid risk management and continued cost control. And good fundamentals in most of the countries in which we operate, they've continued to offer growth potential.

Our agenda is full. We continue to be focused in improving the products and services we offer our customers in adapting our business models to incorporate shifts in customer preferences and technological advances. In short, we have gone through short term domestic and international volatility before. We believe we are prepared to weather the international and domestic headwinds and we continue focused and pursuing our medium-term objectives to maintain customer preference while generating value for our shareholders. Thank you very much for joining us in this conference call and we look forward to seeing you in 3 months time. Thank you and goodbye.

Operator

[Operator Closing Remarks]

Duration: 72 minutes

Call participants:

Cesar Rios -- Chief Financial Officer

Ernesto Gabilondo -- Bank of America -- Analyst

Gianfranco Ferrari -- Deputy Chief Executive Officer & Head of Universal Banking

Jason Mollin -- Scotiabank -- Analyst

Walter Bayly -- Chief Executive Officer

Andres Soto -- Santander -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Reynaldo Llosa -- Chief Risk Officer

Carlos Gomez -- HSBC -- Analyst

Yuri Fernandes -- JP Morgan -- Analyst

Sergey Dubin -- Harding Loevner -- Analyst

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