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Credicorp Ltd (NYSE:BAP)
Q2 2020 Earnings Call
Aug 7, 2020, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd.'s Second Quarter 2020 Conference Call. [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; Mr. Cesar Rios, Chief Financial Officer; Ms. Francesca Raffo, Deputy CEO of BCP; and Ms. Milagros Ciguenas, Investor Relations Officer.

It is now my pleasure to turn the conference over to Creditcorp's Investor Relations Officer, Ms. Milagros Ciguenas. Ms. Ciguenas, you may begin.

Milagros Ciguenas -- Investor Relations Officer

Good morning, everyone, and welcome to Credicorp's conference call. Before our results presentation, I would like to invite you to our Credicorp Day event, which will be held virtually on October 1, 2020, the same month that we will celebrate the 25th anniversary of the listing of our stock on the New York Stock Exchange. Next week, we will be releasing our formal save the date. But in the meantime, please bear in mind that the event will be at 9:30 a.m. Eastern Time on October 1, 2020, and we look forward to seeing all of our investor community.

Thank you very much. Go ahead, Cesar.

Cesar Rios -- Chief Financial Officer

Thank you, Milagros. Good morning, and welcome to Credicorp's conference call on our earnings results for second quarter of 2020. Since our previous conference call, the COVID-19 pandemic has continued to wreak havoc worldwide. Uncertainty remains regarding the course that COVID-19 will follow. The Peruvian economy activity was severely hit during second quarter of 2020. In April, economic activity fell 40% year-over-year and in May declined 33% year-over-year. Our estimates suggest the contraction around 20% year-over-year in June. Nonetheless, there are already clear signs of economic reactivation. First, electricity demand has begun to register a gradual recovery. Last week, demand reflected only a 4% decrease in year-over-year terms after falling around 31% year-over-year in the worst weeks of April and May. Second, our aggregated weekly indicator, which includes transactional data suggests that household consumption has recovered 77% of its prepandemic level. Third, employment indicators deteriorated notably in the second quarter of 2020. Nonetheless, the occupied economically active population Metropolitan Lima registered an uptick in June. All in all, in our opinion, GDP figures for the third quarter of 2020 should show significant improvement compared to the second quarter of 2020. If a new lock down were necessary, we expect it to be focalized. As such, the worst appears to be behind for GDP figures. Next slide, please. In the current context, we expect the economics to show lower levels of year-over-year contraction in the months ahead. Specifically, we foresee upcoming quarter-over-quarter expansion after the decline in the second quarter. Our estimates, with available data, suggest that GDP may contract between 11% and 15% in 2020.

For 2021, we expect the GDP to rebound between 6% and 10%, underpinned by the economic measures adopted. In terms of growth, Peru is positioned to register the highest rebounds in the region, driven by large-scale economic stimulus programs, which represent around 56% of GDP. In our last conference call, economic measures represented approximately 20% of GDP. Since then, additional measures has been announced, most of which focus on economic reactivation. The most recent economic measures include Arranca Peru, a road maintenance and temporary employment program that represents almost 1% of GDP. Importantly, the program aims to create around one million temporary jobs in the short term. In addition, the government plans to bolster investment projects through the government-to-government scheme that was used for Lima's 2019 Pan American Games. The scheme will be used to reconstruct the north of the country and to drive investment projects in the health and education sectors. All of these investments are equivalent to seven points of GDP over time. Other new measures since our last conference call include the implementation of liquidity provision program such as the new FAE sponsor enterprises and this includes FAE-Tourism and FAE-Agro which adds PEN3.5 billion of fresh working capital. We believe that this will lead economic recovery in Latin America toward 2021 due to both economic measures implemented and the country's strong macroeconomic fundamentals. Next slide, please. The country's economic reactivation is reflected in the recovery of the financial system. Transactional data for credit and debit cards indicate considerable acceleration from the lows of April and May, both in the financial system and at BCP. This trend is expected to continue in coming months. Additionally, the financial system is currently highly liquid. In this case, highly liquidity has been driven among other factors by the implementation of the Reactiva Peru program, which is currently in its second phase. This program consists of two phases of PEN30 billion each to provide working capital loans with government-backed guarantees and liquidity provided by the Central Bank.

The liquidity held in Central Bank's current account by the banking sector currently stands around PEN20 billion, where the liquidity indicator stood around PEN three billion in normal times. The Reactiva Peru program has supported private sector loans. And as of June, total loans of this segment grew around 13% year-over-year. If we exclude Reactiva loans, growth drops to around 4% year-over-year. The Central Bank expects private sector loans to increase around 15% in 2020, as fueled by the Reactiva Peru program. Next slide, please. Despite these trying times, our priorities remain unchanged. As a leading organization, we are committed to protecting and supporting all of our stakeholders. Regarding our employees, we are providing personal full medical coverage for COVID-19-related illness. At the branch level, we continue to protect occupational health and help balance performance indicators to monitor service, loan portfolio management and sales. Finally, 95% of our support functions employees are working remotely and will continue to do so, I believe, through 2020. Productivity remains high during this period. Our focus is on alleviating our client financial goals. We have offered medium-term solutions and structural programming facilities and continue to offer skips. We are helping SME clients boost their sales by offering no-cost advertising to our digital channels and providing free business education platforms. In addition, all Pacifico health insurance clients have been warranted 100% coverage for COVID-19-related bills. We have worked to ensure business continuity in this rapidly changing scenario. This has been possible, thanks to the commitment of more than 35,000 employees, who have worked tirelessly to provide essential services. We have taken cybersecurity measures and are bolstering capacity management across channels. Finally, we have actively managed liquidity and solvency to preserve this solid financial condition of our businesses.

Excuse me for the interruption, Milagros. I think there is some problem with the line. Can you confirm that, please?

Milagros Ciguenas -- Investor Relations Officer

I can hear you well.

Cesar Rios -- Chief Financial Officer

Okay. Thank you. Our commitment to community support is unwavering. We have already distributed the donation gather to BCP's "Yo me sumo" campaign. Additionally, our health provider business works in close coordination with the Health Ministry and has joined in a sectorwide effort to provide flat rate hospitalization services for COVID-19 patients with public health coverage. Finally, in addition to the PEN135 million in donation collected by the "Yo me sumo" campaign last quarter, Prima, Pacifico and Credicorp Capital contributed PEN four million this quarter to equip our health system with medical oxygen. Next slide, please. In this context, we have adapted with remarkable agility, leveraging our scale and digital capabilities to fulfill the accelerated demand for digital services. In BCP, our individual digital clients reached 50% or 4.3 million clients, 1.7 million clients more than the same month last year. This growth has driven by an increase in digital sales and transactions. In terms of digital transactions, the channel that posted the highest growth were Yape and mobile banking. In June, we see the three million user mark in the Yaperos, meaning transfers, during the quarter topped PEN985 million compared to PEN170 million the same quarter last year. In mobile banking, we have 3,200,000 users and monthly transaction doubled in comparison to last year's figure. We are about to launch a new version of our mobile banking app and have changed the infrastructure, traffic and transactional flow to optimize the user experience. With regard to digital sales, the share of digital sales of total sales of savings accounts grew considerably year-over-year rising from 2.7% in 2019 to 42.3% in 2020. There is still significant potential to leverage this channel to boost digital adoption and financial cost. To harness this opportunity, we have trained 2,100 agents BCP to inform clients about Yape or mobile banking.

Our goal is to reach one million clients through these partner agents by year-end. In insurance and pensions, our apps and client portal has stood out as the best means to handle client questions and request remotely and quickly. Self-service digital transaction stood at 54% and 91%, respectively. Finally, at Mibanco, 85% of our loan officers are using URPI, a mobile app that provides online access to information of client, sales leads, loan disbursements and other budgets. This boosts agility, improves the client experience and optimize our advisors' productivity. The change in the behavior of our users is proof that our transformation strategy is moving in the right direction to harness potential for growth and inclusion across business segments. Next slide, please. Going on to our second quarter 2020 financial highlights, you will see that we have leveraged our balance sheet strength while maintaining a conservative approach. This temporarily compromises results that will allow us to absorb most of the impact of the crisis by year end. I would like to highlight our loan portfolio and deposit base are growing at a significant pace, more than 21% and 25% year-over-year rate, respectively driven mainly by loans from the government relief programs we Reactiva and FAE. After isolating the effect of this program, Creditcorp's structural loan portfolio grew 7.7% year-over-year. The cost of risk was highly impacted this quarter and situated at 7.76% after forward-looking provisions were set aside in a more challenging macroeconomic outlook due to COVID-19 and updates were made to the probabilities of the call in each segment. Our coverage ratios improved to situate at 167.5%. Backed by a solid capital base, we are prepared to face potential negative outcomes for this crisis. Our NIM situated at 4.03% this quarter due to several factors, which we will explain in detail later on. If we exclude extraordinary charges and the impact of government programs we are given by, the structural NIM is situated at 4.88% this quarter. The decrease in transactional activities during the current time negatively affected fee income but was partially offset by gains in the investment portfolio.

Additionally, the contraction in co-outpays, the reduction in expenses, which were 2.6% lower than in the second quarter last year. In this context, Credicorp posted a loss of PEN620 million this quarter, which represents a return over equity of minus 10.7%. I will now explain the results of our main operating units. Next slide, please. I will start explaining BCP Stand-Alone quarterly results. BCP loan portfolio and deposit rates has been growing at a faster pace than the banking system. This quarter, loan growth was mainly driven by Reactiva loans, the government program loans. Through BCP, we have been supporting our existing and new clients by disbursing more than 40% of the first PEN30 billion Reactiva tranche. This portfolio is mainly concentrated in SME business and middle market segments. Regarding the year-over-year evolution, the total loan portfolio posted 18.6% growth in average daily balance. SME business and SME-Pyme grew 30.6%, of which 90% was attributable to Reactiva loans. While wholesale loans increased 21.3% year-over-year, driven by structural loans to corporate clients. If we isolate Reactiva effects, the structural portfolio grew 10.4% year-over-year. In second quarter 2020, total deposits grew 9% quarter-over-quarter, driven mainly by growth in lower-cost deposits. This led to a reduction in higher-cost time deposits. In the context of the quarantine, corporate and SME obtained fresh liquidity from Reactiva loans, which was subsequently retained in bank deposits. Clients that have the wage deposit in payroll accounts retained funds in saving accounts, reflecting a contraction in consumption. Regarding the year-over-year evolution. Total deposits grew 26%, led by noninterest bearing demand deposits and saving deposits, which grew 67% and 32%, respectively. Next slide, please. Now I will comment on the initiatives that we have been implemented to manage BCP Stand-alone loan portfolio. In Retail Banking, we have conducted service of SME-Pyme to understand the impact that COVID-19 has had on their businesses. We have provided facilities such as installment freezing to May, it skips to June, and more recently, we have offered mainly a structural reprogramming in the form of medium-term solutions.

The retail portfolio reprogramming profile in the figure shows the composition of our retail portfolio as of July 27. 71% of the Retail Banking portfolio is up-to-date, 24% received reprogramming facility to the in the second wave, and 4% is overdue. The reprogramming portion of this portfolio, which accounted for 58%, during the first wave, March to April, has fallen significantly to 24% in the second wave, June to August. The SME-Pyme portfolio is the most impacted, given that 54% of the portfolio is up-to-date and 40% is reprogrammed. Now analyzing the payment performance of the retail portfolio due, we see clearly signs of reactivation in every segment. The percentage of the portfolio that is due and paid each month increased from 35% in May to 88% in July. Although this payment performance data is encouraging, you can also see that the percentage of the total portfolio that is overview each month increased from 1% in May to 6% in July. It is still too early to reach a fully informed conclusion on portfolio health, given that some reprogramming facilities offer are not yet due. In the wholesale business, we are managing lots on a case-by-case basis. 20% of the wholesale portfolio is associated with economic sectors that are highly exposed due to COVID-19 crisis. Next slide, please. To buffer the effects of uncertainty, we have set aside forward-looking provisions in a context where our expectation for a contraction in GDP has deteriorated in the second quarter 2020. And we have updated the probability of default for all of our segments based on impact assessments. Provisions are mainly concentrated in the individual and SME client segment in the retail portfolio. Provisions in Wholesale Banking are associated with a specific client that are highly exposed in the COVID-19 crisis. In this scenario, provisions at BCP increased by 79.3% of quarter-over-quarter and 510.7% year-over-year. This led to a structural cost of risk of 7.99% for the quarter and 6.28% year-to-date. Regarding asset quality, the NPL for the structural loan portfolio deteriorated particularly in the individual segments, given that clients who were delinquent prior to the lockdown, were not eligible for reprogramming facilities.

As a result, our NPL coverage ratio reached a record high and situated at 160.3%. Total accumulated provisions represent 6.6% of the structural portfolio. Next slide, please. Going on to BCP results. BCP's NIM was impacted by several factors. First, two extraordinary factors triggered by the evolution of our loan portfolio in the COVID-19 environment: a one-off impairment charge associated with the expanding freezing facilities offered to clients and a negative mix effect which was generated by incorporating Reactiva loans with negligible NIM levels. Additionally, the Wholesale portfolio grew faster than the Retail portfolio. Regarding the one-off impairment charge, in April and May, we offered 0 interest rate loans to finance up to two froze in installments. For these types of loans, IFRS nine requires us to recalculate the gross carrying amount and recognize a modification loss. This one-off charge of PEN150.7 million at BCP represents a temporary difference that will be amortized over the remaining term of the 0 interest rate facilities. The disbursement of PEN14.2 billion for the Reactiva program in the quarter with negligible NIMs generated an additional downward pressure on NIM. If we exclude both impacts, the impairment charge on Reactiva, BCP is a structural NIM equated at 4.34%. Second, the increase in liquidity at significantly lower interest rate in both currencies also drives NIM downwards. The reduction in cost of funds, while significant, did not offset the above-mentioned factors. In terms of nonfinancial income, core items contracted 31% quarter-over-quarter, which reflects three months of lockdown. The temporary key exceptions offered to clients and an increase in the use of cost-free digital channels. Treasury items posted positive results driven mainly by an expansion in the net gains on securities. The efficiency ratio deteriorated year-over-year, which was attributable to the extraordinary construction and income. Expenses were 9% lower than those in the second quarter last year. If we adjust income for the one-off impairment charge, the efficiency ratio situated at 39.9%, improving 20 basis points year-over-year.

Next slide, please with regard to microfinance. First, we will review the dynamics of Mibanco loan portfolio. Mibanco's loan growth this quarter was mainly attributable to government relief program, FAE-Pyme and Reactiva Peru, but 7.9% year-over-year growth measured in average daily balances is mainly attributable to reprogramming facilities in the structural loan portfolio. The first phase of Reactiva alone was pro forma businesses, which limited Mibanco's participation. Nonetheless, Mibanco has been awarded a higher share of loans in the second phase of the Reactiva program in July. As of May, the contraction in the structural loan portfolio at Mibanco fell below the microfinance system average. Next slide, please. Mibanco portfolio constitutes credit cards most exposed for fraud. We have engaged with microfinance clients and conducted service to assess new risk levels. After providing skips and installment freezing solutions, more recently, we have offered mainly a structural reprogramming at a medium-term solution. Mibanco's portfolio reprogramming profile in the figure shows the composition of the loan portfolio by the end of July, 31% of the portfolio is up to date, 64% is current in wholesale reprogramming facility and 4% is overdue. The reprogram portion of this portfolio, which accounted for 82% in May, has fallen significantly to 64% in July. Now analyzing the payment performance of the portfolio due each month, we see clear improvements. The percentage of portfolio due that has been paid increased from 52% in May to 91% in July. Moreover, the percentage of the total portfolio that was registered as overdue each month decreased from 17% in May to 3.5% in July. However, it is still too early to come with a complete assessment of the health of Mibanco portfolio. We expect to have a better understanding of risk portfolio risk in September, when most of the loans that were reprogrammed come due and will be properly assessed. In terms of our portfolio quality, the structural NPL ratio increased 160 basis points year-over-year to reach 8.1% in the second quarter due to client reprogramming delays that took place in July and were classified as past due in June.

Provisions led the cost of risk to increase 11% points and situated at a record high of 15.1%. Growth in provisions were driven by the downward change in the GDP outlook and by an update to the probability of the fall waves following an assessment of risk profiles. Consequently, Mibanco's NPL coverage ratio increased 44% points year-over-year to situate at 100.3%. Next slide, please. Now we will talk about Mibanco's performance. NIM are impacted by two extraordinary factors on Mibanco: a one-off impairment charge related to the installment freezing facilities offered to clients and a negative mix effect, which was generated by incorporating FAE and Reactiva loans, which NIMs are negligible. The one-off impairment charge, in this case, totaled PEN168 million and represent a temporary difference that will be amortized over the remaining time of 0 interest rate facilities. Second, the disbursement of loans for the FAE and Reactiva Peru government programs in the quarter, we the negligible NIM generate additional downward pressure of NIM. If we exclude both impacts, the impairment charge and the effect of government program, the NIM for structural portfolio situates at 14.2%. The deterioration in efficiency in the bank was mainly driven by income contraction. Adjusting income by the one-off impairment charge, efficiencies equate at 47.3% compared with 54.1% last year. Deterioration is attributable to revenues due to the decrease in net interest income explained early and to a drop in nonfinancial income, which was associated with a drop in fees for bancassurance policies. Operating expenses were down 6.4% year-over-year, driven by the implementation of cost-saving programs. Next slide, please. Now I will comment on the results related to our insurance and pensions business. This quarter, Grupo Pacifico's net income improved year-over-year. This was mainly driven by an increase in the rising result for the property and casualty business after a drop in net claims due to the lockdown, which restricted the movements. The positive impact between corporate and casual have offset the results of life, where net earning premiums decrease.

This decline was driven mainly by the evolution of the credit life product, which was affected by a decrease in fees to bancassurance and the alliance channel and by an increase in net claims due to COVID-19. Pacifico regulatory capital coverage ratio increased from 1.27 to 1.35 quarter-over-quarter, which was attributable to a decrease in capital requirements due to lower plans. In terms of fund business, net income growth due to an increase in the profitability of the reserve fund, in line with the market's partial recovery. This offset the decrease in fees. Assets under management fell year-over-year despite a partial recovery in market prices. This decrease was attributable to government measures to allow affiliates to draw down their pension funds. As of July 23, total assets under management have contracted by PEN7.5 billion, by which represent around 70% of total funds that were available for withdrawals. Finally, the congressional commission is still evaluating pension system reform. Currently, it's very difficult to predict how this will impact our business. Next slide, please. Regarding our Investment Banking and Wealth Management Business. Total assets under management posted an increase of 13.8% quarter-over-quarter in Wealth Management. Growth is associated with new money, while in asset management, a significant expansion in assets under management was driven by growth in traditional funds volumes. Higher assets under management in both businesses were also attributable to mark-to-market effects, in line with the recovery in global markets and to exchange rate differences. Regarding income contribution, the current business grew more than 42% quarter-over-quarter. While including the nonrecurrent business this quarter, growth situated at 92% quarter-over-quarter. Nonrecurrent income was attributable on IPO from our proprietary investment, which led to an unrealized gain of PEN96 million. Our current income increase this quarter was mainly related to the recovery of the capital market business, in line with the recovery in lower markets. The increase in income is mainly due to trading position in Credicorp Capital. In addition, the capital investment portfolio of local and international fixed income from ASB also registered positive performance.

Next slide, please. Now I will summarize Credicorp's consolidated performance. The loan portfolio grew 21.4% year-over-year on quarter-end balances. Growth was primarily boosted by loans under government programs. If we isolate the effects of this loan, the structural loan portfolio grew 7.7% year-over-year in quarter-end balances. In average daily balances, the portfolio grew 16.8% year-over-year. The structural loan portfolio grew 9.8%, mainly driven by a spike in corporate disbursements. In terms of funding, deposits expanded 25.7% year-over-year, primarily due to expansion in demand from saving deposits which grew 63.8% and 30.5%, respectively, mainly at BCP. It is important to mention that BCP is noninterest bearing demand deposits. Our lease expensive funding source accounted for 69% of increase in total deposits. Finally, wholesale funding grew 42.8%, which was mainly attributable to low interest funding from the Central Bank for Reactiva program. Next slide, please. Going on to asset quality and margins, let me summarize the evolution of the main indicators. We reaffirm our conservative approach, and we are looking to absorb the cost of the crisis as fast as possible. We added more forward-looking provisions this quarter to reflect the macroeconomic scenario and probability of default following internal assessment in this context. Credicorp's cost of risk situated at 7.66% in the second quarter and 5.85% year-to-date. After adjusting for government program, the structural cost of risk situated at 8.41% for the quarter and 6.48% year-to-date. We expect provision expenses for loan losses to drop in coming quarters that should remain at levels higher than those seen prepandemic. Our structural tier ratio deteriorated, which was mainly driven by individual clients and retail banking. Nonetheless, our coverage ratio increased year-over-year situating at 107.52%. Credicorp's net interest margin this quarter situated at 4.03% NIM at BCP Stand-alone, and Mibanco was negatively impacted by two extraordinary factors, which when isolated, result in an structural NIM of 4.88% this quarter.

In terms of year-to-date figures, structural NIM reached 4 5.1%. Finally, risk-adjusted NIM situated at minus 1.19% this quarter. Next slide, please. Moving on nonfinancial income. The drop in fees and net gains on FX transactions, driven by a significant decrease in transactional activity was partially offset by results in net gains on securities. In this context, nonfinancial income expanded 6% quarter-over-quarter. Fee income and net gain and FX transactions decreased 33.8% and 10.6% quarter-over-quarter, respectively, both mainly at BCP Stand-alone and mainly due to a decrease in transactional activity. Increasing net gains on securities of 332.6% quarter-over-quarter is mainly related to the recovery of global markets and as a nonrecurrent income of PEN96 million in the trading portfolio at ASB. In terms of efficiency, the cost-to-income ratio situated at 50.1%. If we adjust income for the one-off impairment charge this quarter, the adjusted efficiency ratio situated at 45.9% in this quarter. The deterioration of 280 basis points was mainly driven by the decrease in operating income at Mibanco and BCP. Additionally, efficiency ratio for the microfinance line also deteriorated after expenses for Bancompartir were consolidated. Finally, the efficiency ratio for our insurance and pension fund businesses also deteriorated due to a decrease in fee income. In the short term, we have decreased variable compensation and optimized administrative expenses. We are reassessing employees to areas that are working at full capacity and continuous to invest in digital capabilities, accelerating work on mobile bank, the Appian, digitalization, which are proven drivers of growth. Next slide, please. Our solvency and liquidity allow us to take the measures needed in our rapidly evolving scenario. We have every intention of emerging from this crisis stronger with a focus on recovering profitability. The evolution of our equity was primarily the result of the distribution of dividends this year, given that unrealized loss from the first quarter this year has already been recovered.

Our common equity Tier one levels for both BCP and Mibanco remain over our internal target situated at 11.22% and 15.3%, respectively. Our core equity Tier one ratios are calculated under Peruvian GAAP accounting. And as such, used net income figures in local accounting. In the past, it was not necessary to further discuss this issue as local and IFRS net income figures have always been very similar. But given that temporary difference are relevant in the current environment, we want to draw your attention to this point. Regarding liquidity, we issued $500 million senior 2.75% note which are due in 2025 as a conservative measure to being a buffer for managing the COVID situation. Moreover, BCP maintained a regulatory liquidity coverage ratio well above its internal limits of 100% with a regulatory LCR of 207% at the end of June and 157% in local currency and foreign currency, respectively. BCP applies conservative and disciplined policies that reflect its rigorous approach to risk management. As I have mentioned in the past, management decisions are made with most streaming indicators relying on liquidity coverage ratio for 15, 30 and 60 days, whose standards align with Basel III. Next slide, please. Moving some steps back analyzing our long-term performance. In the past 10 years, Credicorp has consistency grow its net income at a compound annual growth rate of 10.2%, well above the 3.6% growth registered for Peruvian GDP during the same period. This is evidence that Credicorp is poised to maintain its strength in the long term. The diversity and strength of Credicorp's line of businesses has translated into consistently positive results across different economic cycles. Our preceding track record is backed by the strength of our businesses and our relationship with clients, the current situation is no exception. We are experiencing a steady growth in our number of clients. Elevated levels of client trust showed by accelerated growth in our deposit base, acceleration in demand and the stable customer satisfaction across channels. We expect recovery in coming quarters, where transaction levels will increase as the economy reopens. Next slide, please. Slide number 30, we are confident that we have the talented and committed team we need to adapt our organization in a changing environment and drive our long-term strategy. Regarding our commercial initiatives, we are focused on managing the most exposed segments of our loan portfolio, adjusting these management measures and implementing debt restructuring initiatives. We have also restarted our sales efforts by leveraging dynamic pricing and skewing both our clients and sales force toward full adoption of digital alternative.

We'll continue to define our new operating model and have identified specific opportunities to optimize operations such as sizing our footprint of the branch level and rely much more on remote work, which triggers flexible agility and efficiency. Given current uncertainty, we have suspended guidance, but I would like to mention some key dynamics we foresee in the short term to provide a more comprehensive outlook for the short-term results. First, our estimates suggest that GDP may contract between 11% and 15% in 2020. Second, we foresee continuous pressure on income while we deploy the second phase of Reactiva. The liquidity portfolio we assessed with current rates, and we've returned BCP retail and Mibanco origination level to prepandemic levels. And fee income recovered in line with economic reactivation. Third, regarding provisions in our basis scenario, forward-looking provision expenses in the second half of 2020 will decrease in comparison to those seen in the first half of the year. Finally, we will continue our efforts to control expenses and optimize operations. In terms of capital, we expect to maintain a sound capital base.

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

Questions and Answers:

Operator

[Operator Instructions] Thank you. We will go to our first question. That comes from Ernesto Gabilondo of Bank of America. Please go ahead.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi, good morning. My first question is on provision charges. As you have mentioned in your presentations, provision should normalize in the next quarters. So would it be reasonable to assume provisions normalizing to the levels that we saw in the second half of 2019? Or more to the levels that we saw during the first quarter of this year? That will be my first question. And then I will make my other questions.

Walter Bayly -- Chief Executive Officer

Reynaldo, you take this? You take this?

Reynaldo Llosa -- Chief Risk Officer

Yes. Well, we as Cesar has mentioned, we've done an important level of provisions during the first half of the year, especially in the second quarter. In terms of your questions, the second semester, we expect a lower level of provisions than what we've done in the first semester. Having said that, at this time, we wouldn't expect to be as good as it was in the last semester of the previous year. But we have some indicators that the performance of the portfolios is might be improving. So at this stage, it's a different it's a quite difficult to give you a precise estimate on the level of provisions in the future.

Ernesto Gabilondo -- Bank of America -- Analyst

Okay. Understood. And then you mentioned that in your Wholesale loan portfolio, there's around 20% with high exposure and that around 5% of the provision charges that you have created were allocated to this exposure. So after evaluating all your portfolio, where you have made an important effort in individuals and SMEs, do you think higher provision charges could come from the wholesale loan portfolio?

Reynaldo Llosa -- Chief Risk Officer

No. I would say that in that specific case, we've done a one-to-one analysis on every specific client. We've seen positive results in the last weeks in terms of the level of payments they were offering. So we don't expect an important charge in Wholesale Banking provisions for the following months.

Ernesto Gabilondo -- Bank of America -- Analyst

Perfect. And then my last question is on the political and regulatory outlook. We have seen a lot of changes in the cabinet with less than one year ahead of presidential elections. And then we were hearing this potential banking deal that was trying to present an interest amount cap. So can you provide us some details on what are the last update on the political and regulatory fronts as well as the withdrawal of pension funds?

Walter Bayly -- Chief Executive Officer

Gianfranco?

Operator

Sir, perhaps you forgot unmuting.

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Yes, can you hear me?

Operator

Yes, we can hear you.

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Sorry, can you hear me? Okay. Great. Sorry about that, Ernesto. Regarding the political model, although it looks good right now, especially on Congress, there are three potential legislations in Congress. The agro business, the I would say, the valuation have lowered over time. I do believe, and I'm positive that the congress are understanding the impact with those measures. We've had, on the banking sector not only the banking sector, but especially in the microfinance sector, which is the most vulnerable part of the whole financial sector, and obviously, on the economy. So as we speak, there are three initiatives. One, what I would say is the best one, which is creating like a specific commission, involving all the relevant stakeholders regarding interest rates and how to provide more facilities to debtors, that's the status on political matters. As you know, the cabinet has recently actually, yesterday, it has been appointed. I would say the structure of the cabinet is quite similar to what we have had in the previous cabinets, so we are positive that the social measures that are being taken will stay going forward.

Operator

Thank you. We will move to our next question that comes from Thiago Batista with UBS Please go ahead.

Thiago Batista -- UBS -- Analyst

Yes, hi guys. It's Thiago Batista from UBS. I have one question about the margins. You already mentioned that the NIM should contract because of Reactiva Peru. But I want to double check if the impairment of the 0 facility that you booked in the second Q, these do not repeat do not happen again in the 3Q? And also, if you believe that NII, in solid terms, not in margins can return to the level of the last Qs in is the last Qs is the new normal of NII or is this second Q is the new normal of NII?

Cesar Rios -- Chief Financial Officer

Okay. So probably, I would like to review the composition of the margin for every key component. In terms of loans, we have been impacted for this onetime event, and the results, if the loans are starting to pay according to schedule, is that you are going to have a reversal of this initial charge. Already it has been happening in the May and June because most of the impact has been registered in May. And we are starting to reverse this initial provision. Under the currency constancy, this is one only way, a one-off event. The another factor in the loan portfolio, thinking about no margins, but total income is the composition of the loan book. For some months, we have been very focused on restructuring the reprogramming loans and offering reactive approach to our clients. And due to the change in the risk profile, we have been originating and at a slower pace than previously. This dynamic is starting to change in July. And gradually, we are starting to originate to reach the previous levels. The impact in the short term is that we are going to have a smaller portfolio in the retail part of BCP client in Mibanco, because as you have seen, we are having very good levels of payments. So for some months, we are going to have more payments than new disbursements. And over time, probably at the end of the year, we are going to balance out this effect. The order of dynamic that is going to affect our income in the short term is the reset of the liquidity portfolio rate. We have, for example, titles of the Central Bank at 2.2%, 3.5%, 2.5% that are coming due and renovated and at rates that are much lower due to the decrease in the reference rate. This is going to impact at least for one more quarter. And after that, we are going to stabilize this part of the portfolio. In the expense sides of the book, what we are doing is resetting the cost of funds at a very good pace, but we are going to have a one-off event due to the issue in BCP of a new subordinated loans, that's an important amount, $850 billion, in which we have changed bonds that mature next and the following year for new ones with a significantly lower interest rate, but we are going to register a one-off charge due to the premium that we pay for the interchange. But coming down the road, this is going to be a reduction in the cost of funds. I will say that this is the general dynamic that we are going to see in the coming quarters.

Thiago Batista -- UBS -- Analyst

Very, very clear.

Operator

Thanks. Our next question comes from Gabriel Nobrega with Citigroup. Please go ahead.

Gabriel Nobrega -- Citigroup -- Analyst

Hi, good morning and thank you. I'd actually like to ask my first question regarding your refinance loan book. Could you maybe give us a bit more color of what is the current risk profile of these clients? What are the collaterals that they have? Or declines that were maybe paying before? And also, if you could explain to us how you're accruing interest on these loans?

Reynaldo Llosa -- Chief Risk Officer

Your question is in what specific portfolio? Excuse me?

Gabriel Nobrega -- Citigroup -- Analyst

Sorry. The renegotiated portfolio.

Reynaldo Llosa -- Chief Risk Officer

I didn't get you, on what specific portfolio?

Gabriel Nobrega -- Citigroup -- Analyst

Yes. On the renegotiated portfolio, which you've been giving a grace period.

Reynaldo Llosa -- Chief Risk Officer

Yes. I mean we've been quite active during the especially, the first quarter of the year in April. We've been restructuring a lot of the loans, both in the SMEs and individual loans. As you've seen in the charts, this demand for further reprogramming has dropped quite dramatically, especially on individual loans. And we've seen still an important level in the SME market. We have both loans with collaterals and without collaterals. But the trends we've seen in terms of payments of the amounts due in the recent months have been surprising for us. We expected them to be more affected and to request even further reprogramming which we haven't seen. And I would say we have both in both segments, SMEs and individuals, I would say loans with and without collateral. So I would say it's a fair representation of our portfolio in both segments.

Gabriel Nobrega -- Citigroup -- Analyst

All right. Then as for my second question, looking at your expenses, we saw that you did some cost containments during the quarter. But I imagine that in COVID, a lot of your clients started using much more of your digital bank. And also adding to this, that you were already investing in your IT platform. I was just trying to understand for the remainder of the year, if you still plan to continue on investing in your IT platform? Or are you already starting to collect some or already starting to collect some efficiencies from your investment?

Cesar Rios -- Chief Financial Officer

I think we have two different dynamics. In the more traditional fee income, we have an impact due to the decreased level of activity. A number of these collections are related to transactional activity in most of the traditional channels. And as we as the economy reopens, we have seen already an uptick in this regard. And in the case of the digital channel, it's core of our strategy. We'll continue to invest. And what we are going to get out of this is a much lower operating cost down the road. So we are continue investing in digital channels that are going to provide us with the significant efficiencies down the road.

Gabriel Nobrega -- Citigroup -- Analyst

Thank you very much.

Operator

Thank you. Our next question comes from Yuri Fernandes with JPMorgan. Please go ahead.

Yuri Fernandes -- JPMorgan -- Analyst

Thank you gentlemen for taking making questions. I have a more mid-, long-term question here regarding your ROEs. And I totally understand that it's very tough in this kind of environment to think what's going to happen in 2021, what's going to happen in 2022. But when do you expect ROEs to go back to those 18%, 19% more sustainable ROEs, if that is still the case? And if you can comment a little bit about the dilutive impact of Reactiva loans? Because I understood that you have a lot of one-offs on your margin this quarter, but most of those Reactiva loans, they have like 36 months term. And they should stay on your balance sheet for a while. So my question is, even if like economy rebound, even if the cost of risk normalized in 2021, could we continue to see ROEs lower for a longer term, given you have like this pressure for Reactiva, this dilutive impact on your margins for a while?

Cesar Rios -- Chief Financial Officer

We are not providing exact guidance at this point, as mentioned previously, but the dynamic that we see is that we are going to have, for a couple of years, while the interest rate are especially low, reduce margins. But we are working actively in efficiency to return to profitable levels down the road. But this is going to be an adjusting process because the immediate effects of the reduction on interest rate, you need to recover gradually. And in terms of the Reactiva loans, we have mentioned that the main effect of the Reactiva loans is to reduce the structural risk of the portfolio because it provides risk capital to the client. And effectively, we are going to have this loan for three years, one year without payments, and after the 13th month, a gradual repayment process. So in terms of NIM, this is going to be a structural effect. But in terms of the total amount of income should stabilize once we finish the disbursement process during the third quarter.

Walter Bayly -- Chief Executive Officer

Gianfranco, do you want to complement on what Cesar just mentioned?

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Yes. How I see the dynamics is that the main lever in order to return to or to improve our ROE going forward is how the provision account looks. I do believe that the impact on margin because of Reactiva should be managed by the reduction of cost. So that should be a zero-sum game. The key lever here is how to manage provisions. And that's the underlying reason why we've been so, not only active but also proactive in the Reactiva program, in order to keep our clients related and be coherent with our long-term vision of these relationships.

Yuri Fernandes -- JPMorgan -- Analyst

Okay, thank you. Thank you very much.

Operator

Thank you. Our next question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Tito Labarta -- Goldman Sachs -- Analyst

Hi, good morning everyone and thank you for the call. I guess following up on provisions. Just to understand a little bit more how you came up with the level of provisions that you booked. I mean I understand your GDP could fall anywhere between 10% to 15%, but you also expect a strong recovery in 2021. So just to understand, I guess, a little bit of the thought process or some of the analysis you did behind the provision levels. Like how much of this is just preventative and being cautious? Because if we look, I guess, at least regionally your you have the highest cost of risk among most banks in Latin America. Just to understand, I guess, is it because the short-term risk in Peru are very high given the level of COVID infections? But you also mentioned how much government stimulus is 26% of GDP. So just to understand how much of this is sort of a short-term preventative measure? And how as well as how much you are concerned about how much you're going to have to eventually write-off and what's going to become nonperforming? So just trying to get a little bit more color on how you come up with the level of provisions that you booked in the quarter, and also considering you had already a high level of provisions in the first quarter.

Reynaldo Llosa -- Chief Risk Officer

Yes, Tito, thank you for your question. Basically, what we've done this quarter, we've mixed two approaches. The one we did in the first quarter, which was basically a macro level approach top-down, to try to estimate the impact that changes in GDP we have in our portfolio. There has been a further deterioration on the expectations of the GDP growth I mean, drop for the year. So that has definitely had an impact on what we expect will happen on the following months. But in this quarter, we have complemented that analysis with a bottom up approach, by which we have, as Cesar mentioned, survey, an important part of our clients, specifically in SMEs and individual clients as well as on the most important wholesale clients to try to estimate the impact that COVID might have on the portfolio. We have also included some demographics demographic information, economic sectors to see the different impact that the COVID have had on these economic sectors independently. And also some early warning systems that measure change in the level of deposits, change in the level of debt or change in the use of all the credit facilities' great lines. Altogether, that has given us, I would say, a good estimate, as of today, of the provisions required by the end of the first semester of the year. Having said that, I mean, the key information that we would require to have a more precise number in the following months is the level of payments that we would see in the reprogram part of our portfolio. The first indicators are very positive, as you have seen, but there's still an important share of our portfolio that will come due in this quarter and in the fourth quarter of the year. By year end, we will probably have a more precise estimate of the level of provisions that would be required and the level of impact that would have on nonperforming loans.

Tito Labarta -- Goldman Sachs -- Analyst

Okay. That's helpful. Maybe just to follow-up a little bit there. I guess based on what you're seeing initially so far and what you've done, I know you said provision should be lower than the first half of the year, but even that kind of gives us a very wide range. I mean do you think it could be even lower than the first quarter where the cost of risk was 4.5%, like even that was a bit elevated. So should it go somewhere between where you were in 2019 and what the first half was? Or it's just relatively to the relative to the first half of the year when the cost of risk on average is around 6%? So it just only because of the wide range, just trying to see if we can narrow it down a little bit in terms of how you think based on what you've seen so far at least, that level of provisions can go to.

Reynaldo Llosa -- Chief Risk Officer

Yes. One thing we need to incorporate in the analysis that Gianfranco was mentioning was the impact of the Reactiva programs and the reprogramming efforts the bank has done to the portfolio. In general terms, I would say it would be probably around what we've done in the first semester, but there are a lot of uncertainty still on that number.

Tito Labarta -- Goldman Sachs -- Analyst

Okay. That's helpful. So around the level I thought.

Reynaldo Llosa -- Chief Risk Officer

On the first quarter, I mean. On the first quarter, not on the first semester, yes.

Tito Labarta -- Goldman Sachs -- Analyst

So around 4.5% cost of risk, given what you're seeing today is, at least in the short term, sort of a reasonable sort of assessment, you think?

Reynaldo Llosa -- Chief Risk Officer

Yes. The information we have today is probably a fair assumption, yes.

Tito Labarta -- Goldman Sachs -- Analyst

Okay, perfect. Very helpful, thank you very much.

Operator

Thank you. Our next question is coming from Jorge Kuri with Morgan Stanley. Please go ahead.

Jorge Kuri -- Morgan Stanley -- Analyst

Hi, good morning everyone. Thanks for all the commentary around delinquency and provisions. I actually just have another one on that same topic. And maybe similar to the previous question, but asked differently. The your expected loss model that's driving your provision, what is the expected loss that you're assuming that drove the provisions that you have as of now? Your NPL ratio is at 3.8%, I believe. So where does that peak in this expected loss model? And I think that will help us understand the magnitude of the provisions that you have and the room for either being able to lower provisions or the other way around? That's my first question.

Reynaldo Llosa -- Chief Risk Officer

Yes. I would rather give you a I mean we have different expected loss for the different portfolios. Definitely, our main concern today is the SME market because it's the one that has been most impacted and where we have seen the highest level of reprogramming. I would like to date I mean, to provide you a general number of expected losses in terms of NPL, but I'll probably try to work a number, and get back to you.

Jorge Kuri -- Morgan Stanley -- Analyst

I'm sorry. I'm not sure I understood your question your answer, I'm sorry.

Reynaldo Llosa -- Chief Risk Officer

No. I mean we at this time, and usually, we don't provide, I mean, these numbers on a forecast basis. I am not able to provide you what is our NPL levels expected for the second half of the year.

Jorge Kuri -- Morgan Stanley -- Analyst

All right. Okay. Let me ask something that is probably a bit more under your control. On expenses, which we've seen most banks in the region rightly saw trying to be as aggressive as possible on managing expenses to offset some of the top line challenges. What is the commitment of the consolidated bank, the consolidated financial conglomerate in terms of expense growth for this year and next year?

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Yes. So let me answer your question, I would say, in two stages. So for maybe for the first three, four months, we weren't as concerned in our focusing in expenses. We were focusing in health of our employees and health of our customers. And due to the massive reprogramming, specifically in retail loans, we will really focus on that. As you have seen, the expenses have gone despite that, expenses have gone down basically because of the slowdown in the economy. Going forward, I would say, there are like three main levers. One lever is what Cesar mentioned in his presentation that we're seeing it in bank, we see it on massive movement toward by our clients, adopting digital channel and digital products. The second one, which is we because of that, we are going to reduce our footprint this year, I would say, by anything between 4% to 6% of our footprint. And the third one is that which is a more structural one, is I strongly believe that and this goes beyond BCP or Peru, but the banking business is the margins will be lower going forward. So we are very well going to start an efficiency program that may take anything between six to 18 months in order to implement. It's something similar to what we did, obviously by attacking all of our levers, but something similar to what we did five years ago.

Jorge Kuri -- Morgan Stanley -- Analyst

So when you put it all together, what do you think your expenses, on a full year basis, will grow or decline this year? And same question for 2021? I'm just looking for a number really.

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Yes. Maybe yes. Yes, sure, sure. On 2020, quite difficult to answer. The sorry, again. The expenses, we would be current expenses are there was a decrease of 9%, I would say, that's the number. But it's quite difficult to provide a specific number. On 2021, our ambition is to return to the cost-to-income level we had in 2019.

Jorge Kuri -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

Thank you. Our next question comes from Geoffrey Elliott with Autonomous. Please go ahead.

Geoffrey Elliott -- Autonomous -- Analyst

Hello, thank you very much for taking the question. Can you give us a little bit more detail around your expectations for loan growth from here? Maybe kind of breaking it down into the retail components of the structural portfolio, the wholesale and then the government-guaranteed Reactiva portfolio? A bit more detail on how you think each of those is going to grow.

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Yes. It's quite difficult to I would say it's too soon to answer that question in detail or to a breakdown. What we're seeing, and Reynaldo mentioned it before, our economic activity is picking up. So a lot of macro leading indicators, I don't know, like energy distribution and also micro leading indicators like data charts usage, amount of cycle in the credit line. For us, several conversations we are currently having with our especially with our corporate customers provide us that a good feeling of what the economy is how it's going to perform in the second half of the year, so we are positive on that. Having said that, we the counterforce is we still need to manage the performance of the portfolio that was hit by COVID. So we are trying to gather between growing the portfolio and at the same time, maintaining or improving the quality of the risk quality of the portfolio. So it's quite difficult to provide a specific number in terms of growth for the rest of the year. Regarding your the question on Reactiva, in the first tranche of Reactiva, which was PEN30 billion or close to it, we got a market share over close to 40%. In this second tranche, our participation is going to be lower, maybe 20%, 20-some-3 percent. You have to bear in mind that the second tranche of Reactiva and maybe I can jump into Mibanco, that the second tranche of Reactiva was well targeted for the microfinance so that microfinance institutions can provide that facility to their clients.

Geoffrey Elliott -- Autonomous -- Analyst

Great, thank you very much

Operator

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

Jason Mollin -- Scotiabank -- Analyst

Hi. I have two questions, some with follow-ups. I wanted to return to your bank's BCP's north stars for 2021 that you had talked about in the past extensively and the key objectives there, number one, in customer experience, cost income ratio in the mid-30s, double the cross-sell, be the number one in employee experience. If you can give us an update, and actually, I would say, I think on the digital side, you're probably moving very quickly. But if you can give us an update there and how this current COVID situation has adjusted those north stars, it would be [Indecipherable] have if you could? And then my second question is also related to provisioning. Where you talk about the base case scenario that provisions will reach in the second half of 2020. Can you frame that with a bold case scenario? What happens if things go better? Or what would promote what would drive that? And perhaps the base case scenario, how bad things could get?

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Jason, let me take your first question. So the objectives we made public, maybe a couple of years ago or one and half years ago, they're the same. It has been the same. Some of them, we may not reach them by 2021 because of what is going on with the prices. But still structurally, we strongly believe that the play is to provide the best customer experience and to be the most efficient player in the market. So that is those goals and that strategy is still the same. Again, maybe we will have to redefine through time. What I would add is that very clearly, some are changing and will change, maybe more is that we and I'm talking about discipline here. And maybe Walter will mention a little bit about Credicorp also, is that the crisis has reflected us that there are some social gaps in Peru that need to be solved. Because of the relevance of BCP in the Peruvian economy, we need to get more connected on regarding those gaps and obviously, we are not going to absorb them by ourselves. But we do believe that we can play with Santander regarding those differences and including stakeholders that maybe weren't as present in our strategy before. So I would say going back to your question that I would say that the main change that you will see and we will make public in a short period of time will be done. I will now let Reynaldo take the question regarding provisions and risk.

Reynaldo Llosa -- Chief Risk Officer

Yes. I would say the key issue that is going to either provide us a more pessimistic or optimistic view in terms of the provisions required for the second part of the year is the ability of the government and the country as a whole to control the sanitary problem. I mean if we've seen in this since the economy started to free up and some sectors starting to operate very positive numbers in all in transactions in the level of activity in the demand of loans. But I mean if we need as a country another big lockdown, overall lockdown in all regions of the country, specifically in Lima, that would probably provide us a more blooming outlook for what will happen in the next I would say that's key. And regarding 2021, I mean we have elections on April, and that's also a key question mark in terms of what could happen for the company on our longer term.

Jason Mollin -- Scotiabank -- Analyst

Thank you very much.

Operator

Our next question comes from Sergey Dubin. Please go ahead.

Sergey Dubin -- Harding Loevner -- Analyst

Yeah, good afternoon and thanks for the opportunity. The first one is you guys are speaking about economy getting better gradually. You're also talking about Reactiva Peru program is giving fresh capital to the borrowers, which is going to help them. And then thirdly, you also said that these basically, you reprogram the loans, which means you deferred installment payments, etc. So all these things suggest to me that you should see an improvement in the provisioning cost and cost of risk, but your provisioning levels suggest that you actually see the opposite. So I'm having help me reconcile these statements that don't seem internally consistent to me. So my first question is, how can you help me reconcile these statements in your provision cost with it skyrocketing?

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Yes. A great question to say. We're also struggling with the same issues because I think well, there's a lot of evidence that the economy is performing better. I would say, on the macro side, the worst is over. And definitely, note Reactiva, we are, let's say, the corporate midsized companies almost now and the SMEs companies also has played a very important role. Obviously, there are some sectors that are not is not it's not going to have structural problems. But in general, what I would say that the payments flow in the economy haven't stopped, so which is very positive. On the retail business and the personal business again, there has been a lot of liquidity that should affect the long-term stability of those people, which is the pension funds but has provided a lot of liquidity into the market. So yes, there are like to focus here, one is that the hit that we have taken as a country in the second quarter of this year, which obviously has been relative but there has been two or three macro actions by the government that are having a positive impact. The other variable that is quite difficult to assess is the health model. Unfortunately, the management of the sales prices in Peru hasn't been good. It is completely public. Any ratio that we can compare in terms of sales compare to other countries in the world, we were among the worst performance, so that's the only issue. But yes, I would say we're still solving. We are at high positive going forward. But this quarter it's difficult to provide specific figure for the next couple of quarters.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. So if you-yes, go ahead.

Reynaldo Llosa -- Chief Risk Officer

If I could add something to what Gianfranco has mentioned. I mean as we've mentioned, we've seen some positive indicators in both macroeconomic numbers and specifically on the level of payments to all of our clients. But you will see in one of the charts, still 25% of the retail portfolio has required some further reprogramming, specifically in the SME market. And there's still an important size of the portfolio overdues. So the key question here is how this portion of the portfolio, which is, of course, of the total retail portfolio is going to perform in the following months. So that's what makes us uncertain of exactly what the numbers would be for the next six months. So that's the level of confirmations of the payment ability in August, September and the rest of the year would provide us the necessary information to have a more precise number in the second half of the year. That's why we cannot have, as of today, change our perspective in terms of the provision required for the portfolio.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. That is helpful. My second question has to do with your NIMs and specifically your funding costs. So you talked about how Central Bank of Peru has cut interest rates, which has pressured your asset yields. But it should also help you on the funding side in terms of funding cost. So can you discuss I think you might have touched briefly upon this earlier, but can you give a more comprehensive answer and just walk through how quickly your loans reprice? How quickly your deposits reprice? And what's the net effect of that given obviously, the pressure that you face from the Reactiva loans, which are sub-1%. But all in, how should we think about your funding cost and the NIM?

Cesar Rios -- Chief Financial Officer

Yes. Probably going further in the information that I gave previously, talking about the funding cost, we need to consider that we have already, before the crisis, a very cheap funding costs, around PEN60 billion at BCP between saving accounts and current accounts that already were paying float to 0%. So you have a significant part of the portfolio that cannot improve, given the new relative interest rates of the market. That is attractive. And of course, we are repricing the additional parts of the portfolio, the time deposits, some short-term funding. I mentioned also the subordinated loans. But in the other side, you have a short term, almost, I would say, almost immediate impact from the liquidity portfolio that has been invested at rates closely to the reference rate that has been adjusted very fastly. And the other factor that I mentioned previously was the gradual readjustment of the loan portfolios that are starting to pay down by the origination for some months going to be less than the payments that has improved significantly in the last month. I don't know if that's help.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. So overall, would you how long do you think that NIM pressure is going to continue? And when would the NIM stabilize?

Cesar Rios -- Chief Financial Officer

I think we are going to have an in-pressure in the remaining of the year. And it's going to improve as soon as we started to originate more retail loans with higher rates.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. Okay. And then my third question is on capital. You mentioned that you raised $500 million bond before the as I understand it, before June. So does your capital adequacy ratio that you show for the second quarter, does that include I assume that they've gone into a Tier two capital, so does this capital adequacy ratio included that $500 million in there?

Cesar Rios -- Chief Financial Officer

Yes. Talking about BCP, we have a sound capital base at the end of the second quarter, but in core equity Tier one measures and in the regulatory measures more than 11% and around 15% by BIS. The issue of the bond is going to improve the BIS ratio for the marginal $130 million tranche that was issued, that is going to be around 30 basis points for the BIS. For equity Tier1, of course, is not impacted for this transaction.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. So I'm sorry, I misheard. You said that the bond issue would improve CAR ratio by 130 bps? Is that correct?

Cesar Rios -- Chief Financial Officer

No, no, no. The bond issue is going to improve the BIS ratio because it's a Tier two of around 30 basis points because you are substituting one with bond with another one for $720 million and only the marginal amount that this $130 million improves the figure.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. So the marginal improvement is 30 bps for BIS.

Cesar Rios -- Chief Financial Officer

Yes, yes, yes.

Sergey Dubin -- Harding Loevner -- Analyst

Okay. Okay. And then the last question has to do with, again, I think you spoke about it, but the connection was very bad. So I didn't hear the answer well regarding the potential interest rate cap on that's being proposed in your legislation, I guess. Can you talk about exactly what the proposals are? And what do you think is the likelihood that they will pass? And if they do pass, how would you deal with that sort of issue?

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Sorry, can you repeat the question?

Sergey Dubin -- Harding Loevner -- Analyst

Yes. The question is regarding the proposed interest rate cap. I believe you touched on that before, but I haven't heard the answer because the connection was very bad. So I'm asking just if you could repeat and elaborate a little bit as far as the proposals, or what is the likelihood of them passing? And what's your response?

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Yes. Thank you. I will. There's a project or proposal at the Congress regarding interest rate cap, that's the status. And obviously, that has go through the judiciary process. And after that, we actually we use a whole commercial system. We will see if it's legal, if it's according to the constitution and things like that. It's obvious that it will keep very hardly, especially the microfinance industry. But we're working on that and trying to educate and create awareness on the negative impact of measures like that will take on the not only on the financial system, but also in the reactivation of the economy. And that we start with today.

Sergey Dubin -- Harding Loevner -- Analyst

Right. So just in the level of presentation or can you give us a sort of the time line maybe? It's going to is that something that will [Indecipherable]

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

It's quite difficult to so time line to market. It's very difficult to assess. As I have a lot of factors. As we speak, it's a project. So not every project becomes a law. And if it becomes a law, it goes through a process that has to be approved or not by the accredited power. And let's assume it's approved, we're still evaluating if it's according to our the Peruvian constitution or law.

Sergey Dubin -- Harding Loevner -- Analyst

Okay, all right, thanks.

Operator

We will move now to our next question from Andres Soto. Please go ahead.

Andres Soto -- Santander Investment -- Analyst

Good morning all and thank you for the presentation. My question is regarding the Reactiva two program, the second phase of the government guarantee scheme. Gianfranco already commented 20% market share in that one, mostly dedicated to Mibanco. What I heard is that the process for disbursement of this money is taking much longer than in the first phase. So I would like to understand how much of this money that I understand from the Central Bank, they have already awarded 70% of that. How much of that money has already reached your clients? And when would you expect this to be completed? That will be my first question.

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

The rules for Reactiva two are much more complicated, not on our side, but more on the COFIDE which is the government institution that we were doing the due diligence on the file. For us, the number of loans since Reactiva two is also targeted to microfinance institution loans, I would say, well at least tripled. So we will go from 77,000 loans to over 250,000 loans on the not BCP. I don't have this data, but sort of have it top of mind, I can look for. Out of the PEN30 billion maybe, there has been auctions for around PEN20 billion or PEN17 billion. I can double check, I'll provide that. But the speed of this business is quite, quite slow. So and again, it's a matter, not on the financial institutions, but it's a matter on the COFIDE which will be with the government institutional doing the due diligence.

Andres Soto -- Santander Investment -- Analyst

My second question is on dividend. Obviously, this is going to be a tough year for net income. But the way you look at your numbers at the holding company level, you still have $500 million as a rainy day fund that, at some point, you were discussing to use for M&A, but do you say that those opportunities are not there anymore. So what are your thoughts about this morning? Are you given your strong capital levels of your subsidiaries? And given the more positive outlook for 2021, can our shareholders still expect dividend distribution this year?

Cesar Rios -- Chief Financial Officer

Okay. Should I? As we see it, as we have stated, this is a precautionary fund. As you remember, we were operating the previous year with a reserve fund of around $600 million, PEN two billion as we continue with the payment of the dividend at corporate level, but we reduce the dividends on an operational business unit. So we have issued this bond that we have an extra layer of that precautionary measure. When we have a better assessment of the risk, we could again see opportunities to use these funds. But in the short term, it's an extra layer, as a matter of precaution.

Walter Bayly -- Chief Executive Officer

This is Walter Bayly. Let me add something to the dividend question. I think that this is not probably the right time to start thinking about dividends. We are we will have to rebuild the capital of all our banking subsidiaries. So if we would not expect the banking subsidiaries to send any substantial dividends to Credicorp. Thus, if we distribute any dividends, it will be a marginal number.

Andres Soto -- Santander Investment -- Analyst

Understood. Thank you Walter

Operator

Our next question comes from Carlos Gomez-Lopez with HSBC. Please go ahead.

Carlos Gomez-Lopez -- HSBC -- Analyst

Thank you, two questions. The first one refers to a change in your equity. As you mentioned, you paid the dividend, but I was still surprised that we did not have more of a recovery in this quarter. Is there something else that we have not changed beyond the movement in securities? Did you sell the securities when they were low? And the second, I think Walter also answer this one. You have obviously made huge fix provisions. You have given a lot of thought to it, but you can probably provide it two to three times what other banks in the region have provided. So I see three possibilities, either your circumstances or your portfolio are different. Or you are more conservative than perhaps you should be. Or the others have not really taken the crisis to the extent that they should, which would probably which do you think is the most likely explanation?

Walter Bayly -- Chief Executive Officer

Thank you. Yeah, about that. So at the moment.

Cesar Rios -- Chief Financial Officer

Sure. I was talking about the equity and the unrealized gains. During the first quarter, we had an unrealized loss of PEN730 million. And in the second quarter, we have PEN792 million unrealized gains. So a significant change in this number, and we have also realized some gains that you can see impacting positively in the P&L. Actually, we have increased the size of our investment portfolios.

Reynaldo Llosa -- Chief Risk Officer

And in terms of your question of provisions, I would say there are several issues. Peru has been hit very hard as compared to other countries in the region. Also I mean, we as you know, are conservative, and we take that approach always in estimating the respective flaws. I mean we are based on models, and we try to be as much early as we can. And as it was mentioned also, we will try to absorb all that potential losses this year or at least most of them. And finally, we have an important share of our portfolio in the SME market, which is a very sensitive market in terms of losses when these scenarios occurred. So I would say it would be a mix of the different things you have mentioned.

Carlos Gomez-Lopez -- HSBC -- Analyst

Thank you.

Operator

We will move to our final question, and that comes from Brian Flores of Citibank. Please go ahead.

Brian Flores -- Citibank -- Analyst

Hi, thank you for the opportunity. Just a quick follow-up. In a previous question, I had some connection problems, couldn't hear very well. You mentioned some figures for opex. Could you please repeat them? I think it was for a colleague called main profit.

Operator

And speakers, do we still have you?

Walter Bayly -- Chief Executive Officer

Sorry, could you repeat the question? I think we failed to understand your question. And Cesar, could you please answer? I think it's referring to opex, but I wasn't quite sure because of the connection. Could you please repeat, Brian?

Brian Flores -- Citibank -- Analyst

Okay. Sure, no problem. In the previous response to a colleague, you mentioned some figures that could help us understand the development of opex going forward. My connection was a bit bad, so I just I'm asking if you could repeat those figures, please.

Cesar Rios -- Chief Financial Officer

Okay. Yes. We mentioned that during this year, we have controlled costs in several nonessential projects and also reducing variable compensation. So this is going to be the reality during this year. And now we are starting to work in a new efficiency program that is going to give results between six and 18 months to control in a more structural way, the cost structure, leveraging the digital capabilities that have been evident during this pandemic period in which the clients have moved aggressively toward digital channels. One of the measures, for example, will imply to reduce the footprint of the distribution the traditional distribution network, use more remote work, and we are working also, in an already mentioned, like relation with suppliers and so on. The expectation is to maintain similar cost-to-income ratio next year than the 2019, but leveraging different levels, working in expenses and being conscious that the NIMs are going to be somewhat impacted in the short-term due to the reduction of general interest rates in the market.

Brian Flores -- Citibank -- Analyst

It is very, very useful thank you.

Operator

Thank you. And now I would like to turn the conference to Mr. Walter Bayly, Chief Executive Officer, for final remarks.

Walter Bayly -- Chief Executive Officer

Thank you, and good morning to all of you. Undoubtedly, this has been an extraordinary quarter with GDP falling by about 33% when compared with the same quarter last year. This is without precedent, not only in Credicorp's history, but in the last 100 years of Peru's history. And as you are all aware, this is the worst performance of any Latin American economy. In this context, our results should not be surprising. And on the contrary, should be reassuring. And then our balance sheet allows us to front-load what our models indicate will be the required provisions rather than deferring the bulk of the impact over time. Looking forward, we are watching three points of inflection and key indicators of the future: one, the level of economic activity. As mentioned by Cesar, we have solid indicators that, that inflection point is already behind us. The remaining recovery of economic activity should take place in the coming months and will largely be determined by the health situation. The second inflection point is precisely the health situation. Clearly, we are not there yet in Peru and in the world, as the opening up of the economy is creating a spike in infections. We will have to watch this very closely. And the third inflection point relates to our sense that the damage to our portfolio is behind us.

Reynaldo has explained very clearly how we arrived at our provisioning level with top-down model based primarily on how GDP reductions affect the different segments of portfolio complemented with some qualitative data on the retail and some hard data on the wholesale. As mentioned, we are not sure that the impact of the stimulus package, which are quite substantial, is fully reflected in our model. Initial data, still not deep enough from a statistical point of view, indicates that our model is conservative. A real bottom-up data will only be available by the end of this month. We are focused not only on the impact on our portfolio but on accelerating our digital initiatives and reviewing our fiscal footprint physical footprint. We believe there are relevant opportunities in both initiatives. To finalize, we are confident that our decision to front-load the bulk of our provisions is the right one. Our experience in prior crisises have showed us the benefits of this course of action. We will come out stronger and with our franchise in a stronger position. Thank you very much and look forward to the next quarter's conference call. Thank you, and good morning.

Operator

[Operator Closing Remarks]

Duration: 110 minutes

Call participants:

Milagros Ciguenas -- Investor Relations Officer

Cesar Rios -- Chief Financial Officer

Walter Bayly -- Chief Executive Officer

Reynaldo Llosa -- Chief Risk Officer

Gianfranco Ferrari -- Deputy Chief Executive Officer (LoB Universal Banking), Chief Executive Officer (BCP Stand-alone)

Ernesto Gabilondo -- Bank of America -- Analyst

Thiago Batista -- UBS -- Analyst

Gabriel Nobrega -- Citigroup -- Analyst

Yuri Fernandes -- JPMorgan -- Analyst

Tito Labarta -- Goldman Sachs -- Analyst

Jorge Kuri -- Morgan Stanley -- Analyst

Geoffrey Elliott -- Autonomous -- Analyst

Jason Mollin -- Scotiabank -- Analyst

Sergey Dubin -- Harding Loevner -- Analyst

Andres Soto -- Santander Investment -- Analyst

Carlos Gomez-Lopez -- HSBC -- Analyst

Brian Flores -- Citibank -- Analyst

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