Credicorp Ltd (NYSE:BAP) Q4 2022 Earnings Conference Call February 10, 2023 9:30 AM ET
Company Participants
Milagros Cigüeñas – Head of IR
Gianfranco Ferrari – CEO
Cesar Rivera – CFO
Reynaldo Llosa – Chief Risk Officer
Conference Call Participants
Daer Labarta – Goldman Sachs
Geoffrey Elliott – Autonomous
Yuri Fernandes – JPMorgan
Juan Recalde – Scotiabank
Andres Soto – Santander
Tejkiran Kannaluri Magesh – White Oak Capital
Carlos Gomez – HSBC
Operator
Good morning, everyone. I would like to welcome you all to the Credicorp Limited Fourth Quarter 2022 Conference Call. A slide presentation will accompany today’s webcast, which is available in the Investors section of Credicorp’s website. Today’s conference call is being recorded. As a reminder, all participants will be in a listen-only mode. There will be opportunity to ask question at the end of today’s presentation. [Operator Instructions].
Now it is my pleasure to turn the conference over to Credicorp’s IRO, Milagros Cigüeñas. You may begin.
Milagros Cigüeñas
Thank you, and good morning. Speaking on today’s call will be Gianfranco Ferrari, our Chief Executive Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Reynaldo Llosa, Chief Risk Officer; Dario Ferrari, Head of Universal Banking; Francesca Raffo Chief Innovation Officer, Cesar Rivera, Head of Insurance and Pension; and Carlos Sotelo, Mibanco’s Chief Financial Officer.
Before we proceed, I would like to make the following safe harbor statements. Today’s call will contain forward-looking statements, which are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed event or circumstance.
Gianfranco Ferrari will open the call and will comment on the key milestones achieved in 2022, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance and provide our guidance for 2023. Gianfranco, please go ahead.
Gianfranco Ferrari
Thank you, Milagros. Good morning, everyone. Thank you for joining us. While we reported a solid quarter, I would like to reflect on some of the key accomplishments of the year. First of all, I am closing my first year as CEO of Credicorp. As you know, when I came into the role earlier in 2022, I had already spent many years with the group, and in particular, at BCP.
I had worked as part of the prior leadership to establish the foundation of what are the key strategic initiatives that guide us today. In particular, I am very proud of the important work we’ve done in advancing our governance and operating structures over the last three years aimed at ensuring that sustainability would remain an important part of how we do business.
Today, sustainability is being integrated into our strategy, propelling our ability to become the changed agent that we aspire to be and driving positive impact in the countries in which we operate as sustainability becomes more inclined with the core of our business strategy, which is present in how we think and act every day.
We have shifted the way we operate in record time because our purpose and commitment have been embraced from top down to bottom up, leveraging our competitive advantages to be a key enabler of financial inclusion and financial education in the Andean region.
We’ve launched multiple initiatives across our subsidiaries. I would like to highlight that in 2022, we have financially included more than 1.1 million people through Yape and our financial educational web series from BCP surpassed 47 million views.
This year has also been a year of learning for me and an opportunity to flex my strength. I reinforced my knowledge of all our businesses, including insurance and wealth management, which were newer to me. Moreover, I lend a hand to our overall digital transformation strategy based on my experience at BCP where we are more advanced in this area.
Fundamentally, our digital strategy is aimed at facilitating our ability to live our purpose and achieve our sustainable growth objective for expanding our total addressable market and strengthening our operational drivers.
We highlighted our Digital Day in March of last year, the innovation initiatives that are taking place through innovation labs were disrupting ourselves and expanding our tech capabilities and data-driven approach at each of our subsidiaries. Our more mature disruptive initiatives such as Yape keep growing exponentially and are positively impacting society. At the end of the year, Yape had over 11 million users in Peru initial daily part of Yapero’s life solving their financial needs. To give you a sense of how prevalent Yaperos are in Peru, approximately half of the low population in Peru use Yape. We are on the track to be the payment network for Peru.
Now please turn to Slide 1. Overall, we have had a very positive year, not only based on our solid financial results, but most importantly, I would say that as a holding, we have already absorbed the negative impacts due to COVID. On a full year basis, our net income grew almost 30% and ROE was 16.7%. We maintain our prudent stance in managing risk and our cost of risk is on the road to normalization.
We go into 2023 with a very strong balance sheet to both support our initiatives as well as navigate any near-term volatility in front of us. It is important to highlight that despite continued political stability, fundamentals in Peru remains strong, including the relatively low levels of debt to GDP, important levels of international reserves and an independent central bank led by a technical and experienced board.
Having said that, there are some important highlights of the year that I would like to point out. First, the very strong performance of BCP turning in an ROE of 22% for the year. Second, Mibanco is on track to deliver the ROEs we expect from that business. And finally, Pacifico, a business where you have to express reservations in the past, has now reached an ROE of 19.2%. We are optimistic about our ability to keep increasing the levels of penetration of this business.
On the other hand, we still face a challenging environment for investment banking and wealth management, requiring us to redefine our strategy going forward to reach the ROEs we aspire with these businesses. I expect that we will be able to share more details on this regard during our next call.
Before I pass the word to Cesar, I do want to acknowledge how concerned we are that, again, the continued political turmoil and the social unrest we’re experiencing in Peru after the failed coup on December 7, has resulted in near-term headwinds, not only to our businesses, but most importantly, to Peru and its citizens. We, at Credicorp, remain focused on fulfilling our purpose and take very seriously our responsibility and obligation to step up, speak up and more proactively work to solve the fundamental structural issues in the countries we operate.
We are accelerating our agenda of inclusion and financial allocation key factors related to poverty alleviation. Through greater inclusion, we aim to offer to those vulnerable granular levels of security through savings, income generation and economic independence.
Cesar, please go ahead.
Cesar Rivera
Thanks, Gianfranco, and good morning, everyone. We are closing a very good year where the fourth quarter reflects less favorable macroeconomic perspective in Peru, which translated into higher provision and the habitual seasonality expenses at year-end. I want to start by highlighting some key quarter-over-quarter dynamics. The structural loans grew 0.8% measuring average daily balances, driven primarily by retail banking at BCP and Mibanco. Deposits contracted 3% due to a drop in demand deposits in a context marked by lower liquidity across the financial system.
Low-cost deposits which have fallen in recent quarters after having increased significantly in 2020 due to the pandemic relief measures still represent a significant proportion of our funding base weighing in with 50.7% share at quarter end compared to 49% at pre-pandemic levels.
In terms of asset quality, the structural NPL ratio edged up to 4.95% after a financing growth in wholesale banking, particularly in real estate and tourist sectors, as we expected. The aforementioned was partially offset by the improvement of Mibanco and Consumer segment NPL portfolio. In turn, structural cost of risk increased by 85 basis points to a stand at 2.06%. At BCP, growth in provisions was driven by an update to our estimates for key macroeconomic variables such as inflation, interest rate and GDP growth and also reflects the negative impact that rising inflation has had on payment behavior in the Consumer segment.
Provisions at Mibanco also increased materially this quarter due to an initially low comparative base and to an increase in the low portfolio default ratio. This evolution was driven by maturities of specific vintages, which led us to change our credit policy in the second quarter of 2022. From a year-over-year perspective, net interest income registered very strong growth of 30.9%, driven by 10.4% expansion in structural loans measured in average daily balances, ongoing repricing of our portfolio in a context of higher rates and a very competitive funding base. Gains on FX transactions increased due to improvements in products and channels.
Fee income decreased due to a drop registered in investment banking and wealth management, which was partially offset by growth at BCP stand-alone. Provision expenses increased materially over a typically low base last year. Asset quality remains adequate, and we continue to maintain a strong allowances for loan losses which are equivalent to 5.6% of structural loans.
Our coverage level or structured and nonperforming loans remained substantial at 112.2%. In the insurance business, the loss ratio fell significantly to 65.4%, which although close to pre-pandemic levels, still reflects the impacts of COVID-19. In the aforementioned in context, Credicorp registered in the quarter ROE of 15.3% and continued to maintain both, a sound capital base and a diversified business portfolio.
Next slide, please. At the beginning of 2023, conditions for emerging markets improved due to two main drivers. First, inflation in the U.S. to the surprise of many is trending downward and is now far from its peak in June. This has raised expectations that the pinwheel has slowed down the pace of rate increases even further in what is already it’s most aggressive rate hike cycle in four decades.
Second, the Chinese government shifted gears and eased its highly restricted COVID-19 stands and move to shore up the real estate sector seeking to propel economic growth. Both of these factors have had a positive effect on metal prices. Prices for copper, Peru and Chile’s main export product reached the highest level in 7 months of around $4.2 per pound. Gold, another of Peru’s primary exports, shipped a nine-month high. As inflation decelerates, U.S. treasury yields have dropped which generates a more favorable environment for emerging markets as a whole.
Next slide, please. Peru’s GDP is expected to grow around 2% this year and social unrest ceases this quarter. We believe that GDP in Colombia will decelerate to 1.3% after posting one of the highest growth rates in the world in 2022. Chile in turn, is expected to contract 0.5%. LatAm Central Banks have been decisive in preventing the anchoring of inflation expectations. In the context of a slowing inflation, Chile Central Bank maintained the same monetary policy rate in four consecutive sessions.
Colombia Central Bank, on the other hand, instituted rate hikes at a strong pace given the inflation shows no signs of peaking. In Peru, upside risk to inflation have emerged recently in a context of social outrage. As such, Central Bank decisions, indemnity in future are likely to be influenced by the impact of the current scenario, which may mean that record high interest rates continue longer than previously expected.
Next slide, please. Despite the challenging context, BCP continues to deliver a strong profitability. Regarding key quarter-over-quarter dynamics, results were driven by an increase of 8.4% in core income. This evolution was skewed while 12.2% growth in net interest income which rose despite the fact that the average daily balances of a structurally long registered little variation.
Our disciplined approach to pass through in the context of rising interest rate coupled with our ability to lever as a transactional funding base to mitigate the impact of rising funding costs has bolstered our results. This quarter, gains in FX transaction growth as we leverage intelligence capabilities in a volatile FX market.
Nonetheless, income fell this quarter after fees were eliminated for transfers between different cities in September 2022. Accordingly, transactional fees paid to third parties were up due to higher volumes. The aforementioned growth was offset by an increase in provisioning mainly in retail banking due to new macroeconomic perspective for inflation, reference rates and GDP. Additionally, payment behavior in the consumer segment was impacted by raising inflation.
Finally, provision expenses increased in wholesale banking over a low base last quarter. Operating expenses were also up due to seasonality in this context, return on average equity stood at 20.4% on a full year basis. Growth in net income was skewed by a 28.5% increase in net interest income, which was bolstered by raising interest rate and a 12.2% increase in structural loans measured in average daily balances.
Wholesale Banking grew 12.3%, while retail banking expanded 12%. Additionally, fee income increased 11.3% fueled by an uptick in transactional levels, particularly through digital channels and POS and growth of 12.4% in the net gain in FX transactions as we manage FX volatility and roll out improvements in products and channel offerings.
Loan loss provisions increased 55.6% driven by the Consumer and SME segments. In the Consumer segment, payment behavior was affected by higher observed inflation and an unusually low base in 2021.
In SME-Pyme, higher provisions respond to growth in higher risk segments, particularly through the new digital offer, which correlates with higher interest rates. Operating expenses grew 13.4%, driven by growth in variable compensation which was in line with higher income, an uptick in IT expenses bolstered transactional capabilities and an increase in investments in disruptive initiatives. In this context, BCP’s efficiency ratio stood at 40.7% and ROE at 22%. These indicators reflect improvements of 270 and 230 basis points, respectively.
Now please turn to the next slide. Yape has more than 11 million users and 8.1 million active users. If we consider users that make at least one transaction per month, Yape is closer to reaching its 2026 target of 10 million active users. Currently, 42% of Yape’s active users generate revenue, and this number is on the rise. We continue to see positive trends across most of our metrics, including the measurement of our transactional volume which grew more than 2.6 time this year to reach PEN66.2 billion in 2022 with 19.5 monthly transactions per active users. Yape are trending upward and reached 9.8 million in December.
This translated into market share of 25% of total pop-ups in the Peruvian market. As one of Peru’s most important distribution channel, Yape is creating new sources of income for Credicorp through Yape Promos and Yape micro loans. By 2026, we expect 5 million affiliates will have access to financial product through Yape.
Next slide, please. Mibanco registered a drop in profitability this quarter, which was primarily driven by growth in provisions. I would like to look at the key quarter-over-quarter in dynamics. The company hit a record high for disbursements, an uptick in disbursement yield helped us mitigate growth in the cost of funds. Nonetheless, results were impacted by higher provision due to two factors.
First, as anticipated, we registered an initially low base last quarter after methodology improvements were incorporated to the model; and second, specific vintages mature which increased the portfolio default ratio. The higher risk reflect on these vintages was expected and drove our decision to review our risk appetite in the second quarter of 2022.
Mibanco’s structural NPL ratio dropped due to an uptick in write-offs and stood at 5%. As a result, Mibanco’s quarterly earnings dropped 68% quarter-over-quarter from a full year perspective. Net interest income grew 15% in 2022, driven by an increase in structural loans and in disbursement rates. Provision expenses rose 15% in 2022, which was attributable to loan growth and a variation in our risk appetite.
Operating expenses grew 7% year-over-year, driven mainly by marketing and IT expenses and by variable compensation, which reflected growth in earnings and fulfillment of commercial targets. In this context, the efficiency ratio dropped to 51.3% in 2022, while ROE stood at 16.5%. At Mibanco Colombia, pricing strategies and significant loan growth were challenged by a quick rise in the cost of funds, which reflected the evolution of market rates. Provision expenses were well controlled and operating expenses grew in line with portfolio expansion and initiative to develop new capabilities.
Next slide, please. Grupo Pacifico’s net income is decreased 25.4% quarter-over-quarter. In the Life business, net earning premiums decreased over a particularly high pace due to seasonal effects. This dynamic was partially offset by a drop in net claims of COVID-19. In the PC business, net earning premiums increased primarily in commercial lines due to an uptick in renewals. This evolution was partially offset by higher claims in commercial lines from a full year perspective.
Grupo Pacifico’s net income rebounded driven by both the Life and PC business. In the Life business, net earning premiums increased driven primarily by Group Life through price adjustments and an increase in sales of the complementary insurance for occupational risk product and secondarily by an increase in the affiliate base in disability and survivorship. This positive dynamic was accompanied by a drop in COVID-19 claims which were substantial in 2021.
In the Property & Casualty business, net earning premiums increased primarily in personal lines due to growth in sales of car protection products through bank assurance and oncological products via medical assistance. Claim growth, particularly in the commercial line after economic activities normalized. These dynamics led the total loss ratio to stand at 67%, which is close to pre-pandemic levels. In this context, Grupo Pacifico’s return on equity stood at 19.2% this year.
Next slide, please. The investment banking and wealth management business, while still challenged by market conditions has registered a slight recovery in recent quarters. On a quarter-over-quarter basis, earnings rose driven primarily by capital markets where gains were registered in the proprietary fixed income portfolio and secondarily by corporate finance where a number of deals were closed at year-end. Asset management and wealth management remained flat.
From a full year perspective, assets under management dropped 18.7% driven by fund outflows in Peru and Chile and decreasing market value of funds. In this context, income fell 13.1% primarily in asset management. This reduction occurred over a high base last year when we registered a strong gain from anticipated redemptions and third-party upfront fees due to migration to offshore products in a context marked by political risk.
The change in the market environment lets us to initiate a strategic review for this business, which is close to completion. We have identified key levers to achieve long-term profitability and are determining which business represent the greatest opportunity for row and which can be used as platform to capture efficiencies.
Next slide, please. Now we will talk about Credicorp consolidating dynamics. On a quarter-over-quarter basis, our interest earning assets fell 3.1% due to a drop in available funds, investments and Reactiva loans and structural loans grew 0.8% driven by Retail segments and Mibanco. Amortizations in wholesale banking clients partially offset this growth. Our funding base dropped 4.7% is skewed mainly by a decrease in demand deposits.
The positive impact of asset repricing and higher yield assets structurally offset the increase in the funding cost in this context, the yield on our interest-earning assets rose 65 basis points versus an expansion of 29 basis points in the funding cost. On a full year basis, interest earning assets and funding follow trends similar to those in this quarter. On the asset side, there was a shift in the mix where higher yield structurally launched name in micro finance and consumer loans reduced a higher growth than that seen in other segments.
In terms of our deposit base, the mix tilted to higher cost products, where time deposits were up 23%. These dynamics and the fact that we maintain a large share of the market transactional deposits led to increase in our asset yields to obtain growth in the cost of funding.
Next slide, please. Now I will discuss the evolution of core income. On a quarter-over-quarter basis, core income grew 5.6%, driven primarily by an increase in net interest income. Consequently, the net interest margin rose 42 basis points to stand at 4.73%, while structural NIM stood at 5.95%. Risk adjusted NIM fell 6 basis points to stand of 4.44%. Moreover, the net gains FX transactions also increased. Nevertheless, fee income fell 2% driven primarily by the elimination of fees for intercity transfer and the decrease in fixed pay for third parties, mainly due to higher transactional volumes.
On a full year basis, core income grew 17.9%, fueled by growth in net interest income which rose 23.1% in line with an uptick in loan volumes and interest rates. NIM grew 97 basis points and reached 5.07% in 2022 risk-adjusted NIM stood at 4.27%. Net gains on FX transactions grew 17.5% and also boosted the core income result. Fee for growth 4.2% driven by an uptick in POS transactions, higher fees for personal loans disbursements and an increase in bank-to-bank transfer. The 9.4% increase in banking services fees was partially offset by a drop in fee income from mutual funds.
Next slide, please. I will now move to Credicorp’s structural loan quality dynamics. On a quarter-over-quarter basis, our structural NPL volumes increased slightly. NPL volumes in increased mainly in wholesale banking after some clients in the retail and hotel sector abated of financing after having been reprogrammed during the pandemic. And SME-Pyme due to overdue loans of clients in a segment with higher risk profiles, but also higher margins. Asset quality in each segment remains within our expectations and provision levels remain adequate.
The aforementioned increases were partially offset by a reduction in NPL volumes at Mibanco and in consumer loans due to write-offs. Year-over-year, similar to quarter-over-quarter, the increase in NPL volumes was driven primarily by wholesale and SME-Pyme. Write-off in SME-Pyme and Mibanco are expected to continue given that regulatory restrictions or charge-off of loans to clients that possesses both structural and Reactiva loans has been lifted. Credicorp’s structural NPL ratio was basically flat at 4.95% after decreasing NPL volumes, while it was offset by higher loan balances.
Next slide, please. Now let me explain structural loan loss provisions dynamics. On a quarter-over-quarter basis, growth in structural provisions was driven mainly by BCP and Mibanco. The main drivers at BCP were updates to macroeconomic projections for inflation, interest rate and GDP, which impacted retail banking in particular. The impact of high inflation on payment behavior in the consumer segment at Mibanco, the main drivers were an unusually low base last quarter and the maturity of specific vintages which led to the fall ratios for the portfolio to rise.
On a full-year basis, the structural provision expenses increased 38% over an exceptionally low base and are moving towards normalized levels. In this context, the structural cost of risk stood at 2.06% this quarter and 1.26% this year. The structural coverage ratio stood at 112.2%.
Next slide, please. As mentioned last quarter, a significant portion of our annual expenses are registered in the last quarter of every year. To base our analysis and comparable figures, we explained the evolution of efficiency in accumulated terms. Operating expenses grew 11.5% on a full year basis, which reflected an increase in administrative expenses and in salaries and employee benefits. Growth in administrative expenses was driven by an uptick in IT expenses related to cybersecurity new functionalities, a significant higher digital-transactional volumes, and an increase in expenses for fees which reflect growth in transactions; and finally, the acceleration in destructive initiatives.
Salaries and employee benefits grew 10.5% driven by growth in variable compensation by an uptick in hiding of specialists for disruptive projects and IT. In this context, Credicorp’s efficiency ratio improved 150 basis points on a full year basis, driven by higher core income and BCP stand-alone and Mibanco. If we exclude investments in disruptive initiatives such as Yape and Krealo, the efficiency ratio for the year stands at 41.6%, which represents a difference of 290 basis points from the reported figure.
At BCP and Mibanco which accounts for a significant part of operating expenses, operating income grew faster than operating expenses in 2022. In this context, BCP efficiency ratio fell to 170 basis points and Mibanco 410 basis points.
Next slide, please. Credicorp’s full year profitability was fueled by better results at Universal Banking and microfinance and a solid recovery on the insurance front. In addition, profitability was impacted by lower results at the holding level mainly due to a decrease in net financial results and higher expenses for withholding taxes. Net financial results at the holding were impacted by an increase in the negative carry of the senior bond in line with the devaluation of the investments made with the use of these proceeds.
Regarding tax expenses at the holding in 2022, the provisions for withholding tax increased, reflecting higher expectations of dividend payments. As a result, ROE for the full year stood at 16.7% this year, 276 basis points above the level of 2021.
Finally, note that ROEs for the first and second semester were somewhat higher than the full year figure even the equity balance at the end of June was lower. This reflected dividend payments and the accumulation of unrealized losses at the end of the first half of the year.
Now I will move on to the outlook. Despite current political volatility and social unrest, Peru’s macro fundamentals remain solid, and we expect Peru GDP to grow between 1.8% and 2.2% in 2023.
In terms of our loan portfolio, we expect our structural loan portfolio measured in average daily balances to grow between 6% and 10% driven mainly by retail banking. The evolution of total loans will depend on the pace at which Reactiva balances are amortized. High levels of interest rates, the shift our loan growth toward a higher yield mix and our competitive funding base will positively impact NIM. Accordingly, we expect NIM to stand between 5.8% and 6.2%. The cost of risk guidance is between 1.5% and 2%. This range reflects higher uncertainty and an ongoing trend back to pre-pandemic figures at the segment level and the shift of our loan portfolio mix towards retail.
In 2023, we will continue to invest significantly in digital transformation and disruptive initiatives to bolster our long-term competitive position. In this scenario, the efficiency ratio is expected to situate between 44% and 46%. In the aforementioned in context, we expect our ROE to situate around 17.5%. Finally, please consider that this guidance is based on the application of the IFRS 4 accounting standard. This may lead us to adjust these numbers in May as we implement IFRS 17 in the insurance business.
With these comments, I would like to start the Q&A session.
Question-and-Answer Session
Operator
Thank you. We will now begin the Q&A session. [Operator Instructions] Our first question comes from Roberto Durono [ph] with Bank of America. Please go ahead.
Unidentified Analyst
Hi, good morning. This is Gabilondo [ph] from Bank of America. My first question is on operating expenses and the digital investment strategy. We have seen a trend in the region that is focusing in profitability versus client growth, and also looking for an accelerated pathway to monetize the client, experience in the region has been to have digital deposits and digital loans to monetize the clients.
And I think it has been coming from both, not starting with the asset or the funding side. Also, we have seen that digital payments, digital wealth management, the marketplace, digital insurance or more elementary products that are not enough to monetize the clients. We have seen Credicorp has been investing into neo banks in the digital payments exploring to launch unlike a place and has investments in some fintechs and among other initiatives that you have.
However, considering that Peru is still not safe in fintech competition like in Brazil, in Mexico or Colombia, wouldn’t it be reasonable to refocus the digital strategy on accelerated profitability and then maybe use those earnings to invest in multi-initiatives? I would like to hear your thoughts on this and how should we expect in terms of the operating expenses and the digital investments? Thank you.
Gianfranco Ferrari
Hi, good morning, Roberto. Thank you for your question. As we mentioned in — I don’t recall if it was the previous call or two calls ago, we do see the new competitive environment as positive — for the exact same reasons you mentioned as positive for incumbents like us because of, what I call, happy money has somehow dried up for new ventures.
Regarding our strategy, we do believe that the current strategy we have is the right one. As Cesar mentioned, I believe, 280 basis points out of the cost-to-income of Credicorp was expensed in — sorry, in digital initiatives. That’s within the range we provided which is up to 300 basis points of cost to income and up to 150 basis points of ROE.
So we’re on track. We don’t believe that we need to change our commitment regarding digital ventures. Having said that, what we’re seeing is because there’s no more — there’s less new money coming into these ventures, the path to monetization is going to be faster. The more mature — the most mature venture we have, which is Yape is right on track in that sense.
We’re very positive with what we’re seeing. We shared with you the number of active users. We keep increasing the number of usage per — the number of transactions per user and also the number of users already generating income which is at a faster pace than we originally planned. So we’re on track. Obviously, some of these ventures diverge, we will make the right corrections.
Unidentified Analyst
Then my second question is on asset quality. I don’t know if you can give us how much of the provision charges of the quarter were related to the section of rate impacts. And when we look into your culture risk guidance, it seems wider when compared to the ones you guided in 2022. So you see like a realistic cost of risk would be around 1.7%. And then your guidance is conservative to the 2% in case question on rent increases. I wanted to hear your thoughts on that.
Gianfranco Ferrari
Yeah, Reynaldo?
Reynaldo Llosa
Yeah. This is Reynaldo Llosa. Yes. I mean, as Cesar has explained during his presentation, there are several reasons that are impacting the total risk and the guidance for this year. Basically, the return to normal levels as we have mentioned in previous calls, also the fact that the macroeconomic environment is challenging due to what we’ve been watching in the country in the previous months actually, and also for the fact that we are growing faster in the retail market than in the wholesale market.
Having said that, I mean, there’s still a lot of uncertainty for the following months. So that’s why we have provided a guidance that is open between 1.5 and 2. And we — it will be reasonable that we will be some point in the middle, but I would say, it’s a little too soon to have a precise number or the final number for the year.
Unidentified Analyst
Helpful. Thank you very much.
Operator
Our next question comes from Daer Labarta with Goldman Sachs. Please go ahead.
Daer Labarta
Hi, good morning. Thank you for the call and taking my question. I guess my question is on your guidance, I guess, particularly the ROE guidance. Just to try to understand how they get to that 17.5% that you’re expecting for this year? I mean, I know margin is looking better than expected, but that cost of risk seems to be increasing and just taking the 4Q number of 1.9% and given the uncertain macro and political outlook, it does seem like you would be closer to that higher end of the cost of risk, if not even above that. So just to try to see what you’re thinking and get you to that 17.5%. And maybe if you can provide some — what do you think like on fee income growth or expense growth that will maybe help you achieve that?
Gianfranco Ferrari
Cesar?
Cesar Rivera
Thank you for the question. I think the numbers that we provided in the previous guidance where coherent as a whole. But as you can see, we had, at the end, a little bit more cost of risk that’s in the middle of the range. So that explains the 16.7%, basically. And for the 2023, I will argue that we are modeling something similar, in the sense that the combination of the different factors lead us to have around 17.5%. And I would like to stress by the previous call that is an around, it’s not exact figure with decimal points.
Regarding the specific question regarding risk, as Reynaldo already mentioned, we have during the year that was expected to come back to more pre-pandemic levels and at the same time to shift a more retail portfolio. If you see as a whole, it doesn’t look that the shift is radical between wholesale and retail. But within retail, we have been growing significantly faster in Consumer and Pyme than in whole mortgages, for example. So the risk profile has changed. We expect the same behavior during 2023.
So if we take out the specific events that impacted the fourth quarter we consider that the range of cost of risk between 1.5% and 2% is reasonable according to, and I’m going to review the general trend and the come back to the risk profile on a segment level, the shift towards more retail portfolio, the specific short-term impacts of the political rates that are going to impact the last quarter of last year and the first quarter in this year. And I will say, if you put all of this in a package led us to believe that this range is reason. I don’t know if this helps you.
Daer Labarta
Yeah. No, that’s very helpful. Maybe just to try to triangulate everything. Any color you can provide, like on the fee income growth and also expenses. I know you gave the guidance for efficiency. But just any color just on the specific growth in those segments, particularly, I guess, on expenses because just given all the IT investments that you’re doing, any color you can give on the growth that you expect in those lines?
Cesar Rivera
Yeah. Probably, additional comments. In terms of fees, we mentioned at the beginning of last year that we have experienced a significant rebound in specific lines of fees related, for example, in Mibanco to the comeback of disbursement that are aligned with the specific commissions in the case of BCP transactional activity that rebounds very significantly well above pre-pandemic levels propelled by our digital capabilities.
But this significant rebound has already occurred. And now what we are going to have is an increase more aligned with business volumes in the asset side and increased digitalization and transactional capabilities on the deposit side, but not at the same pace that at the beginning of 2022. For this reason as a whole, the fee income is going to grow less than the net interest margin.
And in terms of expenses, I think the general trends are going to be similar but with different rates that in 2022 and a slight increase in variable compensation and a significant increase in two or three accounts. IT expenses to increase product offering, transactional activity, volumes that are growing significantly and market associate expenses. And lastly, the disruptive initiatives that are growing income faster than expenses, but as a whole still impacts the core — the efficiency ratio being more significant in relative terms.
Daer Labarta
Okay. Great. Thank you, Caser.
Operator
Our next question comes from Geoffrey Elliott with Autonomous. Please go ahead.
Geoffrey Elliott
Hello, thank you very much for taking the question. I wanted to dig in a little bit more detail into the Mibanco vintages that you mentioned. Can you give us a little bit more detail on those loans when they were originated, what the characteristics of the customers were and also help us understand why are we seeing the increased provisions now if it seems like this has been a known issue for a couple of quarters new adjusted underwriting I think you said back in the second quarter? Thank you.
Gianfranco Ferrari
Reynaldo?
Reynaldo Llosa
Yeah. In terms of the specific vintages, we had — as you have seen in the first semester, quite important growth in the Mibanco portfolio. And we’re quite optimistic on the evolution of the performance of those segments in the market. Having said that, we identified by the end of the first semester, some specific risk increase in the quality of those segments. So we decided to put us out on our strategy on the second semester. Our growth expectations for the portfolio helped by that event. And that’s basically what has happened. These vintages have been maturing and we are ending up the process of identifying the losses associated with those segments. That’s basically what has happened.
Geoffrey Elliott
Great. Thanks very much.
Operator
Our next question comes from Yuri Fernandes with JPMorgan. Please go ahead.
Yuri Fernandes
Thanks Gianfranco, Milagros. I had a question with regard– just a follow-up on efficiency. When we look to your guidance, the margins are very strong, right, like you have structural loans growing 6% to 10%, meaning extending the midpoint of 90 bps. And when we plug this to your NII, this imply, I don’t know, like more than 20% NII growth, if you assume interest earning assets will grow at the same pace as low, right?
So it’s a very solid top line, but looking to your efficiency guidance, they are kind of flat versus this year, right? And this year, I guess, we had about 11%, 12% expenses growth, BCP leading and it’s totally clear. It’s the digital information. I think we’re doing a good job. But given your main revenue line, NII should grow those 20%, assuming our calculation here is correct. What’s going to happen to expenses?
Like are you calling for such an increase in expenses? Like should we see expenses are approaching those 20% levels or no, it’s a combination of fees as we were discussing previously? I’m just curious a little bit here to understand these expenses because I get it, you have this investment plan. But given the revenue that should be so strong, I’m not getting like if we should consider G&A accelerating as much? Thank you.
Cesar Rivera
Yeah, Yuri. I think it’s a very sensible question. I think it’s a very reasonable one. I just try to explain this way. Think in the P&L, we have the net interest margin. As you mentioned, driven by the NIM and the volumes is going to have an important increase, the combination with volume and higher average NIMs through the year.
The second source of income is fees. And for the reason that I explained previously, the fee income is going to grow at a slower pace than before, more attached to the volume of a number of specific clients that this significant rebound that we experienced at the beginning of last year and also in FX although we continue to deploy significant capabilities.
Last year, we have a number of specific volatility events that we capitalized on that we cannot project that are going to cure again. So summarizing the income part, very solid in terms of margins and a slower growth in terms of fees, okay? This is part of the explanation. The second part relates to expenses. As you point out, we plan to continue investing heavily in developing capabilities inside the business units and in the disruptive ones.
Inside the business units, the growth is going to be in line with the expansion of a client transactional activity and so on. And in terms of the disruptive initiatives, what is going to happen is that although the income of these initiatives are going to grow at a faster pace than the previous year and starting to see significant contribution, the cost base are also going to increase, and the relative weight of the disruptive initiatives are going to be bigger than the previous year lets us a very simple example and the figures are not exact at all.
If I have an efficiency ratio of the disruptive initiative of 150% to say something because we still lose money. But the total size is 100 impact less than when we have 110% efficiency ratio that is a significant improvement but relative size have been double.
Do you — I am clear? So the combination of these four quarters explains why we’re having a significant increase in net interest margin, we still expect to have an efficiency ratio that if you see the margins are not very different from the 2022 actual figures.
Yuri Fernandes
No, that’s super clear, and thank you for all the color and explanation. And just a final one on efficiency like — and I guess already discussed this in previous calls, but what should be the target, let’s say, two years from now, like do you see this efficiency going to 40? Like — because, as you said, there are some components here. They are kind of — they are not structural expenses, right? You were doing some kind of CapEx and developing products. So at some point, we should see G&A coming down to more inflation like levels, right? So when that happens, what is the level we should expect for Credicorp?
Cesar Rivera
Yeah. I am going to provide you a figure that reflects that we have already communicated to the market on the Digital Day and is around and around 43%. That reflects a number of changes in our composition, including the relative weight of the disruptive initiatives in our P&L that continues to have the factor that I mentioned more efficient by itself, but bigger in relative terms to the whole portfolio.
Yuri Fernandes
Got it. Thank you.
Operator
Our next question comes from Juan Recalde with Scotiabank. Please go ahead.
Juan Recalde
Hi, good morning. Thank you for taking my question. My question is related to deposits and funding. So the deposits had been relatively flat year-on-year in 2022. And at the same time, we saw low cost deposits decreasing as a percentage of total funding and interest-bearing deposits increasing. So how should we think about deposit growth and the funding breakdown evolution for 2023? And what role do you think Yape can play in the deposit growth and breakdown?
Gianfranco Ferrari
Okay. I think to understand the short-term dynamics, we need to come back to the pandemic period. Because previous to the pandemic, we had a certain structure in the funding base and the relative sizes of the low-cost deposits in the financial system and during the pandemic, that was a significant infusion of low-cost deposits if I can remember in relative terms.
We have the impact of Reactiva. As you remember, we’re almost PEN 60 billion of Reactiva with PEN 50-something billion funds of the Central Bank that is recirculating the economy and end up being very much transactional deposits, significant short-term imposed from that.
Another source was the impact of — the releases of the Peru pension funds, five releases. A lot of these funds temporarily went to short-term deposits. And finally, during some period of time, the people who had income didn’t have the opportunity to spend much money due to the restrictions in the economy. The combination of these three factors increased the floating, the transactional deposits in the economy and at record high levels, and we capitalize that using our transactional capabilities. So we not only captured our share, but we increased our market share.
When we start to normalize the economy, all these factors are starting to dilute or reverse. For example, the people started spending money again. There were not significant disbursement from the pension funds. And more importantly, the Reactiva were paid. So at this point, around 50% of the initial Reactiva funds, 55% Reactiva funds has already been paid. That is liquidity that you take out of the market.
And in addition to that, we have a significant increase in interest rates, so the opportunity cost for the people who have excess deposits increases from 0.25% to almost 8%. So the composition and general terms explained for that. What we expect is that the figures are going to come back, not to pre-pandemic levels but something between the very high temporary levels and pre-pandemic levels promoted for our digitalization, our transactional capabilities.
What role play Yape in all of this, we have measured. And when you digitalize money, in instead of going to the bank and take out the bills, you let the money in the bank and you make your payments only with electronic transfers. And the average figure that we have identified is that around, we can maintain 25% or 20% of the average transactional volume of our client as an additional transactional deposits. So it’s a significant and valuable contribution. We measure that to measure the performance of Yape as a whole.
Juan Recalde
Helpful. Thank you for the comment.
Operator
Our next question comes from [Indiscernible]. Please go ahead.
Unidentified Analyst
Yes, good morning, gentlemen. I have three questions, just going to go one by one. The first one regarding loan growth. So you said your guidance is for structural loan growth of 6% to 10%. But of course, that — what I’m interested in is total loan growth which I would guess would be around 0% or 1% because Reactiva announced 7%, I think, of your total loans. So implicitly, you believe that Reactiva loans would be fully repaid. So that’s structural of 6% to 10%, let’s call it, 7.5%. Once Reactiva is repaid is more or less zero. Is that the correct assumption or no?
Cesar Rivera
Yeah, it is a reasonable assumption. But as we stated, the impact of Reactiva in the P&L is very marginal.
Gianfranco Ferrari
Yeah. This is Gianfranco. So your assumption is correct. So basically, it will be very flattish in terms of total loans. As Cesar mentioned, Reactiva loans have basically no margin. So the impact on margin is completely different.
Unidentified Analyst
Okay. Okay. Good. So that was actually my next question regarding the margin. So if I look at you again, your guidance, you’re assuming a pretty significant NIM expansion, and you said that Reactiva impact of that, if anything, it’s margin accretive because these are very thin margin loans. But I guess how much of that NIM expansion that you are assuming is coming from the mix shift to retail, and we spoke about within retail, you’re going to hire Pyme and things like that. So how much of that is structural, which mean by like mix shift? And how much of that is still from the interest rate — delayed impact of interest rate increases?
Cesar Rivera
I think the direct answer is that the rates are a significant contribution because the average rates of 2023 we expect are going to be higher than the average rate of 2022, even though the trend is different. During ’22 was an up target trend. In 2023, it’s going to be at some point a downward trend. But the average of the year is going to be higher. So this is going to be a key component of the expansion of the NIM.
And the second factor, less significant because it’s more gradual is the shift in the portfolio composition as you mentioned.
Unidentified Analyst
Okay. Okay. Got it. And then the final question with regard to this Mibanco. So here’s what I’m not understanding. So you just spoke, and you have a slide in your presentation that maturity of specific vintages led to the default ratio in this portfolio to rise and that lets you to increase the cost of risk, which is shown on your slide. But then when I look at your presentation, in your earnings release, there is a chart there that shows — I think it’s on Page 19, that shows the cost of risk or structural NPL — sorry, structural NPL ratio for your various businesses and that one shows that Mibanco has actually declined in December 2022 to 4.96%.
So it’s gone anywhere from 7% in ’21 and it’s been on gradual decline, and it’s already like under 5%. So my question is this, how can I — how should I think about the disconnect between your NPL ratio trajectory and your cost of risk trajectory with respect to Mibanco?
Gianfranco Ferrari
Yeah. Basically, I mean, the improvement in the NPL ratio basically in response to the aggressive write-off strategy we’ve implemented in Mibanco and that basically reflects credit — loans already 100% provisions.
And remember that besides the specific things — the specific case of the vintages I mentioned before, it also reflects the challenging macro environment we are facing in 2023 that is incorporated in our projections of the expected loss calculations for the year-end 2022. So there are like two mix factors.
Unidentified Analyst
Okay. So I just want to be very clear. So you’re saying that the reason your NPL ratio has declined is because you’ve written off some loans which are nonperforming, right? So you accelerated your write-off policy with respect to those loans, correct?
Gianfranco Ferrari
Correct. An important percentage of those write-offs were basically due to the fact that we have also written off the Reactiva loans. And we write-off the whole positions, Reactiva loans plus the positions they have directly with Mibanco funds, not guaranteed by the government.
Unidentified Analyst
Okay. Okay. And then regarding the cost of risk you’re saying because there’s higher inflation and higher — potentially like higher defaults, right, because people maybe squeezed in terms of income, you now think that your model or your cost of whatever, your IFRS model is telling you that your cost of risk for this loan should be higher, right? That’s like an assumption, like whatever you fit into the model spits out higher cost of risk, essentially, right?
Gianfranco Ferrari
Exactly. That’s repeated on the 5.9% cost of risk of the last quarter of 2022.
Unidentified Analyst
Okay. And then the very final question, I heard something very brief mention about — you said something about IFRS 17 implementing in your insurance business. Like, first of all, what that’s all about? And second is how big impact is it? Is that even material or not?
Gianfranco Ferrari
Thank you for the question. No, we believe that the initial impact of the IFRS 17 will not have an important or material impact in credit cards equity or in Pacifico’s equity. Only as a reference, Pacifico’s equity represents 8% of Credicorp’s equity. And our first estimations are around — we will need an increase in around 2% of their reserve or 8% of total equity in Pacifico’s equity. So the impact at the end won’t be material at Credicorp’s levels.
Unidentified Analyst
Okay. Understood. All right. That’s helpful. Thank you very much.
Operator
Our next question comes from Andres Soto with Santander. Please go ahead.
Andres Soto
Good morning to all. And thank you for the presentation. My question is regarding your asset quality outlook vis-a-vis Peru’s current political and social environment. Which areas are you concerned about? You before mentioned on tourism as a scenario that may suffer in the current context. So I would like to understand better where do you — are you concerned about if this situation prolongs beyond the first quarter that you mentioned, which pockets of your business may start to suffer be that this exposure to industry or how concerned are you also on your microfinance exposure? Thank you.
Gianfranco Ferrari
Yeah. Basically, in the wholesale market, I mean, we are somewhat concerned what might happen in the tourism industry as well in the commercial real estate. Having said that, those portfolios are well collateralized. We have real estate behind it. So it’s a matter of patience and providing those plants with the necessary helps to go through this crisis. And we hopefully will see better times in the following months. That’s basically on the wholesale market.
In terms of retail, of course, the specific low segments of both consumers and SME portfolios are the most affected, but we did in the pandemic contacting them very aggressively to provide them the necessary help in different ways. I mean, the experience on the COVID crisis helped us a lot in defining some different alternatives that at the end resulted in a much lower default revenue than we initially expected. So those are the segments that probably are going to be most exposed to this current crisis. But I remember, as Cesar mentioned, those are loans that generate better margins than the traditional segments on both consumer and SME portfolios.
Andres Soto
Thank you very much. And on that, the dimension on the tourism and commercial real estate, how much of your loan book is exposed to these segments?
Gianfranco Ferrari
It’s not — I don’t have a precise number today, but this is not that big. I mean, there are specific cases and we have basically hotels all over the country, but basically concentrated in Lima. So I mean, we — the effect is quite manageable for the industry as a whole. And as we’ve seen before, it’s basically a matter of time and providing them the necessary time to go through the crisis.
Andres Soto
Understood. Thank you very much.
Operator
Our next question comes from Tejkiran Kannaluri Magesh with White Oak Capital. Please go ahead.
Tejkiran Kannaluri Magesh
Hi, good afternoon. I have two questions. The first is a bit of understanding of the provision flows. So we have around PEN730 million provisions in absolute terms this quarter, which is higher than last quarter, which was around PEN460 million. But the overall stock of allowance for loan losses on the balance sheet has gone down to 7.87 billion from 8.03 billion. And the write-offs also on a consolidated Credicorp basis is lower than last quarter by 754 — at PEN754 million. So we have higher provision but lower write-offs and lower allowance for loan losses. So could you please help me understand where the extra provisions have gone? That’s my first question. I’ll come back with my second. Thank you.
Gianfranco Ferrari
I don’t know if I got your question correctly. Basically, I mean, we’ve grown with the provisions because of the reasons we have explained. Remember that some of the provisions that are required for specifically the wholesale segment it’s well collateralized, we have guarantees and a good coverage ratio, requires less provisions than the retail segment.
And at the retail segment, it’s usually written off a lot faster than the other portfolios that have collaterals behind. So that’s basically the general macro explanation of the questions if I got it right.
Tejkiran Kannaluri Magesh
Understood. And can you comment on the recoveries and upgradations from the stressed loans and how the post rate of recoveries have been this quarter compared to the last one?
Gianfranco Ferrari
I mean, basically, we’ve seen — we have like a stable level of recoveries of written off loans and so basically, we haven’t seen an important change in that number in the last few quarters.
Tejkiran Kannaluri Magesh
Thank you. And my last question is on dollarization level, specifically in the SME loans at BCP, it has gone up to 36% from 26%. And is that a sustained trend? And do you think that’s because of the current difficulties in the macro/political environment? And is there any chance this higher levels of dollarization will spill over to other portfolios as well?
Cesar Rivera
Maybe I can take that one. Regarding the funding in progress, there’s no limit whatsoever because of the current political situation. If I go in price, you said 36% of the SME for $1,000, that number — sorry, I’m checking the number, but — SME business, that’s the mid-market companies. We have — that’s a quite — has gone from 26% to 36% over the last year. That’s basically because those are the companies that have dollar exposure are related to dollar-generating businesses. Either they export directly or they are suppliers to exporters. So we have no concerns regarding the foreign exchange exposure in that segment.
Tejkiran Kannaluri Magesh
Understood. Thank you.
Operator
Our next question comes from Carlos Gomez with HSBC. Please go ahead.
Carlos Gomez
Hello. And thank you for taking my question. It’s more on the economic and political side. How concerned are you today? And what impact the current disturbances has over your operations on a day-to-day basis? And again, do you see the situation better or worse today than you did 6 or 12 months ago?
Gianfranco Ferrari
Carlos, this is Gianfranco. I was going to answer you how much more concerned or less concerned am I today as compared to yesterday. It’s a really difficult question. There’s a lot of volatility in terms of political noise and turmoil and so on. This is a very personal opinion, and I’m not — I’m sure all of the people that are sitting at this table today may not have the same opinion. But I do see light in the end of the tunnel.
Unfortunately, the prior government was — this is a lot of — this is based on public information. There are a lot of judiciary processes on the President and its ministers and the executive power and so on because of corruption. On top of that, the lack of capacity of execution was very high. So I would say, we are more positive in what we see going forward.
Obviously, there’s a lot of political turmoil and social unrest today, which is generating the troubles we’ve been talking about over the last few minutes. But overall, we are more positive today as compared to, I don’t know, six months ago or even three months ago.
Carlos Gomez
And in terms of the impact on your operations?
Cesar Rivera
In terms of operations, we have had some — two answers there. We have had some operating issues at BCP, which we’ve managed correctly. Basically, we’ve had to shut down some branches on a — even on a hourly basis on a daily basis. But that hasn’t had a major impact whatsoever. Mibanco has been — since Mibanco operates in much more rural areas because of the microfinance business, two of Mibanco’s branches were burned. Those branches are closed today.
And luckily, no personnel impact in terms of our employees. Nothing happened in terms of personnel impact. What we’re concerned there is a tiny — it a small portfolio around 80 million solid [ph] and we’re somehow concerned because of the lack of capacity for our clients of logistic problems, were to pay and on our side on how to collect. So those are, I would say, on the operational side, the major impact.
Carlos Gomez
Thank you very much.
Operator
It appears there are no further questions at this time. I will now turn the call back over to Mr. Gianfranco Ferrari, Chief Executive Officer, for closing remarks.
Gianfranco Ferrari
Thank you all for your questions. Despite the near-term outlook, which involves more uncertainty, we will keep delivering based on our purpose, executing on our strategy and advancing the many initiatives we have underway throughout 2023. However, we will be prudent as we have always been in managing risk given the current local environment.
Although it’s still early to accurately estimate the potential impact of current social unrest in our economy and our businesses, our guidance of maintaining our ROE in the high teens in 2023 includes our best estimate based on the information we have today.
We expect NIM will continue to increase as the period of high levels of interest rates could be prolonged, and our loan portfolio continues to shift towards retail. Cost of risk will continue to normalize towards pre-pandemic levels.
Finally, we expect to register high single-digit growth in the loan book. And to make this possible, we will continue investing in digitalizing our traditional businesses and disruptive ventures. I am hopeful that the next general election brings the stability needed to rebuild the country in an environment of peace, democracy and inclusion. Peru still maintains the institutional framework and macroeconomic fundamentals, which led the country to 14 consecutive years of poverty reduction prior to the pandemic.
We hope that those that are elected protect those fundamentals and prioritize solving the structural problems in Peru, widespread poverty and an equal access to health and education. We are committed to contributing to achieve the goal of poverty alleviation, which is closely tied to increasing financial education and inclusion. By accelerating our financial inclusion agenda we can support the efforts of those that are the list included, women, the elderly, people living in rural areas as well as those of lower social economic and education levels to achieve greater levels of security through savings, greater income generation and economic independence.
We also believe that Peru has an important opportunity for advancement in the context of the global energy transition process. The prior government have wasted the opportunity of positioning our country as a leading participant in this process. The energy metrics will change fundamentally in the next five to 10 years due to environmental and resulting policy changes with investments shifting away from fossil fuels through renewables.
Global demand for metals is growing exponentially as governments commit to advancing energy technologies capable of addressing the climate change. And the Andean region should be a key supplier of these required metals. If only our governments can focus on stability on strengthening our fundamental infrastructure needs, then we can realize and reach more quickly the tremendous potential in front of us, therefore, having a positive impact on poverty reduction and improvement in education and health services.
Thank you all. I look forward to speaking with you on our next call.
Operator
Thank you, ladies and gentlemen. This concludes today’s presentation. You may now disconnect.
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