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Credicorp Ltd (NYSE:BAP)
Q1 2020 Earnings Call
May 8, 2020, 1:30 p.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. First Quarter 2020 Conference Call. We now have all of our speakers in conference. [Operator Instructions] With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Reynaldo Llosa, Chief Risk 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 -- Chief Financial Officer

Thank you. Good morning and welcome to Credicorp's conference call on our earnings results for the first quarter of 2020. Thank you for attending today. I hope you and your families are healthy and fairing well in the challenging environment generated by COVID-19. We are experiencing an unprecedented phenomenon. Despite these trying times, we could not be more thankful for our interest with the drive engagement and collaboration of our teams.

Employees at all for our operation units have rolled up their sleeves to respond as needed to the pandemic. And as an organization, we are protecting and supporting our employees, clients and [Indecipherable]. Our top priority has been our employees. We are focused on warranting that our thousands of employees remain healthy and continue to work in optimum conditions. Our more than 19,000 front line employees have received protective equipment and are working in secure environments.

Additionally, incentives and performance indicators for employees branches currently prioritize client servings over sales. 95% of our employees at the office level are working remotely from home. Finally, we have implemented programs for employees to ensure the physical, emotional and financial stability of the Credicorp community.

As a customer-centric organization, we are aware that many of our clients are experiencing significant duress. More than 1.5 million of them are benefiting from initiatives to alleviate financial pressure across Peru, Colombia and Bolivia. Currently, we are offering a number of measures through our operating units, including debt and insurance premium programs, cost free cash management services, COVID-19 health and life insurance coverage, and partial reimbursements of premiums on car insurance.

Moreover, clients are taking advantage of our digital channels. We have managed the continuity of each of our financial services and health businesses, which are basic services that shore up the economies where we operate. We have taken preventing physical and cyber security measures and focus on capacity management to ensure operating continuity across channels. But at the same time, we are actively managing liquidity and solvency to maintain our solid financial condition in each LOB.

Finally, have in place several crisis in our 130 years history, we have demonstrated and will continue to show clear commitment to supporting our communities. During this crisis, 160,000 empowers families in Peru will benefit from BCP's donation drive Yo me sumo, which collected PEN126 million, PEN100 million from BCP, PEN10 million from Mibanco and PEN16 million from other companies and thousands of individuals. Moreover, front line national emergency workers, including health professionals, police and the Peruvian Armed Forces now have life insurance policies, thanks to a donation of PEN5 million from Pacifico.

Finally, we have been working in close coordination with the health and finance ministers, giving support during crisis response to design measures for subsequent execution through our health and banking networks. This includes providing health services to public sector patients through our health network and distributing government cash payments to our banking network, all of which benefit thousands of families.

Next slide please. In this challenging context, our clients have been able to rely on the strong relationships we have built and have been benefiting from our digital networks. During the lockdown period, volumes both in loans and deposits have material increase. In the second half of March, corporate and large enterprises are defined by the superintendency increase the short-term funding needs in the segment.

BCP's loan growth, which was situated at 15.7% outpaced the expansion of 12.3% posted by multiple banking. This dynamic boosted BCP's total loan portfolio growth to 11.9% compared to 9.6% of the multiple banking level. Part of the fresh liquidity obtained by the aforementioned segment has been maintained at the bank as demand deposits and from February to April, our wholesale deposits increased by almost PEN3.6 billion, 80% of these funds were hug in demand deposits.

Our retail client deposits increased almost PEN3.6 billion, will grow [Phonetic] to approximately PEN4 billion in savings deposits was offset by a decrease in other types of deposits. This context has also been an opportunity for our clients to benefit from our digital channels. We have to welcome 580,000 new users, so in January to April this year. And as of April, the monthly amount transacted through these app have grown fourfold in one year. Moreover, our BCP digital channel have reduced their material gain in their share of our distribution network, due to an uptick induced during lockdown.

As of the end of April, our digital sales of individual saving accounts increased from representing 2% of this product sales to reflecting 27% of the same in just one year. Additionally, the digital channels share of our retail transaction was situated at 70% -- 73% versus 48% last year. Finally, the digital channels share of collections and serving payments in wholesale banking was situated at 60% this year compared to 32% last year.

Next slide, please. Peru's government has to steep it up to face this crisis. President Vizcarra took quick and stringent measures to control COVID-19 contagion through a countrywide lockdown. The lockdown duration is data dependent. As of today, it is expected to last 56 days until May 10. To it's credit, Peru received its [Phonetic] some of the strongest macroeconomic fundamentals of all emerging markets and has maintained a stable credit rating outlook over the past few years.

The government has institute an ample package of measures to mitigate and stimulate economy for the equivalent of approximately 16% of GDP. The ability to implement measures of this magnitude is little bit correlated with a prudent macroeconomic policies that has been carried out for decades. The economic measures taken have primary focus on containing immediate economic damage due to loss of income at the individual and company levels.

We believe that these measures are moving in the right direction as this provide -- as they provide support for companies and households that have suffered extreme duress. In particular, the government has target the business sector through two government-backed programs Reactiva Peru, a liquidity program to provide PEN30 billion in funding to a small- and medium-sized companies and the Enterprise Support Fund known as FAE by its Spanish initials to provide up to PEN4 billion in financing for a small and micro firms. We will discuss this briefly in the next slide.

An additional measure of note is allowed at purchase access to private savings and allow patient affiliates to withdraw up to 25% of the pension funds up to a total of PEN12,900 by deducting the withdrawal of PEN2,000 previously approved by the government. Finally, the central bank has lowered it's reference rate 200 basis points to 0.25%, a historic minimum and has provided liquidity for six and 12 months to rep operations for a total of almost PEN17 billion since the beginning of March. Central Bank has also implemented measures to mitigate exchange rate volatility. Additionally, this superintendency has helped to raise credit extensions for up to six months with no effect on client credit ratings.

Next is slide please. [Technical Issues] from COVID-19 contagion, will lead the world to experience the greatest economic hardship since the Great Depression. In Peru, economic indicators such as electricity demand and public investment registered significant declines at the end of March and April. Last Sunday, the government declared that it will enact a stage-based economic reopening in four phases from May to August. 27 economic activities in poor economic sectors will restart their operations in May, as part of the first stage.

Nonetheless, there is still considerable uncertainty regarding the magnitude of GDP contraction that will be seen in 2020. Our estimates suggest that 2020 GDP may contract between 7% and 13% depending on the degree of economic recovery registered in the second half of 2020. It is important to note that the government's strict economic response will help stem effects on the financial system down the line. Without these measures, the negative impact will surely be greater.

In particular, Reactiva Peru the government-backed liquidity program for PEN30 billion represents around 4% of GDP, and will help mainly a small- and medium-sized companies obtain fresh working capital and continue to operate. The coverage level for these loans varies between 80% to 98% of loans between PEN30,000 and PEN10 million. Loans have terms of up to 36 months with a grace period of up to 12 months.

In parallel, FAE program enables banks and microfinance entities to provide a small and micro businesses loans for up to PEN4 billion, with coverage levels between 90% and 98%. This amount represents about 9% of the loan portfolio for SMEs system wide. Given that the environment is constantly shifting, the effect on loans in the financial system has yet to be determined. Our estimate suggests total loans in Peru may experience anywhere from 4% contraction to a 2% expansion in a contest mark by government loan support as discussed earlier.

Next slide please. Now let me explain where we stand financially speaking to face this crisis. As a conservative and disciplined in financial group, we operate through exigent management standards. This has provided a solid platform to weather the storm of COVID-19. In terms of our liquidity, the regulator monitors the 30-day liquidity coverage ratio and as shown on the graph BCP has maintained levels well above the regulatory minimum. However, for management decisions, we use a more stringent indicator relying on liquidity coverage ratio of 15, 30 and 60 days with the standard aligned with Basel III. In this context, we have maintained our high-quality liquid assets at adequate levels.

Regarding capital each of our subsidiaries maintain adequate capital level, which ensures that solvency. As of March 2020, the core equity Tier 1 of BCP was situated at 11.9%; in the case of Mibanco the core equity Tier 1 as of March 2020 is 14.5%.

Next slide please. We are managing exposure at each asset class and client segment. Current volatility has impacted the financial assets in our investment portfolio. It is important to note that 90% of our investment portfolio is comprised of fixed income investments, which primarily consist of investment-grade sovereign bonds. Moreover, only 11% is considered part of the trading portfolio. As such most value changes do not impact results that directly affect equity.

Regarding our loan portfolio, we would like to share some of our metrics or exposure by segment and economic sector. It is important to note that we have developed and widely disseminated a complete set of short-term liquidity facilities to support our clients, as the COVID-19 scenario evolves. This dynamic and consisting approach will mitigate credit risk.

First, 47.6% of personal loans at BCP is stand-alone and 17% of its SME-Pyme portfolio were paid on time in April. In the second half of March, we offer schemes which consists of debt reprogramming options that change interest, that charge in the result. Later in April, we developed and offered debt freezing facilities, which consists of true frozen earnings financed at zero interest rate. It is important to highlight that as of April, we have already reprogrammed the following loan portfolio shares; 38% of the Mibanco portfolio, 71% of BCP SME-Pyme portfolio and 50% of BCP individuals portfolio.

Finally, as a complementary measure for the business clients, we are participating at Reactiva Peru program, where BCP has been awarded a significant share of the account auctioned. The bank is currently in the process of disbursing these funds. Currently five BCP stand-alone exposure in economic sectors that are highly exposed in COVID-19 and by the way, we estimate that 20% of our wholesale portfolio and 25% of our retail portfolio. SME-Pyme business is highly exposed. In this analysis, high exposure sectors include retail, vehicle, real estate, poultry, airlines, tourism, microfinance, transport and restaurants.

Next slide please. When analyzing Credicorp performance, it is important to understand the drivers that will impact Credicorp result through 2020. First, the macro environment, I just described, coupled with the special interest free and cost free solutions offered to clients and a market decline business activity during the lockdown will impact our sources of income.

Second, it is important to note that we are using IFRS in light of the coronavirus uncertainties. Foundational report to estimate provisions, we are using judgment and adjusting our approach to determining expected losses in different circumstances. We are not applying our existing expected losses methodology mechanically. Finally, we are measuring expected losses based on reasonable and supportable information.

Consequently, in the first quarter of this year, we have registered our best estimate, which assumes a severe impact at the macroeconomic level that will be partially offset by our programming facilities and by government mitigation measures. It is important to note that IFRS and local reporting standards materially differ. And the local regulation, regular programming does not change client risk classification and deterioration is recognized later on when losses are incurred.

Finally, in order to manage expenses, we are freezing recruiting and salary increases adjusting variable compensation and working to preserve our cut. We are also putting the brakes on market strategic projects and looking to identified savings in a context of short-term decrease in business activity.

Next slide please. Going on our first quarter 2020 financial highlights, you will see that results has been offset mainly by forward-looking provisions. In our coming slides, I will explain our metrics, but at this point I would like to highlight both our loan portfolio and net interest income have performed excellently posting 11.4% and 8.3% year-over-year growth respectively. The COVID-19 outbreak has negatively impacted our results and mainly manifested to a decrease in non-financial income, material forward-looking provisions and one-off expenses, all of which, offset profitability in the first quarter 2020.

Next slide, please. To explain BCP stand-alone's quarter results, I will start by reviewing loans, asset quality and the evolution of deposits. Despite the lockdown during the second half of March, BCP's average daily loan grew 8.4% year-over-year. This was driven by retail banking which grew 11% led by consumer and credit cards, which increased 14% and mortgages which expanded 12%. It is important to highlight that measuring quarter end figures, the loan portfolio grew 12% year-over-year and 5.4% quarter-over-quarter. In the current context, corporate clients saw fresh liquidity at higher spread, which was mainly retained at the bank facility deposits. Growth in retail loans decelerated due to COVID-19.

As I have explained, although asset quality has remained stable, we have shore up provisions based on changes in macroeconomic expectations and an increase in the probability of default. This measure led the cost of risk to increase 230 basis points year-over-year to situate at 4.44%. Retail banking NPLs ratios deteriorated quarter-over-quarter mainly in SME-Pyme and credit cards, but since provisions posted a higher increase, the coverage ratio for BCP stand-alone has situated at 118% compared to 105% in the last quarter of 2019.

Total deposits grew 16% year-over-year led by non-interest-bearing demand deposit and saving deposits, which grew 23% and 16%, respectively. During this quarter, total deposits grew 8% in the context of COVID-19, where corporate client go down, share liquidity on both individual from businesses to spend less and maintained larger balances in their accounts.

Next slide, please. Now, I will comment on BCP stand-alone quarter P&L figures. This quarter, the downward trend in interest rate became steeper. The negative impact of these driver on NIM has been offset by a more favorable funding structure at the liability management measures were executed in the last two quarter of 2019 and new less expensive short-term funding has been taken. This has allowed the net interest margin to remain stable at 4.7% year-over-year. Higher provisions, however, led the risk-adjusted NIM to drop to 1.5%, both core and non-core, non-financial income decreased in year-over-year and quarter-over-quarter terms.

Regarding core items, the reduction of 10% quarter-over-quarter in both fee income and net gains on FX transactions reflects two weeks of lockdown out of 12 weeks in the quarter. The decrease in business activity, including a 43% drop in monetary transactions in April, the implementation of cost free solutions to clients and an increase in digitalization adoption will generate greater negative impact in non-financial income next quarter. The efficiency ratio deteriorated 7 basis points year-over-year, mainly due to a acceleration [Phonetic] in income generation, while expenses grew in line with seasonality and include PEN15 million in COVID-19 related operating expenses.

Finally, BCP includes a PEN100 million non-deductible charge for COVID-19 donation in other expenses. Overall, BCP's results are offset mainly by provisions and the one-off COVID-19 donation.

Next slide, please. Mibanco's quarterly performance was impacted by forward-looking provisions. This quarter, Mibanco posted 7.3% growth year-over-year in low measured in average daily balances. Mibanco's portfolio is primarily composed of the small and micro businesses and constitute Credicorp's most exposed portfolio. It's key that Mibanco still required that clients in Prague with loan officers to execute to our program. As such as of March, the operating unit cost for program 22% of its total portfolio.

Regarding asset quality, Mibanco posted a slight year-over-year improvement in its NPL as a result of origination and collection measures taken in recent quarters. Nonetheless, COVID-19 forward-looking provisions have led the cost of risk to increase 315 basis points and situated at 6.7%. Consequently, Mibanco's NPL coverage ratio situated at 157% this quarter compared to 138% in the first quarter last year. Mibanco's NIM increased 50 basis points to situate a 15.2% this quarter. This was attributable to one optimization in the funding structure and the cost of funds. Additionally, changes in insurance fee recognition reduce non-financial income.

Finally, due to higher cost of risk, risk adjusted NIM fell 240 basis points year-over-year to situate a 9.5% in this quarter. Mibanco registered a slight deterioration in its efficiency ratio year-over-year, which was mainly attributable from an increasing Mibanco's headcounts to effectively manage and strengthen relationships with clients. Administrative expenses were down this quarter driven by the implementation of cost savings programs and some delays in executions.

Finally, a non-deductible charge of PEN10 million for COVID-19 donation has been recorded in other expenses. Overall, Mibanco performance was negatively impacted mainly by provisions.

Next slide, please. Now, I will comment on the main drivers and results related to our insurance and pensions funds businesses. This quarter, Grupo Pacifico's net income improved year-over-year due mainly to an improvement in the underwriting result of the property and casualty businesses and to a lesser extent to an improvement in the life business. This was a result of a decrease in net claims for car insurance after circulation decrease and there were fewer reported cases during lockdown.

Regarding the life business, we registered an increase in total net earning premiums for the credit life product after sales increase for our alliance channels, health insurance and medical services reduced their decreasing activity and therefore reported lower claims during lockdown.

All of the aforementioned resulted in an improvement of 620 basis points year-over-year in the lowest ratio. Our investment portfolio has good credit quality and is concentrated mainly in fixed-income assets. In terms of liquidity and solvency, Pacifico maintains comfortable liquidity and debt-to-capital ratios. There are two one-off COVID-19 related charges that impact Pacifico results this quarter. First, as a financial relief measure for clients, we are reporting 50% of the car insurance premiums for the months of March and April to individuals that are up-to-date in their payments. The impact as of March is around PEN8 million in premium reimbursements.

Second, Pacifico donated PEN5 million in life insurance policies to COVID health service professional, police men and Peru's armed forces who are directly exposed to the virus during the quarantine. In terms of pension funds business, the negative contribution to Credicorp net income is mainly attributable to a decrease in the profitability of the reserve funds, given market conditions.

Commissions will be negatively affected next quarter given that pension fund contribution will be waived for April. Additionally, assets under management withholds in the government decree, a withdrawal facility for some affiliates and after reports the Congress approved a law, which enables affiliates to withdraw up to 25% of the pension funds with a ceiling. As a result of this specific material changes in the system, we expect our income before we reserve funds profitability to be reduced by 11% this year.

Next slide please. Now, I will comment on the drivers and performance both investment banking and wealth management businesses. Total assets under management posted a reduction of 9.6% quarter-over-quarter, up 5.1% year-over-year. In wealth management, the result mostly affected by a mark-to-market affecting March as an important client outreach therefore attenuated withdrawals. In the case of the asset management, a slight decrease in assets under management was seen in the last two weeks of the quarter due to withdrawals from transactional funds mainly at Bancolombia.

Regarding income contribution, based on the year-over-year analysis, the results are as follows. In the wealth management businesses, the slight haul is mainly due to lower deposit balance and lower income from family office in Peru. However, income in Colombia and Chile increased due to the diversification of the product portfolio.

In the asset management business, given that alternative funds and distribution of third-party products income goals are both expected, the negative effects on March was offset. In the corporate finance business, the contraction is attributed to our unfavorable situation for the execution of operation, including those that were already identified within the first quarter 2020 pipeline.

The capital market business was the most severely impacted by the reaction of the markets to the global crisis, significantly affecting the results in trading positions at Credicorp Capital. In this context, trading portfolio was reduced by 60% to mitigate volatility impact in March. In addition, the proprietary investment portfolios of local and international fees income from ASB registered losses. However, the sales business achieved higher-than-expected results in equities, driven by an increase in the volumes traded. Likewise as market recovered, the losses have started to reverse in April.

Regarding other businesses, the reduction was mainly from the Treasury business due to a negative exchange difference originated by positions in foreign currency. Finally it's worth mentioning that although a long-term strategic portfolio has not generated losses in P&L, the unrealized losses were PEN77 million as of March.

Next slide please. Now, I will summarize Credicorp's consolidated performance. Now in a context of market volatility and low asset prices by the end of March 2020, the investment portfolio share of our interest-earning assets increased to 20% from 19% in December. The loan portfolio grew 11.4% year-over-year in quarter-end balances and 7.8% year-over-year national and average daily balances, boosted mainly by BCP.

In terms of funding, deposits grew 15.3%, primarily due to demand and saving deposits, which grew 22.2% and 14.9% respectively, mainly at BCP. Additionally, wholesale financing grew 7.8% after funding was provided to corporate and medium-sized companies. In this context, Credicorp's funding cost fell 25 basis points.

Next slide please. As explained early, Credicorp's cost of risk posted a significant increase of 268 [Phonetic] basis points quarter-over-quarter, mainly due to COVID-19 forward-looking provisions, which were mainly concentrated in BCP stand-alone and Mibanco. It is important to note that the change in economic expectations affected all of our line of businesses, but mainly retail banking and microfinance. Additionally, 34 basis points of the increase in the cost of risk was related to a deterioration of a specific business segments at BCP stand-alone, mainly SME-Pyme and credit cards, which was offset by an improvement in the cost of risk [Indecipherable].

Our non-performing loan portfolio has posted growth that was significantly lower than the expansion seen in provisions due to debt facilities that Credicorp subsidiaries have offered to clients to cope with these difficult times, which translated into an improvement in the coverage ratio.

Credicorp's net interest margin reached 5.35%, remaining relatively stable year-over-year increase of 5.4% in interest income, which was driven by an increase in interest from loans and a decrease of 2.5% in interest expense due to a more favorable spending structure was offset by the large increase in average interest-earning assets.

As mentioned early, the decrease in NIM at BCP stand-alone quarter-over-quarter was driven by a decrease and market rates was offset by an improvement in Mibanco's NIM after a new pricing strategy was implemented to improve loan rates. Finally, risk adjusted NIM deteriorated 197 basis points quarter-over-quarter to situate at 2.33%. This was primarily driven by the aforementioned increase in provisions.

Next slide, please. The 18.8% year-over-year contraction in non-financial income was mainly attributable to non-core items. Fee income and net gains on FX transaction both core items dropped after transaction activity in the banking business decreased during lockdown.

Fee income and net gains on FX transactions decreased 10% or 14% quarter-over-quarter respectively and driven mainly by BCP stand-alone and Mibanco. The net gain on securities loss PEN120 million after the global COVID-19 crisis generated a market downturn that impacted proprietary investment portfolios.

In terms of efficiency, the cost to income ratio deteriorated 100 basis points year-over-year, mainly due to the deterioration in microfinance. Most of the deterioration in microfinance is due to the inclusion of Bancompartir and more personnel expenses while decelerating operating income at Mibanco. Grupo Pacifico also reported a slight deterioration, which was attributable to current premium partial reimbursement. This was mitigated by an increase in net earning premiums in the life business.

Next slide, please. Assume the results of consolidated profitability of Credicorp primarily reflects the negative impact of BCP, which was in term attributable to charges related to COVID-19. To wrap up our performance this quarter, we continue to register resilient drop in loans, deposits and net interest income with 11.4% and 15.3% and 8.3% year-over-year growth respectively.

Our customers helped ramping up the use of digital channels in the new context and as such our digital capabilities stand as a competitive advantage. The COVID-19 outbreak negatively impact our results primarily to a decrease in non-financial income and increase in forward-looking provisions and the existence of one-off expenses all of which offset profitability in the first quarter of 2020.

Credicorp is well positioned to face this crisis in terms of both, liquidity and capital. We reduced dividends of all subsidiaries to strengthen operating units, capital base. Given the level of uncertainty, regarding the global economic impact of COVID-19, we are suspending guidance as of today, so that we have a better sense of the impact of this phenomenon, we will provide guidance.

Next slide, please. We are aware of the level of uncertainty we are facing and at the same time we feel confident about our capability to adapt our businesses and organization in changing environment. In this context, we are reviewing our strategic initiative on a constant basis. In BCP, we are focusing on engaging with customers to understand their situation post COVID-19 on financial needs, implementing Reactiva Peru program, adjusting risk management measures and designing medium-term restructuring initiatives. We are starting sales capabilities coupled with dynamic pricing and accelerating customer digital adoptions and we're thinking the new operating model.

In Bolivia, we are engaging with customers, adjusting risk management measures and fostering the use of digital channels. In microfinance, we are working on engaging with customers, assessing new needs and risk and executing refinancing initiatives, implementing five program to provide fresh working capital and support our clients' short-term liquidity needs, accelerating the path to the hybrid decision-making model, leveraging the use of data and analytics, redefining the new remote operating model and finally, finalizing a competitive measure for the third quarter of 2020.

In insurance and pensions, we will work on. We're starting insurance sales force coupled with digital capabilities, adjusting Pacifico's new operating model, managing the liquidity and profitability of the pension investment portfolio in accounting of expected withdrawals actively participating in pension system reform.

In investment banking and wealth management, we are focusing in developing business opportunities in wealth management and asset managements by offering a diversified portfolio, developing the corporate finance pipeline, improving our efficiency by reprioritizing operation expenses and investments, finalizing the integration of Ultraserfinco by the first half of 2020, defining our support functions and technological platforms to improve the customer experience and enable for the further future growth.

At the corporate level, to further strengthen our long-term performance and competitiveness in the markets we operate, a project has been launched this month to develop a strategic aim on integrating ESG more deeply and consistent in our business planning and activities to take advantage of the new opportunities, a specific initiatives of [Indecipherable] are been selected in more than to be accelerated.

With these comments about our quarter performance, I would like to open the Q&A please.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] We'll take our first question. Caller, please go ahead.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi. I'm Mr. Gabilondo from Bank of America. Hi, good morning, Cesar and good morning, everyone. Thank you for the detailed presentation and for the opportunity to ask questions. My question is on the provision charges and cost of risk. After more than doubling your provision charges in one quarter with respect to the loss in COVID-19. The changes have reached the peak of provisions or do you think it will be more tangible next quarter? And how much of this provision charges of the quarter are considering the client's applications in SME-Pyme and Mibanco and individuals? And what level of your DSP from minus 7% to minus 13% is considering the expected loss model? As you have mentioned, we will not follow the expected loss mechanically. What I think is you'll be very helpful to understand the assumptions that you are considering to hope to beat the provision charges. Thank you.

Reynaldo Llosa -- Chief Risk Officer

Hello, Ernesto. How are you? This is Reynaldo Llosa. Yes, definitely, this has been a sharp quarter and to our best estimate at the end of March of this year we just estimated this loss of provisions. As Cesar was mentioning throughout his presentation, these are forward looking estimates. Our numbers, our baseline for them while our weighted average loan-to-GDP of around 5.25%, we will need to update our projections in the following quarter. I would say that there are a lot of other initiatives in terms of reprogramming and all the initiatives are governments sponsored by the governments would probably give us a better outlook on what will happen with provisions throughout the year. But certainly this is going to be a start up year.

Ernesto Gabilondo -- Bank of America -- Analyst

Okay. Perfect, thank you. And then my second question is on loan growth. We noted an important acceleration due to the currency depreciation. But also I think from some, we don't want some companies anticipating to have liquidity. However, I would like to know your strategy in the short-term. Are you going to focus in the long-term base or are you also going to provide credit to new clients? Also, any color in which portfolios do you expect to be more selective and which ones will be the ones delivering the growth will be very helpful. Thank you.

Operator

We'll take our next question. Caller, please go ahead.

Jason Mollin -- Scotiabank -- Analyst

Hi, this is Jason Mollin from Scotiabank. My question is related to Slide 7 at credit closure and litigation. I thought that was very helpful the way you feel the most exposed chart with the most exposed to the less exposed and showed Mibanco and SMEs on your top and wholesale on the bottom. If you can talk about giving us -- if you can talk a little bit about the expected loss in those most exposed and less exposed? And I guess if that average was -- it wasn't that easy to hear, but is that kind of previously -- is that kind of where you're coming out with your expected loss cost of risk in the quarter?

And also on the slide, if you can just give us some details on the Reactiva Peru program, and you do mention that you have an important share through BCP and Mibanco. Is that similar to your market share in those markets? And how do those options really work? Thank you.

Reynaldo Llosa -- Chief Risk Officer

Well, in terms of -- on the mainly expected losses levels for this specific segments, we don't have a rough number. You can understand that for these specific estimation in terms of the end of the first quarter, we were basically considering the impact it would have in the macro level. So we have worked very closely with all that segments, in fact, we are seeing a general impact in the portfolio. And we are not able, at this time, to provide a specific level of the expected loss for each of the portfolios. And in terms of the participation of market share of Reactiva Peru, I would say it's somewhat above our average market share.

Jason Mollin -- Scotiabank -- Analyst

Sure.

Operator

We'll take our next question. Caller, please go ahead. Caller, your line is live, please ask your question. Hearing no response. Moving to the next question. Caller...

Jorge Kuri -- Morgan Stanley -- Analyst

Hello. Hi. Jorge Kuri from Morgan Stanley. Thanks for taking call -- questions. Can you remind us your sensitivity on net interest margins to movements in rates? Is there a particular expectation that you have for NIMs by the end of this year? Thank you. And I guess we also would appreciate if you tell us what your expectation is for reference rate at the end of the year. Thank you.

Cesar Rios -- Chief Financial Officer

Hi. The reference rate is already at the minimum historical level at 0.25% and the interest rate has already been passed through in the new transactions. So we wouldn't expect a significant change in reference rates during the year. You can say that probably the markets are going to be expensed, capturing in the new transactions, in the new origination and a higher expected probability of default. But I will say both in soles and dollars, we are in a low level in terms of reference rates and probably we are going to have some expansions on margins, but based on probability of default not reference.

Jorge Kuri -- Morgan Stanley -- Analyst

Sorry, I didn't really mean adjusted risk margins and adjusted net interest margin. No, I'm not sure I understood the point about to early year report.

Cesar Rios -- Chief Financial Officer

No. Yes, what I am trying to tell you is the reference rate is already in historical lows both in soles and dollars. So the new marginal rates are going to increase based on the probability of defaults. So the margins are going to increase slightly based on these new originations. You should also consider the new originations are going to be particular in retail banking and a slower pace than historically has been happening due to the decreased demand in the short-term period.

Jorge Kuri -- Morgan Stanley -- Analyst

And if I may add just. I have a second question, can you talk about what you can do on the expense side to try to provide some offset to the downturn on revenues both in 2020 and 2021? Thank you.

Cesar Rios -- Chief Financial Officer

Yes. We are already working in on a number of measures. As I mentioned previously, we have adjusting variable compensation. We are freezing in most of the companies of the group, probably with the exception of the investment banking in terms of hiring and salary increases. Some of the expenses are going to be naturally adjusted based on the level of activity is particular during the second quarter. And additionally, we are working very disciplined and in a very disciplined way in identifying expenses that are not absolutely necessary in the short term, but we are maintaining investment developing core capabilities, particularly in terms of digitization and intelligent decision making.

Jorge Kuri -- Morgan Stanley -- Analyst

Thank you.

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

This is Gianfranco. Maybe just -- good morning, everyone. And just to add a few words on what Cesar just mentioned. You are all aware that we were -- we've been working in -- readily in developing our digital capabilities. Obviously, due to this crisis, the demand on digital channels have picked up dramatically. And another lever of -- that we are currently analyzing is how to reach income on distribution channel. And the main objective there is not to reduce expenses, but to provide a better service to our clients, but obviously our concept as of now would be that our footprint in several branches should be pretty down in the next couple of years.

Jorge Kuri -- Morgan Stanley -- Analyst

Thank you.

Operator

We'll take our next question, caller. Please go ahead.

Marcelo Telles -- Credit Suisse -- Analyst

Hi, hello everyone. Thanks for the opportunity to ask questions. Marcelo Telles, Credit Suisse. I just want to follow up on your front-loading of provisions, the more or less some of PEN700 million in the quarter. Can you just tell us what was the GDP assumption that was -- could see there in the models for that provisioning. I understand you say you expect to be between minus 7% to minus 13% GDP this year. Is that something that was [Indecipherable] to the model? Just to understand how much has already being factored in of that worse scenario? Thank you.

Reynaldo Llosa -- Chief Risk Officer

Yes. On the margin revisions.

Marcelo Telles -- Credit Suisse -- Analyst

Provision items.

Reynaldo Llosa -- Chief Risk Officer

Yes. On the margin revision we used our weighted average fall on GDP of around 5.3% for the year.

Marcelo Telles -- Credit Suisse -- Analyst

Okay, all right. Well, that's very clear. And for next year, is there any -- if there is a duration of the crisis I mean how was the duration, let's say take into account what sort of recovery was taken into account for 2021 from economic world standpoint?

Cesar Rios -- Chief Financial Officer

So probably, if I can comment on that. As Reynaldo mentioned we have used for the close of March a weighted average of the -- of 5.3% GDP. Now we think that the GDP is going to decrease more, but we expect a significant uptick in 2021 in the turn of probably 5%, 6% increase next year after a decrease in this year in the range probably between 7.5% to be 11% as basic scenarios for this year.

Marcelo Telles -- Credit Suisse -- Analyst

Okay. That's very clear.

Cesar Rios -- Chief Financial Officer

These things has been impacted because during the demand that the last weeks the lockdown has been extended and these impacts directly in GDP levels.

Marcelo Telles -- Credit Suisse -- Analyst

That's very clear. Thank you so much.

Operator

We take our next question. Caller, please go ahead.

Ernesto Gabilondo -- Bank of America -- Analyst

Yes. Hi guys. I have just one follow-up again on the preview -- on the expected losses. So you mentioned that you did provisions with a GDP of 5% -- kind of 5%. Now you have something close to 7% to 11% of decline. So is it possible to say that you need to do more provisions in next quarter or at least if you need to do the final provision today, you need to do a huge amount of provisions again in the next Q?

Reynaldo Llosa -- Chief Risk Officer

Well, they are basically based only on the macro cap estimations, obviously we need to do some extra provisions, we expect that to happen. I can say that there are a lot of things we are doing on the other side. I think, as I mentioned and Cesar mentioned in terms of reprogramming and government-based initiatives that would probably lead us compensate in sometimes the level of provision we would need to do in terms of this more steep or dramatic macro environment.

Ernesto Gabilondo -- Bank of America -- Analyst

Okay, thank you.

Operator

We'll take our next question. Caller, please go ahead.

Jorg Friedman -- Citigroup -- Analyst

Thank you very much for the opportunity to make questions. My question is related to understand a bit further on how the IT transformation program continues in such an environment. I think more and more it will be needed, but at the same time you have for on the cost containment strategies. So just for us to understand if there is any change and the development of the program? And in parallel with that to understand, how much of your transactions have been originated in the digital channels and how much continues to be originated throughout the digital channels? Thank you very much.

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

Maybe I can take this question and thank you for your question, Carlos. On the contrary, actually as I mentioned before, we did provisions, I would say each and every bank in the world have happened the same. The digital demand has spiked and actually we're investing and more importantly as of this time developing faster applications. We know for our clients to interact more through digital channels with us.

As Cesar mentioned at the beginning of the presentation, a very little -- of temporary work might happen with the app but even those transactions across channels at the beginning of the crisis will reduce by over 50% in the app-based amounts of fact that increased. So what we have seen is that the trend of our clients using more digital channels falls as [Indecipherable]. Therefore, our plan to keep investing in digitalizing in most front end and back end of the bank it has become more important. The way in order to cope with that investment additional investment is how to reduce cost in digital channels for us, how to be more efficient because we are digitalizing also the interaction with our clients.

Jorg Friedman -- Citigroup -- Analyst

Perfect. Just a follow up there. By the way, this is Jorg Friedman from Citigroup. Sorry for not being introduced myself. But just a follow-up to understand in terms of costs. What do you believe will happen going forward? We see the IT transformation program, if it is accelerated or on the other hand to content costs, is there any parts of the project that can be frozen for a while? Thank you.

Cesar Rios -- Chief Financial Officer

Probably. I can... Sorry, go ahead.

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

Go -- go ahead. Go ahead. Go ahead Cesar.

Cesar Rios -- Chief Financial Officer

Yes. As I mentioned before, we are thinking a number of measures that are going to contain cost focusing on variable compensation, reducing non-strategic initiatives and being very fast and focused on developing digital capabilities. We see that that the direction, the strategy you break. But this crisis that have still left clearly that we need to go deeper and faster and more focused. So we are redirecting cost, overall reducing the expenses, but redirecting cost to improve the capability and go faster in developing digital capabilities. As a result, you are going to see less overall cost. But we are going to go deeper and faster developing these capabilities, not only thinking in the year 2020, but into the future. The crisis has shown how powerful are these tools and the clients really need these tools to interact with us in a more efficient way.

Jorg Friedman -- Citigroup -- Analyst

That is very clear. I really appreciate. Just a final follow-up, if you allow me. How many branches are open nowadays? And I know that you are in full lockdown or how many branches, you expect to open after May 10? And how many were opened by the end of March? Thank you.

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

Let me answer that question, Cesar. The original plan was to state that in terms of number of branches for this year, for 2020. The plan was to basically to broaden the ability to [Indecipherable] branches this year. And although we'd close a similar numbers. Again we -- as of today, we haven't decided how to really shift this plan, but my educated guess would be that by year end, we should have a lower number of branches. And currently -- and this is because of the crisis, we are operating with 70% of our branches, the remaining 30% remains closed. I think, it is because of the crisis.

Jorg Friedman -- Citigroup -- Analyst

That is perfect. Thank you very much.

Operator

We'll take our next question. Caller, please go ahead.

Carlos Gomez -- HSBC Securities -- Analyst

Hello and good morning. This is Carlos Gomez from HSBC. I want to ask about the evolution of your equity. If we look at your consolidated shareholders' equity, it declined 11.6% in the quarter. We imagine that is because of the valuation of securities. Can you give us an update as to how that has evolved after the end of March, if you have recovered somewhat or it remains at those levels?

And also if you could reconcile the capitalization figures that we see on Page 42. So you have the Tier 1 at 11.9% and -- sorry, the Tier 1 at the level, which is -- 10.3%, which is 1.6% lower than the CET1. I know there's an explanation about how the calculation is made. But there still is a bit -- it's come on practice.

Cesar Rios -- Chief Financial Officer

Okay. I'll take this one. The decrease in shareholders' equity at Credicorp level is mainly due to two factors. First is the declaration of dividends as a significant amount is around PEN2.4 billion, that household really being registered as liability and is going to be paid today. And the other factor is the decrease in unrealized gains. The unrealized gains decreased during March and has been recovered in a meaningful way in April. And you have an another question that I couldn't take notice of.

Carlos Gomez -- HSBC Securities -- Analyst

Yes. Initially this transformed before is the difference between the CET1 and the Tier 1. And in almost any bank, the CET1 is less than the Tier 1, in your case the Tier 1 is below the CET1. Could you reconcile the difference?

Cesar Rios -- Chief Financial Officer

I don't have these figures at this moment. Sorry I can come back with you with this specific answer, sorry.

Carlos Gomez -- HSBC Securities -- Analyst

Thank you.

Operator

[Operator Instructions] We'll take our next question. Caller, please go ahead.

Alexandre -- Credicorp Capital -- Analyst

Hi. My name is Alexandre [Phonetic] from Credicorp Capital. I wanted to ask about Bancompartir and Colombia separation. If you could give me a bit of your view on Colombia separation and your future plan for them? Thank you very much.

Walter Bayly -- Chief Executive Officer

I can answer this one. This is Walter Bayly. The second part of the question. We have no future plans at this time. At this stage, we will focus on our existing operations and businesses that we have. There is a lot of work to do and this is not a time to change focus from where we are focused today.

We are clearly not at the end of the crisis yet. We do not feel there's an inflection point. Thus, we're extremely focused on what we have today. Our operations in Colombia have been working aggressively refinancing the customers and are doing in a similar protocols to what we do domestically, obviously, with some differences. That's all I can mention about it.

Alexandre -- Credicorp Capital -- Analyst

And regarding Bancompartir?

Walter Bayly -- Chief Executive Officer

I was mentioning about Bancompartir.

Alexandre -- Credicorp Capital -- Analyst

Thank you very much.

Walter Bayly -- Chief Executive Officer

Okay.

Operator

We'll take our next question. Caller, please go ahead.

Sergey Dubin -- Harding Loevner -- Analyst

Yes, good morning, gentlemen. This is Sergey Dubin from Harding Loevner. Thanks for the call. My first question is with regard to your kits and the -- as you call it reprogramming of the loans. Are you saying that are these loans considered basically performing? Are they in any way factored into your NPL ranges and also in Page 7 you show, for example, that you reprogrammed 50% of your BCP loans for retail, but it looks like it's only really 25% of retail that's highly exposed. So my question is, how are you deciding what to reprogram and what not to reprogram? That will be the first question. Thanks.

Reynaldo Llosa -- Chief Risk Officer

Yes. Basically in terms of the initial, we have given our clients we are basically concentrated on all those clients that require some kind of support during the crisis. What -- we were basically both reactive and proactive in giving some kind of short-term facility, either a freezing of two installments or skips between one and three months for the next one or three repayments.

Having said that, our challenge here is the next phase, which will be to be in contact with all those clients and opportunity in terms of our their needs on further reprogramming initiative that will require adjust -- there is so many program to their ability to pay their loans given the crisis.

And in terms of the full portfolio, yes, I mean that's -- the macro numbers in terms of the exposed clients, but everybody has been to a certain degree affected by this crisis. So as I was mentioning, we have been actively, reactively and proactively, addressing these reprogramming initiatives in the short term to receive unfreezing initiatives.

Sergey Dubin -- Harding Loevner -- Analyst

Okay, thanks. And then the follow-up question. You talked about your level of provisioning, which is correlated to your assumption of GDP contraction. It sounds like it was 5.3%. So -- but you also have this Reactiva Peru program that kicks in and helps, where the government takes 80% to 98% of their risk. So how do you -- so the two questions there is, first, I didn't really understand the explanation how these auctions work. If there is multiple banks involved and obviously, everybody who wants to get part of this program doesn't mean that it's allocated based on market share or -- if you can really explain that it would be helpful.

And then the second question is with respect to your credit loss assumptions. How do you factor -- obviously, you have your own models, but you also have this government support, which is fairly significant. So how do you factor those supports in your credit metrics and the credit loss assumption?

Reynaldo Llosa -- Chief Risk Officer

Yes. In terms of the...

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

Does this mean -- go, ahead, Reynolds.

Walter Bayly -- Chief Executive Officer

Look, I was going to -- sorry, I just wanted to explain the -- sorry, the way the banks has assigned what the central bank has done is the central bank does auctions based on the coverage by the government. The central bank has set a fixed rate toward the fundings for the bank, and banks participate in those auctions and therefore they get the amount. The one that auctions the lowest rate from that branch is the bank that gets the amount auctioned. After that, the -- each bank provides that funding to its clients. And the cash in the rate that was offered by the bank in the auction. Again, remember, please complement me in terms of the risk part.

Reynaldo Llosa -- Chief Risk Officer

Yes. To be clear, I mean the auction is based on what bank offers the least final rate to that client in different banks, depending on the size of the loan as well as on the level of coverage by the government in their guarantees. Therefore, the impact of the Reactive Peru, we think it's going to be positive impact, of course, but we will see that number reflected probably on our estimation operations in these following quarters. We haven't concluded that effect yet in the total numbers of the first quarter.

Sergey Dubin -- Harding Loevner -- Analyst

Okay, got you. And then, the very last follow-up. In this year, to your response, so these reprogrammed loans that you have. I think these are still considered the performing loans. Correct? They haven't really been classified as an NPL in any way. So the NPLs are very much the same as they were?

Cesar Rios -- Chief Financial Officer

Yes.

Sergey Dubin -- Harding Loevner -- Analyst

Okay, thank you.

Cesar Rios -- Chief Financial Officer

Yes, they [Indecipherable] performing loans.

Reynaldo Llosa -- Chief Risk Officer

That's correct.

Sergey Dubin -- Harding Loevner -- Analyst

Yes, got it.

Reynaldo Llosa -- Chief Risk Officer

That's correct. Our base are all the performing loans.

Sergey Dubin -- Harding Loevner -- Analyst

Okay, thank you.

Operator

We'll take our last question. Caller, please go ahead.

Yuri Fernandes -- JP Morgan -- Analyst

Thank you, gentlemen. Yuri Fernandes from JP Morgan. I would like a follow up on margins. I understood from what you mentioned that margins that could move up in the next quarter as well with price and some loans up, given the higher risk. But if you -- I don't know if I get this properly, it's likely that margins should go up. But you have like Reactiva Peru that should hurt a little bit the needs. Even though it's a good program, you have the like wholesale likely growing more in retail, and also the lower rates. I think, like lower rates that should be somewhat negative for your security book.

And finally, I guess renegotiated loans -- you were doing some renegotiation for credit cards and other products with zero interest rates. And about 50% of your retail book was renegotiated. So my point is, how can we see margins in that? And regarding the renegotiation, should we expect a big pressure on NIMs in the second Q?

Cesar Rios -- Chief Financial Officer

Yes. Let me go for parts. And probably my answer was relating to, I will say, the standard portfolio not including a refinance at [Phonetic] Peru because you are right. Reinance at Peru is going to come with very thin margins. In average the interest rate has been around 1% with cost of funds 0.5%. So in average, you are right. If you consider refinance at Peru, their average is going to go down, definitely with this [Indecipherable] factor.

Relating to the other parts of the portfolio, what is going on is that [Indecipherable] loans, part of the loans has been refinanced at an interest rate of zero. And probably, we are going to make some kind of a impairment charge between some interest rate and zero for this installments in particular. But the other parts of the portfolio tend to be refinanced and rate similar to the original rates. But US spend longer terms and the new origination that is going to be a smaller than it has been in the previous quarters are going to be originated and a higher -- with higher spread. Down the road, during this year, we should see this aspect, but you are right if you consider the effect of refinance at Peru, the average blended is going to go down for this factor. I was referring to the more structural portfolio.

Yuri Fernandes -- JP Morgan -- Analyst

No, super clear. And a final one, just if I may on Reactiva Peru. Is there any seniority on the debt? Do like a client need to Reactiva Peru before they pay previous lenders of the bank?

Cesar Rios -- Chief Financial Officer

The intention of Reactive Peru is to provide new fresh working capital and then they get intended not to repay or prepay another debts, but to provide fresh working capital to clients. That's the intention of the program. If you combine all the measures you have on a very comprehensive fact as you and -- facing the uncertainty you offer the client [Indecipherable]. After that, you provide Reactiva Peru to have fresh working capital. And down the road based on the specific circumstances, probably there is going to be a new refinances, that more tailor-made based on the performance in the following quarters.

Yuri Fernandes -- JP Morgan -- Analyst

Thank you very much.

Cesar Rios -- Chief Financial Officer

Just to add -- Yuri, do you listen?

Yuri Fernandes -- JP Morgan -- Analyst

Yes, I'm here.

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

Yes. Just to add on what Cesar has mentioned about Reactiva. It's correct that the idea is to provide a fresh working -- new working capital. However, there are not only -- the only limitation regarding paying pre-dues [Phonetic] financing facilities is not to prepay any grade.

Yuri Fernandes -- JP Morgan -- Analyst

In the case, the clients didn't survive. If the clients didn't survive down the road, like which credit has seniority, your loan that was done before or the Reactive Peru? I still need to collect this -- I don't know, any kind of money that was remaining.

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

So how it works is that -- so obviously, given 80% to 98% of the Reactiva Peru loans is backed by the sovereign wealth and then we have to collect whatever can be collected from the clients on a pari-passu base. If there is any financial institutions have any collateral that was placed as a -- pledged as a collateral for the previous loan that collateral will still shared.

Yuri Fernandes -- JP Morgan -- Analyst

Okay, thank you very much.

Operator

We do have one more question. Caller, please go ahead.

Unidentified Participant

Yes. [Technical Issue] previous discussion. So thankfully, the way that we decide how much [Technical Issues] how much to allocate, how much lending to do it in a 1% rate is based on your prep test of your clients. So if you see the client is very -- in a debt position and it's better to extend 1% or even 0% loan to them as opposed to then we could do that because that would save potential with the client and sustain you from recordings NPL even though you may sacrifice interest income, [Indecipherable]. So that's how you decide how much to dial-up or dial down this participation of the program, is that correct?

Walter Bayly -- Chief Executive Officer

That's -- your assessment is correct. The objective for us regarding the Reactiva Peru program is to provide most of the benefit to our clients. And obviously this profile of our guidance due to these more working capital facility, extraordinary rates and conditions, improve the risk profile of our portfolio. So -- and so far, what we expect is that, and the Reactiva Peru has already over two-thirds of the program has already been auctioned. But we expect is to satisfy demand of almost of all of our clients.

Unidentified Participant

Okay. And the same goes for FAE, as you mentioned that for micro businesses. Is that the same mechanics that banks participate in the auction. And then obviously the loan limits may be different. But is it essentially the same idea, the same -- it works the same way as Reactiva, right?

Walter Bayly -- Chief Executive Officer

The FAE is targeted more to microfinance. As you'll be -- as you maybe aware, there is a high correlation with formality and the micro business. So the typical client of a microfinance institutions didn't qualify for Reactiva because of the lack of formality. So the FAE, the target is basically in former clients. Despite that the process is similar.

Unidentified Participant

Okay, understood. And then very last question, it was discussion on interest rate and NIMs. You said that, so obviously rates has dropped by 200 basis points in last two months or so. It looks like if I'm interpreting the disclosures correctly, you guys have essentially -- and the rate, obviously your net income increases, right, is that correct? So they could -- could we save more and [Speech Overlap]

Cesar Rios -- Chief Financial Officer

Sorry. Under normal circumstances that may happen, because you have already some funding at very low rates like demand deposits and savings that we pay low rate. So in normal circumstances, what you have is lower interest rate, less margins, because you cannot have a smaller margins. What I mention is that due to the change in the risk profile, we are going to originate loans with wider margins in order to reflect higher probability for default, but in normal circumstances, low rate means lower margin, because you already have a funding very close to zero.

Unidentified Participant

Okay. Just the price of loan higher essentially than we would have otherwise and so would everyone else in the bank [Indecipherable].

Cesar Rios -- Chief Financial Officer

Yes.

Unidentified Participant

Okay, understood. Okay, thank you.

Operator

We'll take our next question. Caller, please go ahead.

Unidentified Participant

Thank you, everyone. Sorry for jumping in late, but I have a follow-up. So let's just give an example here. If there is the PEN40 million loan to a client and you lend an additional PEN10 million from government lending lines in defaults and there is only PEN40 million in collateral. Who gets the PEN40 million? You, or the line that goes to the government?

And my second question, if I may, is also a follow-up on NII. When you do not charge interest on the renegotiated line consumer do you reorganize zero NII in that quarter? So second Q will that be zero or do you reprogram the entire loan and you start recognizing the different accrual method where your second Q is not as impacted?

Cesar Rios -- Chief Financial Officer

Probably I'll take the...

Reynaldo Llosa -- Chief Risk Officer

Sorry.

Cesar Rios -- Chief Financial Officer

Probably I'll take the second question? Yes.

Reynaldo Llosa -- Chief Risk Officer

Your go ahead.

Cesar Rios -- Chief Financial Officer

Yes, I'll take the second question. What we are doing conceptually in the case of zero interest rate is to originate a new loan to pay the older installments and originate a new program, in the case of BCP is in several installments and in the case of Mibanco in most of the case is a balloon. And what you are going to do in the second quarter is to recognize some kind of impairment between certain interest rate and the zero rate that you are going to charge. This recognition is going to be all through the time also because you are going at the end to have known on a specific loss in one-time, but a lower rate that is zero to it, I don't know if this helps.

Unidentified Participant

It does help very much. So you don't have to keep in the second Q. It's clear. And in the other one, about the collateral?

Walter Bayly -- Chief Executive Officer

Yes. So, yes, if the collateral was pledged before the loan, then that collateral is not sure. Let's say it wasn't pledged, but there are assets that can be taken up for collateral as a way of collecting then you will share on a pari-passu base. Obviously regarding [Indecipherable], the bank gets 80% to 98% right away [Indecipherable] I believe in three months, after that, you have the responsibility of collection for both ourselves and the government.

Unidentified Participant

Very clear. Thank you very much.

Operator

We will be taking our last question now. Caller, please go ahead.

Carlos Gomez -- HSBC Securities -- Analyst

Hello. Carlos Gomez again from HSBC. I have more of a macro question. You said that you expect government to start releasing restrictions at the end of the month. However for anybody who follows the numbers from Peru, unfortunately, we continue to see an increase in cases and increase in debt? What is your realistic expectation as to when the lockdown will be eased and have you already included that in your 7% to 11% expectation for GDP decline? Thank you.

Cesar Rios -- Chief Financial Officer

Yes, what we are assuming so far -- sorry, what we are assuming so far is that economy now is working around 45% to 50% with the initial release is going to go after 70% and after that gradually to up to 100%. What is difficult to estimate is how effective is going to be the comeback of specific activities not only based on regulation, but based on behavior of the customer, like in tourism or restaurants. So when we are talking about this ample range of GDP expectations, we are considering the first case starting, reopening that follows the schedule and in the more pessimistic figures of 13%, that is a more gradual or less [Indecipherable] reopening process. But as you can notice the range is very wide and has been moving based on decisions taking in terms of extend -- extension of the lockdown and methodology of the opening the economy.

Carlos Gomez -- HSBC Securities -- Analyst

All right, thank you very much.

Operator

Thank you. Now, I would like to turn the conference back to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.

Walter Bayly -- Chief Executive Officer

Thank you and good morning to all of you. These are clearly unprecedented times. Some of us have gone through several domestic and international crisis and they all have been somewhat different. The key aspects to understand better, to better understand the current and forward-looking scenarios and what makes this current situation different in my mind are the following. One is the health and humanitarian concerns are the drivers.

Second, it is extremely difficult to predict, as Cesar was saying, the ramp up of production after quarantine, which will not necessarily be in a straight line, but it has setbacks along the way. Three, the capacity of the government to execute public health and public works policies has limitations. And last but not least, this process impacts practically all sectors of the economy.

The strength of our balance sheet, liquidity and franchise is tremendous, and it gives us the resources not only to weather this crisis, but to emerge from it earlier and stronger, thus allowing us to capture opportunities in a post-crisis scenario. Our conservative nature and balance sheet strength has led us to front load an important portion of the impact in our credit portfolio, that line of action has proven to be effective over and over, and will definitely be our line of action in the months to come.

As mentioned by Cesar also going forward, we are reviewing our strategies, projects and initiatives in each line of business to prioritize and adapt to the new scenarios. There is still work in progress here.

To finalize, we thank our shareholders for your support and personally are extremely thankful to all of the Credicorp's collaborators, which have once again demonstrated tremendous commitment to our customers and institutions. Thank you very much for this call and we look forward to meeting with you in the months ahead. Thank you and goodbye.

Operator

[Operator Closing Remarks]

Duration: 92 minutes

Call participants:

Cesar Rios -- Chief Financial Officer

Reynaldo Llosa -- Chief Risk Officer

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

Walter Bayly -- Chief Executive Officer

Ernesto Gabilondo -- Bank of America -- Analyst

Jason Mollin -- Scotiabank -- Analyst

Jorge Kuri -- Morgan Stanley -- Analyst

Marcelo Telles -- Credit Suisse -- Analyst

Jorg Friedman -- Citigroup -- Analyst

Carlos Gomez -- HSBC Securities -- Analyst

Alexandre -- Credicorp Capital -- Analyst

Sergey Dubin -- Harding Loevner -- Analyst

Yuri Fernandes -- JP Morgan -- Analyst

Unidentified Participant

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