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Credicorp Ltd  (NYSE:BAP)
Q4 2019 Earnings Call
Feb. 06, 2020, 9:30 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 Limited Fourth Quarter 2019 Conference Call. We now have our speakers in conference. [Operator Instructions] With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Reynaldo Llosa, Chief Risk Officer; Ms. Francesca Raffo, Transformation Officer; and Mr. Cesar Rios, Chief Financial 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 Briceno -- Chief Financial Officer

Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the fourth quarter of 2019. Before we review the Credicorp's performance, I would like to highlight some important matters regarding the local environment. First, following the dissolution of Congress by President Vizcarra on September 30, 2019, congressional elections took place on January 26, 2020. Closing results point toward a fragmented Congress with 9 political parties. A simple majority required 66 votes, while an absolute majority required 87 votes, which means that parties will have to form a consensus to pass legislation. Members of Congress will assume their votes on March 2020 and their term will end in July 2021. Second, the executive branch has taken measures to bolster public investment. Amount emergency decreased 100 down to stimulate public investment.

The following are not working. The reactivation of paralyzed projects measures to increase execution of prioritized infrastructure projects, a prioritizing public investment regime and losing the fiscal deficit the goal to achieve a 1% deficit of GDP by 2024 instead of 2021. These measures are expected to have an effect on economic activity toward the second half of 2020. Next slide please. Third, economic activity decelerated during the last quarter of 2019. As you can see in Chart 1, our estimates suggest GDP expanded around 1.6% year-over-year in the last quarter of the year. With these results, GDP expanded 2% in 2019, while non-primary GDP grew around 3%. The lackluster result for 2019 is primarily attributable to a decline in the results reported by the primary sectors, particularly fishing and mining. For 2020, GDP is expected to accelerate and advance 3%. However, the recovery will mostly be attributable to a rebound in the primary sectors and to public investments.

As you can see in Chart 2, according to analyst consensus, Peru will remain one of the most dynamic economies in the region in 2020. Lastly, banking sector loans decelerated in 2019. As you can see in Chart 3, banking sector loans grew 6% in 2019, which falls below the expansion registered in 2019 and represents the lowest figure registered since 2017. With total loans, corporate loans reported the highest deceleration, posting growth of 2.9% in 2019 compared to 9.7% in 2018. Consumer loans over accelerated advances 14.8%. Next slide, please. Regarding full year performance, there are important aspects of our lines of business that I would like to mention. In the case of universal banking, in 2019, average daily loan balances at BCP Stand-alone posted a 6.9% growth in a context of ongoing strong pressure on pricing and a decrease in the overall demand for financing in wholesale banking. Loan portfolio growth at BCP was driven by retail banking segments in local currency.

This evolution in the portfolio mix had a positive impact in both NIM and risk-adjusted NIM. In 2019, BCP began to offer consumer loans to new segments through digital channels. BCP is now targeting broader segments of the population and specific needs such as very short-term loans and a small immediate disbursement products. As BCP grows in this regard, the organization has developed the capabilities to maintain adequate levels of risk-adjusted NIM. BCP has significantly increased expenditures and transformation while maintaining a sharp focus on cost management. As a result, its cost-to-income ratio improved 100 basis points. In 2019, BCP Bolivia celebrated its 25th and share in a complicated political environment. Nonetheless, the bank registered good levels of loan growth and engaged in a very disciplined cost management, which had a positive impact on the efficiency ratio. With regard to microfinance.

In 2019, Mibanco experienced downward pressure on margins due to a strong competition. Moreover, having taken these adjustment measures, the bank has focused on targeting lower risk profile segment through the year. These 2 factors combined, led NIM to drop 76 basis points. In addition to focusing on short-term measures such as fine-tuning risk and collection models as well as pricing, Mibanco has embarked on a multi-pronged risk management program in which they are developing additional capabilities with ambitious goals. These efforts have already begun to reap benefits, which is evident in the fact that the Cost of Risk of Mibanco decreased 47 basis points in 2019.

Regarding efficiency, the cost to income ratio of me Banco, deteriorated in 2019. The bank expanded his relationship management of Salesforce to these capabilities to sustain business growth, and his strength is analytical and innovation capabilities. It is important to note that new vanquish migration to hybrid models, liberating the use of data and analytics to enable loans based on motors why gradually relying less on loan officers for loan origination. Finally, in December credit court finalized the acquisition of one compartir in Colombia. It has also been working on preparing the marriages within Congress to consolidate his presence in the country's micro finance sector. With regard to insurance and pension funds, the insurance underwriting results increased on a full year basis, this was primarily due to the positive evolution of the property and casualty business, which posted an increase in its net earnings premium level offsetting growth in net claims.

Additionally, net interest income increased, including investment gains. In the case of the Life business, there was an increase in net premiums and in net claims after Pacifico was the center for disability, with variable ship and burial expenses policies for the private pension fund system. Nonetheless, this product reported higher claims than the other products in the life business. Additionally, operating expenses grew less than operating income, which led Pacifico to increase its contribution to Credicorp. The pension fund business registered an improvement in its results due to an increase in fees through both flows and net balance. The profitability of the business, legal reserves increased in line with more favorable market conditions. Investment banking and wealth management. In 2019, the proprietary portfolios posted better results in comparison, 2018, in a context of favorable market conditions, both the trading books and the available-for-sales portfolio reported higher revenues, which were driven mainly by the evolution at ASB, which realized gains while decreasing the size of its investment portfolio.

During the year, assets under management increased, particularly in Chile and Colombia in local currency, which fueled 6% growth in assets under management in 2019. The asset management business continues to focus on growing its international platform of funds for institutional investors in Latin America and other regions. Corporate Finance registered a decrease in 2019 versus 2018, which was attributable mainly to the performance in Chile. However, total income in this segment recovered considerably in the fourth quarter, mostly driven by activity in Peru. After receiving approval from the regulatory in Colombia, Credicorp completed acquisition of 100% of the capital stock of Ultraserfinco and has begun the process to prepare the merger. Next slide, please. Now I will comment on the highlights of Credicorp's performance in the fourth quarter and full year 2019.

First, at the profitability level, Credicorp reported net income of PEN973 million in the fourth quarter of 2019, which was 11% lower than the third quarter results. This was the result of seasonality. In operating expenses, mainly at BCP Stand-alone which were not offset by growth in risk-adjusted NIM and such, return of average equity dropped to 14.9%. For the full year 2019, Credicorp reported net income of PEN4,265 million, 7.1% higher than the figure posted last year. These results for the full year represented a return on average equity and average assets of 17% and 2.3%, respectively. The full year average daily loan balances grew 6.6%, driven primarily by BCP Stand-alone retail banking portfolio.

The cost of risk increased 22 basis points in 2019 and situated at 1.6%, the increase was reported at retail banking in BCP Stand-alone in line with the shift in the portfolio mix, meaning that Credicorp increased 11 basis points to situate of 5.39% in 2019. The improvement in BCP was partially offset by the deterioration of Mibanco. The risk-adjusted NIM decreased 4 basis points in 2019 impacted by Mibanco results. This was partially offset by growth in BCP Stand-alone's risk-adjusted NIM. In terms of operating efficiency, the full year cost-to-income ratio improved 30 basis points. Improvements were driven by BCP Stand-alone and Pacifico, which contributed with a reduction of 80 basis points and 100 basis points, respectively. This contribution were partially offset by the 70 basis points impact on Mibanco.

Finally, core equity to one ratio of GDP increased by 34 basis points yielded to 12 35%. Next slide, please. In the analysis of the evolution of earnings and profitability, the following is worth noting. As you can see in Chart 1, some additional expenses at the corporate level has led to a deceleration in earnings growth at Credicorp. First, the group has spent more in withholding taxes in 2019 after more provisions were set aside for taxes for dividend distribution for fiscal year 2019. As you know, the dividend per share paid in 2019 was PEN28 compared to PEN14.17 in 2018. It is important to mention that withholding taxes has led impact in 2018 earnings because fewer dividends were upstreamed from subsidiaries seeing additional cash was obtained from the sale of BCP share from Credicorp to Grupo Credito. Second, there was an increase in credit loan business expenses and in other administrative expenses at the holding level.

Regarding ROAE, as you can see in Chart 2, the ROAE was positively impacted by the evolutions in universal banking, insurance and pensions and investment banking and wealth management. But this effect was partially offset by the results of microfinance and the impact of corporate expenses. Next slide, please. In a context of market deceleration, at the end of 2019, the loan portfolio share of interest-earning assets situated at saving of 67% in 2018, down from 58% in 2019. Regarding the full year evolution of loan measured in average daily balances. As you can see in Chart 1, total loans grew 6.6% in 2019. Loan growth was mainly driven by retail banking at BCP Stand-alone. As you can see in Chart 2, the mortgage loan book lead expansion within the retail banking portfolio, accounting for 40% of total growth. The majority of the remainder of growth was attributable to the consumer, credit card and SME segment.

It is noteworthy, that the credit card loan growth continues to grow at a faster pace and registered expansion of 19% year-over-year. Loan expansion was mainly driven by local currency and higher margin segments, which led to an increase in the cost of risk. Next slide, please. In terms of funding, as you can see in Chart 1, Credicorp's funding structure grew 4.2% year-over-year, driven mainly by an increase in deposits. In this context, deposits increased their share of total funding, while wholesale funding reduced its share. It is important to note that BCP stand-alone improved its wholesale funding maturity profile, reducing the funding cost cure in both local and foreign currency, due to the liability management strategy that was made in the third quarter of 2019.

The new money issue allow BCPS stand alone to replace during the fourth quarter more expensive than such a corporate bond that despite another federal subordinated debt that was told In Chart 2 for deposit by type, year-over-year growth was situated at 7.1%, which was primarily attributable to time and savings deposits, which grew 8.7% and 7.9%, respectively. The cost of funding increased by 12 basis points which was mainly attributable to currency mix effect, given that growth in local currency funding accounted for 90% of the expansion of the leader in total funding. Next slide, please. As you can see in Chart 1, the IOL ratio increased 4 basis points due to deterioration in the SME business and in the middle market segment. It is important to note that these loans have been adequately provisioned. Additionally, corporate refinance loans decreased as clients from the construction sector have partially paid their debt. In this context, the NPL ratio decreased 9 basis points. In Chart 2, you can see that the cost of risk increased 22 basis points.

This was attributable to an increase in provisions in retail banking and BCP Stand-alone. In the case of consumer segment, provisions were impacted by the exclusion of higher risk segments through digital channels. Nonetheless, the increase in the cost of risk was offset by higher margins. In the credit card segment, provision will also increase after the probability of the 4 goals in a context of systemwide increase in client indebtedness. Finally, medium-term loans in the SME team segment deteriorated as has been the trend in recent quarters due to a misalignment in the risk model for a specific segment. Accordingly, provisions deteriorated more than expected price origination and collection measures has already been taken. But due to the duration of this portfolio, with results of the adjustment will materialize later this year. It is important to mention that increasing provisions and BCP Stand-alone retail portfolio was partially offset by reversal of provision in wholesale loans portfolio.

Additionally, at Mibanco, the efforts made late last year and the first semester of this year, led to an improvement in the quality of origination and in the collections processes. Next slide. In 2019, Creditcorp's NIM increased 11 basis points. This was attributable to the positive evolution of NIM at BCP stand-alone, which rose 5 basis points quarter-over-quarter and 26 basis points in 2019. This was driven mainly by loan growth and by more profitable mix by business sector and policy. Aforementioned was partially offset by the reduction in Mibanco's NIM, which fell 5 basis points quarter-over-quarter and 76 basis points in 2019. Mibanco's portfolio has been affected by the economic contract and by higher competition, which pressures margins downward. Additionally, Mibanco decided to focus on segments with better risk profile, which negatively impacted NIM. Finally, the risk-adjusted NIM at Creditcorp increased 6 basis points quarter-over-quarter and decreased 4 basis points in full year 2019, after the improvement of BCP Stand-alone was offset by deterioration of Mibanco.

Next slide, please. Regarding nonfinancial income. In Chart 1, you can see the evolution of nonfinancial income, which expanded 11.1% in 2019. This was driven mainly by 2 factors: first, by an increase in net gain on securities which was attributable to growing gains in the proprietary investment portfolio at Atlantic Security Bank and BCP Stand-alone. Second, a bit of the expansion was due to an increase in the fee income. Combined, this slide, hence, represents 82% of increase in non-financial income in 2019. In Chart 2, we can see that the fee income register growth of 3.4% in 2019, mainly at BCP Stand-alone. This was primarily attributable to an increase in the gain of drafts and transfer in some payments and collections and secondarily, from an increase in the fee income at Mibanco. Due to a change in the accounting recognition of the fee-related to insurance and loans, which were previously accrued over 12 months but now it is registered when the policy is sold. Next slide, please. In the following chart, you can see the contribution of each subsidiary to the variation in the efficiency ratio.

The BCP Stand-alone improved its operating efficiency with an increase interest income. This was attributable to growth in retail banking loans, which offset increase in administrative general and tax expenses. At Mibanco, the efficiency ratio deteriorated. This was driven by an increase in personnel expenses in the first semester of the year. As mentioned earlier, our newly hired sales force is still on a learning curve and such, productivity should increase this year. Groupo Pacifico posted an improvement in its efficiency ratio. This 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 disabilities with digesting assets policies for the private pension fund system. This represented an improvement of 70 basis points in the efficiency ratio. However, it is important to mention that the increase in net earning premiums was offset by net claims which are not part of the efficiency ratio that impacted net income.

In the investment banking business, the efficiency ratio deteriorated due to an increase in salaries and employee benefits, mainly as Credicorp capital. In the full year analysis of operating efficiency, the cost-to-income ratio decreased 30 basis points. If the effect of increase in net earning premiums due to disability, survivorship and burial expenses policies for the private pension fund system is excluded, the operating efficiency ratio at Credicorp increased 40 basis points. Next slide, please. As mentioned in the past, BCP aspiration is to become the number 1 bank for customer satisfaction in Peru and the most efficient in the region. To achieve these, BCP has been investing in customer experience by differentiating at physical self-service and digital channel levels. BCP currently leads the market for customer satisfaction in all retail and wholesale segments. In 2019, BCP bridged the digital consumer client base by 57% to achieve a total of 3.3 million clients. This represents 41% of consumer banking clients as observed in Chart 1.

The faster growth in digital channels have a subsequent increase in digital uses has reduced the marginal fees normally obtained through traditional channels. It is important to note that digital clients are those that meet any of the following criteria: they consume 50% of the monetary transaction to digital channels, conduct at least 50% of nonmonetary transaction through digital channels or have purchased any product digitally in the last 12 months. In line with the strategy to increase banking penetration, BCP is now able to preapprove credits to 36% of the total economically active population, the aspiration is to be able to do this for 50% of the total economic active population by 2021.

Also, as you can see in Chart 3, in 2019, digital sales measure in units has increased 2.4x with regard to last year's figures In this context, digital sales represent 13% of total sales. The most important product for basically is advance wages where digital sales accounted for 46% of the total sales in 2019 versus 25% in 2018. In the case of the Yape, you can see in Chart 4 that the number of users continue to grow significantly. Additionally, transactions for Yape in 2019 totaled more than 18 million, increasing 5x compared to 2018 figure. Finally, in January 2020, Yape totaled 2 million users and expect to reach the 10 million user mark by 2021. Next slide, please. In terms of the long-term evolution of key financial indicators. In the past 10 years, Credicorp has consistently grown its net income at a compound annual growth rate of 10%. This has been achieved despite the economic slowdown in play since 2014. In 2019, net income as Creditcorp rose 7% despite headwinds sustained from a highly uncertain political context, lower market rates and higher competition.

Moreover, profitability levels have been strong and consistent throughout the year despite variations in economic cycles. As we have recently communicated Credicorp is working to bolster its governance framework. With 2 main objectives to drive long-term stakeholder value and to demonstrate the leadership in corporate governance within our operating region. As such, the board has agreed on the following. First, to simplify the committees structure by migrating from 7 committees to 4. Which are the Risk Committee, the Compensation and Nominations committee, the Corporate Governance Committee and the Audit Committee. We believe the reduction in committees will allow us to populate committees more effectively. Increasing the diversity of these represented by increasing committee member size and independence. Second, regarding the chairperson of committees, after the election of board members at the Annual General Meeting, the Chairman of the Board will no longer churn any standing committees.

So he will continue to be a member of the risk committee and be a member of the newly formed compensation and nominations committee served. The board has designated the Corporate Governance Committee, the task to define the criteria for independent directors to ensure that we need the highest international standards for good practice. For the more we submit a proposal to expand the size of the Board of Directors from 8 to 9 Directors. As for Creditcorp by law this proposal has to be approved at the Annual General Meeting of Shareholders by the assistive board of 2/3 of outstanding shares. Credicorp proposes this expansion in order to enhance the independence and diversity of its Directors as well as to expand their skills and experiences represented from the world. Finally, the board has designated CFO, the task of instituted more stringent policies and procedures at the Holding companies.

Next slide, please. Going to guidance. Credicorp's key indicators for the full year 2020 is based on the following: despite some episodes of political uncertainty and good growth in the primary sector in Peru, 2019, the macroeconomic and political context is expected to slightly improve in 2020. This will have a positive effect on the economics and growth of the banking sector. The following contains Credicorp's guidance for key indicators. Loan growth for 2020 to situate between 8% and 10%. This will be driven mainly by the retail banking segment and BCP Stand-alone and by Mibanco, where efforts will continue to fine-tune the business model. In terms of cost of risk, the figures are expected to range between 1.6% to 1.8% in 2020 as the group focuses on growing in riskier segment. These riskier segments are expected to bring higher margins, which will help reduce the effects of an environment characterized by lower interest rate and higher competition. As such, guidance for NIM will increase to a level between 5.4% and 5.7% and guidance for risk-adjusted NIM remains flat at a level between 4.3% and 4.6%.

Therefore, we continue to implement our transformation programs for BCP, Pacifico and Mibanco. In this context, the efficiency ratio is expected to remain stable in comparison to 2019's period. Higher costs are expected to be offset by better income generation. Regarding capital. BCP will remain its internally limited for a minimum common equity Tier 1 of 11% in the first quarter every year as this quarter is going for, now the dividends have declared. Average return on equity is expected to range between 16% and 18%, 2020. Credicorp has expanded the range for this indicator, while assessing how to optimize the reserve fund that has been accumulated over the past few years, considering potential application. Finally, Credicorp is confident that when the full effect of each transformation initiatives materialize and the capital optimization process is fully implemented the target level of return of average equity of 19% is achievable.

With this comment, I would like to open the Q&A, please.

Questions and Answers:

Operator

[Operator Instructions] Our first question will come from Jorg Friedemann, Citi bank.

Jorg Friedemann -- Citi bank -- Analyst

One point on the guidance, please. And one point that is implied in the guidance, but I know you do not comment. So on the asset quality, we have seen that Cost of Risk as guided for 2020 is in the range of 1.6%, 1.8%. So the floor would be the level bolstered in 2019. And you mentioned that this is due to the origination in riskier segments. However, over the past two years, you have already been focusing strongly in riskier segments. But in 2018, for instance, your Cost of Risk declined. So my question is, what is different now because the activity seems to be picking up and your NPLs are already coming down, so why to keep a higher guidance of Cost of Risk are you willing to build up coverage, which is below historical average? This is the first point. And the second point, just for me to understand what kind of drove the fee income compression or the slowdown in 2019, you grew 3.5%, which is below even the level of credit growth. That was at 6.6%. And what you have for 2020 in terms of expectations for fee income.

Cesar Rios Briceno -- Chief Financial Officer

I will give you additional comments and probably Reynaldo can complement me. In the case of asset quality, we have came down for the last four years from around 2% to 1.6%, while we have been improving several barriers in our risk and management models. Going forward, we have 2 factors to consider when the inclusion of higher risk segments and the momentary effect of the deterioration of the Prima portfolio at BCP. During 2020, we are going to fine-tune the results of this Prima portfolio. And at the same time, we are going to purposely take more risk in new segments that we have been mentioning previously. In relation to fee income, we have stated previously also that the expected is that the fee income is going to grow less rapidly than the margins because as we incaution in new margins, we are going to go for example, in consumer loans, digital loans that tend to have healthier margins, but usually nothing income related. And there is a strong competition in the payment system. So structurally, we are going to expect lower fee income growth down the road.

Reynaldo Llosa Benavides -- Chief Risk Officer

Regarding the coverage of our NPLs, I would like to add that it is around 113%. It's been stable around that number and did pick up a little bit during this year. And I would say that, that happens because, I mean, that's let alone -- basically long factor by real estate polluters so I mean, that doesn't reflect that there's an important recovery value in digital Pacifico loans. So with that level of priority, I would say we are pretty healthy.

Cesar Rios Briceno -- Chief Financial Officer

Okay, thank you.

Jason Mollin -- Scotiabank -- Analyst

Thank you. Our next question will come from Jason Mollin, Scotiabank. Yes, hello. Hi everyone. Good morning. Credicorp showed a quarter-on-quarter and year-on-year increase in noninterest expenses. And in your release, you stated that an important part of the increase is due to consulting and market expenses. Can you help us quantify that to understand that these will be ongoing expenses or not? And in relation to that, looking at your return on equity outlook and the sustainable return on equity outlook. You mentioned that the sustainable ROE is 19% will be once you've optimized, I guess, the capital and the transformation program. If you can talk about, particularly on the capital side, is this more on earnings improvement? Perhaps some efficiency on sustainable ROE? Is it -- or is it more about optimizing capital?

Cesar Rios Briceno -- Chief Financial Officer

Okay. Probably first related expenses, particularly at BCP Stand-alone level, we have a strong seasonality in the fourth quarter. And I wouldn't say that there's any particular effect in advisory fees for this year. What's happening is that, in many cases, you registered the final invoices in the last two months of the year, and this is a seasonal effect. I think it's mainly the reason when you have extraordinary gains that coincide with this period, you offset, but in this case, we have only will say the trend. In the case of return on equity, what we are having now, I will say, are 3 main effects. First, we have the impact of the reserve fund that in general terms costs us north of 100 basis points. If we put these funds to work or make another decision. You -- I will say, automatically increased 100 basis points of return on equity. We are talking about around $600 million at this point. The other factor is the transformation. Now we are in the face of investment -- investing a lot -- spending a lot in the transformation.

And we expect to start gradually gaining more ongoing, tangible, not only operational and financial rewards for these investments, and this will pay off down the road. And third, and most -- less important, the effect of the withholding tax, we have increased significantly the withholding the dividends from 2018 to '19, and we expect to continue paying increasing dividends over time. So for example, from 2018 to 2019, almost 2% of the increase in earnings growth was attributed to marginal more withholding taxes. The money that we shipped upwards from Peru to their new a dividend pay and withholding tax of 5%. If we pay more dividends, we paid more withholding taxes. And the rate of the withholding taxes can increase also. When we start to operate in a more sustainable levels of dividends, the marginal factor of this increase is going to diminish. A change on 14 to 28 is very significant. Down the road, the changes shouldn't be as dramatical as this on a continuous basis. I have a original expectation of higher ROEs.

Jason Mollin -- Scotiabank -- Analyst

Thank you so much

Operator

Our next question will come from Ernesto Gabilondo, Bank of America.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi, good morning, sir. Good morning guys. Thanks for the opportunity. So GDP growth is expected to improve this year by public investment and a rebound in the primary economic sectors. However, we continue to see tough competition, especially in wholesale loans from international players and in the microfinance sector. So how do you see the challenges for your loan growth of 8% to 10%, especially in a year with a divided Congress and almost one year ahead of the presidential elections. And then I will make my next question.

Cesar Rios Briceno -- Chief Financial Officer

Okay. I will say that we are going to face probably 2 different realities there. The retail, the BCP retail portfolio and the Banco portfolio growing at a faster pace not only competing, trying to capture the same specific markets that we have been building, but probably addressing with new products, different markets. So we are not only competing in the same specific field that expanding the potential market now going downward or creating different products. So we are positive about that. The counterpart is, as you rightly mentioned, in the wholesale segment that we expect tougher competition, both in terms of volume and margins. The combined effect produce as an expectation of between 8% or 10% as we have provided in the guidance.

Ernesto Gabilondo -- Bank of America -- Analyst

Perfect. So -- and then my second question is, how do you see the net income growth this year? Are you expecting double-digit growth? Or it should be more in the high single-digit growth? And what will be your assumptions for the dividend payout ratio to achieve the 16%, 18% ROE guidance? And then my last question is on your M&A activity. Do you continue to see opportunities in the region, any sector or country where you are more interested?

Cesar Rios Briceno -- Chief Financial Officer

Okay. Ernesto. It's -- Okay. I think there are really 3 questions. If I can address one, one by one. I think in terms of NIM, our implied growth and NIM are going to give you the answer, combining the loan growth with the expected NIM, give you the answer. And probably it's going to be in the vicinity, that as you already you already mentioned.

Ernesto Gabilondo -- Bank of America -- Analyst

Oh, so you pointed net income growth.

Cesar Rios Briceno -- Chief Financial Officer

The net income, if you combine of this figure, probably we are going to be in the single digits.

Ernesto Gabilondo -- Bank of America -- Analyst

In the single digits? And your payout ratio, you think it could be the same as in 2019? Because I believe you consider a special dividend in '19.

Cesar Rios Briceno -- Chief Financial Officer

In the case of the payout, we are, I would say -- this is kind of a split answer in the sense that we expect to continue paying a higher dividend, but in addition, we are now analyzing or we have not reached a conclusion at this point. How -- what to do with the reserve funds that was set aside mainly for M&A purposes. Based on these decisions, a potential additional special dividend will be declared.

Ernesto Gabilondo -- Bank of America -- Analyst

Perfect. And then my last question on the M&A activity, as you were mentioned, you can use these reserve funds. So any sector or country where you are seeing more interest?

Walter Bayly Llona -- Chief Executive Officer

This is Walter, Ernesto. Regarding M&A, we continue to regularly review opportunities both domestically and in the countries that we have targeted, which we have well commented with all our shareholders. Frankly, we're not finding a lot of potential assets that are interesting for us. So probably in the first half of this year, we will have to review and take a decision on the size of continuity of such reserve fund. This is all work in progress. So I do not want to create expectations, but we are managing this aggressively. Vis-a-vis opportunities in the market and providing value for our shareholders.

Ernesto Gabilondo -- Bank of America -- Analyst

Perfect. Thank you very much sir and Walter

Operator

Thank you. Our next question will come from Alonso Garcia, Credit Suisse.

Alonso Garcia -- Credit Suisse -- Analyst

Morning everyone. Thank you for taking my question. My first question is on the CET1 level...

Cesar Rios Briceno -- Chief Financial Officer

Excuse me, could you speak a little clearly.

Alonso Garcia -- Credit Suisse -- Analyst

Okay, sorry. I will start again. So my question is on capital. I mean, you are targeting a sustainable ROE of 19%. So my question is, what kind of CET1 ratio is embedded in the 19% target? And my second question is -- well, I can ask my second question afterwards.

Cesar Rios Briceno -- Chief Financial Officer

Okay. I would say that in line with this expected ROE can be a payout ratio north of 50%. If you assume that the business grow, let's say, 8%, 10%, and you have an ROE of around 18%, 19%, a very simple mathematics gives you that ROE is going to be a little bit north of 50%.

Alonso Garcia -- Credit Suisse -- Analyst

Okay. But just to clarify, this 19% implied capital structure with a CET1 close to your type -- your internal minimum of 11%. Is that correct?

Cesar Rios Briceno -- Chief Financial Officer

The basic foundation is to have each company appropriately capitalized. That is the foundation and that's the basic assumptions after that requirements fulfilled, we have a extra fund to pay dividends. And at this point, with the analysis that we conducted and the case of BCP, the core equity Tier 1 in the minimum is 11%.

Alonso Garcia -- Credit Suisse -- Analyst

Okay, understood. And my second question is on OpEx. Is it -- I mean, based on your guidance, is it fair to correct to assume that you are anticipating an acceleration in expense growth from 6.7% growth in 2019 to high-single digits this year? And what is the time frame for your investment planning, is it like to two years of intense investment four years? When should we expect OpEx will to normalize after this 11%?

Cesar Rios Briceno -- Chief Financial Officer

While we are targeting in average is maintaining the efficiency ratio with an internal transformation of some variables. What we expect is, as a product as a transformation, we became much more efficient down the road, but it spends more on technology and new digital capabilities and less on the traditional. expenses. Actually embedded than our numbers and a significant shift spending more in it in new capabilities and less in traditional expenses. In the short term, the effect is going to be neutralized. And down the road, we -- what we expect is better efficiency but continuous investing aggressively in new capabilities. It's not going to be a three year plan that is going to end. We expect that this is a time framework to reap the benefits, but we are continuing to transform the capabilities to be a more digital, more data drilling institution.

Andrea Soto -- Santander -- Analyst

Our next question will come from Andrea Soto, Santander. Good morning thank you for the presentation. My question is related to Bolivia. This operation represents almost 7% of the loan book. And you highlighted some macro and political uncertainty in this country. And when I look at your coverage, I see that only 3% of your loan book in Bolivia is currently covered. So my question, in relation to the cost of risk guidance is, what level of coverage are you assuming in this guidance? And to what extent you see some downside risk in your guidance based on your Bolivia exposure?

Cesar Rios Briceno -- Chief Financial Officer

Probably finance is going to complement me. But as a general rule, all our as loans are properly covered. In the case of Bolivia is no exception, what you have in Bolivia is a structurally lower past due loans that implies and -- in relative to Peru, smaller relative amounts, but the loans have property coverage.

Reynaldo Llosa Benavides -- Chief Risk Officer

And just to add to what Cesar has mentioned on that. But yes, we're quite concerned about the potential impact regarding the portfolio. However, we have been positively surprising the evolution of the portfolio. We have given significant impact in other quality in Bolivia. We have to take a closer look at what happens in that country in the following months in terms of the elections. But -- so today we'll have any major concern in terms of the potential impact we have in our guidance of provisions to [indecipherable]

Walter Bayly Llona -- Chief Executive Officer

Andres, this is Walter. Yes, we are concerned with Bolivia. Even furthermore than the political volatility research is needed in the country to do some financial adjustments that will undoubtedly have an impact on the macroeconomic stability of a country. We are hoping that those adjustments are gradual and start soon, otherwise, a more volatile situation could come down the road. It is not material in the portfolio of Credicorp. And our portfolio impact in Bolivia is more than adequately capitalized. And we feel that we have taken the appropriate measures to prepare us for such, hopefully, unlikely, scenario of more disruptive macroeconomic commissions after year -- during this year.

Andrea Soto -- Santander -- Analyst

Perfect. Thank you guys for doing.

Carlos Gomez -- UBS -- Analyst

Thank you very much, [Operator Instructions] Our next question will come from Carlos Gomez, UBS. Hi, this is Carlos Gomez from HSBC. Two questions. One, on the corporate change, you want to increase the size of your board. Could you comment a little bit as to why specifically from 8 to 9, what is the rationale? And could you have in mind for the position. Second, a technical question on the Page four of your press release, you showed the profitability by company. There is a growing item, which is Others, which is now minus PEN175 million. Could you explain exactly what this is in that particular line?

Cesar Rios Briceno -- Chief Financial Officer

[Foreign Speech]With regard to the size of the board, that's the outcome of an assessment that has been informed and has to do with the diversity and the -- a more balanced distribution of board members in the committee. And on top of that, the need to increase the number of independent Directors. So the conclusion was basically to have one more board member and that will help a lot in this governance improvement process.

Carlos Gomez -- UBS -- Analyst

Okay. The second question.

Cesar Rios Briceno -- Chief Financial Officer

Yes, probably, the last question is in relation to the already mentioned withholding taxes. The company builder unit, [indecipherable] and some corporate expenses, but the main factors withholding taxes. As I mentioned before, when you increase dividends, you need to reserve more money for withholding taxes delivering from one year to another one increased in fold.

Carlos Gomez -- UBS -- Analyst

Sorry, as a follow-up there. Is there anything that you can do about digital investments and I mean, [indecipherable] in the company, save you some money, you know?

Walter Bayly Llona -- Chief Executive Officer

Carlos, this is Walter. Yes, we are continuously evaluating and obviously, because of the increase of the amount of this withholding impact. We are bringing the issue back to the table. It is extremely complicated because it involves selling assets and moving assets from one country to the other, which have huge consequences from a tax perspective. So yes, we're looking at it. But so far, we have not been able to find an alternative, which seems to be a better structure than what we are today. Because our cost of moving from one place to the other. I don't know if I explained myself.

Carlos Gomez -- UBS -- Analyst

No. You explained yourself. And obviously, there is no simple answer. No simple answer to sort to make a leap, effectively, higher tax rate going forward.

Walter Bayly Llona -- Chief Executive Officer

That is unfortunately true.

Carlos Gomez -- UBS -- Analyst

Okay. All right. Thank you very much.

Operator

Thank you. Our next question will come from Yuri Fernandes, JP Morgan.

Yuri Fernandes -- JP Morgan -- Analyst

Thank you, gentlemen. I had a question regarding your guidance, particularly your risk-adjusted NIM. It points to a 0 to 30 bps increase, that seamless your margins, but your costs should be from 0 to 20 bps higher. So my point is, like what's the confidence level that the risk-adjusted will increase? Because about this mix shift toward consumer and local currency loans. This trend is not totally new, like we saw this in the last one, two years. So my point is like how -- like how should we think about the risk-adjusted NIM for 2020 more in the lower end of the expansion? Or are you confident that we can see a surprise here?

Cesar Rios Briceno -- Chief Financial Officer

We have -- let's say, we have different ranges in the ranges are the expected outcomes. Something that we need to consider is that the basic of calculation is not identical. Cost of Risk is based on the loan book and the NIM is in the entire portfolio, including investments. So it's not absolutely linear.

Walter Bayly Llona -- Chief Executive Officer

I mean the underwriting profits in the NIM segments of the market is taking us every year, a larger share of our total portfolio. So we expect -- I mean you have the Cost of Risk increased a little bit, but our a net interest margin adjusted to risk increased more than what the impact -- the negative impact on the adjusted risk.

Yuri Fernandes -- JP Morgan -- Analyst

No. I mean, just like if you have like your NIM includes extended bits and your Cost of Risk to move in the same direction. I mean like the risk adjustment can be flattish, right? So that was my concern when you try to put together the NIM with the Cost of Risk.

Walter Bayly Llona -- Chief Executive Officer

Okay. I think we are usually quite attractive on our projections. And we see -- we are very opinionated the level of growth in these new segments, so that's why we projected a higher Cost of Risk for the year.

Yuri Fernandes -- JP Morgan -- Analyst

No, guys, thank you very much.

Operator

Thank you. Next question will come from Arvin Bahl, TRG Management.

Arvin Bahl -- TRG Management -- Analyst

Hi, thank you for taking my question I had a question on cost, it seems you're guiding for your cost income ratio, et cetera, to be flat this -- in 2020 versus 2019. I know you've had an aspiration to dramatically improve your efficiency ratio. So is that going to be harder to do now? And you've spoken about the cost for the technology transformation program. So I was wondering what those costs were? And then finally, I had a question on loan growth. You guide to a big pickup in loan growth. Have you actually started to see this in early 2020? Or is this more of a hope and aspiration that once the political environment improves spending starts coming through, you'll eventually see or has this been something you've already started seeing in 2020 as evidence of this?

Cesar Rios Briceno -- Chief Financial Officer

Okay. Our guidance is related to efficiency in our costs. So our implied numerator and a denominator are both growing. In terms of the impact of the transformation, as already mentioned, is a medium-term effort, and we are starting to see the benefits. And in the particular case of BCP, that explains almost 70% of the results of the group. During 2018, despite a growing investment in the transformation that almost doubled during the year, we have improved a cost-to-income ratio of 100 basis points.

Arvin Bahl -- TRG Management -- Analyst

How much are the investments you're making in this transformation, roughly?

Cesar Rios Briceno -- Chief Financial Officer

Excuse me?

Arvin Bahl -- TRG Management -- Analyst

How much is the quantity of investment in the transformation?

Cesar Rios Briceno -- Chief Financial Officer

BCP level, we have a [indecipherable] expenses, there are some investments. In terms of expenses, we are in the vicinity of PEN200 million -- PEN200 million solid, but the investment is significantly higher than that figure, and we are going to see to depreciation and amortization, the impact of that down the road and the benefits also.

Arvin Bahl -- TRG Management -- Analyst

Okay. Yes. And then on loan growth, I was just wondering, have you actually started to see an improvement in earnings growth in 2020, or is this something that you're hoping will come through as the year progresses? And sorry, I just had one more thing I was curious about, you said something about PEN600 million in reserve funds that you could get more interest on, and you talked about that, it's something -- you could deploy these funds to improve your sustainable ROE in the long term, but I was a bit confused about what you meant by that.

Cesar Rios Briceno -- Chief Financial Officer

Okay. In the case of loans, our expectation is, as I mentioned to you, between 8%, 10%. This is a little bit higher than the 6.6% average daily balances that we grew during this year. We expect some pick up in specific segments, but especially, we have significant expectations to grow market share in special niches through new products, new channels, as we have stated before. So it's a combination of both.

Walter Bayly Llona -- Chief Executive Officer

Regarding the results from -- the intent of that fund was mainly to be able to have the liquidity available to capture opportunities that we've seen totally found in the market and in the businesses and we have strategically focused to report. In order to have that liquidity, obviously, we did it in very low yielding, very liquid assets. Thus, the reserve obtained for that excess capital has obviously been very low. If we were to assume that, that totally disappears, which is not something that is quite on the table right now. This would mean a distribution of funds that will increase the return on equity by about 100 basis points. Those areas that was really the prior question. Going forward, as I mentioned in the prior question as well, we are starting to believe that there are no significant opportunities that seem to be available.

And during the first half of this year, we will reassess the size and whether or not we want to keep that size fund at this stage. We have not made the decision. My only comment is that we will reassess this during the first half of the year and take the decision that obviously generates more value to shareholders. If we are going to keep a cash fund for that size. It doesn't make any sense. If we can redeploy, to improve the profitability and wider generation for our shareholders, it does make sense. Those were the comments, I don't know if I explained myself.

Arvin Bahl -- TRG Management -- Analyst

Now Perfect. Thank you.

Operator

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

Walter Bayly Llona -- Chief Executive Officer

Thank you very much. A quick comment for each of our 4 business lines regarding the last year's performance. At BCP, we have seen strong results, growth on loans driven mainly by the retail banking, thanks to improvement in the value proposition and the bank targeting broader segments of the population, while implementing new risk, data and analytics model. Very intense competition on the wholesale side. Fortunately, the margins are not on that side of the business. In the -- micro finance was a challenging year for Mibanco due to a combination of increased competition and portfolio reservation, which led to pressured margins. As a result, Mibanco has strengthened its risk model and is in process of developing a hybrid business model, leveraging data and analytics to be able to originate better and distribute more efficiently, our loans. There's an ongoing process, and I will talk a little bit more about it.

On Pacifico, we have improved profitability as a group in a three month and Pacifico won the tender for 2 tranches of the contract to cover the cost of disability, survival and burial for the ASPs. And Prima had a very strong performance, driven by cost control and portfolio gains. Creditcorp capital and boost in profitability of investment banking and asset management business due to favorable financial market conditions, which allowed the group to achieve gains in proprietary portfolio. Going forward, BCP will continue its strategy focused on customer experience and efficiency in all segments. Investments in digital transformation are already helping to increase bank penetration. We are starting to see the results. There are still not absolutely meaningful within the site, but we think that this is the way to go, and we will pursue this path going forward. In micro finance, as I mentioned, we are -- the efforts are focused on consolidating this new hybrid model and in creative business alliances to be able to elevate growth with the help of partners such as Yape and Uber to scale the business without increased cost.

And additionally, this year, we have the efforts to consolidate the investment we have made in Colombia and merge it with our operation there and be able to create an avenue of growth -- a faster growth for Credicorp in that country. In the insurance and pension business, efforts will continue focused on strengthening the bank insurance strategy to develop the group's synergies. In investment and wealth management business, we will focus on strengthening regional offerings in order to continue gaining market share in Colombia and Chile. Additionally, we are consolidating our back office and IT archistructure to have a more scalable business and a more solid platform and focusing on the recently acquired business in Colombia.

Just a quick word, we have presented preliminary measures to bolster our governance framework with the aim to be aligned with the highest international standards. And finally, we are convinced that our strategy, focus on long-term transformation is the path we need to take in order to outpace market growth while sustaining short-term profitability. Again, with this, we conclude our call. And as usual, I really want to thank all of you for the continued interest in our company. Thank you very much, and we look forward to having a continuous dialogue with all of you. Goodbye. Thank you.

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

Cesar Rios Briceno -- Chief Financial Officer

Jorg Friedemann -- Citi bank -- Analyst

Reynaldo Llosa Benavides -- Chief Risk Officer

Jason Mollin -- Scotiabank -- Analyst

Ernesto Gabilondo -- Bank of America -- Analyst

Walter Bayly Llona -- Chief Executive Officer

Alonso Garcia -- Credit Suisse -- Analyst

Andrea Soto -- Santander -- Analyst

Carlos Gomez -- UBS -- Analyst

Yuri Fernandes -- JP Morgan -- Analyst

Arvin Bahl -- TRG Management -- Analyst

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