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.

Thank you, Francesca. On this page, You can see our guidance for full year 2019, which we represented in our previous conference call. In terms of macroeconomic indicators, we have lowered our estimate for the VCRP reference rate for the year end 2019 from 3.25% to 2.75%, its current level. This reduction was made in a context. where economic activity continues to grow below its potential while inflation remains under control and within the VCRP target range. With these comments, I would like to open the Q&A, please.

Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star one to ask a question. We'll pause for just a moment to allow everyone the opportunity to signal for questions. We also ask that you please only ask one question at a time. After each question has been addressed by our speakers, you will then be allowed to ask as many follow-ups as needed. But again, please only ask one question at a time. Thank you. We'll take our first question from Jorg Friedemann with Citibank.

Thank you very much for the opportunity. So my first question is related to asset quality and coverage. I understand that you have observed an improvement in asset quality for the Mibanko portfolio, as well as other retail products, but SME business and large corporates continue volatile with coverage achieving the lowest level ever below nowadays of 110%. So how do you see the progression of asset quality going forward and how comfortable we are with coverage at this point? I know that you do not manage coverage. This is a result especially taken into consideration IFRS 9, but just wondering if you think that this could come down to at some point something around 100% or even below.

Thank you. The quality of our corporate loans is basically stable. We don't foresee any important changes in the quality of our assets in that portfolio. The coverage that you were mentioning is basically the result of our split provisioning, and maybe you can see some integration in the coverage we see actually. However, we don't see it below 100%. We would see a little stability in the future months and future quarters, and we don't foresee having it below 100%.

And perfect, and a follow-up there. Taking into consideration that expectation, you know, would it be reasonable to assume that, you know, cost of risk would continue to progress towards the upper range of your guidance? Right now you are slightly ahead, the midpoint of the guidance, but, you know, taking that into consideration that coverage should not come down substantially from the point it is, it would make sense to converge to the upper range of the cost of risk guidance?

Well, we see it within the guidance range. I mean, stable at 1.4 probably in the next quarter. And you have to remember that our corporate portfolio basically is very well covered with collateral and basically just real estate behind that. So, I mean, even 100% coverage, considering the amount of collateral behind those loans, it's basically adequate in terms of the expected loss. So, I mean, we don't see the need to have additional provisions for that specific portfolio.

This is Gianfranco Ferrari complementing on what, sorry, this is Gianfranco Ferrari complementing on what Reynaldo just said. You have to bear in mind that we manage our portfolio based on risk-adjusted NIM rather than cost of risk by itself. And as was stated in one of the slides, the cost of risk, sorry, the risk-adjusted NIM is improving and we foresee that a slight improve in the upcoming month within the range we provided.

That's perfect Franco. Thank you very much for the clarification. And my second question would come you know, related to loan growth. You just mentioned that, you know, the activity has been a bit lower than expected, below potential. You even reduced the, you know, estimates for the reference rate year-end. So looking into the loan growth so far, Not only you are well below the guidance for the year, but you are still losing market share. How do you reconcile the improvements that you mentioned in your presentation in terms of customer satisfaction, and I know this is lower growth versus the market, and how do you see this evolving throughout the year for you to be able to reach your guidance? Thank you very much.

Maybe it's a twofold answer. If you go into the retail portfolio, retail portfolio is growing at a stable pace, and In general terms, we're not losing much here, and that's very related to the customer satisfaction impact Francesca mentioned before. Regarding the wholesale portfolio, and specifically the corporate portfolio, the first quarter has been poor in terms of growth. Basically, because by the end of last quarter, the growth was very high. There has been a lot of activity in both local and international capital markets by the major corporates. That has impacted our balance sheet. We don't foresee that happening in the remaining quarters of the year. We still believe that we will be within the guidance by year end.

Perfect. Sorry for that. Just for a brief follow-up, for that to happen, you would have to be able to likely even surpass market growth on a sequential basis for the next three quarters. So given, you know, the effect on the wholesale and the continued improvement in customer satisfaction, you believe that this is feasible, correct?

That's correct.

Perfect. Thank you very much.

We'll take our next question from Domingos Falvina with JP Morgan.

Thank you, everyone, also for the opportunity. My question is just with regards to the sale of a loan book. You mentioned you had a sale of non-performing loan book, but you didn't mention the size. So if you could just provide some more color. If you did, I'm sorry, and I missed it. But how much did you sell in non-performing loan, and how did that impact your NPL ratio?

The sale of non-performing loans are written off from our book. I mean, those are basically loans that are fully provisioned, and that has a minor impact on our ratios as well.

Yeah, sorry, but like last year, I think you mentioned 177 million in sales. This year, I didn't get the number.

No, I didn't mention that. I would say it's not significant in terms of the impact on their operations.

Okay. And if I may ask a second one, on the gains that you mentioned also on mark-to-market of securities that help non-interest income, how large were those?

Excuse me, could you repeat the question?

Yeah, you had some gains on the sale and market-to-market of securities, which helped your line non-interest income. So how relevant was that, like a one-off? How big?

I think it was in line with the general gains that the whole market has registered in the first quarter. Please let me, allow me to review the figure, but

I think it's not that material.

Some securities. In the page 12, we have 23.6 million solids year over year. As an explanation of the change, year over year.

Okay, perfect. A delta of 23. Thank you very much.

Again, as a reminder, please only ask one question at a time. After each question has been addressed by our speakers, you will then be allowed to ask as many follow-ups as needed. Our next question comes from Ernesto Gabalondo with Bank of America.

Hi, good morning, and thanks for taking questions. My question is a follow-up on long-growth and competition. Excluding the mining sector or the impact on , the underlying growth continues to be strong in Peru, but the loan portfolio continues to be at single-digit growth. So is there a level of GDP where we can start to think about loans growing slightly above double-digit? Do you think this is the reason, or do you think the tough competition environment is making loan growth to remain at these levels? Can you elaborate on who are the main competitors that are offering lower interest rates at MiBanco and the retail banking, and if you continue to see strong competition in wholesale loans? Thank you.

This is Gianfranco Ferrari. Let me start by the two last questions. Regarding the MiBaco competitors, even though MiBaco is the largest player in the SME business, that's in terms of the whole country. However, if you drill down, the competition is very fragmented, and within each region, there's some regional competitors within the region.

We lost the line, right?

Hello? Excuse me one moment. We are having technical difficulties. Please give me one moment. Hello?

Hello?

Yes, I can hear you.

Sorry, I believe the line went out. So, I was telling you that at the SME business, there were issues. Regional competitors are being more aggressive. They have a relevant position within the region. Plus, we have an issue in terms of our pricing strategy and the RM level, which we've already resolved. On the wholesale business, Specifically in concrete, competition is very harsh. It's a highly concentrated market with basically three of all the tanks competing there. But again, the competition and stress are tiny. That's regarding your last two questions. Regarding your first question, we don't foresee double digits or growth for the whole portfolio or the whole loan books in Peru. The correlation between the loan growth and GDP growth has been in the past higher than today. And obviously as the banking penetration increases, the elasticity should go down.

Thank you.

I wanted to compliment that the correlation that is found is usually 1.4, 1.5 nominal GDP. in this range.

Okay, perfect. Thank you. Just a second question related to the M&A activity. We have seen small acquisitions happening in the Latin American region, such as in Colombia and in Chile. So I just want to hear your thoughts on why are you expanding into new regions and increasing your dividend payout ratio? So are you finding difficulties to maintain the same growth in Peru?

Yes, this is Alvaro Correa. A general comment would be that it is difficult, as you mentioned, to find additional targets in Peru. We have very stringent limits by the regulator, and I don't know if you know, but yesterday was approved a law that will prevent from openly go after additional targets from the financial sector and any sector as a matter of fact, so there are limits in Peru. And we are very disciplined on what to do elsewhere. As you mentioned, two recent decisions. They are small, but they allow us to get into markets and learn about those markets and see if there are other opportunities to grow there.

Perfect. Thank you very much.

We'll take our next question from Andres Soto with StandTender.

Good morning. My question is related to your investment in digital transformation. Your guidance implies a deterioration in efficiency throughout this year versus 1Q. In the last call, you explained some of these additional costs is related to digital transformation. I'm wondering how much flexibility you have in this planning expenditure, specifically If NIA happens to remain weak this year, will you prioritize your ROE target or your investment in digital transformation? Thank you.

Before giving back a fuller answer to Francesca, I would like to highlight that we have a clear seasonality in our expenses, so the guidance for the year doesn't have a strict correlation with the first quarter results.

Regarding your last question, which is relevant from a strategic standpoint, we will always skew over long-term rather than short-term. So digital over ROE, over short-term ROE for sure.

That's very clear. Thank you very much.

Our next question comes from Jason Mullen with Scotiabank.

Hi, thank you. Looking at your current guidance, you can now see, as you mentioned, the outlook for a lower BCRP reference rate now at 2.75% year-end versus the 3.25% earlier in the year. Can you update us on the sensitivity of Credit Corp's net interest margin to a 50 basis point change in the policy rate? More specifically, if you can comment on the sensitivity of NIEM at BCP and at Mibanko. Thank you.

BCP is more sensible to variations in the marginal rate due to the strong but in the short term, the effect is very moderate because we realize this profitability to repricing of the loan. So for this year, the impact of lowering 50 basis points in the reference rate is minor, but if the trend continues, would be potentially more significant in the 2020. In the case of Nivanco, due to the funding structure of Nivanco, actually lower reference rate doesn't impact negatively because they fund probably 70% of the portfolio at market rates. And the pass-through to the loan book is delayed over the time. In average, as a credit course, the net effect is negative. to have a lower reference rate but minor during this year due to the repricing process throughout the year.

Thank you. Maybe a second question related to this and related to some of the questions on economic growth. And you spoke about the headwinds for GDP growth in Peru. and a downside bias to the current economic growth forecast. Does this mean that we should think about management seeing a downside risk for earnings and your guidance for this year at this point?

At this point, we are maintaining the guidance as is stated in Gate 21, adjusting only the reference rate as we mentioned previously.

Okay. So if, I mean, right now the GDP growth is still based, your guidance is based on this GDP growth of 3.7%. Yes.

Probably one issue to consider is that when we established the business plans last year, we were considering a GDP growth of 3.7% while other significant players in the market and the central bank were establishing a reference, a GDP growth of around 4%. So we have some cushion there.

That's helpful. Thank you.

We'll take our next question from Alonzo Garcia with Credit Suisse.

Good morning. Thank you for taking my question. So last year, besides the usual seasonality of expenses in the last part of the year, the expenses related to the transformation strategy were also very heavily skewed towards 4Q18. So could you please share with us how much of the expenses related to that strategy were already executed in 1Q19, and how should we expect the rest of the expenses to be distributed during the remainder of the year? Thank you.

Usually we have, as we mentioned before, a strong seasonality, and as you correctly stated, the transformation has even a higher seasonality due to the way that the consultancy, billing, and IT expenses are billed to the end of the year.

But do you have a sense of how much you have invested already this year and how should we expect the reminder to be distributed during the other three quarters?

In terms of how much we've invested, regarding Cesar's comment of seasonality, we're around 15% of our annual budget has already been spent, especially in IT. And we have not changed our plans yet in terms of expenditure. We plan to achieve our target and move on developing our capabilities.

As a whole, considering expenses and investment in transformation, the total disbursement this year should be around 60% higher than the previous year. Not all with impact in P&L due to the composition of investments. 60% in total as a cash disbursement with a significant proportion of investments.

And finally, regarding funding, I just want to check on regulation for liquidity in Peru in terms of LCR and the net stable funding ratio. I mean, what is in place currently in the country or what is the timeline for these regulations to apply and how comfortable you feel with your compliance of these metrics?

Thank you. Could you repeat, please? I couldn't really understand.

Regarding the liquidity regulation in Peru, LCR, Net Stable Funding Ratio, what is in place currently in Peru or what is the timeline for these regulations to be implemented and how comfortable you feel with these ratios currently?

Thank you. We manage our liquidity with internal models which are more rigid and strict than regulatory ratios. And as of today, I mean, we are fully compliant with the 100% regulatory regulations. I would see no impact in terms of how we manage liquidity today in our bank.

Perfect.

Thank you. Our internal methodology includes systematic and idiosyncratic ratios well above the regulatory.

Perfect. Thank you very much.

Again, if you would like to ask a question, please press star 1. We'll take our next question from Miguel Tola with CAPIA.

Good morning, everyone, and thanks for taking my question. My question is really – well, I have two questions related to IFP Prima. The first one comes for the IFP fees based on the licitation won by Integra. Are you going to change – The mixed fee that is right now is 0.18 by the flow and 125 for the balance. And just take it on the counting of assets under management model. And the second one comes for the other income and expenses, the figures and the income statement. About the increase of 290%. Can you tell us a little bit more about that income? Thank you.

Regarding to the first question, I think forward-looking business strategies, I'll take it internally. We wouldn't disclose this previously to be taken. The second question... The second question, please.

Oh, the second question comes for the other income and expenses increased from year over year. That's about like 290%. Oh, yes.

This is related to the profitability of the reserves that IFP Prima has as a percentage of the total portfolio managed. It's around 0.8%. The first quarter was a profitable quarter, and we registered in the books the net effect of that.

Okay, thanks.

The fourth quarter of 2018 was not favorable in terms of market return. For this reason, we registered a loss of $6 million solid in this account.

Okay, thanks.

Thank you. There are no additional questions at this time. I would now like to turn the conference back to Mr. Alvaro Correra, Deputy CEO, for closing remarks.

Excuse me. I see Carlos Gomez. I think you have to make a question here.

We'll now take our next question from Carlos Gomez with Credit Corp.

Thank you very much for taking my question at the last minute. I just wanted to ask about the credit card business. It's growing rapidly. much faster than the system as a whole. Should we be concerned about the rate of growth? Do you think that the industry is healthy? There has been some problems in this industry in the past. Do you think it is, you know, you are giving the cards properly today or are you concerned anyway? And the same thing I would ask about the mortgage business.

Thank you. Sure. So the credit card business, the level of penetration of the credit card business in Peru, we do believe is still, it has a lot of potential, of upside potential. We do, we've been, our strategy is based on risk-adjusted returns. As Mr. Reynaldo mentioned before, our vintages have been very good over the past We are within risk appetite, and that's the reason why we've been more aggressive recently. On top of that, we started maybe three months ago to sell credit cards through digital channels. As of today, over 10% of the total credit cards are sold through digital channels. Therefore, we see, and that has a positive impact not only on customer satisfaction, but also in distribution costs. And that enables us to tap different segments of the market. What was the question about? Basically, Yeah, basically the reason is the same reason. At one point in time, so the bulk of a mortgage business is related to housing financing, to real estate financing. At some point in time due to the construction problems we had as a country maybe a couple of years ago, we were much more conservative at that point in time. What we've seen over the last few quarters is that the market has picked up again, and we are financing much more of those projects. Therefore, our portfolio has been growing, and as a matter of fact, even though we're by far in that market. We've gained market share over the last year, and we expect something similar for 2019.

Thank you very much.

Thank you. There are no additional questions at this time. I would now like to turn the conference back to Mr. Alvaro Correa, Deputy CEO, for closing remarks.

Thank you. Let me please do a summary of what we consider the most relevant messages for our shareholders. We continue to be positive about growth, although there is correlation with GDP growth, as has been mentioned. And that's because we expect favorable trends on private investment going forward, especially on the mining sector. But we also foresee a slow activity on the public side as long as the political environment continues to be surrounded by corruption pros. But we expect 2019 to be the decisive year for that last matter. With regards to the four business units, a general comment is that we have seen stable growth in the top line of all units and segments on a year-to-year basis. and improvement in efficiency ratios, with the exception of Nivanco, which is, as has been mentioned, investing in building capabilities for future growth. We've also seen improvement overall in the cost of risk of the different subsidiaries. All in all, we're happy to be running a very healthy business here. In universal banking, At DCP, as we mentioned, the quarter was marked by a drop in corporate loans. But that's due to year and seasonality, basically. But there is a very positive trend for all segments on a longer-term perspective. And we've seen, as I mentioned, improvement in portfolio quality and cost of risk, both in the retail business and in the wholesale business. At DTP Bolivia, there's a positive evolution as well on loan growth. The cost of risk is going down, but we see some pressures on the cost of funding. In microfinance, at Nibanco, we will continue to see loan growth, but we will also continue to see margins under pressure due to increasing competition. The good news in Nibanco is that the portfolio quality is on the right track Management took action and set new standards for loan acquisition and collection practices. One thing that is worth mentioning is Encumbra. Encumbra, as you know, a few years ago we decided to go greenfield in Colombia. We have learned a lot about the market. We have fine-tuned the model to a point where we feel comfortable with pursuing a faster growth path. in that strategic market. In the insurance and pensions business unit at Pacifico, we expect further growth, especially on the life insurance line. We're happy with the evolution of the medical services performance, and we have also seen a positive evolution on the car insurance bottom line. But we have to focus on the SOAD and medical assistance business lines. The claim ratio has been not at the levels where we expected. Overall, the insurance strategy is geared towards capturing the untapped mass market. And there, I want to highlight the increasing focus of Credit Corp in bank assurance, both at BCP and IBANCO. where we have set aggressive targets in the years to come. At Prima, we definitely expect additional regulatory changes at the pension system going forward, since there are several initiatives on the table that will most likely mean additional pressure on fees, and therefore we have to prepare the company for different levels of income that's focusing on efficiencies. In investment banking and wealth management, we are at the final approval phase for the acquisition of Ultratercinco, so we have to focus on that and on the integration of that business with what we already have in Colombia. And for the regional model, we're in the process of redefining the operational platform and operational model to bring standardization and efficiencies. And a final comment would be, as Francesca highlighted, in the case of PCP, all business lines are at different stages on the path for transformation, agility, and overall change in mindset, something that we truly believe will prepare us for the challenges of a more competitive world. With that, I would like to close this conference call and want to thank you very much for being with us today. Thank you. Goodbye.