Credicorp Ltd. (NYSE:BAP) Q3 2023 Earnings Conference Call November 3, 2023 10:30 AM ET
Company Participants
Milagros Ciguenas – IRO
Cesar Rios – CFO
Raimundo Morales – CEO, Yape
Reynaldo Llosa – Chief Risk Officer
Conference Call Participants
Tito Labarta – Goldman Sachs
Ernesto Gabilondo – Bank of America Merrill Lynch
Geoffrey Elliott – Autonomous Research
Thiago Batista – UBS
Yuri Fernandes – JPMorgan
Sergey Dubin – HL
Carlos Gomez – HSBC
Andres Soto – Santander
Operator
Good morning everyone. I would like to welcome all of you to the Credicorp Limited Thrd Quarter 2023 Conference Call. A slide presentation will accompany today’s webcast which is available in the Investor 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 an opportunity for you to ask questions at the end of today’s presentation. [Operator Instructions]
Now it is my pleasure to turn the conference over to credit corpse IRO, Milagros Ciguenas. You may begin.
Milagros Ciguenas
Thank you and good morning, everyone. For today’s call our Chief Financial Officer Cesar Rios will be providing the introductory comments in addition to his usual discussion of the macro environment and financial performance, as our CEO Gianfranco Ferrari could not be with us today.
In addition to speaking on today’s call will be, Raimundo Morales, CEO of Yape, who will give us an update on the Yape’s progress. Finally participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer; Reynaldo Llosa, Chief Risk Officer; Cesar Rivera, Head of Insurance; and Pension; and Carlos Otello, CFO at Mibank.
Before we proceed, I would like to make the following Safe Harbor statement. Today’s call will contain forward-looking statements, which are based on management’s current and — current expectations and beliefs and are subject to a number of risks and uncertainties. And I refer you to the forward-looking statements sections 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 change events or circumstances.
Cesar, please go ahead.
Cesar Rios
Thank you, Milagros. Good morning, everyone. Thank you for joining us in our third quarter 2023 conference call. While the macro environment has been more challenging than expected Credicorp has continued to demonstrate its distinctive resilience in Peru, thanks primarily to our diversified and prudently managed loan portfolio and funding advantage. Its strong NII is complemented with an increasing share of the core non-interest income streams, including those from insurance and Yape, which are partially mitigating the impact of the loan portfolio deterioration.
While there is still work to be done, we are pleased with the progress in increasing core non-interest income, which is a key part of our strategy of recovering from the macro. Our strong track record demonstrates our ability to successfully navigate complex environments. We have built a diverse portfolio of businesses, most of them benefitting from robust brand recognition and a strong customer loyalty. This privileged position further solidify our leadership, especially in challenging conditions. We are registering healthy margins even after high provision supported by long mix shift is stricter origination in vulnerable segments, dynamic pass throughs and our funding advantage.
Our solid capital base represents a strength, particularly within a challenging credit cycle where the impact of soft macro conditions of payment performance in specific segments is evident. We have already stated, we believe strongly in the importance of continuing to invest in both the technological transformation our core businesses, and in disruptive initiatives to maintain and enhance our strong competitive moats and future sustainability.
Please, next slide. By embracing our agile and self-disruptive mindset we are building a diverse business capturing synergies, maximizing our main profit pools, targeting the new client segments and developing our own disruptors as we seek to retain a healthy and sustainable ROE. Our focus on gaining a deep understanding of what pricing and upcoming market trends allow us to meet our customers’ changing needs, solidify our leadership and increase penetration in new markets.
Raimundo will now provide an update on the sustained progress at Yape, which in just over seven years has become the main payment network in Peru and is the most mature example of our disciplined approach to disruption and innovation as we advance towards our goal of decoupling from macro. Raimundo, please go ahead.
Raimundo Morales
Thanks, Cesar. And good morning, everyone. Yepe is an example of a rigorous approach to innovation and our commitment to meeting current and future market needs. Hitting the PEN10 million mark for Yaperos over a year ago was a turning point for us. We initiated our monetization plan by rapidly launching new business lines and functionalities driving both scale and engagement.
At the close of Q3, Yape had over 9 million monthly active users conducting an average of 29 transactions per month, up over 160% year-on-year, making interoperability a reality. Yape continues growing at an exponential rate, a clear sign of the benefits of this service offers to both clients and the ecosystem in general. Yape is not only the primary payment network in Peru, it is also the digital brand that boasts the highest awareness level in the country.
Please turn to the next slide. As the number of active Yaperos continues to grow, with each new feature added, the use of individual features also increases, driving gains in market share, attracting even more Yaperos from partners, while operating more and more efficiently reinforces our flywheel effect.
Top-ups a clear example of how Yape is helping us decouple a row from the macro. BCP’s top-up market share used to be around 10%, but after launching this functionality through Yape, our market share rose to 46% which represents 5x growth in just 18 months.
Last January, we enabled bill payments through Yape and have seen an upward trend for mostly growth with over 20% of Yaperos now using the service. We are currently at just 5% of our expected time for bill payments, so still have an immense opportunity for continuous growth.
Similarly, the use of our features in each business line including POS, QR codes and payments, microloans and financial service, and promos within marketplace is still incipient but quickly growing each month. Rapid adoption of this product is allowing a revenue generating TPV to grow at a three extra pays of our total TPV which has grown from non-existent in early 2022 to around 5% at the end of Q3. Our long-term aspiration is above 20%.
Please turn to the next slide. Unitary economics continue to move towards an expected breakeven in 2024. Revenues are growing and moving closer to cash costs as we incorporate new features. Monthly revenue per active user stands at PEN2.9 in the quarter compared to a cash cost per active user of PEN4.3. Q4 will be key in Yape’s evolutions for SuperApp with multiple product launches.
In marketplace, Yape at the end will initially focus on electronics, which typically represents 50% of e-commerce sales. We’re also launching other high engagement products such as ticketing through our acquisition joining gaming and gift cards.
In financial, we are introducing small multifamily loans with longer tenures through 100,000 pre-approved fleet. In payments. We’re competing our portfolio of solutions with FX transactions and remittances, among others. We are also providing collection services for CPG companies.
On the functionalities front we’re enhancing our UX to include the critical capabilities of a SuperApp. So as you can see, we’re going to remain very busy. Yape continues to progress towards monetization by pursuing its medium term target of being the payment, the main payments network in Peru being an integral part of Yaperos daily life and addressing their financial requirements. We look forward to updating you again in the future on our continuous progress.
I’ll turn the call back over to Cesar.
Cesar Rios
Thank you, Raimundo. I will share now the key financial highlights of the quarter focusing primarily quarter-over-quarter revolution to emphasize the recent shift in trends, both structurally launch and low cost the positive or positively quarter-over-quarter growth in the structural loss measuring average daily balances stood at 1% fueled primarily by retail banking at BCP. Meanwhile, low-cost deposits grew 1.2% and accounted for 50.9% of our funding base at quarter-end. Similarly, most of our income stream registered relevant sequential increases.
NII grew 1.6% driven by asset mix dynamics, which were partially offset by a higher cost of funding for bank deposits. Fees also grew 1.6% of the back of positive dynamics and revenues from debit card, collection services and bill payments. Insurance underwriting results rose 11.6% as earnings in the life business continue to trend upwards. We navigated asset quality headwinds as Peru credit cycle continued to deteriorate such because of risks each up to 2.5%. A structural NPLs ratio is stood at 5.6% given that weak economic performance took a toll on payment performance in specific segments, all in all, we delivered resilient results despite negative GDP growth, and have maintained solid capital levels at our subsidiaries.
Having said that, a note of caution is in order to cease as we’ll elaborate later, the recent change in macro and climate perspective will more than likely weigh significantly in our profitability for the rest of the year.
Next slide, please. In the third quarter, the Peruvian economy is suspected to have registered its third consecutive quarter decline year-over-year. Accordingly, annual GDP growth will be lower than expected, and is stand around zero or slightly below. Several factors both expected and unexpected has driven weak performance for the social protests at the beginning of the year, which were prolonged in the country’s health. Second, climatic events namely cyclone Yaku and the El Nino Costero, which heavily impacted agricultural fishing and manufacturing sectors. I will go into more detail on El Nino topic on the next slide.
Third, there a weak private investment on a sluggish consumption led to non-primary sector to contract. Fourth, the government’s efforts to stimulate the economy have been insufficient. It’s important to note that growth in the mining sector mainly to increase copper production at Quellaveco has remained a bright spot. The confluence of these factors has led the country to reduce at its lowest print for economic performance in 25 years, excluding the pandemic. Despite this disappointing performance, Peru macroeconomic fundamentals remain robust, with low levels of public debt and high international reserves.
Additionally, there is a significant package of public and private projects that impact by political intent and deploy quickly could generate growth down the road.
Regarding inflation, price pressures have eased in Peru and inflation expectation has falling. Additionally, the policy rate has been good by 50 basis points.
Next slide please. The El Nino Costero weather phenomenon that has directly affected the Peru this year is associated with a sustained rise in sea surface temperature above certain thresholds along the north or central coast of Peru. El Nino Costero has battered the fishing agriculture and textile sectors in particular in the first eight months of the year.
The fishing sector is set to record its worst anchovy catch in 25 years after the first fishing season was canceled. Agricultural production in turn is expected to reduce overall resource performance in 31 years while textile production has record its more market declined in 28 years, excluding the pandemic and the global financial crisis. Given that there was no winter season this year in the coastal region.
With performance in these key sectors of the economy has exercised a multiplier effect and exacerbated contraction in the non-primary sectors. Given this context, we continue to closely monitor the evolution of El Nino and its impact on our businesses. I will look at the expected evolution El Nino to the summer of 2024 and its potential impacts later.
Next slide, please. BCP results were impacted by economic downturn described earlier. This has pressured provisions hour and impacted loan growth. Analyzing key quarter-over-quarter dynamics. The 1.5% increase in NII was driven by several dynamics on the mix side wholesale loans reduced our contraction due to low private investments while SME-Pyme reported in an upswing in disbursements that entail less risk. These dynamics helped mitigate an increase in the funding costs, which was pressured by a more expensive deposit mix.
It is important to note that migration from low cost time deposits have decelerated in recent months. This quarter BCPs fee income was bolstered by an uptick in fees from debit cards collection services of business clients and build payment services provided through Yape.
Provisions remain high in a prolonged recessive high inflation environment that has affected payment capacity of vulnerable segments individuals and higher risk segments in SME-Pyme. In individuals growth was driven mainly by consumer loans and credit cards followed by mortgages. This uptick was partially offset by a reversal of provisions in Wholesale Banking.
On a year-over-year basis, a 16% increase in NII was driven by raising interest rates by a 1.2% increase in structural allowance, which was primarily attributable to an 8.1% uptick in retail banking loans. Loan loss provisions increased 87.6% due to the same quarter-over-quarter in dynamics. On a year-to-date basis, operating expenses grew 6.1% which primarily reflects growth in core business IT expenses due to an increase in digital transactions and to significant investment in new capabilities and investment in disruptive initiatives. In this context, BCPs efficiency ratio is stood at 37.8%. Finally, ROE is stood at 20% in this quarter and 22.2% on a year-to-date basis. Next slide please.
After a difficult first semester, where social and climate events as well as ongoing deceleration have hit clients hard, Mibanco registered a decrease in loan origination in riskier segments and higher provisions, on a quarter-over-quarter basis. Net interest income rose 3.2% despite lower loan growth. This favorable results reflect disciplined interest rate management, which help us offset the uptick in the funding costs in this context, and NIM increased 80 basis points and stood at 13.5%.
Provisions remain high this quarter given that social protests and weather anomalies continue to impact our customers’ payment capacities. Other income fell 2.5% fueled by a drop in bank insurance fees follow a reduction in disbursements. From year-over-year perspective, NII rose 1.9% is fueled by an increase in structural loans and interest rate pass throughs which mitigated the impact of rising funding cost. Mibanco’s provision froze due to the same dynamics mentioned earlier.
On a year-to-date basis, operating expenses rose 5.8%, reflecting on increasing IT related cost. Fee income in turn, grew at a slower pace, which led to efficiency ratio to rise to 52.6%. Finally, ROE is stood at 8.3% this quarter and 7% on a year-to-date basis. Mibanco Columbia is facing high inflation, high funding costs, lower interest rate ceilings, and a deterioration in economic expectations. We have adapted our strategy to record profitability.
Next slide, please. ROE at Grupo Pacifico was high this quarter, and is stood at 34.7% as we continue to capitalize in transitory tailwinds in the life insurance business on top of a strong underlying business. From quarter-over-quarter trends, net income rose 19%. Growth was primarily boosted by an uptick in insurance underwriting results, in the life business after claims fell primarily by credit life and individual life products. An increase in the net gains from exchange difference also contributed to the positive evolution this quarter. These developments were partially offset by a decrease in net financial income.
Year-over-year profitability was up, 37% primarily driven by positive dynamics for insurance and the right off results in the life business. Pension products reported an uptick in income, which was attributable to better prices and more favorable dynamics. While credit life and personal accident products registered decrease in service expenses. Next slide please.
ROE for the investment banking and wealth management line of business has stood at 8.2% impacted by a drop in income generation at our more volatile businesses. Income from our capital markets business decreased 5.9% quarter-over-quarter pressured by market dynamics that negatively impacted our proprietary fixed income portfolios.
Market volatility also impacted our asset management business where income decreased by 0.8% impacted by losses in the market value of seed capital in the funds we manage. Despite market headwinds, our assets under management remained relatively flat, growing by 2% 2.4% quarter-over-quarter in the asset management unit and contracted by 1% quarter-over-quarter in the wealth management unit.
As we shared with you on our Investor Day we took the strategic decision to reduce exposure to the most volatile business of this line of business. We have made progress in this front, but it’s important to emphasize that the process is graduate.
Next slide please. Now, we will look at credit cards consolidating dynamics. On a quarter-over-quarter basis our structural loan measure and average daily balances grew 1% or 0.3%, with FX [indiscernible] growth in BCP, retail banking, which has shifted away from the most vulnerable segments was offset by a contraction in Wholesale Banking at BCP and Mibanco. Our deposit base expanded 3.5% or 1.2% with FX neutral. This evolution was driven by an uptick in time deposits and demand deposit, which was partially offset by a drop in saving deposits. Additionally, the migration of funding in sols from low costs to time deposits decelerate.
On a year-over-year basis, structurally loans increased 1.2% measuring average daily balances fueled primarily by retail banking, at BCP on Mibanco. Deposit balance dropped 2.8% or 0.5% with FX neutral. Low cost deposits as far as system wide and currently represents 63.7% of our total deposits. Our market share in low cost deposits by the end of all is stand at 40.3%. Next slide, please.
Now, let me explain core income dynamics. On a quarter-over-quarter basis core income rose 1.4% on the back of NII, which rose 1.6%. Growth was attributable for more favorable interest earning asset mix and to our interest rate management. When analyzing the results for fee income and FX transactions, it is important to know that both lines have been affected by our operation in BCP, Bolivia, where we charge fees to FX clients to offset losses on buy-sell FX transactions.
Excluding BCP, Bolivia, fee income rose 2.9% quarter-over-quarter driven by an uptick in transactional levels from debit card collection services and bill payments at BCP and gains in FX operations diminish 2.6% quarter-over-quarter, due to a dropping FX transaction volumes at BCP.
On a year over year basis, core income increased 8.8% on the back of NII, which rose 12.9% due to an uptick in the structural loan volumes and our active interest rate management. Excluding BCP, Bolivia, fee income diminished by 1.9% of the back of lower fees, at [Indiscernible] paid was an adjusting in the fee framework applicable to a significant share of affiliates at Credicorp Capital primarily due to lower assets under management in the third party fund distribution business. These dynamics were partially offset by gains in FX transactions, which grew 1.4%.
In terms of margins, net interest margin rose 9 basis points quarter-over-quarter to stand at 6.11%. Risk adjusted NIM fell marginally over the same period due to an increase in provisions and is stood at 4.45%. Next slide please.
Let’s look at the dynamics of a structurally non-performing loans. As indicated early adverse events in 2023 and weak economic performance continue to client impairment performance and consequently portfolio quality. In this scenario, on a quarter-over-quarter basis growth in structural and non-performing loans was driven by Wholesale Banking where specific clients in the hospitality and commercial real estate sectors became delinquent.
Individuals were the debt service capacity of clients continue to face challenges due to over indebtedness, unsustainable employment. SME-Pyme where low ticket sub-segments have poor payment performance, and Mibanco where the increase in delinquency was concentrated in over indebted clients, clients impacted by social conflicts at the beginning of the year or those affected by climatic anomalies.
On a year year-over-year basic, is structural non-performing loan volumes increased due to an uptick in refinance loans from Wholesale Banking. The evolution of non-performing loans and retail banking at Mibanco was driven by the same factors as in the quarterly analysis. In this context, the structural coverage ratio is stood at 101.4%. The NPL coverage ratio fell quarter-over-quarter and year-over-year driven by Wholesale Banking clients, which represents a deterioration that has been previously provisioned and high, high and have high levels of collateral. Please refer to appendix two for more details.
Next slide, please. Moving on to provisions. The cost of risk has risen once again and stand at 2.5% while the structural costs of risk is stand at 2.6%. This reflects the fact that client payment capacity has deteriorated alongside ongoing macroeconomic contraction. Provisions for the individual segments at BCP have risen since, as I just explained payment performance has been impacted mainly to consumer and credit cards.
Additionally, individuals provision for mortgages increases to reflect increased expected losses on lending to clients who have reported an uptick in delinquencies in consumer probes or in other entities. Provisions at SME-Pyme and BCP and Mibanco are also up driven by the downturn in payment performance as I just described. The aforementioned and was partially offset by reverse effect, Wholesale Banking, after some clients in the corporate segment register improvements in the credit ratings or canceled obligations.
Next slide, please. We will review the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operational expenses grew 11% in the first nine months of the year, driven primarily by core business at BCP and disruptive initiatives at the Credicorp level. At BCP, core business fueled growth in expenses through an uptick in IT expenses related to increased use of cloud as clients go more digital investments, enhanced digital capabilities and improved service security and most to attract more specialized digital talent. Marketing expenses, mainly driven by the advertising to boost deposits and digital sales. Expenses for disruptive initiative at Credicorp level increased 64.2% as some of these initiatives has scaled up.
Operating leverage remains strong at BCP and Mibanco. Operating expenses remain under control, but operating income is still a challenge. In this context, our efficiency ratio is stood at 45.1% for the first nine months of the year, down 160 basis points year-over-year, driven by positive operating leverage at BCP, and Pacifico.
Next slide please. This quarter profitability was sustained by solid results in our universal banking and insurance business. ROE this quarter decreased to stand at 16.2%. Meanwhile, ROE for the first nine months of the year was 17.8%. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. To exercise caution, we have decided that no additional dividends will be distributed this year. Now before commenting on our perspective for the rest of the year, I would like to briefly discuss core expectations on the magnitude for El Nino phenomenon for coming months. Next slide please.
At the time of our last conference call, our outlook contemplated El Nino phenomenon that was either weak or moderate in intensity. The combined probability of these two scenarios was 75%. Currently projection from expected — experts indicate that the two most likely scenarios entail an El Nino that is either moderate or strong in intensity. The combined probability of these two scenarios stands at 96%. Furthermore, the probability of a strong El Nino over the summer has grown by more than fourfold and currently stands as 49%.
It is important to consider that the levels of risk and exposure associated with this phenomenon vary by region but are concentrated in specific areas that experience heavy rains and flooding. The share of Credicorp’s loan portfolio located in impacted geographies areas is stand at 6.2%, which is comprises of 10% of retail banking portfolio BCP and a 10% of Mibanco’s bank’s portfolio. The levels of impact will vary across areas and clients.
We have rolled out multiple measures to mitigate the adverse effects of El Nino on our client businesses and the country in general. In a coordinated effort with Pacifico, BCP and Mibanco, we have proactively developed a communication plan to educate our clients and the population about taking specific proactive measures to mitigate potential damage to homes or businesses.
Additionally, we have adjusted our underwriting policies for the most important clients in retail banking, or BCP and Mibanco. We have also leveraged our extensive network of relationship managers who are working with clients in advance to solve a potential financial needs and help them to be better prepared. The El Nino underway is expected to generate impacts that are strong, not catastrophic, such as that seen in 1982 for example. We are rolling up preventions and response plan with anticipation to reduce impacts and support clients. Next slide please.
Significantly weaker than expected economic performance for Peru coupled with a material change in the outlook for El Nino over the coming summer has triggered changes in the perspective for our business, particularly for costs of risk and consequently, ROE. Our new estimates are in line with that a scenario of a moderate to a strong El Nino. As previously mentioned, our updated macro scenario for 2023 now reflects a GDP growth estimates close to zero percent with a downward risk. A structural loan growth measuring average daily balances remain in line with guidance. NIM in turn remains resilient and such is expected to sit within guidance.
We now expect the full year cost of risk to stand between 2.6% and 2.9% impacted substantially by provisions related to expected losses caused by El Nino. We still expect a consolidated efficiency ratio between 45% and 47% as BCP and Mibanco continue to demonstrate positive operating leverage. Given the aforementioned dynamics ROE is not likely to stand at around 15.5% for the full year.
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] Thank you. Our first question comes from Tito Labarta with Goldman Sachs. Please go ahead.
Tito Labarta
Hi, good morning. Thank you for the call and taking my question. I guess my question, if I look at the revised guidance of 15.5% ROE roughly for the full year. You just given where you’re coming from rough math here, that would imply about $700 million in earnings in 4Q, which would be around a 9% ROE. And I assume that’s all because of much higher provisions just to I guess, wonder if you can, does that match sound correct? Is that what we should expect more or less for 4Q?
Cesar Rios
Hi, Tito, thank you for the question. I feel I will say that roughly you are more or less in line. When we talk about 15.5 around is specifically this is around. But you are correct that the main driver for the decrease profitability of the quarter is the increase provisions due to expected losses by El Nino. And if you compare the fourth quarter with the third quarter, the other thing relevant is the seasonal increase in expenses at BCP that happens all four quarters.
Tito Labarta
Okay, no, that’s very clear. Thanks for clarifying. So I guess my follow up question would be on the provisioning. How much of this is just — you mentioned due to expected losses. But you think a lot of it will be in anticipation does that mean cost of risk should normalize next year? If so, what would be a normalized level of cost of risk for 2024? And if there’s further impacts from El Nino, could there be additional provisions in next year as well?
Raimundo Morales
Yes, Tito. That will depend on the severity of the El Nino. Today, we have accumulated an impact on the fourth quarter that is very relevant and explains that increase in the cost of risk projected for the whole year. Having said that, we have a strong NIM we will probably see an impact in provision during the first semester of next year.
And then based on when all whatever is done in managing the portfolio’s more than a year in consumer markets, we should expect much more stable costs or risk during the second semester of 2024. So we see this as a big that will depend on the impact of El Ninos that as you know, carries a lot of uncertainty for degree of the impact that this could have on the economic side of the country in general and specific in the northern side of the Peru.
Tito Labarta
Okay, no, that’s helpful. And one I guess more weather related, I guess, but how long could El Nino go on for? Is there a timeframe where you would then feel comfortable that okay, you’re past the worst, just any thoughts on that?
Cesar Rios
Yeah, usually El Nino procures during December, January and February can extend a little bit more or less than that.
Tito Labarta
Okay, perfect. Great. Thank you so much.
Operator
Thank you. The next question is from Ernesto Gabilondo with Bank of America. Please go ahead.
Ernesto Gabilondo
Thank you. Hi, good morning. Gianfranco, Cesar, Francesca. Good morning all your team. Thanks for taking my call. But my question would be on your ROE expectation for next year. I understand you’re still running numbers. But considering that you will create an important number of provisions anticipating to this medium to strong El Nino. How should we think about the ROE for next year? Can we expect it to be higher when compared to 2023 levels?
Cesar Rios
Hi, Ernesto. As you know, we are going to provide a guidance for 2024 in the next call. But directionally, I will say that a ’24 if the impact of El Nino is according to our current expectation should be relative a better than this one. Even say that, Raimundo has explained previously, we need to really assess the impact at the beginning of the year. So we should expect probably more cautious credit loan origination at the beginning of 2024.
Ernesto Gabilondo
Okay, now, excellent. So just on my second question. You have said in the past that management has been doing a lot of important efforts to invest in technology and in the digital transformation. However, if at some point we get into medium to strong El Nino, probably you will be thinking maybe to relate some of these investments to protect the profitability and maybe to return to those investments after getting away from a Nino.
Are you still thinking about this, or you will continue the investment phase.
Cesar Rios
I will say that what we did in the past probably is a good reflection of our general strategy. At the beginning of the year than the expectations of the GDP growth, we’re starting to deteriorate were just the general expenses trend to better adjust to the income generation capacity without forgetting investment in the transformation of the business. So we are going to manage prudently. But we are committed to long-term profitability to build capabilities for the future.
So we are going to manage prudently. But we are not contemplating stopping developing a new capabilities in these initiatives that are creating a new business for the future.
Ernesto Gabilondo
Thank you very much. Thank you very much, Cesar.
Operator
The next question comes from Geoffrey Elliott with Autonomous. Please go ahead.
Geoffrey Elliott
Hello, thanks very much for taking the question. It’s another one on the cost of risk outlook. Could you just quantify for us how much of the additional provisioning that you’re expecting in Q4 relates to El Nino? Looking like it’s going to be worse than you were expecting back in in August. Just trying to isolate that impact from the impact of the broader macro weakness. Thank you.
Cesar Rios
Yes, it explains almost all of that change between our guidance on the previous quarter. And basically, it has two impacts. It has an impact in a specific region, which is — which could be severe if we have a strong El Nino. And it also has an impact on the overall economy of the country because there’s an important level of sales that are channeled through that, to northern businesses. So it has a double impact, as I explained, so I would say it is I cannot give you specific number of the amount of the difference between both numbers, but it’s basically seen by those two effects.
Geoffrey Elliott
Thank you. And if I could just squeeze another one in more clarification that nothing’s changed, but on the sensitivity to lower rates have you just quickly give U.S. dollar rates and Peso rate sensitivity 200 basis point cut?
Cesar Rios
Yes. This topic has been a reviewed carefully internally, and now we think is below than we previously communicated, below 20 basis points or 100 basis point for instantaneous adjustment. So the composition of our portfolio is flexible enough to allow us to converge to a sustainable NIM, assuming that we can control the effect of readmission rates with a shift in the portfolio mix.
Geoffrey Elliott
Okay, thanks very much.
Operator
The next question is from Thiago Batista with UBS. Please go ahead.
Thiago Batista
Hi, guys. Good morning. My question is about Yape. When you look [Indiscernible] for Yape. What do you believe be the main source of revenue of Yape? And among the 10 million monthly active users of Yape, how much of those guys were already [Indiscernible] Credicorp comp.
Cesar Rios
Could you repeat the first part of your question? I had some interference.
Thiago Batista
Yes. Not sure. I’m not sure if the line is better now.
Cesar Rios
Yes.
Thiago Batista
But when you look in a couple of years, or what do you believe will be the main source of revenues of Yape?
Cesar Rios
Right, now very clear.
Thiago Batista
And among the 10 million clients of Yape, how much of those guys are — aware already BCP or Credicorp clients?
Cesar Rios
Okay. So in your first question, and we currently expect a payments to continue growing as our number one line of revenue. But definitely we expect in two or three years, lending to become much more relevant. So I would say that around 40% to 50% will be payments revenue, then a third around the lending. And the rest will be come from the retailer marketplace that’s more or less where we’re aiming to and what we expect of course, that might change a bit.
Regarding the second part of the 10 million clients. It’s a tough question, because there were a lot of — so there’s like two, 2.5 million of those clients that are Yape with then that they open exclusively in accounts without being BCP clients. But of the ones that were BCP clients, there’s a big group that opened the BCP account to have Yape in the future. So really, it’s a mixed number. It definitely a lot of those clients are much more active in Yape than at BCP. So I know it’s half and half of 10 million, I would say that you could attribute to Yape.
Thiago Batista
That’s clear. Thanks.
Operator
The next question comes from Yuri Fernandes with JP Morgan. Please go ahead.
Yuri Fernandes
Hello, everyone. I have a question on revenues. So far. So good, right? You are — you have margin expanding. So your NII is still really healthy. But what is the outlook for 2024? Because you already mentioned that credit origination should be like less term given like a more cautious outlook and makes total sense. You have a lower rates, right, that should be bad for your sensitivity on margins.
And on the flip side, I guess it’s a weaker economy. So my question is, what should we expect for revenues NII for the next year? Should we be a little bit more cautious on these also, like what is the — I know you don’t have a guidance but just on a trend? What should be the ultimate here for revenues? Thank you.
Cesar Rios
Thank you, Yuri. I think if we have the impact of El Nino as we expect, we should expect a slight increase in revenues, that is the combination of a manage NII and increasing volumes is starting probably in the second quarter of the year. In terms of fees, we still expect an increasing fees driven by the transactional activity that we are developing and increasing through our traditional channels and Yape, in particular.
Yuri Fernandes
But I think like more decelerating 2024 versus 2023? Or should remain those low-single digits just as a more consultative target?
Cesar Rios
I will be considering single digit. We still expect next year GDP to be around 2%? No, a booming year?
Yuri Fernandes
No, perfect, super clear. And if I may, just asset quality just to see if I got correctly. This quarter, the third Q, you had a very high NIM formation higher charge offs. So this was basically the clients’ payment behaviors were seen, right the provisions that everything was sewn out. And for the fourth Q, the increase you should see on the guidance, this is a — I mean, this is more, more or less, the delta should be mostly down in right. So this quarter, basically bad macros, and for the next quarter, a little bit of bad macro, but also down right. Is this correct like [indiscernible] on asset quality?
Cesar Rios
Totally Correct. That’s 100% correct. We are ending up the [indiscernible] of the bad portfolio we had during in the year, but the most impact explained by El Nino was you referenced too.
Yuri Fernandes
Perfect, thank you very much, guys.
Operator
The next question is from Sergey Dubin with HL. Please go ahead.
Sergey Dubin
Yes, hello. All my questions would be on asset quality and cost of risk. Very surprised to see this significant jump in Q3, especially on wholesale loans, or wholesale NPLs, I should say. Could you comment, what do you mean by 22% of Credicorp NPL volumes, which will refinance loans? What are these loans?
Cesar Rios
Well, basically, what we have done is there have been two specific cases in the tourism sector and then real estate commercial real estate without falling in default, which are recognizing in the NPLs. But also we are now that that activity is starting to recover in some of those activities on those businesses. And we have, we are able to project a cash flow for those businesses we are refinancing those loans. And that portfolio is included on the NPL ratio. So that’s basically why this number has been growing in during the year.
Sergey Dubin
So are you saying that these loans or these, these borrowers had hit problems and you basically refinance, or, you know, refinance the loans so that they’re going to be performing? Again, I don’t quite understand like, how are these? Are these borrowers in trouble? Or is it just an issue of having you extended and maybe soften some terms, so they can pay on a different schedule? How should I think about that underlying credit quality of the borrowers?
Cesar Rios
Yes. I mean, two things about your comment. Those were loans that we were monitoring the short term, because we were unable to project a cash flow in the long term. Once we extend a structurally the final term of the loans, we mark them as refinance loans. And then we included — we include them in the NPL ratio. And having said that these are loans that have significant collateral mostly over 150% because they are basically hotels and real estate projects, which have guarantees that support extensively the amount of position with those clients.
Sergey Dubin
Okay, so these — at the moment is borrowers are paying right, they’re not in default that paying on what — as you refinance, if they continue to pay interest in principle, is that correct?
Cesar Rios
Yes. Basically, they were — before they were paying on interest and now they are starting to pay principal as well.
Sergey Dubin
Okay. All right. And then also on consumer book, my impression — my very distinct impression from the last call was that you guys — what you communicated actually was that you tighten the credit standards and consumer book you obviously foresaw this macro, macro pain, so to speak, so you tighten the credit standards. I was on the impression that that should help in terms of asset quality, but it doesn’t look like that was really what transpired. So can you explain why your reduced risk appetite didn’t translate into better credit quality on the consumer book side?
Cesar Rios
Yeah, what we’re doing is refocusing on our appetite on those clients that we know better. And that’s basically what explains why we are growing in the consumer portfolios. Basically, in times like this, when we don’t have GDP growth, we obviously become more conservative in our approach to those plans that we know better. We still do some pilots with specific segments, but relatively with a much less proportion that what we have done in the previous years, that basically, what explains that our strategy today.
Raimundo Morales
Probably may I add something? But I think what I understand what you’re hearing, too, of course, we adjust our credit orientation policy, and the new vintages are being originated and actually are coming with lower risk profiles. But they already booked loans has soured, as I suspected. So we have a combination of all books that are already deteriorating, and a higher rate a rate and newbie integers that are smaller in size higher quality. And the result that you are going to see during the next quarter is a combination of these two dynamics.
Sergey Dubin
Okay. And then is there any way to — so I’m going to put a linear side because that’s completely unpredictable phenomenon that depends on nature, it’s not up to you. I understand all that. But if you looked at your underlying borrower health, so to speak, and kind of a cost of corporate risk trends and NPL trends, again, putting a linear aside for a moment, are you seeing that we sort of at the bottom of this cycle, or there’s more pain? And if so — if it’s later, how much more pain are we going to see in the here?
Cesar Rios
Yes, our expectations putting the EL Nino aside as you mentioned, is that we would reach the higher cost of risks of those portfolios during this midyear, and during 2024, that will be we will see that — we would have seen a decline. I would say that EL Nino is around the corner. So we have to consider that on our projections.
Sergey Dubin
Okay, so ex-El Nino, you should see a decline in cost of risk in ’24, relative to ’23?
Raimundo Morales
Specific portfolios. I also want to emphasize that we are shifting gradually the portfolio towards a more retail. So the cost of risk for a specific portfolios are going to decline. But the long term trend is to shift the portfolio towards a more retail one that entails higher costs of risk. That’s important to consider.
Sergey Dubin
Yeah, that’s a longer trend, but like in the shorter term, you’re going to – it’s — like maybe that’s a question actually, like in the shorter term? Are you going to maybe pull back on retail a little bit and really, manage risk? Because I think that’s where a lot of pain is going, right.
Cesar Rios
No, there is no change in the strategy. What is an adjustment to react to the current macroeconomic conditions is an adjustment in a specific sector that are more vulnerable, but the long term strategy remains the same, I would say in general terms.
Sergey Dubin
Okay. And that last question because it’s also related. So as of, I believe, as of Q3, right, you have 3.1% of your loan portfolio, which is these Reactiva loans. Right. So they’re very, they’re only — they’re very thinly covered, right. It’s only 17% I think NPL coverage on that specific segment. Because obviously, they are government backed.
So if you, — let’s assume you’re going to all of them, will they pay down by the end of the year, when you grow your retail book from — on year-on-year that new originated loans in retail, that would have to be covered up from 17% to probably I don’t know 100%. So with that, how much — if that’s the — if I’m describing the dynamic correctly, what will be the incremental delta and the cost of lifts that you would see from that specific point?
Raimundo Morales
I can give you some general comments. And after Reynaldo can compliment me. First the Reactiva loan at this point is around PEN4 billion only, it’s not going to be entirely paid down at the end of the year. The level of coverage is significant. The wholesale part is 84%, 91 in retail BCP and 97%, in Mibanco, so the risks associated with this is substantially covered by the government. And this portfolio is going to be paid down substantially over the next year, but not at the end of the year, the payment of this year probably be around PEN900 millions out of the PEN4 billion.
Reynaldo Llosa
Having said that, I mean, your assumption that these will require higher provisions is true, but also we will provide a much higher margin, because remember that in the Reactiva loans, there were very, very low government funded interest rate that almost only covered operating costs. But back to normal, they will provide a much higher yield on those loans as well, that will compensate the higher provisions you mentioned.
Sergey Dubin
Okay, okay. So by the end of the year, only PEN100 million will be paid down, and they will be paid down gradually, or next 13 or 16 months or whatever. So — and I guess, I know that your strategy is to grow retail book longer term, but again, given the macroeconomic pain, and then this El Nino coming up, do you think it will be prudent to perhaps emphasize wholesaled book more in this next 12 to 16 months, or you still are going to emphasize retail as well? Like, I’m just trying to see how you think about growth in this challenging environment?
Cesar Rios
Well, we view the environmentally. Today we see it proper to adjust our underwriting policies on the specific segments that could be affected on the northern side of Peru and those specific industries like fishmeal and agriculture that could be affected. But that’s in permanent revisions. I mean, we will see how the El Nino evolves and then we will adjust either further or we lost a little bit our underwriting policies as well. It’s a permanent process as you know. Today, we are providing you with the best information we have at hand.
Reynaldo Llosa
Yes, I think it’s worthwhile to remember that this is a cyclical event. We have experienced different levels of EL Nino each five-seven years has been several severe Ninos in the past, and we have developed a capacity to manage that. The whole country is not paralyzed by El Nino. During the presentation we shared some figures relating to the level of direct exposure for our Credicorp portfolio in the northern part is around 6% directly exposed. And so the rest of the country has a spillover effects, but this one is working. And we expect a more or less but a rebounding economic growth next year.
Sergey Dubin
Okay, all right. That’s fine. Thank you.
Operator
The next question comes from Carlos Gomez with HSBC. Please go ahead.
Carlos Gomez
Hello, good morning. Thank you for the call. I want to ask you about expenses. At the beginning of the year, you mentioned that your budget for transformation was equivalent to 1.5% of ROE which we calculated to around $125 million. Has that changed? And what is your expectation going into next year?
Cesar Rios
I think this is a more than a budget this is an appetite and a boundary. We adjust that according to the dynamics of the underlying business and the specific disruption initiative. So I will say that is a rough number that is a guide for us is abandoning but I wouldn’t qualify that as on a budget.
Carlos Gomez
Okay, but mentioned we understand that you have been adjusted during the year and should we expect more or less in 2024?
Cesar Rios
As I mentioned this is I would say an upper limit and we are going to be operating under this this upper limit.
Carlos Gomez
Okay. Thank you.
Operator
The next question is from Andres Soto with Santander. Please go ahead.
Andres Soto
Good morning and thank you for the presentation and the opportunity to ask questions. My question is regarding your macro assumptions for 2024. I believe you, Cesar, mentioned you have in numbers 2% GDP growth is that what you have, the implicit for the cost of risk that you are guiding to this year? We have already incorporates this assumption for 2% growth next year.
And when I look at the weather pattern that you show n your presentation on slide number 10, which is quite interesting. It looks like it is turning increasingly similar to the – this Nino to the 1997 event. And based on that experience, is that the type of growth that you may expect? I remember back then, the economy was growing the year before El Nino the economy was growing 7% and it came to a decrease of 1% so dramatically slowed down. Are you still expecting it, it makes sense to expect the recovery next year considering that this sort of El Nino can come to realize?
Cesar Rios
I think these are very relevant questions. We still have an expectation of a 2% GDP growth for 2024 that it considers an impact of El Nino. The Nino considering in this GDP growth is more than it was strong already consider. And still we are considering that the year of reference, as El Nino is 2017.
It’s also good to remember that at the end of the century in 1998, we have a combination of El Nino and the debt crisis an international debt crisis. So this significant drop in GDP that you mentioned is a combination. We have probably a stronger El Nino that is now expected and an international monetary crisis.
Andres Soto
That’s very helpful, Cesar. And regarding monetary policy, now that Peru is officially in a recession, do you see additional space for this? And the actually inflation is printing pretty well? Do you see additional space for the central bank to cut rates more aggressively that they have done or you believe that, the carry trade will prevent a more aggressive move?
Cesar Rios
I think the carry trade is a factor but another very important one is the Fed funds looking only to internal factors probably the central bank will be more aggressive cutting rates. But a combination of El Nino that usually have inflationary effects in the short term. And the higher for longer guidance from the Fed suggests that the central bank has only limited room to decrease rates until the middle of next year.
Andres Soto
Perfect. That’s very clear. Thank you so much.
Operator
It appears there are no further questions at this time. I will now turn the call back over to Chief Financial Officer Mr. Cesar Rios for his closing remarks.
Cesar Rios
Thank you all for your questions. As discussed challenging circumstances persist in Peru. Given weak economic performance and higher probability of El Nino is scenario worsening to moderate a strong in the upcoming ’24 summer season. Nevertheless, we are confident that the preventive measures that we are taking together with our flexibility to adapt to changing conditions rapidly will allow us to effectively navigate these near term challenges.
It’s important to keep in mind that El Nino is a transitory shock. And historically, we have seen the economy rebound after prior El Nino events. We expect to see the same trend again.
Prior to closing today’s call, I would like to leave you with these four key messages. First, Credicorp is resilient and has the ability to adapt to challenging circumstances. We deliver help to risk adjusted margins this quarter, even as we increase provisions for a specific customer segments with weakening payment capacity giving a prolonged resale — regressive, and inflationary environment in Peru.
Seconds, we have increased our efforts across different fronts to mitigate the negative impacts of El Nino on the population, our customers and our businesses. Pacifico, BCP and Mibanco are promoting preemptive actions to limit damage to homes and businesses through various educational programs. In addition, we have modified our underwriting policies for the most exposed retail segments at BCP and Mibanco. Only about 6% of our portfolio is in the area suspected to be directly impacted. Our teams are working closely with clients in these areas to anticipate the likely financial requirements.
Beyond the private sector, the government’s capacity to unlock and execute progress will be key to jumpstart growth. There is significant — there’s a significant package of projects that will be key to jumpstart role. There is a — there are a lot of projects in the pipeline. The global long-term trend to transition to a greener economy favours copper consumption. As a leading global copper producer with the lowest production costs and the highest copper reserves, Peru stands to benefit from this trend. Though it is imperative to accelerate execution of mining projects.
Third, the strength of our balance sheet, prudent management and leading franchise built upon top notch transactional capabilities provide solid foundation for us to weather the short term challenges.
Lastly, we continue to investing into the future. We are remained focused on executing our midterm strategy that evolve decoupling from the macro and securing a healthy long term ROE. We are committed to continue to develop our disruptive strength our competitive mode while further enhancing the efficiency of our core businesses to technological transformation.
In closing, we thank you for your continued support and are committed to delivering on our value creation strategy. Thank you for joining us in this call. Goodbye.
Operator
Thank you, ladies and gentlemen. This concludes today’s presentation. You may now disconnect.
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