Credicorp Ltd (BAP) Q3 2021 Earnings Call Transcript

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Credicorp Ltd (BAP 0.99%)
Q3 2021 Earnings Call
Nov 5, 2021, 2:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, everyone. I would like to welcome all of you to the Credicorp Ltd. Third 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. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Cesar Rios, Chief Financial Officer; Mr. Reynaldo Llosa, Chief Risk Officer; and Mrs. Milagros Ciguenas, Chief Investor Relations Officer.

And now, it is my pleasure to turn the conference over to Credicorp's Chairman of the Board, Mr. Luis Romero. You may begin.

Luis Enrique Romero Belismelis -- Executive Chairman of the Board

Good morning, everybody, and welcome to our Credicorp Conference Call. I hope you and your families are healthy and safe. Before Cesar begins the presentation on our results, I would like to share some opening remarks with you. I'm very pleased to join you today in a special period when our strong third quarter results reflect an inflection point in our business's recovery and in our digital as well as sustainability journeys. This coincides with the transition in our top management scheme, and this happens to be Walter's and Alvaro's last conference call.

I wanted to take this opportunity to express our deepest gratitude to both Walter and Alvaro for their invaluable contributions to Credicorp. They are the main leaders to have inspired our teams, transformed our business, and driven our success. Alvaro has had an exceptional 24-year career within the group, including the last three years as Deputy CEO, overseeing insurance, pensions, investment banking, and wealth management. Over the last two years, he has played an invaluable role in driving and steering our process to integrate sustainability in our business strategy.

Alvaro's technical chops, transparency, and fidelity, coupled with deepening value over the years by the investors and colleagues alike. Walter has had an extraordinary 28-year career at the group, including the last three years as CEO of Credicorp and prior to that, 10 years as the CEO of BCP. With strong vision and a steady hand, Walter has led us as we embarked on new journeys, including penetrating with micro-finance business and new LATAM markets, which now represent our main avenues for regional growth. Most importantly, Walter has been an inspirational yet approachable leader who has attracted and developed a talented and professional management team.

Alongside these individuals, he has helped build a resilient organization over decades of both challenging and promising periods. It has been our privilege to have Walter as the charm of our group. We have planned and managed this transition process very carefully and are fully confident that Gianfranco has both the skills and experience to lead Credicorp to new tiers. He will build upon the foundations of the organization before us today, a leading and diversified financial services group with more than 40,000 employees and a solid presence in Peru, Colombia, Chile, and Bolivia.

Gianfranco knows our organization inside and out and has actively participated in the process to define critical strategy. Over his 25 years with the group, he has successfully led a myriad of areas in BCP, including corporate banking, investment banking, BCP Bolivia, and retail banking, where he spearheads the bank's digital transformation journey. Gianfranco is an inspirational leader who energizes and engages his management teams to set the bar higher. We are very pleased to have him as the next CEO of Credicorp. Again, many things to both Walter and Alvaro.

Now I would like to give the floor to Cesar and the management team, who will conduct the conference call on the results for third quarter '21. Thank you. Go ahead, Cesar.

Cesar Rios -- Chief Financial Officer

Thank you, Luis. Good morning, and welcome to Credicorp's conference call on our earnings results for the third quarter of 2021. I hope you and your families are healthy. Official data indicates that in August, economic activity grew 11.8% year-over-year and 1.6% compared to the figure reported in August 2019. Our estimates indicate that in the third quarter of '21, the economy expanded around 11.2% topping pre-pandemic levels. It is worth noting that the construction sector grew 21% with regard to the third quarter of 2019.

In addition, the statistical rebound recovery in recent months has been boosted by a favorable external environment where copper prices stand at historically high levels and Peru's main trading partners are registering an acceleration in growth. Regarding the sanitary situation, mortality rates has fallen considerably after reaching a peak at the beginning of the second quarter. This improvement has been driven by noteworthy advances in the vaccination program as 81% of the other population have received at least one dose.

The government's goal is to -- for all adults and children between 12 and 18 to be vaccinated by year-end. We expect Peru GDP to rebound around 12% in 2021, which is better than initially expected due to a strong commodity prices and expansive monetary and fiscal policies. Next slide, please. President Castillo's recent cabinet reshuffle was perceived by economic agents as a signal of potential moderation. This move, coupled with the ratification of Julio Velarde as Chair of the Central Bank bolstered Peru's financial market and some indicators improved.

For example, the exchange rate has fallen from PEN4.13 to PEN4 sols per dollar. Additionally, the 10-year local currency government bonds yields dropped from a peak of 6.8% to 5.9% as November 3, while the level of nonresident holdings of solid denominated government debt recovered from a low 44% in June to stand at 52% in October trends. Net international reserves came in $75.4 billion in October after standing at $71.8 billion in June. It is worth mentioning that the Central Bank has raised its policy rate by 100 basis points in August to control inflationary pressures. This rate currently stands at 1.5%.

Political front, the new Prime Minister appeared before Congress to request a vote of confidence for her cabinet. Additionally, the executive branch presented a plea Congress to request extraordinary power to legislate on several relevant bonds. The main points of this proposal include increasing the personal income tax for individuals who earn more than PEN300,000 a year, extending the application of dividend taxes to domiciled legal entities, creating a new mining tax regime, imposing a sales tax on life insurance policies, enhancing measures to adapt capital requirements in the financial system to Basel III standards, increasing the level of economic sanctions that a regulator can impose on financial institutions, and implementing initiatives to ensure a more active role for Banco de la Nacion.

We will continue to closely monitor political and regulatory events and the impact in our businesses. Next slide, please. Going on to Credicorp's performance, we continue to foster financial inclusion and business growth through digitalization, while we recover profitability across the board. In line with our ambition to create a more sustainable and inclusive economy, in the last nine months, we have included 785,000 individuals in the financial system through Yape, Mibanco, and Soli, our GAAP equivalent in Bolivia.

Complementarily, millions of individuals and micro-businesses has also benefited from our ADB financial education program BCP and Pacifico. We operate in under-penetrated market and the size growth opportunities are accelerating our digital transformation. BCP is growing its client base mainly through digital clients, which, as of September, accounted for 57% of individual clients. Mibanco has already reapened the benefits of the implementation of this hybrid model in September with 10% of loan operation working toward our terminal channels.

Regarding quarter-over-quarter results, Credicorp's loan portfolio rose 2.4% in quarter head balances boosted by local currency devaluation. However, excluding the exchange rate effect, the loan portfolio remained flat, given that 1.7% achieved in restructured loans was offset by 8.6% drop in government program portfolio. Core income, which is composed of net interest income, fee income, and FX transactions grew 4.8% due to an uptick in restructured loans and higher interest rates. Additionally, the income was boosted by growth in transactional activity and interbank transfers.

Provisional expenses dropped due to improvement in the trading behavior of clients of BCP and Mibanco, which led the cost of risk and structural cost of risk to drop to record low levels of 25% and 0.54%, respectively. Insurance underwriting results for the quarter after COVID-19-related claims in the life business registered a material reduction, which reflects the improvement in the sanitary situation. In the third quarter of this year, credit card registered PEN1,164 million in net income and an ROE of 18.57% year-to-date. ROE is still at 13.46%, which is within our guidance.

Finally, our balance sheet remains strong with ample liquidity and adequate capital ratios. Next slide, please. I will briefly describe the results of the lines of business level and then provide further details in the section on consolidated performance. Wholesale Banking is registering a strong rebound at BCP accelerated transformation investments. In the third quarter of '21, BCP contribute PEN1,058 million in earnings with a return on equity of 23.1%.

BCP's ROE this quarter is exceptionally high due to the 69% quarter-over-quarter contraction in provisional expenses, which reflected an improvement in payment behavior that was driven by a better-than-expected Reactive and economic reactivation. Core income reported growth of 3.3% quarter-over-quarter, which was mainly driven by growth in restructured loans and interest rates and by an increase in transactions, which was fueled by an increase in consumption of interbank and international transfers. BCP Stand-alone registered a 14% year-over-year increase in expense, which was primarily attributable to an uptick in '19 Banco sweeping expenses for digital transformation.

ROE at BCP for the first nine months of 2021 stands at 19.7%, which reflects a strong rebound from the COVID prices. BCP Stand-alone's core equity Tier one ratio remains within our internal limits and stood at 11.1% this quarter. BCP Bolivia results showed little variation in the growth, which reflects a lower risk appetite in an uncertain economic environment. Next slide, please. Macro finance continues to recover as business activity pickups and implementation of the hybrid model begin to pay off.

At Mibanco, the use of data analytics and alternative channel has begun to yield improvements in productivity and has allowed us to streamline loan underwriting for good quality borrowers. The structural disbursement has exceeded pre-pandemic level in results. Net interest income grew 7.5% quarter-over-quarter, boosted by a reversal of interest income provision set aside previously for reprogrammed loans. The increase in net interest income was also attributable to an uptick in the origination volumes. Loan provisions dropped slightly due to an improvement in client payment performance and new originations with dollar risk profiles.

Our hybrid model has helped us control operating expenses and improve origination volumes, and in parallel, we have to reduced branches and the sales force. At Mibanco Colombia, results improved with an uptick in origination volumes. Micro-loans are gaining relevance and boosting yields, while the decrease in the level of provisions reflects an improvement in credit quality and risk models. The company is now focused on implementing Mibanco's Peru best practices as it improves the productivity of the sales force and develops digital capabilities.

Next slide, please. Regarding the insurance business, Pacifico's earnings goes back this quarter and witnessed a positive range due to a decrease in claims in the Life segment and growing premiums in the life and property and casualty businesses. In life, COVID-19 claims dropped 82% quarter-over-quarter after IBNR results were released in the context of a significant drop in mortality. Life results were also boosted by growth in net premiums, which surpassed pre-pandemic levels In property and casualty results were impacted by an increase in claims as COVID-related restrictions or movement and business activities were lifted.

This effect was mitigated by an increase in net premiums. Results in our Corporate Health Insurance segment also bounced back due to a reduction in COVID-related medical claims. Conversely, medical services was impacted due to a decrease in pandemic-related targets. In the pension business, Prima fees remained resilient despite an 18% reduction in assets under management quarter-over-quarter in a context of pension fund releases. We are closely monitoring the regulatory risk in this business. Next slide, please.

Regarding our investment banking and wealth management businesses, income dropped quarter-over-quarter, mainly by the capital market and asset management business due to lower traded volumes and assets under management outgrows, respectively. In this quarter-over-quarter analysis, assets under management grew 1.6% in local currency but registered a drop of 5.2% in U.S. dollars. Assets under management contractions were driven by the asset management business where traditional funds experienced outflows.

Assets under management in the wealth management business remained relatively stable after Peruvian clients migrated assets to our offshore plant accounts, where we are growing the value proposition to cover our clients' changing needs. The income contribution on this business decreased 11.4%. This was mainly attributable to the capital markets business as income was affected by results of profitable portfolios in a context of rising interest rates and a decrease in transactional activity.

For this extent, the drop in income contribution was driven by the asset management business where assets under management contracted. Next slide, please. Now, I will discuss Credicorp's consolidated performance. The interest-earning asset mix improved in a context marked by an increase in restructured loan share of total assets and a decrease in reactive loans balances. This was partially offset by a 12.2% quarter-over-quarter contraction in the investment portfolio due to an expiration of certificates of deposits, which were not renewed and increased the liquidity assets.

A mortgage loan-driven portfolio, coupled with an increase in market rates, leads to rise in our interest-earning amounts. Quarter-over-quarter, credit cards loan book grew 2.4% in ending balances at 4.8% in average daily balances fueled by an uptick in the exchange rate. If we control both, the exchange rate effect and the government program loans, the structured portfolio grew 1.7% in quarter-end balances and 5.1% in average estimated balances.

On the liability side, a reduction in funding from government loan was offset by an uptick in low-cost deposits, which resulted in a less expensive funding mix. Moreover, interest rate hikes had a limited impact in our funding cost, which is not very extensive to interest rate movements even back. THe ow-cost deposits account for approximately 58% of our funding and most of our wholesale funding benefits from fixed interest rates for upgraded locking. Next slide, please. This quarter, both the restructured portfolio and payment behavior continued to evolve favorably across all segmets.

Consequently, both the structural NPL ratio and the cost of risk ratio improved. Loan volumes and payment behavior registered improvements in retail banking and at Mibanco this quarter. This positive evolution was attributable to an economic reactivation, an uptick in employment, growth in levels of personal liquidity via pension fund withdrawals, and increasing public investments. In this context, Credicorp's structural NPL stood at 9.2%, which represented a quarter-over-quarter reduction of 40 basis points.

A downward trend in the cost of risk is also not worthy as it represents record low levels. This improvement was seen across all our subsidiaries, driven by better payment behavior and partially offset by an increase in provisions related to an adjustment in write-off policies at Mibanco. In this scenario, Credicorp's restructured cost of this contracted 69 basis point, falling from 1.23% to 0.54% in year-to-date figures. The cost of risk stood at 1.15%. The level of structural allowance of loan growth in the quarter end was equivalent to 7.1% of Credicorp's loan portfolio.

It is important to note that the quality of the government loan portfolio deteriorated this quarter due to grace period expirations. This deterioration negatively impacted asset quality ratios for the total portfolio let to believe we are not highly concerned about this evolution because the loans in the Peruvian portfolio are safeguarded by state guarantees. Credicorp's structural yield increased 21 basis points quarter-over-quarter to stand at five -- 4.53%. Recovery was attributable to an increase in yields and a more favorable asset mix driven by the strongest portfolio loan origination and a reduction in Reactive loans. Risk-adjusted NIM increased 57 basis points this quarter and reached 3.95%.

This metric recovered faster than we NIM boosted by a significant increase in provision levels. Core income increased 4.8% quarter-over-quarter, which was primarily driven by growth in net interest income. The income grew alongside an uptick in transactional activities in several channels and interbank and international transfers at BCP Stand-alone. This whole offset the impact of recent regulatory changes, which paved a few restrictions for variable sources of income beginning in the second quarter.

This 15.3% year-over-year improvement in core income was primarily attributable to growth and interest income and secondary link to an increase in fee income, given that the few restrictions that were in place last year due to the pandemic are no longer in effect. Next slide, please. In the first nine months of the year, credit cards efficiency ratio improved 120 basis points year-over-year. Improvements were driven mainly by the positive evolution of operating income in the banking businesses, insurance, and pension line of business.

This evolution offset higher expenses at BCP extended loans for digital transformation. Pacifico's fee income registered growth this year after it won a larger tranche of the SISCO V tender for ASP-related coverage. The premium rate for this tender was higher that offered by the SISCO IV, the previous biannual program. At Mibanco, operating income grew 19% year-to-date, while operating expenses grew only 1%. Expenses remain under control despite a significant increase in digital transformational expenses to implement a heavy business model.

It is worth mentioning that of the monthly 38% of September loans operations, which represented 9% of total disbursement amounts, were processed to alternative channels. This alternative channel complemented our traditional business by originating low ticket cost-efficient loans that boost Mibanco's operating income. Next slide, please. At BCP, we continue to work on key digital initiatives to achieve our objective for customer experience and efficiency and ensure our competitiveness in the long term. Regarding technology, in the first nine months of 2021, our software releases increased 87% year-over-year, our downtime in key channels was high, and we made segues and managed the side of risks.

Our aim by year-end is to fully comply with all the statements of the FFIEC cybersecurity assessment tools at the baseline evolving an intermediate level and fulfill 90% of all these payments at the advanced level. Today, we have fulfilled 84% what we started. The Consumer segment customer satisfaction has evolved favorably, driven by improvements in key customer requirements for both digital and personal processes. Growth in digital clients, which represents 57% of the total client base this quarter continues quietly. The use of data in real-time has helped with digital sales, which stood at 37% this quarter.

BCP's firm progress is driving digital channel use facilitate a 9% reduction in branches over the last 12 months. The digital transactions continue to grow exponentially, and it is worth highlighting how Yape's share of total transactions has driven. This quarter, Yape surpassed mobile banking in terms of monetary transaction level, while just two years ago, Yape numbers were mid-level. Next slide, please. Yape was launched as a P2P application to allow BCP clients to make a small data transfer using the telephone number or QR code instead of using cards.

Yape has been evolved to offer new features and numerous partnerships. Over the last year, Yape usage has grown exponentially and today boasts more than seven million users. We expect to reach the 10 million user mark early next year. As the largest and small payment ecosystem in Peru, Yape's mission is to become Supra, which is a third-party distribution channel for companies in Peru. The Yape card is important level for growth in financial inclusion and is used by 34% of the Yape subscribers, who are able to open a digital wallet with a national identification number.

No bank account is required. By channeling government, social, and feasible payments to vulnerable families, Yape card captured new users that have yet to be bankerized. Yape will channel a new branch of government-assisted payments to beneficiaries in the fourth quarter of this year. 49% of total users are active on a monthly basis. Of these users, 61% are BCP clients and 19% are SME's clients, which have digitalized their small and big installations and transactions to Yape. Frequency of usage and transactions have also grown in recent months.

Today actively, [Technical Issues] in September last year. Total transactions have reached nearly one million for a volume of PEN2.4 billion. Yape's focus thus far has been on growing the user base and increasing frequency of use. Today, we are initiating the monetization phase. Before the end of this year, Yape will launch micro-loans, mobile top-ups, and dynamic QR codes for companies. We are also working on an interesting monetization pipeline, which we will launch down the road. Next slide, please.

As part of our innovation efforts, we have developed several disruptive initiatives to pinpoint exponential growth opportunities within new sources of value. These initiatives have ambitious objectives that force us to think out of the box, and success relies on impeccable execution. Some initiatives are close to our core and such are developed within a specific product of segments. Initiatives adjusting our core of roles that are considered more transformational are developed to innovation centers at multiple companies where transport work and product-market fees for interesting idea.

In the pending initiative investment to Krealo, our corporate venture capital company [Indecipherable] are in the early stages of testing new business models based from an easy perspective. The scale initiatives such as Yape, which was conceived in BCP's innovation sector has leveraged BCP customer base and commercial market to grow its user base quickly along with interactional and transactional level initiatives such as Tenpo and Tyba, which was developed in the country to Krealo's augmented physical phones. They have flexible architectures that can be easily adapted for UH UY and time to market purposes when developed in near futures. Having learned from different experience, we are now revisiting the strategy for our payment of systems to review assets relative to investment business.

Operator

Pardon me, ladies and gentlemen, we seem to be experiencing some technical difficulties. So please hold for a moment while we reconnect our speakers. And I reconnected our speaker line.

So I'd like to turn it back to Cesar.

Cesar Rios -- Chief Financial Officer

Sorry for this technical issue. Probably, I'm going to repeat the last rate. Having learned from different experiences, we are now revisiting the strategy for our fintech ecosystems to review assets relative to investment vehicles, the governance model, and management initiatives. Our aim is to develop the best disruptive business models by leveraging our incumbents, market knowledge, and customer relationships. The goal is to enhance decision-making at credit cards level, but at the same time, avoid conflict of interest within our incumbents.

We expect to share our revisited digital strategy with the market in the first quarter of next year. Next slide, please. Regarding the sustainability front, we have recently published an ESG update on concurrence with investors to comment on our recent milestones and upcoming initiatives. You can find this document in the Presentations section of our website. We want to highlight some specific milestones from this update.

First, this year, we made a solid commitment to the environment by declaring our goal to achieve carbon neutrality in our direct operations by 2032. We have also made progress in other initiatives related to this commitment. On the social front, we successfully extended the benefits of our hybrid model for cost optimization of Mibanco to our smaller macro finance values and implemented other initiatives related to our general security program.

Additionally, we continue to make progress in bolstering financial inclusion education, banking more individuals under SMEs, and also reaching a very large audience with innovative financial education initiatives. Regarding governance, we have incorporated gender diversity guidance in our process for the goal in our corporate growth policy. Additionally, we are seeking to ensure that the Board actively engage with investors and other relevant stakeholders.

All these efforts are directed and supervised by our senior managers and sustainability sponsors. We have focused on providing leadership of the company with the knowledge to be effective role models for sustainability, which will ensure that the sustainability mindset is both communicated to and internalizes buying the entire organization. Next slide, please. We are confident that our trend in profitability weakness this quarter will continue in the short term.

We expect Peruvian GDP growth for 2021 to stand around 12% in a context marked by better-than-expected economic recovery that top pre-pandemic levels and record high prices for growth. Loan portfolio growth measured in average daily balances expected to be situated slightly above the guidance range impacted by local currency devaluation. We expect NIM to situate in the mid branch of guidance in line with a more profitable interest-earning asset mix and higher interest rates.

Regarding cost of risk, we expect to close the year below given year-to-date levels. Regarding efficiency, the ratio is expected to situate at the upper end of the guidance range as higher expenses are recovered in the last quarter as we accelerate transformation initiatives. Finally, in the context of ongoing gains in profitability, overall, ROE for 2021 is expected to situate in the upper end of guidance. We will continue accelerating value creation by executing our digital strategy, which coupled with our sustainability efforts will ensure that we sustain long-term competitiveness.

With these comments, I would like to start the Q&A session.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today will come from Jason Mollin with Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

Thank you very much. Hello, everyone. My question is, after all this, I mean, it seems like really the economic reactivation has been on moving ahead in full steam, even faster than many expected. I mean, what happens next? How are you thinking about the economic outlook for next year 2022? And what that means for the banking system.

And in that context, I guess, if I were to calculate the depreciation of the Peruvian Sol from probably the beginning of 2020, it would probably be close to 20% off the top of my head, something like PEN3.30 to PEN4 sols per dollar. We've seen a big move there. And I guess it was the end of 2014 that we saw a push to de-dollarize the loan book. But if you can also, in that context of what you're looking for, talk about how the movements in the FX has impacted the economy and your business? And if you see that being an important factor going forward?

Walter Bayly -- Chief Executive Officer

Okay. Thank you, Jason. This is Walter. I will give you some of the things that come off the top of my head, and then I will pass it on to Cesar for maybe a little bit more detail, but I'll try to give you the color. The way I think we're viewing it at this stage is that you will have an economic recovery, a growth next year that will be somewhere between maybe two and 2.5 in around that number. It is difficult to estimate loan growth because we have had a distortion in the growth of the loan portfolios because of the injection of the many via the Reactive.

So the long-term or medium-term measure of loan growth is 1.5 times nominal GDP has been disrupted. That it is not easy to predict growth for next year. But I would say it will be kind of the low end of what we would expect. So with a 2.5%, maybe 2.5% GDP growth, we should be growing somewhere around 6%. And maybe loan growth will be somewhere between 5% and 7%, let's call it 6%, but with very big differences. Probably a lot more dynamics in the retail side and a lot less dynamic of growth on the wholesale side.

But it's very unclear, as I mentioned because this long-term trend has been interrupted by the incredible amount of injection of the Reactive program. Regarding the FX, we do expect a lot of stability going forward. It is very clear that the current level of foreign exchange is severely impacted by the political noise. And thus the fundamentals do not -- if it were just for the fundamentals, probably the exchange rate would be lower. But we don't expect more political noise going forward, just to maintain the actual existing relatively high level of political noise, but with very strong positive factors in the global economy.

Thus, we do not expect any significant deterioration in the foreign exchange rate. The devaluation that you mentioned has not had a severe impact on the economy. It has been -- it has happened over a relatively medium but very short time frame. The economic agents have adopted, and it hasn't created, I think, any long-term sustainable damage. It does -- it did create, of course, a level of inflation.

But I would think that this deterioration in the exchange rate have any long-lasting effects. It did have some effect in our common equity Tier one at BCP because, of course, risk-weighted assets measured in local currency increased. But with the lot of profitability that BCP is having, that is not an issue at all. I think I will stop here and, Cesar, maybe you can add some more of your opinions and color to these comments.

Cesar Rios -- Chief Financial Officer

Thank you, Walter. Probably only some additional opinions. As you mentioned, the devaluation has been significant this year, around 20%, and the top was around 25%. But we didn't say that the impact in inflation was moderated. The expectation is that it's going to be around 1% and the Central Bank is acting decisively to control that using a number of instruments, including direct sales in the market and derivatives. The direct sales have been probably $100 billion and the derivatives around $4-additional billion.

But due to the stability, the country has already suffered an outflow of funds. It's estimated that probably from the beginning of the relation process to the close of October, it has been around $15 billion. But it's not worth it to say that the trend has decreased significantly. And in the last month, it probably has been neutral.

So probably the biggest part of the instability process has already passed on has caused international reserves, has had some impact on the level of the service of the Central Bank. But at the Central bank, at the end had $75 billion of reserve now, and the exchange rate is trading in a narrow range at this point. So probably the most volatile part of the impact has already been absorbed by the economy.

Walter Bayly -- Chief Executive Officer

Thank you, Cesar. I think we have covered Jason's concerns.

Jason Mollin -- Scotiabank -- Analyst

Yes. I was just going to -- for sure. My only -- I mean one comment that one number I was looking at was just the proportion of dollars as a percentage of total deposits, and that has increased to about 51% from around 46% a year ago. Is that something that we should expect to reverse or is that here to stay?

Walter Bayly -- Chief Executive Officer

I would expect that, that is going to stay there for a little while and will only gradually start to decrease to where we were before. As people realize, understand that there is no concern or expectations of further devaluation of the currency. But it will say thereon for a while.

Jason Mollin -- Scotiabank -- Analyst

Thank you.

Walter Bayly -- Chief Executive Officer

Thank you. Next question please.

Operator

Our next question comes from Ernesto Gabilondo with Bank of America.

Ernesto Gabilondo -- Bank of America -- Analyst

Hi, good morning. And good luck, Walter and Alvaro. Congratulations on your results. My first question is on the political and economic landscape. We have seen the vote of confidence for the cabinet, we have seen a more moderate speech from Castillo's government. So we think all of these should be helping in the short term. However, I would like to know your thoughts about the medium-term outlook.

I think the country needs to implement a tax reform, maybe some structural reforms to promote growth. But how do you see all this under a divided Congress? And also, I don't know if you have been hearing the noise of a potential impeachment of Castillo at some point. And also in all these environments as you pointed out in your initial remarks, there could be more competition from state of banks. So I would appreciate your thoughts on this.

Walter Bayly -- Chief Executive Officer

Sure, Ernesto. Thank you very much for your question. I was going to actually address a lot of your comments in my closing remarks, but I will take the opportunity to mention them now and repeat them later on. I think we have to take the conversation and the conversation around Credicorp far away from politics. I think what we have seen in the first 100 days of this government is probably going to be the norm, which is basically decent macroeconomic policies, a lot of political noise, continued political noise and probably not a very strong execution capability to implement changes.

So that is most likely -- that is what we have seen in the past 100 days, the first 100 days of the government. And I would expect that, that will be the case the next couple of years. So I think it's time to take the conversation out of politics and focus on fundamentals of what is happening within the country in terms of economic development and what's happening within Creditcorp. So basically, in summary, Ernesto, I don't expect anything very different from what we have seen in the past 100 days. Did I answer your question?

Ernesto Gabilondo -- Bank of America -- Analyst

Yes, yes. Very helpful. Thank you very much. And then I have a second question related to your NIM. We saw a year-over-year expansion, also in Cesar's remarks, he was saying that we should expect probably a NIM expansion in the next quarters in light of higher rates. But considering that the Reactiva loans were extended for the end of the year, what should be the impact of the Reactiva loans in your NIMs in the next quarters?

Walter Bayly -- Chief Executive Officer

Sure. I will let Cesar take a first crack at your question, and Gianfranco that is sitting here with me would like to add a comment after Cesar's first response. Cesar, go ahead.

Cesar Rios -- Chief Financial Officer

Yes. Ernesto, in general terms, we expect that NIM is starting to expand driven by a mix in the portfolio and the increase in the short-term and long-term interest rate that goes through the pricing process. So the general trends should be upward. The impact of Reactiva was around 40 basis points in the NIM, but this part is going to decrease gradually in the next quarters to be, I will say, measurable in 1.5 years.

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

Yes. Just a quick addition, a short addition. Exactly. Even though we do not expect an important growth in terms of the size of the book. In terms of NIM, it should improve because the Reactiva loans get paid, we expect some substitution with higher margins.

Ernesto Gabilondo -- Bank of America -- Analyst

Okay, perfect. Thank you very much sir.

Operator

Our next question comes from Thiago Batista with UBS.

Thiago Batista -- UBS -- Analyst

Yes, hi guys. I had just one follow up on this last question about the margins. When we look for the margins of Credicorp, now we're talking about 4.5% of NIM. I mean looking at the structural NIM. And pre-COVID this used to be, let's say, 5.5% per year. Now, more or less 100 bps below the pre-COVID level. Do you believe it is possible to see margins going back to the pre-COVID level or all there changes directly to Peru, the cap, etc.

The cap -- I know that there is no big impact for cut cost, but we saw the changes in Peru, do you see it's possible to return the pre-COVID level? And the second one, very fast here. Sorry for the second question. It's about ROE. What is the level of ROE that is possible for third quarter in coming years? So will it be say, 14% or we can see let's say, the high teens? What is level of ROE that is feasible in the current scenario for third quarter?

Walter Bayly -- Chief Executive Officer

Thank you, Thiago, for your questions. The answer to the first question is yes. We think NIMs will get back to where we were pre-COVID and just off the top of my head, will probably be there sometime around last quarter next year. And second, regarding your return on equity, we are very confident that the sustainable return on equity for Credicorp will be around the 70% level.

Thiago Batista -- UBS -- Analyst

Thank you.

Walter Bayly -- Chief Executive Officer

Thanks next question please.

Operator

Our next question comes from Tito Labarta with Goldman Sachs.

Tito Labarta -- Goldman Sachs -- Analyst

Hi, good morning everyone and thank you for the call. First of all, best of luck to Walter and Alvaro, you guys set a very high standard. So I wish you guys the best. My question is on the cost of risk, very good performance in the quarter, a little bit of deterioration in asset quality. Looking at your coverage ratio getting closer back to historical levels, help us think about the cost of risk going forward from here? Do you automatically now go back to like that 1.8%-2.3%? Can you still keep the cost of risk low through year-end and into next year? When do you expect that to normalize to more normal levels?

Walter Bayly -- Chief Executive Officer

Okay. Thank you for your words, Tito. Cesar, could you tackle the question of Tito, please?

Cesar Rios -- Chief Financial Officer

Yes, Tito. We expect the cost of risk are going to remain below pre-crisis levels during this year and some part of next year due to a combination of a better quality origination and the maturity of loans probably with better performance that was anticipated and booking our books during 2020. And we are going to come back to more normal levels given the composition of the portfolio in 2023.

Walter Bayly -- Chief Executive Officer

Thank you, Cesar. So in summary, Tito, I think that all throughout the next year, cost of risk will still be below pre-COVID levels. Just to be very precise. Thank you.

Tito Labarta -- Goldman Sachs -- Analyst

Okay. Yes. No, thankful to Cesar. That was helpful. And maybe just one follow-up on not necessarily policies, but as you mentioned on the GDP given the political environment. You mentioned for next year, two to 2.5, is that what you think sort of the midterm growth outlook for Peru should be, right? I mean I imagine getting back to historical levels will be tough, but is that sort of the sustainable growth level you think from this administration?

Walter Bayly -- Chief Executive Officer

Unfortunately, yes, Tito. It is below the potential, but I don't see that the -- in the next two to three years, at least the investment from the private sector will be able to drive the economy to higher levels of GDP growth as we have the potential to do.

Tito Labarta -- Goldman Sachs -- Analyst

Okay, thanks. Walter. Very clear.

Operator

Our next question comes from Andres Soto with Santander.

Andres Soto -- Santander -- Analyst

Good morning to all and thank you for the presentation. My first question is just a quick follow-up on the margin outlook. I would like to just understand in terms of the substitution process that we have seen for the Reactiva loans, how are these new origination clients willing to take the interest rate that they used to pay in the past for those loans? Or there have been any type of consequence in terms of pricing given the low rates that they were getting before. And also on margins, if you can remind us your sensitivity to the policy -- the sensitivity of your balance sheet to the policy price.

Walter Bayly -- Chief Executive Officer

Sure. I will -- the first part of the question will go to Gianfranco and the second part to Cesar. Go ahead, Gianfranco.

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

Yes. Andres, we haven't seen any resistance whatsoever among clients that are getting new loans under market conditions in order to replace the Reactiva loans. Not only at BCP, but most importantly at Mibanco where as you know the margins or rates are much higher. So we don't foresee any issue regarding that substitution process.

Walter Bayly -- Chief Executive Officer

Cesar, go ahead with the second part, please.

Cesar Rios -- Chief Financial Officer

Yes. Doing, I would say, a static flexibility analysis of 100 basis points of increase in rates along the curve will mean PEN200 million additional solace of margins on a consolidated basis.

Andres Soto -- Santander -- Analyst

Perfect. And what is the time line, Cesar, for that? How long it takes for your asset to reprice?

Cesar Rios -- Chief Financial Officer

The whole period is longer, but I am -- what I'm giving you is the one year -- one next year of the sensitivity. If you start talking now and you move 100 basis points, what is the PEN200 million? It's the result -- the net result in our books.

Andres Soto -- Santander -- Analyst

Perfect. Thank you so much for that. And my second question is regarding digital transformation and the investment that you guys are planning and which is stepping up this quarter and probably next one, I would like to understand if this is something that will continue into 2022, and therefore, we should expect efficiency to remain at the current level.

Walter Bayly -- Chief Executive Officer

Thank you. Gianfranco, go ahead.

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

Yes. The answer is yes. We will definitely -- I believe we had this conversation a few quarters ago. We will definitely keep investing and maybe speed up our investments in digital transformation as we achieve results. As you are all aware, the digital investments, especially on the new ventures, don't -- are not cash flow positive in the short run. And the best example is Yape.

We -- as Cesar mentioned, we already have over seven million clients. We do not expect that next year and maybe by the end of 2023 or during '24 still to be cash flow positive. So the answer is yes, we will keep investing obviously in the ventures that are, in our vision, successful and key in order to stay not only competitive but also shape the new digital market in the market where we operate.

Andres Soto -- Santander -- Analyst

And to Walter and Alvaro, thank you so much for all these years, and good look to you.

Walter Bayly -- Chief Executive Officer

Thank you.

Operator

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

Yuri Fernandes -- J.P. Morgan -- Analyst

And congratulations on the results. I have a question regarding dividends. I guess, the historical payout when we do the adjustment for the outstanding shares, in the past years would be around 50% to 60%, right? And as you said, maybe low growth will not be there in 2022. I mean, it's going to be the 5% to 7% you just mentioned. And your ROEs, it's likely they will be in a more normalized level. So my question is, do you plan to increase the payout? Can you share some color on that or no? Maybe you say, Yuri, maybe we want to create more capital, so maybe in 2023 we want to grow more. So what is the view for capital allocation?

Walter Bayly -- Chief Executive Officer

Yes. Good question. Thank you, Yuri. The answer is increased dividend payout. We do not need additional capital. We have the levels of capital that we think are the appropriate ones. And -- so as we have more higher return on equity that exceeds obviously the growth in risk-weighted assets, we will be distributing more dividends.

Yuri Fernandes -- J.P. Morgan -- Analyst

Thank you.

Walter Bayly -- Chief Executive Officer

You're welcome.

Operator

Our next question comes from Carlos Gomez Lopez with HSBC.

Gomez Lopez -- HSBC -- Analyst

Thank you. I would also like to say thank you and goodbye to Alvaro and to Walter. In particular to Alvaro because he had a very, very tough job in the insurance business, and I think he did very well over there. So from the point of view of the analysts and investors, thank you very much. And Walter, I know you want to focus on the bank, but I have a policy question.

We now have a new composition of the Central Bank Board. You have mentioned in the past how this could be determinant as to the policies there. And obviously, the interest rate caps are very important for the banking sector now. Do you expect any movement here over the next couple of years? Or do you think that we have seen what we are going to see in terms of caps?

Walter Bayly -- Chief Executive Officer

We should wait -- thank you, Carlos, for coming and your question. We should expect to first see the complete Board of Governors of the Central Bank to get done. Only three members have changed, and there are three more that are coming from Congress. But even with that level of uncertainty, the answer is no. We do not expect any changes in the interest rate caps for the next year or two or something like that.

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

Carlos, this is Gianfranco, just to complement, Walter's comment, it is clear that the rates in Peru are where they are because there's a lot of cost in order to assess risk because of the level of informality in the economy. I would say that the current authorities at both the Central Bank and both the Superintendencies are very, very aware of the negative impact that caps on rates have in order to get financial inclusion.

Gomez Lopez -- HSBC -- Analyst

Sorry, if I can follow up because, yes, I think the Congress is aware about the impact on financial inclusion. That would also extend to the discussion around the pension funds, and we have not heard much over the last few months. But obviously, that's a debate that will come back. You are pessimistic as you were a few months ago regarding the future of the private pension system?

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

Okay. Regarding the pension system, as you know, there will be -- that the government has called for a reform that a commission has been formed, they will study review. There's been a lot of work that has been done. As I have mentioned in the past, from Credicorp's perspective, it is more important that the country ends up with a pension system that works, and it's financially sustainable, fiscally sustainable over time, more than what happens with Prima as a very good contributor to profits of Credicorp. I would expect that the industry is going to change completely. Our likely scenario is that, yes, we will have a smaller contribution from Prima to Credicorp going forward. So our vision has not changed.

Gomez Lopez -- HSBC -- Analyst

Thank you.

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

You're welcome.

Operator

[Operator Instructions] Our next question comes from Jose Wanka with CitiGroup.

Jose Wanka -- CitiGroup -- Analyst

Hi everyone, thank you for taking my question. Just to follow-up with regards to what you -- what segments you expect loan growth to be more dynamic during the next year or going forward? I think you mentioned credit card or retail to be more dynamic. But I was wondering how does this -- or how do you reconcile this with what -- with the figures that we've been seeing lately and that is somewhat weak growth from credit card, I mean, improving economic and overall COVID conditions. So how can we think about the retail going forward, looking at current figures? And what could this mean, given that we're growing in a particular risker segment, what could it mean for core and NPLS?

Walter Bayly -- Chief Executive Officer

Sure. I'll give you a first comment and then Gianfranco, maybe you can complement. Actually, what I was thinking when I mentioned retail, I was really thinking a lot about mortgages, in my mind, and I should have been clear on that. So I think that but I think there is an appetite. I feel there is an appetite for low-end of the consumer market, and that includes consumer loans, more than actual credit card portfolio.

Our credit card portfolio, as you probably know, is more focused on the bit of the upper end of the consumers. But I think there continues to be a good dynamic on the low end of the consumer, probably installment loans, particularly as we utilize more data coming from all the new Yape customers and our ability to distribute loans via digital channels that lowers the distribution costs and make smaller loans more economically viable for us. So installment loans and mortgages where I see a nice demand going forward. Gianfranco, maybe you could...

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

Just specifically on Credit card, if you see the overall market, the market due to COVID, Frank, like for the outstanding balances shrunk like by 30% to 35%, mostly driven by big-ticket items that, obviously, because of the situation, like, I don't know, travel, tourism, appliances and so on. So even though the economic outlook is not positive. We do expect that somehow that demand will come back. So that's the main reason. On top of what Walter said, that's the main reason why we see opportunity for growth in that product specifically.

Operator

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back to Mr. Walter Bailey for closing remarks.

Walter Bayly -- Chief Executive Officer

Thank you. Before we conclude this call, I would like to say a few words. As Luis has generally mentioned, I will be retiring from Credicorp by year-end after almost 29 years of being part of this company. Thus, this will be the last quarterly conference call that I will be participating in. I joined BCP in 1993 before Credicorp. was actually formed and was very much part of the team that worked on the exchange of shares of BCP, Atlantic Security in Pacifico. By the way, that is the origin of the letter's BAP, thus Credicorp was created.

Since then, I have been in several roles and positions being part of Credicorp senior management and have participated actively in almost all major strategic decisions. With Credicorp, I have gone through all the possible business and political cycles, and we have managed to steer the company to always emerge solid, healthy, profitable and focus on delivering value to customers and society. Undoubtedly, along the way, I have made my share of mistakes and made decisions that proved to be the wrong ones. This, of course, is very much part of what being a manager is all about.

As an advice and lesson to those taking the leadership, having the clarity humility encouraged to recognize those mistakes is what allows us to grow as an organization and individuals. I would like to be very emphatic in thanking the members of Credicorp's team that have worked with me over the years. It is this wonderful and talented team that always brought the best in me. Their support has always been unconditional, even under the most difficult and strange situations.

I know that some of you are listening today. Thank you again. You have made it all worthwhile. To the international investment community, thank you as well for your support, understanding and patience. I took the role of being the main spokesperson for Credicorp approximately 15 years ago and have always enjoyed the dialogue challenged and challenged by our investors and analysts. I am confident that Credit Corp. is in a very solid position, having fully recovered its profitability after the very dramatic impact of COVID in our markets, particularly in Peru.

Going forward, I believe the future of Credicorp changes on three very fundamental issues: one, the continuation and maintenance of prudent macroeconomic policies, both on the fiscal and monetary front in the countries in which we operate. In this regard, I believe it is time to ship the conversation around Creditcorp away from politics. Over the past couple of months, the market has been rightly so, very concerned with the political scenario. What we have seen the last 100 days is probably a good indicator of the next couple of years, namely, decent macroeconomic policies, continued political in finding and noise, limited capacity to execute government policies.

Thus, I reiterate the recommendation given to us by one of our long-term institutional investors in that it is started to shift away from politics and focus on fundamentals. The other two key factors that I believe will be -- will determine Credicorp's future depend on management. And they are the successful outcome of our multiple digital initiatives relative to the day-to-day interactions of our customers as well as the escalation of the various disruptive initiatives.

The combination of both sets of initiatives will ensure the continuation of our customer preference as well as the cost reduction that will allow us to successfully compete with alternative business models. And last but not least, our whole hearted embrace of our very well-articulated ESG initiatives. The talent and commitment of the team that is taking leadership gives me tremendous confidence on the continued success of Credicorp. Thank you all very much. And with this, we conclude the call.

Operator

[Operator Closing Remarks]

Duration: 72 minutes

Call participants:

Luis Enrique Romero Belismelis -- Executive Chairman of the Board

Cesar Rios -- Chief Financial Officer

Walter Bayly -- Chief Executive Officer

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

Jason Mollin -- Scotiabank -- Analyst

Ernesto Gabilondo -- Bank of America -- Analyst

Thiago Batista -- UBS -- Analyst

Tito Labarta -- Goldman Sachs -- Analyst

Andres Soto -- Santander -- Analyst

Yuri Fernandes -- J.P. Morgan -- Analyst

Gomez Lopez -- HSBC -- Analyst

Jose Wanka -- CitiGroup -- Analyst

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