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Credicorp Ltd (NYSE:BAP)
Q1 2021 Earnings Call
May 7, 2021, 10:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, good morning everyone. I would like to welcome all of you to Credicorp Limited First Quarter 2021 Conference Call. We now have all of our speakers in conference. [Operator Instructions]

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

And now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr, Rios, you may begin sir.

Cesar Rios -- Chief Financial Officer

Thank you. Good morning and welcome to Credicorp's conference call on our revenue results for the first quarter of 2021. I hope you and your families are healthy. As you know, the current sanitary situation in Peru as well as the political landscape are key factors of uncertainty. The sanitary situation in Peru and Metropolitan Lima has not improved in recent months as is reflected in data on excess mortality. Peru's vaccination roll-out, which began in February has progressed at a slower pace and the order of countries in the region. Nonetheless, the government has announced there will be an acceleration in the immunization process in the coming months. In this challenging context, we continue to put the well-being of Credicorp's employees first as we focus on ensuring operating continuity and offering financial solutions to clients and employees alike. So our ultimate goal is to serve society as we continue to create value.

From the political theme, candidates Pedro Castillo and Keiko Fujimori will face off in the second round of presidential elections on June 6th. The latest polls show candidate Pedro Castillo in the lead. Mr. Castillo from the political party Peru Libre has proposed a number of measures. According to the party's government plan, it intends to shift away the current market-oriented economic model, the one that prioritize a so-called popular economy with markets. Under this model, the state will play much more active role in businesses. Peru Libre's plan also includes holding a constitution assembly to write a new constitution and nationalizing so-called strategic sectors.

Mrs. Fujimori in contrast, who is maintaining an economic model that supports national and foreign investments and advocates a restricted and secondary role for the state in the economy. Mrs. Fujimori also believes that the current constitution should remain in effect. It is still early to predict the outcome of this election. those can shift considerably in the Peruvian context which is marked by high levels of broader indecision. In any scenario, the new executive branch will need to generate consensus to be able to implement changes. The recent elected Congress is highly fragmented and composed of 10 political parties. All the relevant elements of the records operating context in Colombia, the Executive Branch recently withdrew the bill for tax reform that is submitted to Congress, which represents the 15th of its kind since 1991. A new bill will be formulated. In Chile, elections will be held on May 15 and 16, primarily to determine the members of the Constitutional Assembly.

Next slide, please. Regarding Peruvian economic activity, recovery continued in the first quarter of 2021 despite focalized lockdowns. Our estimates suggest that GDP grew around 4% year-over-year in the first quarter of 2021. This is the first positive registered in five quarters. In addition, in seasonally adjusted terms, GDP in the first quarter of 2021 stands very close to the pre-pandemic levels. Electricity demand also continue to recover in the first quarter of '21 and surpassed, albeit slightly, pre-pandemic levels.

Due to political uncertainty, sovereign Peru interest rate has increased primarily for medium and long-term maturities. The Peruvian sol has also depreciated to hit a record low. The global economy continues to improve, but interest rates and FX level remain volatile. Commodity prices continued to be robust, and the price of copper, which is relevant for Peru, reached a peak or $4.43, almost a 10-year peak. We expect Peru's GDP to rebound to 9% in 2021, underpinned by high copper prices as well as extensive monetary and fiscal policies.

Next slide, please. Now, I will comment on the evolution of the financial system and the regulatory environment. According to data from the Central Bank, loan growth in March stood at 9.4% year-over-year at a constant exchange rate, driven by the influence of Reactiva loans. If we exclude the effect of Reactiva loans, total loans declined 7% year-over-year.

Regarding economic policy and the regulatory environment, I would like to highlight the following. First, the Congress approved a new Private Pension Fund withdrawal. Under this plan, both current contributors and non-contributors will be able to withdraw up to PEN17,600. It is important to note that the Ministry of Finance has announced it will propose taking the law to the Constitutional Court.

Regarding new regulations, Congress also approved the withdrawal of 100% of CTS accounts until December 2021. As of February, CTS deposits totaled PEN21.8 billion systemwide. Moreover, the government approved rescheduling of Reactiva loans for a total of PEN19.5 billion along with the FAE loans for PEN2.1 billion, both until July 15. The rescheduling process includes a new grace periods of up to 12 months.

Lastly, the Executive Branch has announced, it will bring the law on interest rate caps and fee restrictions before the Constitutional Court. Several private institutions have presented legal actions that may also be taken before the Constitutional Court. Fee restrictions have already been implemented, while recent guidelines from the Central Bank has set an interest rate cap of 83.4% for a small consumer and micro business loans from May to October 2021. We will continue to closely monitor these developments to evaluate the impact on Credicorp's operations.

Next slide, please. Now, I will comment on Credicorp's performance in the first quarter of 2021. Credicorp's net income totaled PEN661 million this quarter, which represents an increase of 215.8% year-over-year, and reflects the fact that in 2020 we set aside significant provisions to mitigate the impact of the pandemic. Despite an adverse environment due to COVID-19, we continue to recover and posted a return on equity of 10.6% this quarter. The upward trend in earnings in recent quarters has been driven mainly by a decreasing provisions and reflects the favorable evolution of asset quality and a peak in fee income. This was offset by a decrease in the net interest margin and an increase in the life insurance claims.

Regarding our quarter-over-quarter evolution, I would like to highlight the loan portfolio remain flat in terms of quarter imbalances, as growth posted in consumer loans, mortgages and Mibanco was offset by contractions in corporate banking and credit cards. Net interest income grew 2.6%. This result includes PEN88 million in expenses, related to a liability management operation that BCP stand-alone, which will generate savings going forward in a context of lower cost funding, where these results will remain flat at 3.73%.

Provision expenses fell due to the ongoing improvement in client payment behavior, which led to a cost of risk of 1.63% and unstructured cost of risk of 1.92% this quarter. Within non-financial income, fee income contracted 4.9%, which was mainly attributable to a decrease in transactions due to seasonality and localized lockdowns.

The net gain on securities also posted a decrees as fixed income securities from ASB proprietary portfolio registered a drop in value in a context of higher interest rates. Insurance underwriting results were severely impacted by a considerable increase in COVID-19 related claims, and incurred but not reported provisions in the large business. Expenses remain under control. Finally, our balance sheet remains strong with ample liquidity and adequate capital wages.

Next slide please. In terms of performance of our lines of business, each of our subsidiaries is in a different stage of the recovery. In terms of subsidiaries, I would like to highlight, BCP stand-alone growth recovery with an earnings contribution of PEN725 million, which represented an 18.4% return on equity. Mibanco's recovery was sluggish with an earnings contribution of PEN14 million and a 2.7% return on equity. Pacifico's business was the most impacted by the pandemic this quarter, and registered PEN96 million in losses. Investment banking and wealth management in turn reported and earnings contribution of PEN37 million, which was close to pre-pandemic levels. I will now explain the key dynamics in each of our lines of business this quarter, which led to mixed results. After that, we will review in detail our consolidated performance line-by-line.

Next slide. Going into Universal Bank. This line of business drives the recovery this quarter. After registering the most difficult quarter in history in the second quarter of 2020, BCP stand-alone remain on track to earnings recovery posting an earnings contribution to Credicorp of PEN725 million, and a return on equity of 18.4% this quarter. Net interest income decreased 10.4% year-over-year, which was driven by a decrease in market interest rate, a contraction in the structural loans and the presence of government loans. These impacts were partially offset by growth in low-cost deposit actions to take advantage of lower rates, reliability management strategies and increase of the investment portfolio.

Provisions expenses decreased 65.5% year-over-year, after the majority of grace periods expired and clients registered improvements in payment behavior. In this context, cost of risk was 1.37% and structural cost of risk was 1.62%. Fee income increased 6.2% year-over-year given that the first quarter last year was impacted by fee exemptions. On a quarter-over-quarter basis, however, fee income fell somewhat due to a decrease in transactional activity amid localized lockdowns and the initial impact of government mandated fee restrictions. Net gains on securities increased PEN73 million year-over-year after posting losses in the first quarter of 2020 due to a general decline in capital markets in the context of the first wave of COVID-19. On a quarter-over-quarter basis results were mainly driven by sovereign bond sales in the banking book portfolio. Finally, operating expenses remain under control. This reflection of monetization in the levels of variable compensation and the impact of other cost controls. Regarding Bolivia, the business resumed positive earnings contribution, given that the last quarter of 2020 was impacted by new government regulations and reprogram loans.

Next slide please. In micro finance, Mibanco's recovery is pretty low. After resuming growth in earnings during the second half of last year, the bank registered PEN14 million in earnings contribution this quarter. Mibanco's lines were primary micro businesses felt the impact of lockdown measures more than larger thin clients at BCP. Nonetheless, Mibanco's progress in implementing a hybrid business model has helped partially offset this effect. As a result, origination decelerated and the loan portfolio grew 0.5% quarter-over-quarter. There were new needs for credit facilities as grace periods expired and delinquency increased.

Net interest income contracted year-over-year. This reflected the advent of lower interest rate and the fact that through 2020 we targeted lower risk clients, so an increase in the average ticket and registered a decrease in yields. It also includes the net effect of interest reversals of previously reprogram, non-reprogramming loans and amortization on impairment on zero interest rate loans made last year.

Recently, the average ticket trend is moving in the opposite direction as the average ticket decreases and origination deals increase. These trends coupled with a decrease in the cost of funds led net interest income to grow 4.4% quarter-over-quarter. Provision expenses increased 17.6% quarter-over-quarter, which was driven primarily by a deterioration in portfolio quality, and by alignment with borrow bureau information and as competitors delinquency increased.

Non-financial income contracted 52% quarter-over-quarter, given that last quarter we recognized extraordinary fees for credit life insurance, commissions relating to the reprogramming loans for the full year 2020. At operating expense level, Mibanco results reflect the positive impact of the gradual implementation of the hybrid distribution model. In Colombia, Mibanco posted positive results for the first time since the acquisition of Bancompartir in 2019. Loan origination is already at pre-pandemic levels and commercial productivity has been improving. Additionally, overdue loans improved from 5% to 4.5% quarter-over-quarter.

Next slide please. Regarding insurance and pensions. I think it was life business generated a stable earnings in the first half of 2020, but began to reflect the weight of pandemic in the third quarter of last year. In the first quarter of 2021 a second wave of COVID-19 weight through the country severely impacting the life business. Consequently, Pacifico posted a negative earning contribution of PEN95.5 million this quarter driven by PEN260 million of claims and IBNR reserve for COVID-19. Year-over-year and quarter-over-quarter, the evolution of earnings was driven by an increasing life claims and IBNR provision, which was partially offset by a decrease in claims in the property and casualty business due to mobility restrictions and an increasing net income from the medical service business due to higher demand.

Regarding the pension business. Prima's assets under management expanded year-over-year reflecting the recovery of capital markets, offset by the fund withdrawals of PEN7.2 billion in 2020 and PEN2.5 billion in 2021 due to government-mandated facilities. On a quarter-over-quarter basis, assets under management contracted 3.2%. fees contracted 5.5% year-over-year due to a decrease in affiliate contribution, but show an improvement quarter-over-quarter due to growth in average salaries and in the number of active contributors.

Next slide please. Regarding our Investment Banking, and Wealth Management businesses, assets under management and income grew year-over-year given that the steepest decline in the capital markets was seen in the first quarter of 2020. On a quarter-over-quarter basis. I would like to highlight: Total assets under management increased 3.3%, mainly driven by net new money in the asset management business. The effect of new subscriptions was partially offset by the evolution of asset values, which were affected by an increase in interest rates.

Regarding recurring income contribution, the contraction was driven by a downturn in capital markets and corporate finance. In capital markets, fixed income securities from the proprietary portfolios reduced. There is a drop in value in the context of higher interest rate. In corporate finance, income was affected by seasonality posting lower levels of corporate transaction executions. These results were partially offset by growth in income in Wealth Management, which was primarily associated with higher gains from brokerage business growth and primary losses. Asset management income growth driven by traditional and alternative funds as well by the distribution of their multi products and growth in the treasury income which was affected by devaluation of loans held proprietary investments.

Next slide please. Now I will discuss Credicorp's consolidated performance. On the asset side, Credicorp's interest earning assets grew 26.9% year-over-year driven by government program loans and investments. The structural portfolio dropped after wholesale clients has less need for liquidity, which led to an increase in cancellation of short-term loans. On a quarter-over-quarter basis, I would like to highlight, interest earning assets decreased 2.9% driven by the investment portfolio of BCP at stand-alone. This quarter we increased positions in the short-term investment portfolio and managed exposure in the medium-term banking book in the context of rising interest rates.

Our loan portfolio contracted 0.3% quarter-over-quarter in average daily balances, which was mainly due to a drop in the Wholesale Banking and Corporate portfolio and to a lesser extent to prepayments in some Reactiva loans. This was partially offset by the expansion posted in Retail Banking and at Mibanco in Bolivia. The 1.3% quarter-over-quarter expansion in Retail Banking loan portfolio was driven by mortgage, consumer and SME driven segments. This evolution was partially offset by a contraction in SME business which was high levels of liquidity and in credit cards, which reduced the low balances due to a drop in big-ticket purchases and higher constraints in the risk appetite for consumer segment. Mibanco's loan portfolio expanded 1.9%. Loans origination in this segment decelerated in February due to mobility restrictions, but growth resumed in March.

Next slide please. Regarding funding structure, total deposits grew 21.3% year-over-year. Expansion was driven by an increase in demand and saving deposits due to an injection of liquidity through government program facilities and higher savings rates among individuals. The aforementioned, coupled with lower interest rate and active liability management led to an improvement in the funding cost.

Regarding funding management this quarter, I would like to highlight, total funding increased driven by growth low cost deposits in a context of high market liquidity and BCP stand-alone executed a new liability management transaction in exchange to callable subordinated bonds and bonds and 2026 bonds at 6.875% and 2027 bond at 6.125% for a new subordinated bond of $500 million at 3.25% that matures in 2031. This transaction, which will allow us to capture savings going forward figure related charges in financial expenses or PEN88 million in March 2021. The structural funding costs dropped to 1.35% this quarter. If we include funding relative to government programs and charges related to liability management operation, the total funding costs situates at 1.43% this quarter.

Next slide please. Evolution of both payment behavior and portfolio quality improved in Retail Banking. But the situation at Mibanco was less favorable, as clients in this segment have been more impacted by the second wave of COVID-19. At BCP stand-alone, retail clients sustained a strong payment performance on-time payments on loans was 95% in March as higher volumes of reprogrammed loans with party. Non-reprogrammed up-to-date loans increased this quarter to represent 76% of the structural loans and the high uncertainty portfolio, which is comprised of reprogrammed loans and are within grace periods and those that had other due reduced to 5% compared to 9% last quarter.

At Mibanco on-time payments on loans due remained at 93% in a context marked by an increasing exploration of grace period quarter-over-quarter. Analyzing the structural portfolio figures we know that first, loans reprogrammed up-to-date loans posted are not warranted growth this quarter to represent 57% of structural loans compared to 49% at the end of 2020. Second, the overdue portfolio increased this quarter from 6% to 9% of the structural loans as clients facilities expired and clients were impacted by lockdowns. Finally, the high servicing portfolio was reduced to 19% of structural loans compared with 24% last quarter. In this portfolio, 10% of the structural loans were still within grace periods which will be expired mainly by June 2021.

Regarding portfolio quality ratios, the majority of Credicorp's structural NPL ratios increased this quarter. The Retail Banking portfolio, the BCP stand-alone improved its structural NPL ratio this quarter for decreasing over due loans in the consumer and credit card segments reflecting a positive payment behavior and increasing write-offs and loan growth also fueled a drop in the ratio, deterioration in NPL for Wholesale Banking was attributable to specific clients in the middle market segment.

In Mibanco, the NPL ratio deteriorated this quarter due to higher delinquencies after a large tranche of grace period expires and client payments began to reflect the effect of the lockdown in February. As a result, Credicorp's charter NPL increased to 6.05%. Finally, the NPL coverage ratio decreased 142.9% this quarter reflecting also PEN767 million in write-offs.

Next slide please. Now, I will explain cost of risk dynamics, provision expenses continue to follow on not our downward trend, which was attributable to an improvement in client payment behavior and uptick in transactional activity at BCP stand-alone, mainly in Retail Banking segment. At Mibanco, the increase this quarter due to two factors, an upswing in delinquency after grace periods expired and external alignment given that our competitors delinquency levels rose, as a result credit cards structural allowance for loan losses over the total structural loan ratio fell this quarter to 8.5%.

Regarding the evolution of the structural loans which is quarter-over-quarter BCP stand-alone ratio reduced at a significant contraction of 95 basis points and situated at 1.62% while Mibanco's ratio increased 73 basis points to situate at 5.45%. As result Credicorp's structural cost of risk contracted 72 basis points and situated at 1.92%. Finally, Credicorp's total cost of risk contracted 50 basis points quarter-over-quarter, posting a level of 1.63%.

Next slide please. At Credicorp NIM remained flat this quarter at 3.73%. This was attributable to the fact that increasing net interest income was offset by growth in our interest earning assets. NIM includes a negative impact of 7 basis points from charges related to the liability management transaction at BCP stand-alone, structurally NIM dropped 12 basis points this quarter affected by a less favorable mix in interest earning assets and lower origination rates at BCP stand-alone. Finally, we suggested NIM increase 34 basis points this quarter in line with lower provisions. BCP stand-alone NIM contracted 37 basis points quarter-over-quarter following the same dynamics seen at Credicorp level. Mibanco NIM increased 17 basis points quarter-over-quarter given that the structural dynamics continue to recover despite the lockdown both by the government and interest rate on new loans increasing line with a drop in there with lot ticket.

Next slide please. Non-financial income expanded 24.7% year-over-year driven by 9.3% growth in fee income, given that the first quarter of last year was impacted by fee exceptions and were in the net gain on securities given that the first quarter of last year reported losses in line with a steepest decline in value in the capital markets due to the onset of the pandemic. On a quarter-over-quarter basis, non-financial income contracted 10.2%, which was driven by a decrease in net income securities where significant gains were booked in the last quarter of 2020. This drop was driven by losses registering fees income securities from ASBs proprietary portfolio due to a drop in value in context of higher interest rate. These losses were offset by gains on sales of sovereign bonds at BCP stand-alone's banking book portfolio. A decrease in fee income at BCP after extraordinary fees were registered in the full quarter of 2020 of reprogrammed loans during the full year 2020.

Next slide please. The insurance underwriting result was severely impacted this quarter, and posted a loss of PEN65.2 million. The main driver of this result was the life insurance business. On a year-over-year basis, the increase in the loss ratio in the Life business was driven by excess mortality related to COVID-19. This was partially offset by growth in net premiums from SISCO V after higher fees were obtained through the new auction for ASB mortality which covers and price adjustments were made in the Credi's Life business. In the case of property on casualty, the loss ratio improved after the claim level drop across businesses due to mobility restrictions. The material quarter-over-quarter increase in IBNR provisions for COVID-19 is due to two factors. Mortality was driven by the retired population in the first wave and by members of the economically active population in the second wave. Credit exposure in the second group was consequently high. Provisioning in the context of the pandemic has been challenging and initially involve our base estimates, even when there is a lag between the moment in which cases were few and when they are reported. Our lending has increased significantly since the beginning of the crisis and such as we have adopted our IBNR more or less to reflect the potential impact of increased mortality. Statistics show that mortality rates are beginning to decrease and IBNR should follow that trend.

Next slide please. Credicorp's operating expenses remain under control. The year-over-year deterioration in Credicorp's efficiency ratio which situated at 44% was driven by a decreasing income due to lockdowns and charges for BCP stand-alone credibility management transactions. Excluding these charges, Credicorp's adjusted efficiency ratio was 43.06%, which represent a year-over-year improvement of 32 basis points. Expense controls at BCP stand-alone was reflected primarily in a reduction in variable remuneration expenses. Mibanco in turn has made significant progress in implementing its hybrid distribution model, which is more cost efficient.

Next slide please. In terms of our liquidity, the regulator monitors a 30 day liquidity coverage ratio and BCP stand-alone and Mibanco have maintained levels well above the regulatory meaning above in sols and in dollars. However, the management decision we use are more stringent indicator relying on liquidity coverage ratio of 15, 30 and 60 days, whose standards are aligned with Basel III. In this context, we have maintained our high quality liquid assets at high levels.

Regarding capital, each of our subsidiaries maintain adequate capital levels which ensures their solvency. A slight reduction in Core Equity Tier 1 at BCP stand-alone is related with the reduction of unrealized gains, which in turn is related with increasing long-term interest rate in sols. Mibanco's Core Equity Tier 1 decreased this quarter, given that in local accounting the effect of capital increase of PEN400 million reported last year was canceled out by the effect of constituting a similar amount of voluntary provisions last quarter. This offset was registered in the first quarter of 2021.

Next slide, please. We have advanced on our digital journey and are accelerating digital initiative above the business and Credicorp's levels. At BCP stand-alone, digital clients have fueled growth, this trend has accelerated over the last year and will continue to be key going forward. Digitalization has grown at Pacifico were almost 64% of its clients are now able to self-serve for different types of transactions. At Mibanco, the hybrid model has boosted the productivity of loan officers and improved efficiency. At Credicorp level, we are in the process of building an ecosystem that focuses on the needs of SME clients. We aim to provide these businesses with a consistent and integrated offer to a platform with unique user experience standards and high connectivity. This will enable us to process data and transactions efficiently. Our goal is to innovate to provide clients with solutions to develop and grow, increase customer loyalty and generate new sources of income.

Next slide, please. In March, Credicorp published its first sustainability report at the holding level, with details of its 2020-2025 sustainability program. As part of the exercise, the company developed a new purpose, vision and values, which now guide the implementation of its a strategy and decision making. Additionally, Credicorp has defined three pillars oriented to sustain long-term value creation and alignment with the United Nations sustainable development goals, create a more sustainable and inclusive economy, improve the financial health of citizens. And finally, empower our people to thrive. We invite our investor community to navigate through our sustainability report, where you will be able to find the base of our ESG business strategy, our analysis of risks and opportunities, our governance structure and our commitment to the future. Finally, as always, we are glad to receive any feedback you may have on our sustainability approach, as we believe it will contribute to advance further in this journey.

Next slide, please. Regarding our 2021 guidance, as of today, we maintain our expectation for GDP growth between 8% and 10% for this year. Loan portfolio dynamic has been weak, and as such, we expect loan growth to be in the lower end of guidance. Net interest margin was sluggish in the first quarter of 2021, the recovery of this indicator for the year will depend on structured loan dynamics. The cost of risk has improved faster than expected. And if current conditions hold, we expect this trend to continue. The efficiency ratio posted in the first quarter of 2021 is under control. Our ability to maintain the efficiency ratio within guidance will depend on the income dynamics.

All-in-all, we maintain our return on average equity guidance. There are other factors that may impact our results this year that I would like to mention. First, regarding the new law that sets interest rate caps and restricts some fees, while we estimate that this will have a limited impact on Credicorp's P&L, however, we are concerned about the negative impact of these measures on financial inclusion in Peru. Second, regarding life insurance claims and IBNR provisions going forward, we have fine-tuned our model to better estimate potential losses. If the mortality curve will start to ease in Peru, we expect these IBNR provisions to reach their maximum level in the second quarter of this year. Finally, as we communicated to the market previously, we have postponed our decision of dividend payments until uncertainties on the local scenes are despaired.

With these comments, I would like to give the floor to Walter Bayly, who would like to add some remarks before starting the Q&A session.

Walter Bayly -- Chief Executive Officer

Thank you, Cesar. Good morning to all of you. I would like to summarize the key results of this first quarter conference call. Let me make some additional comments before opening up to the Q&A portion of the call.

BCP delivered a strong quarter with an 18.4% annualized return rate. We're still not seeing growth in the loan portfolio, and loan growth will probably be sluggish throughout the year. The strong results were largely driven by lower cost of risk. Mibanco's path to recovery was negatively impacted by the lockdown measures which curtailed loan origination. The situation is stabilized, and I'm confident that Mibanco can still deliver high single digit return on equity this year.

Pacifico's results were severely impacted by the second wave of COVID related deaths. This was exasperated by changes in the methodology utilized with more equity calculated incurred of reported terms. We should see the tail end of the second wave in the second quarter. The impact, nevertheless, grew less severe and that the statistics indicate that the second wave is already declining, and the rebound from transactions have allowed to anticipate IBNR claims.

A third wave cannot be ruled out before the year-end. The possibility should be less that the vaccination process is already under way with approximately 5% of the population already vaccinated. But the relevant risk factors today are not related to the performance of any of Credicorp's units, and are centered around legislation and politics. As Cesar mentioned, Congress recently passed a not good legislation around interest rates, which benefits no one. This legislation has limited impact for BCP, who is traditionally more focused on up-scale consumers. This legislation is more relevant at Mibanco, who have redirected its loan origination sales force with other seconds. This could even be marginally more profitable as the entry level microfinance loans are not the most profitable, but are core to our purpose and mission of financial inclusion.

This piece of legislation which is being challenged in the Constitutional Assembly, will have a very negative impact on financial inclusion. However, it is worth mentioning, with an additional distribution of funds from private banking systems, which will represent approximately PEN11.4 billion or 24% of assets under management. But of course, the largest risk factor is from the upcoming second round of Presidential Elections. It is still unclear where important segments of the population still undecided which could swing the results in any way. We will have a clear picture as the election date comes closer.

But it is very worrisome that one of the candidates has made public statements regarding its party's intention to shut down or eliminate institutions such as the Tribunal Constitucional and parliament, which are pillars of our democratic system. Furthermore, Peru Libre's current program mentions the state taking over oil, gas, mining and other sectors of the productive side. Such initiatives have been pressed in the past in neighboring counties with very negative results from production levels, employment, investments and overall economic well-being.

Members of Congress have already been elected. And we will have a very fragmented Congress and whoever becomes President, will have a hard time enacting new legislation. We except that the new administration governs within the boundaries of democracy, checks and balances of our system [indecipherable]. Having said that, this political and economic vulnerability is extremely negative, in terms where there are moments when the economy is struggling to recover from the worst economic and health crisis in its history. Peru's population is very much impacted by the health and economic crisis, and hopefully, we will be able to continue down the path of the past decades that have proven successful in reducing poverty and improving the quality of life in Peru.

With this, I finish my comments. And we open up for Q&A session. Thank you.

Questions and Answers:

Operator

Thank you, sir. [Operator Instructions] Our first question comes from Ernesto Gabilondo with Bank of America.

Ernesto Gabilondo -- Bank of America Merrill Lynch

Hi, good morning, Walter and Cesar. Thanks for your presentation. I have got a couple of questions. So, I would like the first one, I would let you to answer and then I will do my second question. So the first one is on the political outlook. Just want to know your thoughts on what could be the race for the financial sector if Castillo is elected President?

Walter Bayly -- Chief Executive Officer

Yeah. It is very unclear, Ernesto, that what legislation would be passed regarding the financial sector. There is nothing specific in the economic program. So there is a little bit unconfirmed.

Ernesto Gabilondo -- Bank of America Merrill Lynch

Okay, perfect. And then my second question is on the cost of risk which came at 1.6%. So I know your guidance is 1.8%, 2.3%. Do you think that now the cost of risk would be involving the low end of your guidance?

Reynaldo Llosa -- Chief Rick Officer

Hello, Ernesto, this is Reynaldo. Yes, I mean the performance of the portfolio in general has been quite good, better than we expected by the end of last year. So, I mean your forecast is probably correct. We expect the performance continues in these good trends on the low side of our guidance.

Ernesto Gabilondo -- Bank of America Merrill Lynch

Got you. Thank you so much.

Operator

Thank you. Our next question comes from Brian Flores with Citi.

Brian Flores -- Citi -- Analyst

Hi, good morning. I have a few [indecipherable] Just a quick follow-up on the guidance. You mentioned cost of risk between 1.8% and 2.3%, so if you reach the high in the second quarter, and then if you could talk about that we should expect these expenses, given that in this quarter those nearly reduced 6%? Thank you very much.

Cesar Rios -- Chief Financial Officer

I couldn't hear very clearly.

Walter Bayly -- Chief Executive Officer

In terms of cost of risk we haven't changed our guidance. There are still some -- certain bits on the different -- there is important size of a portfolio, which is still on reprogramming facilities without payments. So we haven't changed our guidance as to this point. Having said that, as I mentioned before, we are positive on the trend and the performance was in more segments of our market. So we are expecting to be as I mentioned in the lower side of our guidance for the next quarters.

Cesar Rios -- Chief Financial Officer

Yeah, I think you made an additional question, but I couldn't hear you clearly.

Brian Flores -- Citi -- Analyst

Sorry, the business returning to extent [Indecipherable]. So how do we think about these lines for these geographically?

Cesar Rios -- Chief Financial Officer

If I hear you and understand well, we think our expenses are under control and what we sold during the last year was a reduction on variable compensation, Variable compensation now is going to be adjusted more in line with the current results and to normalized levels. At the same time, we are enforcing a number of initiatives to control other expenses and increase efficiencies, particularly for example in Mibanco. So in terms of cost, we think that we are going to be very much in control. The combined ratio, the cost to income ratio is going to be more affected by the trends of income that as we stated during the initial remarks are somewhat challenging in terms of margins.

Brian Flores -- Citi -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Thiago with UBS.

Thiago Carlos -- UBS

Yeah, hi guys. Thanks for the opportunity. I have one question about Mibanco. Mibanco used to have an ROE of close to 20% or even above 20% before COVID. Do you see this level again considering a more normal proven macro scenario or there are any driven change in the markets that should prevent the ROE to return to this 20% level?

Cesar Rios -- Chief Financial Officer

Yes, we can see.

Walter Bayly -- Chief Executive Officer

Thank you, Thiago for the question. I will take this, this is Walter. Yes, we expect, we have -- we feel very comfortable that Mibanco will be able to return to the 20% plus return on equity next year. This year our target, as I mentioned in my comment is to have probably [Indecipherable] high-single digits. The size of the portfolio -- the profitable portfolio of Mibanco suffered a lot. The duration of that for the full year is about 30 months. So a couple of months with very sluggish loan origination due to the lockdowns really shrunk the profitable portfolio in a substantial way. So we think we can get back once the situation gets normalized in terms of as sales force [Indecipherable] freely and we are also making a lot of efficiencies in the hybrid model, which is not exclusively dependent on the sales person. So in short, yes, we can get to the 20% plus return on equity, not this year, next year.

Thiago Carlos -- UBS

Thanks. Very clear.

Operator

Thank you. Our next question comes from Jason Mollin with Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

Yes. Hi, hello everyone. My question is a general question about the current context of the uncertainty that you mentioned, it could be given political scenario. How have you dealt with these kinds of political uncertainty in the past? How should we think about what Credicorp is going to do to prepare now just with this uncertainty? Are there actions to be taken in terms of calling up positions -- U.S. dollar positions. Are there things you are doing now to prepare for a less market-friendly environment?

Cesar Rios -- Chief Financial Officer

Hi. can you hear me?

Jason Mollin -- Scotiabank -- Analyst

Yeah, could you hear me?

Walter Bayly -- Chief Executive Officer

Yes. Cesar, are you there?

Cesar Rios -- Chief Financial Officer

Yes, we are preparing, I will say in two different fronts. One, in the short-term, we are managing the FX position and the sensibility of our books to the volatility of interest rates. And in parallel, we are analyzing how we can navigate in a different scenario. But I would like to emphasize the experience of the institution and the management team in general dealing with uncertainty and complicated situation throughout the history of the company. We have managed challenging situations before, and tried increasing the capabilities through this kind of time. So we are prepared in the short-term, a number of measures. And we, in general, think that we have the capabilities to adapt and manage uncertainty down the road. It's very early to say what specific impact they could have, but we rely on these strengths of the company and the culture.

Walter Bayly -- Chief Executive Officer

Well, let me add something to what Cesar just mentioned. Apart from the very obvious increase in liquidity maybe some FX positioning and managing less exposure to interest rates, long term, we are an institution that is basically Peru based and that is what we are. Going back, we have said nobody can manipulate, but more importantly, we will -- we have as Cesar mentioned, navigated in the past through very difficult situations and we think we can continue to do so, but we have of course some obvious of increased liquidity taking some FX positioning within the limits of what is reasonable.

Jason Mollin -- Scotiabank -- Analyst

Thank you very much. I have seen Credicorp really manage some pretty challenging situations. So I understand that. Is there anything that's different this time? That's what we've experienced in the past in this room, in the last 25 years?

Walter Bayly -- Chief Executive Officer

No, not really, [Indecipherable], we went through a similar situation and this one is no different.

Jason Mollin -- Scotiabank -- Analyst

Thank you very much for the comments. Congratulations on the results in this tough environment.

Walter Bayly -- Chief Executive Officer

Thank you, Jason.

Operator

Thank you. Our next question comes from Alonso Garcia with Credit Suisse.

Alonso Garcia -- Credit Suisse -- Analyst

Hi, good morning everyone and thank you for taking my question. I wanted to touch base on the interval caps and the Central Bank already announced a level of 83.4%, which was actually much higher than we had expected, and much higher compared to mid caps in Colombia and Chile. So certainly a more benign outlook for Credicorp based on these rate cap, but could you please share your views on the potential impact or the potential percentage of your portfolio that would likely be impacted in case the rate cap is listed at 83.4%? And also if you could discuss the timing, the potential timing for implementation of this rate cap? Thank you.

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

Yeah, this is Gianfranco, let me take this question. Good morning, everyone. I tend to disagree with your comment on being in benign rate. You have to bear in mind that a level of formality of the economy in Peru, therefore both the cost assessment of the -- the cost of risk class, the distribution costs are very high in our market. The major impact is going to be in terms of financial inclusion. There are some studies that say that over 1 million people are currently financially included that have -- but alone will be excluded in the upcoming months. So that's actually the major impact. Regarding the BCP, about BCP and Mibanco, unfortunately the small ticket loans are going to be here hurt the most. That's not relevant in terms of size of the portfolio. However, it's relevant again in our financial inclusion agenda. Regarding your question on timing, actually I believe it's on the -- the May 11th is cap starts to be in place.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you. Very good. And just as a follow-up is there like legal challenges to the straight cap in place or it will be in put in place next Monday?

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

Yeah, yes, the answer is yes. Well, first of all, the executive power has mentioned that they will send -- I don't know how to say that, a proposal, a requirement to the constitutional tribune in order to asking for that this law is unconstitutional, there is another, it's [indecipherable] that also -- which is a private association, associated with the same requirement and there are some financial institutions that have already presented another type of legal requirements. So the answer to your question is, yes.

Alonso Garcia -- Credit Suisse -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Yuri Fernandes with the J. P. Morgan.

Yuri Fernandes -- JP Morgan -- Analyst

Hello, thank you for the opportunity. I have a question regarding FX deposits, we saw some increase [Technical Issues]

Operator

It looks like Mr. Fernandes line cut out.

Walter Bayly -- Chief Executive Officer

Hi, could you repeat the question?

Operator

So we would go to do our next question, Brian Flores with Citi.

Brian Flores -- Citi -- Analyst

Hi, [Indecipherable]

Cesar Rios -- Chief Financial Officer

I couldn't hear him.

Brian Flores -- Citi -- Analyst

Just wanted to follow up -- Sorry, just wanted to follow up on the dividend payment in the last conference call it was mentioned that maybe in 2021 dividend in the capital base, in these terms do you see some upside risks for the dividend payments in 2021?

Walter Bayly -- Chief Executive Officer

Couldn't hear. I'm sorry...

Cesar Rios -- Chief Financial Officer

Brian.

Walter Bayly -- Chief Executive Officer

I think I understood the question, it was related to dividend payments. I think that was the question. At this stage, we are [indecipherable] with the capital banks that we have and we are going to clear some of the uncertainties around the current situation and the politicization to be able to analyze paying dividends in the second half. I think that was the question. I'm sorry but the line is not very clear.

Brian Flores -- Citi -- Analyst

Yes, that was the question I had, very clear, Thank you.

Operator

Thank you. Our next question comes from Alonso Aramburu with the BTG Pactual.

Alonso Aramburu -- BCG Pactual -- Analyst

Yeah, hi, good morning and thank you. Thank you for the call. I wanted to follow up on the interest rate couple [Technical Issues] fee income, is it possible to quantify the impact of fee income from this law? And do you know if the challenges, if the constitutional challenges presented to the tribunal, would this also impacted the fee income or the constitutional challenge is only for the interest rate cap?

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

Hi Alonso. Actually it's for both however, it's actually for both. In our case, I'm talking about BCP that is my prior in there on the fee side rather than on the interest rate [Technical Issues]. I don't have the exact figure as of today, I don't know, Cesar do have some info there?

Cesar Rios -- Chief Financial Officer

Yes, the impact in interest rate is actually very modest impact in the number of clients significantly as Gianfranco mentioned before, but the fee income impacts are around 4% of the fee base on a yearly basis.

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

That is 4%.

Cesar Rios -- Chief Financial Officer

Yes.

Alonso Aramburu -- BCG Pactual -- Analyst

Okay, And do you know if the challenge will also challenge the constitutionality of the fees being imposed or being taken out?

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

Yes, yes. No the challenges for whole is low Alonso.

Alonso Aramburu -- BCG Pactual -- Analyst

Okay.

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

Both on the fee side and the rate cap, yes.

Alonso Aramburu -- BCG Pactual -- Analyst

Okay. Thank you.

Operator

Thank you. Our next question comes from Andres Soto with Santander.

Andres Soto -- Santander -- Analyst

Good morning, everybody. I would like to hear your thoughts regarding margins, obviously Credicorp is facing a low rate environment, but asset mix has probably been a bigger factor in your NIM for recently given the increased weight of securities versus loan in your asset composition? So can you please comment on your NIM on loan trends? And also if you can exclude from that the effect of the Reactiva and how your current levels compared with those before the pandemic?

Cesar Rios -- Chief Financial Officer

Yeah, I will say that even if you exclude Reactiva loans, we now are operating under lower margin that is the reflection of the low short-term interest loans that affect the investment portfolio, but also the short-term corporate enterprise loans that are significant part of the portfolio. So this is impacted and is going to be impacted as long and the interest rate as low as it is now. In terms of mix, we have, as was explained in the remarks mainly by two factors in the case of the BCP, lower demand in corporate loans. The companies are optimizing the balance sheets and are in general terms liquid, so lower demands incorporate the loans.

And in the retail portfolio, we have an impact particularly in credit cards due to two factors. One is the big ticket discretionary expenses are a lower level and this is going to be the case until the lockdown is in place or restricted measures are in place. And some restrictions in risk appetite for the consumer segments. The other parts of portfolio are growing a healthy pace.

And in the case of Mibanco as Walter mentioned, have a decrease in volumes that are recovering now and also we are transitioning from lower -- with lower margins to higher margins with a little bit more risk down the road. This mix are going to be visible down the road. But until the pandemic is still with us the mix is going to be affected in the finance sector and the credit cards particularly.

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

Maybe I just a quick comment on -- additional comment on what Cesar just mentioned, is over the last I would say 30 days also the mortgage performance in terms of new origination has slow down, which makes total sense with a political uncertainty. The last quarter of last year and maybe the first couple of this year or three months of this year were very positive in terms as of the mortgage growth. However, as we speak, the state of origination has lowered quite a bit for the last 45 days.

Andres Soto -- Santander -- Analyst

Thank you. And my second question is regarding other measures, loans have been approving congress, one regarding new ASB withdrawals, a significant amount almost PEN10 billion according to some estimates. And also, the one approving the withdrawal from CTS accounts, which really impact strike on the funding side. But decided these negative effects on your businesses are there any opportunities that you see given this high levels of liquidity that we are going to have it through as a consequence of the measures?

Walter Bayly -- Chief Executive Officer

Let me take the question on CTS and maybe someone can take question on the pension part. On CTS, this is game of relativity, the institutions they're going to -- being hit the most, as they [indecipherable] and other financial institutions that have up -- their funding structure was or the long-term funding structure was heavily based on CTS. That's not the case neither for Mibanco or BCP. So In terms of -- that's an opportunity for us. We would see especially in the microfinance business, several financial institutions that are going to have a problem, both in terms of liquidity and funding or -- and normally what happens for us because of the market share, we have, I'm talking about BCP is that we end up getting more deposits in terms of savings and the current account.

I don't know who wants to take the answer on -- the question on pension fund?

Alvaro Correa -- Deputy CEO & Head of Insurance & Pension Funds

Hey, Alvaro. Here. Hello everyone, good morning. Yes, on pension funds, the challenge today with this new law is to manage investments in order to minimize the impact on values and therefore, could not affect us much those customers who stay at the front. And in turn -- do the required payments without any major stress. As you know there are investments in the local markets, but also in the foreign markets, and in order to keep the balance of the portfolios probably both of them will have to be used. But that's the challenge. The opportunity for Credicorp, I would say, has to do with what happens with those withdrawals. People go and deposit data on the financial system and that's typically something that benefits the most solid financial institutions and especially, over the last year was beneficial for BCP deposit. So, that's -- that's the opportunity that I find in that event.

Andres Soto -- Santander -- Analyst

Perfect. Thank you for the answers and congratulations on the results.

Cesar Rios -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Sergey Dubin with Harding Loevner.

Sergey Dubin -- Harding Loevner LP -- Analyst

Yes, good morning. Thank you for the presentation. My first question is with regard to your guidance on the loan growth, are you assuming sort of a stable political scenario here? And how, if there is a victory of Castillo in the elections how should we think about the loan growth going forward? That is the first question. And then my second one, let us listen to the first one, first and then the last and the second one later.

Cesar Rios -- Chief Financial Officer

Yes. Our guidance assumes I would say, the continuation of the economic model, I think is there yearly to project the impact of a change in the case of Castillo wins, and Mr. Castillo wins and we need to hear the specific measures that they are meant propose as an elected Officer and not as a candidate.

Walter Bayly -- Chief Executive Officer

Maybe just to complement that, there is a high correlation between GDP growth and loan growth, the details of that. Obviously, we still expect Peru to grow anything between 8% to 10%. Therefore, there should be a growth in -- an important growth in our portfolio, obviously political uncertainty generate some -- our economic agents to be much more conservative, that is the reason why I was mentioning, what is going on, but it is you currently going on with mortgage, the mortgage portfolio. Obviously, the corporate also very conservative today. So again GDP, the growth in a very strong pace this year. Therefore, loan growth should follow that plan, but the political scenario is still to be seen.

Sergey Dubin -- Harding Loevner LP -- Analyst

Okay. And then the second question is related to that, in terms of, I think you mentioned before, but I would like to maybe elaborate on that, what is kind of -- what are the specifics, I know it is very hard to know, because you still don't know what is being proposed, what is being -- what kind of rules are going to be put in place. But as a management team what -- directionally, what are you seeing in terms of worst-case scenario preparations like, does this mean, I think you mentioned something about reducing foreign currency exposure. Can you maybe elaborate on some of the steps that you may be taking? And also what is the impact without specific numbers, how should we think directionally about about the impact of these measures?

Cesar Rios -- Chief Financial Officer

Hi, I think initially this, what we are trying to. In the very short term. And this is not an strategic response, but this is a tactical one is to be launched in the opex side and manage the exposure to medium term bonds, but this is a tactical a tactical response.

Sergey Dubin -- Harding Loevner LP -- Analyst

So does that mean that you want to increase your FX holdings or FX exposure, because you believe there is a risk currency...

Cesar Rios -- Chief Financial Officer

Yes. Within the the established limited by the regulation. In any case, it will have moderate impact in total results.

Sergey Dubin -- Harding Loevner LP -- Analyst

Okay. Okay, thank you.

Operator

Thank you. Our next question comes from Yuri Fernandes with JP Morgan.

Yuri Fernandes -- JP Morgan -- Analyst

Thank you, again, guys. Hope this time it works well. Congrats on the BCP special results this quarter. I have a first question regarding liability, notably deposits in dollars. We saw some increase on [Indecipherable] in time deposits in dollars. How is that tracking lately for you in April and May? And if this trend continues in light of this likely dollarization of some of liabilities, how that impacts your margins? So that is my first question and if possible, I would like to make a second question later. Thank you.

Cesar Rios -- Chief Financial Officer

Okay. We have seen in terms of liquidity and general level of deposits, we have not seen any negative trend. We have seen some change in composition of the deposits, a slight decrease in sol deposits and an increase in dollar deposits and we maintain our books regarding that. Given the ample level of liquidity and the relative low rates both in dollars and sols, the short-term impact of these increases are minor. If we think in the very short-term, fed funds return, let us say 9, 10 basis points or the Central Bank, 25 basis points, the difference between one and another is real, but minor.

Yuri Fernandes -- JP Morgan -- Analyst

Super clear. And if I may, a second question regarding Bolivia. Can you talk a little bit about the challenges you face in the country, not for COVID, but before COVID, we saw that the Bolivian unit was like 11%, 12% ROE. That is lower than the group. So can you explain little a bit like historically what were the challenges you saw in Bolivia, like what explains this ROE gap. Is a difference in scale, is a difference in penetration, is a issue in Bolivia like, can you talk a little bit about the business in that country? Thank you.

Walter Bayly -- Chief Executive Officer

So let me take that one. Actually it is all of the above. Bolivia, doing business in Bolivia and especially being in the banking sector in Bolivia is really challenging. There is a lot of I would say excess of regulation. There are both interest caps on the lending side and also on the deposit side. There are also like you have to have a specific portfolio in some sectors at subsidized rates and on top of that recently due to COVID there have been a lot of limitations in order to both -- to collect actually interest and installments. So it is quite complicated to do business in Bolivia. It is unfortunately -- it is unfortunate because we do believe that we have a strong franchise in Bolivia, specifically in the mid-size and corporates. But actually, I would say it is all of the above. Bolivia is still a country that there is a lot of potential to do business, but the current political situation and economic way -- the economic policies of the current government makes it very complicated.

Yuri Fernandes -- JP Morgan -- Analyst

Perfect. Thank you very much.

Operator

Thank you. Our next question comes from Brian Flores with Citi.

Brian Flores -- Citi -- Analyst

Just to confirm, you mentioned on the interest rate cuts, I think liquidity of 4% specifically -- what item specifically? Thank you.

Cesar Rios -- Chief Financial Officer

I couldn't hear clearly. Brian, sorry, I couldn't hear clearly.

Brian Flores -- Citi -- Analyst

Can you hear me better now.

Walter Bayly -- Chief Executive Officer

Yes. That is better, Brian.

Brian Flores -- Citi -- Analyst

Okay. Perfect. One interest rate cap on [indecipherable] breakups. You mentioned an impact of 4% opportunity, this 4% is to what items specifically?

Cesar Rios -- Chief Financial Officer

If I understood well, you want one additional comments regarding the interest rate caps and fee restriction. The percentage that I mentioned of 4% was related to the fee impact -- to the fee restrictions impact on the fee income line on annualized basis. The interest rate impact, as we mentioned previously, is moderated.

Walter Bayly -- Chief Executive Officer

Yeah. But let me stress my previous comment. That might be a very short-term vision or answer. What concerns me, or what concerns us is that going forward, there is a huge potential for growth in lower segments of the population. These interest rate cap is going to have a huge impact on that, both on the business for the financial institutions, but more importantly on the bank or on the bank today.

Brian Flores -- Citi -- Analyst

Okay. Thank you very much.

Operator

Thank you. Our next question comes from Carlos Gomez with HSBC.

Carlos Gomez Lopez -- HSBC -- Analyst

Hi. Good morning. You might have already answered this, and I apologize, I joined the call late. I would like to know if you could comment on the allowed withdrawal for CTS and insurance component front, whether that could affect any of your business or unit and even that can affect banking system as a whole because I understand that is an important part of the funding for some smaller banks? Second, on the...

Cesar Rios -- Chief Financial Officer

Yes, basically, as we have systemwide around probably PEN21 billion, around PEN7 billion at BCP, as we mentioned, in a situation like this, we will expect an important withdrawal of these funds. But what usually happens is that the deposits came back in another form. For example, saving deposits or short-term CDs. In the previous cases, BCP is gaining share in another form of deposit, but the impact in systemwide can be significant for the smaller institutions, that has municipales, that has [indecipherable] who is a significant part of this fund, or the funding based on CTS are high interest rate. For them, it can be a significant pressure in terms of funding.

Carlos Gomez Lopez -- HSBC -- Analyst

Do you expect these funds to ever return to the system?

Cesar Rios -- Chief Financial Officer

Usually, the funds are recycled, but usually changed in the forms of CTS that are restricted funds into more transactional funds or certain parts goes to the policies of short term fund -- investment funds, but in different institutions, what is usually happens in situations like this.

Carlos Gomez Lopez -- HSBC -- Analyst

Okay.

Cesar Rios -- Chief Financial Officer

The money is not going to disappear. The PEN21 billion solace are not going to disappear, are going to be recycled among the institutions in the system.

Carlos Gomez Lopez -- HSBC -- Analyst

We understand that. The question was more whether, I mean, this is a form of long-term savings, and we wonder if in the future it is going to be rebuilt or this is something that the system will have lost forever?

Cesar Rios -- Chief Financial Officer

No. If [indecipherable] are not taken, the funds are going to rebuild. That is going to be a lengthy process, because what is deposits is one-twelfth of the yearly income on a yearly basis with two deposits. So to reach these levels is going to take probably 3, 4 years, in the extreme case that all the deposits are taken out. That is an extreme case, not the basic scenario.

Carlos Gomez Lopez -- HSBC -- Analyst

Okay. That was very clear. And if I can ask another question is regarding your insurance business. Obviously, you have had an impact in the short term because of a higher claims which is completely understandable. I imagine that you would continue to have it this year. I don't know if you have given some guidance, In the long run, I am talking 3, 4, 5 years from now, do you see your insurance business changing for the better or for the worse because of the challenge and the experience of COVID?

Walter Bayly -- Chief Executive Officer

Carlos, I think -- this is Walter. We recently had very interesting conversation at the Board of Pacifico. It was questioned whether our portfolio mix would serve to be revisited given the changes that have happened due to COVID in the part and the conclusion was no, the portfolio that we have, which is highly skewed toward sales to the banks, Mibanco, Banco de Credito and other financial institutions and a very -- the formula that is mostly individual and corporations is a good portfolio. It has been extremely profitable in the past and we think that once this stage normalizes, it will continue to be a profitable portfolio as it has been in the past.

Carlos Gomez Lopez -- HSBC -- Analyst

Very good. That's clear. Thank you so much.

Operator

Thank you. At this time, we have no further questions, so I will turn it back to Mr Walter Bayly, Chief Executive Officer for closing remarks.

Walter Bayly -- Chief Executive Officer

Okay. Thank you. Thank you all for joining us in this conference call. These are indeed challenging times. We hope that by the next conference call, earnings will be better and we will be able to continue the path of recovery of our profitability and our finances. This is as we mentioned, we are working toward recovering the profitability and continuing with all our expansion programs and digital investments. Again, thank you all for joining us. And so we will leave that to the next conference call. With this, we conclude the call. Thank you all.

Operator

[Operator Closing Remarks]

Duration: 86 minutes

Call participants:

Cesar Rios -- Chief Financial Officer

Walter Bayly -- Chief Executive Officer

Reynaldo Llosa -- Chief Rick Officer

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

Alvaro Correa -- Deputy CEO & Head of Insurance & Pension Funds

Ernesto Gabilondo -- Bank of America Merrill Lynch

Brian Flores -- Citi -- Analyst

Thiago Carlos -- UBS

Jason Mollin -- Scotiabank -- Analyst

Alonso Garcia -- Credit Suisse -- Analyst

Yuri Fernandes -- JP Morgan -- Analyst

Alonso Aramburu -- BCG Pactual -- Analyst

Andres Soto -- Santander -- Analyst

Sergey Dubin -- Harding Loevner LP -- Analyst

Carlos Gomez Lopez -- HSBC -- Analyst

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