Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to Credit Corp's LTD first quarter 2019 conference call. We now have our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. With us today is Mr. Gianfranco Ferrari, Deputy Chief Executive Officer, Mr. Alvaro Correa, Deputy Chief Executive Officer, Mr. Cesar Rios, Chief Financial Officer, Mr. Reynaldo Llosa, Chief Risk Officer, and Ms. Francesca Raffo, Head of Transformation at BCP. Now it is my pleasure to turn the conference over to Credit Corp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

Thank you. Good morning and welcome to credit course conference call on our earnings results for the first quarter of 2019. Before we review credit course performance in the first quarter of 2019, I would like to highlight some important matters that characterize the scenario in which we have operated in the last few months. as tailwinds for our businesses. First, mining investment has continued to expand at double-digit rates in 2019. This is attributable to projects such as Keyabeco and Mina Justa, among others. Second, trade talks between the U.S. and China have improved since late 2018. Moreover, the price of copper stands at around $2.9 per pound, which represents an increase of 7.5% year-to-date. Third, local assets were favored by inflows to emerging markets during the first quarter of the year. It is important to remark that, in Peru, non-resident sovereign bond holdings increased 10.1 billion soles during the first quarter, an historical peak in quarterly flows. As headwinds for our businesses, first, our estimates suggest GDP growth was 2.5% year-over-year during the first quarter of the year. We highlight that the contraction of primary sectors and public investment lowered GDP growth by 0.4% points and 0.3% points, respectively. The global GDP growth forecast has deteriorated in the past months. As factors to watch, the developments of La Bamba's mining unit should be monitored to determine potential impact on investment climate. Finally, the corruption pros relative to the Lavallato case continue to negatively affect economic activity by paralyzing certain investment projects and generating political uncertainty. Let's move to the next page, please. Here, I would like to discuss the evolution of economic environment and the local economy's performance in the first quarter. In table number one, you can see that IMF has cut its global GDP growth forecast for 2019. This is the third consecutive cut that institution has made for 2019. In chart number one, you can see that Peru's GDP growth has decelerated in the first quarter of the year, as mentioned previously. We still hold our GDP growth forecast for 2019 at 3.7%, but there is a downward risk. Furthermore, the second quarter of the year will also cause moderate growth rates due to a base effect as GDP expanded 5.5% year-over-year in the second quarter of 2018. In chart number two, you can see that local and international interest rates, which affect our businesses, has decreased in the first quarter of the year. Additionally, the Peruvian Central Bank reference rate has remained stable at 2.75% since March 2018. Finally, in chart number three, the orange line shows that total loans in the Peruvian banking sector expanded 8.8% year-over-year in the first quarter of 2019. Consumer loans expanded 13.9% year-over-year in the same period, which represent a three-year peak. In this context, quarter-end loan balances at Credit Corp grew 7.7% year-over-year in the same period. Next page, please. Regarding our quarterly and year-end and year-over-year performance, there are important aspects of our lives of business that I would like to mention. In the case of universal banking, for DCP, the results of the first quarter of 2019 were highly marked by seasonality, as the fourth quarter of every year is usually more dynamic in terms of loan growth and income generation and registers higher expenses. This is why it is important to focus on the year-over-year evolution of the main indicators. In the first quarter of 2019, average daily loan balances at BCB hosted 7.5% growth year-over-year. Growth was seen across business segments, in retail banking segments in particular. Expansion was mainly in local currency, which offers higher margin than foreign currency lots. The loan mix and the currency mix favored the evolution of NIM. interest rates on investments and available funds increased, which also favored NIM, leading to an increase of 33 basis points in the year-over-year comparison. Moreover, the cost of risk dropped year-over-year due to an improvement in the risk quality of new vintages in retail banking and the positive evolution of the construction sector portfolio. Finally, the cost-to-income ratio improved year-over-year due to mainly to the increase in interest income on loans, which in turn was associated with loan expansion. This helped offset the increase in operating expenses, which was driven mainly by the increase in salaries and employee benefits. BCP Bolivia reported a good level of loan growth and a reduction in provisions. However, expanding costs increased year over year in line with higher interest expenses on deposits. With regard to microfinance, MiBanco posted a moderate level of loan growth in the quarter-over-quarter and year-over-year terms, as it finalized the adjustments of its credit policies and continued implementing improvements in its pricing strategy. The cost of risk improved quarter-over-quarter after a process was implemented to fine-tune admissions and collections models during 2018. Regarding margins, downward pressure due to the competition was caused net interest margin to deteriorate this quarter, as the interest rates of new businesses continue to follow a downward trend. Nibanco continues to focus on clients with better risk profiles, and this also has impacted margins. After significantly improving its operating efficiency in 2017 and 2018, Nibanco has started building capabilities to sustain business growth, which led to the pace of growth of operating expenses to accelerate. Vivanco has continued to increase its number of employees, mainly over the last two quarters, and is building new channels to leverage data analytics and digital solutions, which has increased administrative and general expenses. Regarding Encumbra, we ratified the viability of this business model, and as you can see in the chart, the business has posted a year-over-year increase in its profitability. with regard to insurance and pension funds. The net earning premiums increased this quarter, driven by the fact that Pacifico won two out of six tranches in the last tender process for the disability, survivorship, and burial expenses policies for the private pension fund system, which covered the period from January 1st, 2019, to December 31st, 2020. However, the underwriting result contracted quarter over quarter due to the increase in net claims in property and casualty businesses, mainly in the mandatory automobile line. On the other hand, the cost for health insurance and medical services that we manage in association with UnitedHealth continue to improve. The pension fund business also improved after recovering the profitability of its legal results. This business's efficiency ratio has improved due to the increase in its operating expenses and an increase of its fee income. In investment banking and wealth management, in the first quarter of 2019, the mark-to-mark of proprietary investments recovered from the low levels of 2018. Regarding the wealth management businesses, growth plans in Colombia are currently under evaluation. In February 2019, Credit Corp acquired Ultracefingo, which registers approximately $500 million in assets under management and market shares of 22% and 23% in the equity and fixed income markets, respectively. We are now working to capture synergies after the merger. Corporate finance activity posted a slower growth at the beginning of 2019 than posted in 2018. Finally, regarding the asset management business, Growth in assets under management is low, mainly in Peruvian mutual funds. Next slide, please. In this chart, you can see the most significant figures of credit course performance in the first quarter. Credit course reported net income of $1,101 million solid. which was 15% higher than the four-quarter results and 6.1% higher than the figures posted in the first quarter of 2018. The results represented a return on average equity and average assets of 18.5 and 2.5, respectively. The quarter-over-quarter increase was mainly due to construction and operating expenses in line with the seasonality of first quarter and a lesser extent to the drop in provisions for credit losses. The aforementioned was partially offset by the reduction in net interest income and increasing income tax, which was in turn due to the increase in net income and in the dividends paid by subsidiaries to credit courts. The year-over-year increase in net income is attributable to an increase in net interest income in line with loan growth's positive effect on net interest income and increasing core items on non-financial income. This was partially offset by the increase in operating expenses, mainly in salaries and employee benefits, and to a lesser extent by the implementation of IFRS 16, which increased depreciation and amortization expenses and decreases leasing expenses. It is important to mention that the effect of IFRS 16 implementation did not have effects on net income. Finally, the improvement in cost of risk is not worthy. Next page, please. As you can see in chart number one, interest earning assets measured in quarter and balances remain stable quarter over quarter but increase by 3% year over year. The quarter over quarter evolution is the result of cancellation of short-term loans in wholesale banking loans and seasonality in the rest of our business sector. Their coordination was attenuated by the increase in total investments. Regarding the year-over-year evolution of loans, first, there was a change in the composition of interest-earning assets to favor our most profitable asset loans, which increased their share in total interest-earning assets to 66.5% at the end of March 2019. Second, as shown in chart number two, Average daily loan balances expanded 7.2% year-over-year. Furthermore, in terms of the loan mix by business segment, loan expansion was mainly driven by retail banking at DCPS and alone. It is important to note that the loan expansion in retail banking was led by the mortgage loan bulk, followed by the credit card and SME payments act. loan growth was posted mainly in local currency loans which have higher margins than foreign currency loans. Next page, please. In terms of funding, first, as you can see in chart number one, Credit Corp's funding structure shows an ongoing increase in deposit share of total funding, which is more evident in the year-over-year analysis. Second, In chart number two for deposits by type, you can see that the missing deposits has also favored the funding structure. Even the low-cost deposits, such as saving deposits, increase the quarter-over-quarter share of total funding. However, demand deposits decrease quarter-over-quarter, which led to market share to drop at the end of February 2019. In the year-over-year analysis, the increase in total deposits was mainly attributable to savings deposits, which grew 10.9%. Before analyzing the funding costs, it is important to mention that from January 1, 2019 onwards, we adopted the new requirements of IFRS 16, which, among other things, led us to report an increase of 15 or 14 million soles quarter-over-quarter in interest expenses. In this context, as shown in chart number three, credit courts' funding costs, excluding the effect of IFRS 15, has remained relatively stable year over year. Next page, please. Next, interest income fell 2.5% quarter over quarter, mainly due to the decrease in interest on loans, which was in turn related to the contraction in loan portfolio as BCP stand alone, and to the lower interest rate of new vintages at NIVA. Increasing interest expenses on deposits related mainly to the increase in fine deposits also has a negative, although less significant, impact in net interest income. Year-over-year, net interest income grew by 7.1%. This performance shows, first, the positive effect of long growth on interest income, where all segments of ECP expanded their portfolios. Second, the currency mix of the loan portfolio favored income generation as loan growth was mainly in local currency. Third, the increase in the return on investments and available funds offered favored income generation. This was partially offset by the following. First, the increase in interest expenses on deposits in line with growth in deposit volumes. Second, the deterioration of net interest in Cotamibanku as margins continue to face pressure from competition. Finally, the implementation of IFRS 16 led to an increase in interest expenses of approximately 14 million soles. Next page, please. With regard to risk quality, in chart number one, you can see the quarter-over-quarter evolution of the total cost of risk. which decreased six basis points. This reduction was due to the decrease in the cost of risk at Mibango, in line with the decrease in the provision requirement after the adjustments made to the admission policies and collections, but at the second half of 2018, led to a recovery in risk quality. In chart number two, you can see the year-over-year evolution of the total cost of risk, which decreased seven basis points. The reduction was in line with the decrease in the cost of risk at PCP, due to improvements in risk quality of both the retail banking loan book and the construction sector portfolio in wholesale banking. Next page, please. On this page, you can see the evolution of delinquency as coverage ratios. The non-performing loan ratio registered an increased year-over-year in line with first The refinance loans that were granted to some clients in different sectors in wholesale banking at BCP stand alone. Second, the impact of refinance loans in second quarter 2018 and third quarter 2018 that were granted after the execution of performance bonds from construction sector clients in corporate banking at BCP stand alone. And third, but to a lesser extent, the increase in the internal overview loan book of SME business segments at BCPS and along, and the evolution of the banco as previously explained. The new refinance loan book has a coverage ratio of the haircut of around 180% with collateral such as warrants of commodities and commercial mortgages. The refinance portfolio for the construction sector is appropriately provisioned and the total exposure continues to decrease. Next page, please. Credit course net interest margin has been relatively stable in the recent period, reaching a level of 5.37% in the first quarter of 2018, which represents an improvement of 27 basis points year over year. The cost of risk also improved year over year, and as a result, credit cards risk-adjusted net interest margin increased 19 basis points and reached a level of 4.43%. Next page, please. On this page, we will discuss the evolution of non-financial income. As you can see in chart number one, non-financial income expanded 5.8% year-over-year due to the performance of its core items, fee income and net gain in foreign exchange transactions. After transactional activity in the banking business increased mainly as BCP stand alone. In chart number two, the core items of non-financial income expanded 5.4% year-over-year As we expected, the pace of growth of this core item has decreased over the years due to the regulatory changes in the fee changes to retail clients, higher competition in the local market, and our transaction strategy to encourage clients to migrate to digital channels. Next page, please. In the year-over-year analysis of operating efficiencies, which eliminates seasonality, the cost-to-income ratio improves in line with the acceleration in the pace of growth of operating income. In chart number one, you can see that the growth in operating income was mainly driven by the increase in the net interest in CPS and alone, and to a lesser extent to the growth of net earning premiums in the insurance business. All the aforementioned was partially offset by an expansion in operating expenses, which was due to an increase in salaries and employee benefits, and in depreciation and amortization. It is important to mention that the implementation of ISRS 16, this quarter, which requires that operating leases be treated as financial leases led to an increase in reported interest expenses and in depreciation and amortization. However, these increases in expenses were offset by a decrease in the leasing item, which is included in administrative, general, and tax expenses. The effect in the bottom line is medible. In chart number two, you can see the contribution of each subsidiary to the variation in the efficiency ratio. First, the improvement in the efficiency of Pacifico was mainly due to growth in net earning premiums, 64% of which was associated with the life insurance business. This was driven by a drop in the acquisition costs for the life insurance business. However, it is important to mention that the increase in net earning premiums was offset by the increase in net claims, which impacted net income. In the case of BCPS standalone, the improvement of operating efficiency was mainly attributable to the increasing interest income on loans in line with the year-over-year expansion in average daily balances. Also, the increase in the return on investments and available funds all for favor income generation. This offset the increase in salaries and employee benefits. The improvement in efficiency in Pacific World BCP was partially offset by the deterioration in operating efficiency of Mibanco. In the next slide, we will explain Mibanco's efficiency in more detail. Next slide, please. The net interest margin at Mibanco deteriorated by 124 basis points. This was driven mainly by the decrease in interest income on loans as interest rates for new vintages continues to face downward pressure due to competition. To a lesser extent, the increase in interest expenses on deposits, which was associated with an increase in retail funding also pressure margin. The increase in operating expenses was mainly attributable to the following drivers. First, the increase in salaries and employee benefits, which is in line with the long-term strategy to train the new sales force to cover growth in the client base. Second, the growth of administrative general tax expenses due to three factors, the expenses related to the relocation to new headquarters, the expenses generated by digital transformation efforts, and leases expenses for new branches. This was partially offset by growth in income, which was partially attributable to a methodology change under which fees related to insurance and loans, which were previously accrued over 12 months, are now registered at the moment the policy is solved. Now, I would like to hand over this call to Francesca Rasso, Head of Transformation at BCP, who will talk about the strategic initiative transformation that we are executing at BCP.

Thank you, Zeza. Good morning. I would like to go to BCP's transformation strategy slide. The transformation began in 2014 when we realized we ranked fourth among the four major banks in Peru in terms of customer experience. That same year, we celebrated our 125th anniversary and started to think about what we needed to do to remain leaders for another 125 years. Those were the seeds for what were then two major initiatives, the digital transformation looking to provide a distinctive customer experience through digital solutions, and a cultural transformation aiming to define our purpose, our aspirations, and the organizational changes required to fulfill these. We initially progressed in each of them independently, defining our purpose, aspirations, cultural principles on the one hand, and creating our innovation center and launching our first digital solutions on the air. Early 2017, we merged both initiatives into one big transformation. As we realized, we needed both to operate in sync, to live our cultural principles and to provide digital solutions to our customers in order to fulfill our purpose, transform plants into reality. In fact, as our digital transformation successfully progressed with great results with onboarding and sales, we realized we needed to incorporate additional work streams into our transformation program, such as customer experience journeys, data, IT, and risk. In 2018, we defined and communicated to the whole organization our 2021 North Stars, that we explain in detail in our next slide. We established our two North Stars for 2021 as being the number one bank in customer experience in Peru and having the best efficiency ratio in the region. To describe how they look like in more concrete terms, we have set six key results. We have challenged ourselves significantly to define them, and we know we might not achieve all of them. The purpose is to communicate the size of our ambition and to encourage the organization to move towards them. These key results are number one in customer satisfaction, a cost-income ratio around mid-30s, duplicate cross-sell ratio, three approved 50% of the economically active population, be number one in customer experience, and serve 70% of our sales digitally, and a non-disclosed net income aspiration that will result from these key results. The next slide, we see the program's goals. As I mentioned before, our transformation program is a journey, and today we describe it as a journey to planet SF, experience and efficiency. We are all on board of a spaceship that today has 10 engines, 10 work fronts, which I will briefly comment. Digital journey, the work stream is focused today on improving customer experience through digital innovation. The number of YAPE users, our peer-to-peer payment app, has grown significantly to more than 800,000 users as of today. YAPE is a key piece in our digital strategy, and we are focused on increasing its use. It helps build customer loyalty, reduce the use of cash, increase deposits, and allow us to obtain more customer data to serve them better. We also keep building new MVPs through digital innovation center to test functionalities and create business models. Data analytics, this work front has the challenge to enable a data-driven organization. We have secured the first layer of three of our new data architecture, the data lake. We also established a team of data scientists to capture value using data analytics to solve common business problems. Culture and leadership. We are adjusting our practices to manage human resources, developing new capabilities needed for our transformation and working to become the number one employer in terms of employee experience in Peru. Digital operations. We are improving front and back offices processes with the automation tools to deliver faster, less risky, and more efficient processes for increased customer satisfaction and cost reduction. Digital risk. The team is focused on transforming the risk practice within the bank so that we are more prepared to manage risk in a digital world. Governance. we are gradually deploying a more agile and autonomous budget and performance management system. Agile at scale. We continue to work on implementing agile methodologies across several units, seeking efficiency while improving speed and employee experience. And now I will go into a bit more detail about IT distribution model and customer experience. Next slide, IT. DCP's standalone division is executing its 2021 strategy focused on three main areas. The first one is people, both employees and vendors, people ready. It's about building a strong technical talent pool based on specialization and technical proficiency and enabling agility across IT to obtain higher frequency and value on each delivery. The second one is technology, to guarantee a wow customer experience. We're having best-in-class architecture and reliable infrastructure is key. The last one is efficiency. Here the focus is on prioritizing IT resources allocated based on value and tracking the progress to ensure the value is achieved. Due to our efficiency operating model, the ratio of IT expenses to revenues decreased from 9.4% in 2011 to 8.1% in 2016. And it has continued to decrease with a transformation reaching 7.8 in 2018. These expenses totaled 702 million soles in 2016, 705.2 million in 2017, and $718.5 million in 2018. Moreover, IT annual investments support both our day-to-day operations and our transformation initiatives. They totaled $227 million in 2016, $260.5 million in 2017, and $331.2 million in 2018. Although we have continued to invest in our digital transformation, continuous control and optimization efforts have allowed us to maintain expenses levels that grow at a compound annual rate of 1.2 from 2016 to 2018. We estimate our IT expenses and investments to grow 7% in 2019 compared The next slide, transforming the distribution model. In terms of transforming our distribution model, our purpose is to offer an astonishing experience at the right place and time in an efficient way. We plan to do so by addressing three themes aligned to our overall excess strategy. The first one is to provide a multi-channel experience. Here we are looking to optimizing our branches in terms of footprint, size, format, and role, as well as migrating customer interactions to alternative remote and digital channels. The second one is about incorporating the use of data, data analytics and digital marketing as part of our commercial capabilities so that we reach customers and make offerings according to their preferences. The last one is about developing digital capabilities by offering digital functionality, educating our customers, and aligning our performance management model to a digital world. In terms of branch optimization in 2018, we reduced the number of branches from 432 to 407, and the square meters in branches from 181,000 to 173,000 square meters. We do not set targets regarding our physical footprint. We review our performance every three months, evaluating our multi-channel experience, commercial and digital results, and we adjust accordingly to achieve satisfaction and efficiency targets. Next slide, customer satisfaction. We remain as a market leader in customer satisfaction for all segments in our wholesale business, middle market, corporate, and institutional segments. And now we have become the market leader in all retail segments as well. We moved from third place in customer satisfaction in our consumer segment, increasing from 23% in 2017 to 47% in the first quarter of 2019. This is the result of following a structured methodology to review our customer journeys, understand their pain points, and implement changes to improve those journeys. We are committed and continue our transformation journey. We have seen relevant results in customer experiences and we are now concentrating on gaining traction on digital sales and emphasizing initiatives that generate cost savings and new income. Now I will turn it over to Cesar.