Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to Credit Corp LTD second 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. Walter Bailey, Chief Executive Officer, Mr. Alvaro Correa, Deputy Chief Executive Officer, Mr. Gianfranco Ferrari, Deputy Chief Executive Officer, Mr. Cesar Rios, Chief Financial Officer, and Mr. Reynaldo Llosa, Chief Risk Officer. 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 Corp's conference call on our earnings result for the second quarter of 2019. Before we review Credit Corp's performance, I would like to highlight some important matters regarding recent events in the local and international economic environment. First, President Vizcarra has proposed a bill to institute a constitutional reform to call for general elections in 2020. rather than waiting to 2021. We know that the bill proposed includes a decision in which President Vizcarra will not be able to run in the announced elections. This reform has still to be approved by Congress. As such, it is still too soon to forecast outcomes. A number of scenarios may play out, and all of them are uncertain. In any scenario, the decision process regarding this proposal will follow the guidelines established by the Constitution. Despite political noise, the strong fundamentals of Peru remain. These fundamentals include prudent macroeconomic policies, trade openness, and a market-friendly economic model. We now believe that our 2019 GDP growth will be in a range of 2.5 to 3%. Second, in chart number one, the orange line shows that total loans in Peruvian banking sector expanded 7%. in June 2019. Consumer loans grew 14.1% year-over-year in the same period, which represents a three-year peak. However, data from the formal job market has not improved at a similar pace. In light of this, we continue to monitor for any early signals that non-performing loans will increase. We know that there is currently a global scenario of lower monetary policy rates amidst risk of global growth. Central banks in both advanced and emerging economies have started to ease their monetary policy stance by lowering their reference rates. The Central Bank of Peru joined other central banks and yesterday lowered its monetary policy rate 25 basis points. It is important to consider that the local and external environment evolution just described affects the financial system and our business performance. Next page, please. Regarding our quarterly and year-over-year performance, there are important aspects of our lines of businesses that I would like to mention. In the case of Universal Banking, in the second quarter, of 2019, average daily loan balances at BCP cost 6.5% growth year-over-year. The retail banking portfolio grew by 11.6%, while the middle market expanded by 8.7%. The corporate banking segment, however, contracted by 1.5%. The loan mix and the currency mix favored evolution of net interest margin. both in a quarter-over-quarter and year-to-date terms. The cost-to-income ratio improved year-over-year and year-to-date, mainly due to an increase in interest income on loans. This helped offset the increase in operating expenses, which was driven mainly by growth in salaries and employee benefits. The cost of risk grew quarter-over-quarter and year-over-year due to an increase in the expected loss reported by a specific retail banking segment. BCP Bolivia reported a good level of loan growth and a reduction in provisions. Also, the efficiency ratio improved year-over-year and year-to-date in line with the increase in net interest income and fee income. With regard to microfinance, Nibanco posted a moderate level of loan growth in quarter-over-quarter and year-over-year terms. In terms of margins, the negative effect of downward pressure on interest income in highly competitive context was offset by an improvement in the funding structure by which the share of retail funding increased. As such, net interest margin posted a recovery quarter over quarter. The cost of risk in the bank rose quarterly over quarter as a result of the economic disacceleration. We are already taking origination and collection measures to adjust risk performance. Milbanco began increasing its number of employees in the later part of 2018, primarily by expanding the sales force to build capabilities and sustain business growth. It is important to note that this is the first time that Milbanco has increased its workforce since its acquisition. Prior to this date, the bank was able to grow its loan base without increasing the hard count. Milbanco is also building new channels to leverage data analytics and digital solutions, which has increased administrative and general expenses. With regard to insurance and pension funds, the insurance underwriting results increased this quarter. This was primarily due to the evolution of the property and casualty business, which posted an increase in the net earning premiums level primarily through its commercial lines for aviation and fire. The underwriting results in the life insurance business, however, contractors due to a competition, particularly in rent-a-plex interest rates offered to clients. Corporate health insurance and medical services, which we manage in association with UnitedHealth, continue to improve. The pension fund business also improved after posting a recovery in the profitability of its legal reserves. This business efficiency ratio improved due to a decrease in its operating expenses and an increase in its fee income. In investment banking and wealth management, in the second quarter of 2019, the proprietary portfolios continue to have a good run in a context of favorable market conditions. This was the case for fair value through profit and loss investments and fair value through other comprehensive income investments, which have no impact in the P&Ls. Regarding the wealth management business, assets under managed have grown significantly. by 5% year to date. Finally, corporate finance activity continues to post lower results than those seen in 2018. Next slide, please. In this table, you can see the most important figures of Credit Corp's performance in the second quarter. Credit Corp reported net income of 2,099 million soles, which was 0.2% lower than the first quarter results and 12.3% higher than the figures posted in the same quarter of last year. The results represented a return on average equity and average assets of 18% and 2.4% respectively. Overall, in terms of loan portfolio, most key figures posted improvements quarter over quarter and year over year. Net interest income and net interest margin follow the same trend. Additionally, the year-on-year analysis of operating efficiency indicates that the cost-to-income ratio remains relatively stable. The cost of risk, however, increased quarter-over-quarter and year-over-year, mainly in retail banking, as we will develop later. Targeting risk segment has been part of our growth strategy. However, given the cost of risk deterioration in the financial system, we have been taking pricing origination and collection adjustments while continuing with the strategy. Finally, in terms of capital ratios as BCP stand alone, BIS and Tier 1 ratios decrease quarter over quarter due to growth in risk-weighted assets in line with long expansions. Core equity field 1, however, posted an increase both quarter-over-quarter and year-over-year. Next page, please. Regarding the year-to-date results, net income increased 9.1% and translated in a return on average equity and average assets of 17.9% and 2.5% respectively. Net interest income increased 8.3%, while net interest margin rose 15 basis points. Finally, the increase in provisions led to a higher cost of risk, while risk-adjusted mean remained stable. Let's review the main figures and indicators for the second quarter. Next page, please. As you can see in chart number one, our loan portfolio accounts for 66% of our interest earning assets as of June 2019. Regarding the accumulated evolution of loans measured in average daily balances, as you can see in chart number two, total loans grew by 6.7% from first half 2018 to first half 2019. This expansion improved the long-mix portfolio both by business segment and by currency. Long expansion was mainly driven by retail banking at BCP standalone, specifically in the mortgage loan book, followed by the credit card and consumer segments. In terms of currency mix, long expansion was mainly driven by local currency for BCP, retail banking, and Nibanco portfolios. As we will in the long portfolio mix has a positive impact in net interest income. Next page, please. First, in terms of funding, you can see in chart number one, Credit Corp's total funding cost has slightly increased in the last quarter while remaining relatively stable during the last three years. Second, you can see in chart number two, That credit course funding structure shows an ongoing increase in total funding driven by a higher level of due to banks and correspondents along repos with the central bank. Third, in chart number three, in the quarter-over-quarter analysis, you can see there is a decrease in the volume of demand deposits, which offset the increase in time deposits. There is significant competition for local corporate demand deposits as certain banks are pushing interest rates above central bank reference rates. In the year-over-year analysis, the increase in total deposits was mainly attributable to saving deposits, which grew 9.7% driven by opening accounts in kiosks. Next page, please. net interest income rose by 3.1% quarter over quarter and 9.4% year over year. Year to date, net interest income grew by 8.3%. This performance shows, first, a positive volume and currency mix effect on interest income given that the pace of growth of average daily balances rose mainly in the retail segments and primarily in local currency. This was partially offset by the increase in interest expenses driven by a more expensive funding mix by source and currency. Next page, please. As you can see in chart number one, risk adjusted mean decreased four basis points, quarter over quarter, and nine basis points year over year, reaching a level of 4.39% in both the second quarter and the first half of 2019. Regarding year-to-date evolution, risk-adjusted NIM increased to basis points. Year-to-date evolution is a result of net interest margin increase of 15 basis points, partially offset by an increase in the cost of risk of 19 basis points. Net interest margin growth was driven by the long portfolio mix improvement, while the cost of risk increase was mainly attributable to a specific retail segment in BCP standalone and to a lesser extent to MiBanco's portfolio. As we mentioned earlier, penetrating risk in a more profitable segment is part of our retail growth strategy. which resulted in a 11.6% BCP retail banking year-over-year growth in the first half of 2019 in average daily balances. However, given the consumer banking portfolio deterioration in the Peruvian financial system, our retail portfolio cost of risk slightly grew more than expected. In this regard, as part of our portfolio monitoring process, we have been taking pricing, origination, and collection adjustment measures to improve risk-adjusted mean, in particular in credit cards and SMEP. According to the duration of these specific portfolios, the full impact of this adjustment will materialize during next year. Regarding microfinance, MiBanco portfolio has been affected by the economy's deceleration, and we are making origination and collection adjustments to manage portfolio quality. Next page, please. Regarding non-financial income, if we focus on the accumulative evolution, as you can see in chart number one, non-financial income expanded significantly. 9.4%, mainly due to the increase in the net gain in sales of securities, driven by higher gains at BCP standalone following repurchases of Peruvian government bonds and Atlantic Security Bank and Credit Core Capital by the positive evolution of their proprietary portfolios. To a lesser extent, growth was related to an improvement in fee income and in the net gain of foreign exchange transactions, both core items of non-financial income. The evolution of these items is driven by transactional activity in the banking business, mainly at BCP standalone. Next page, please. In the year-to-date analysis of operating efficiency, the cost-to-income ratio improved in line with an acceleration in the pace of growth of operating income. In the following chart, you can see the contribution of each subsidiary to the variation in the efficiency ratio. First, Pacifico posted a decrease in its efficiency ratio, which was primarily attributable to growth in net earning premiums, mainly driven by the fact that Pacifico won two out of six tranches in the last tender process for disability, survivorship, and burial expenses policies for the private pension fund system. it is important to mention that increasing net earning premiums was offset by growth in net claims, which are not part of the efficiency ratio but impacted the net income. In the case of BCP standalone, the improvement in operating efficiency was attributable to an increase in interest income in line with retail banking expansion, which offset increase in salaries and employee benefits. The improvement in efficiency at Pacific on BCP was partially offset by the deterioration in operating efficiency at Mibanco, which was primarily driven by an increase in personal expenses, in line with the long-term strategy to train the new sales force to cover growth in the client base. The relevant impact of other subsidiaries is explained mainly by a deterioration in the efficiency ratio of Credit Corp Capital, as it posted a decrease in its derivative results. It is important to note that the derivative result was offset by the net gains on securities, which is not part of the efficiency ratio. To a lesser extent, the deterioration of the efficiency ratio is also related to an increase in salaries and employee benefits of credit core capital related to the increase in its hedge counts. Next slide, please. On this page, you can see our current guidance for full year 2019 and the revised figures for the full year 2019. First, in terms of macroeconomic indicators, given that economic activity remains below its potential and was less dynamic than expected at the beginning of the year, we have lowered our estimate for real GDP, domestic demand, and private investment growth. In line with this, we expect the Peruvian Central Bank to ease its monetary policy as such have lowered our forecast for the reference rate for year-end 2019. This change in the economic outlook period to the dynamics we are observing our businesses have led us to make some changes in our guidance for the full year 2019. In line with the aforementioned, we are reducing our estimates for loan growth, net interest margin, and risk-adjusted NIM while we are increasing our estimate of cost of rest. Next slide, please. Finally, I would like to talk about Credit Corp's strategy. In 2017, we defined the three pillars that will guide the way we organize and plan for the next 20 years. The first pillar, Credit Corp Way, is focused on identifying and documenting the best practice in each subsidiary to deploy them across the organization. is to leverage our scale and synergies without losing agility. The second pillar concerns governance and focus on defining the operating model for the future. In this regard, we organize our subsidiaries into four business lines and implementing organizational changes to enhance this new structural management. The third pillar is growth. In recent years, we have built capital in each of our subsidiaries to very comfortable levels. This capital will sustain future growth. We are confident that all of our lines of businesses have considerable organic growth potential to ensure that we adequately identify and leverage opportunities. Each line of business has developed strategic initiatives to fuel sustainable growth. Digital transformation is also key in our growth strategy. Each of our lines of businesses has its own agenda regarding digital matters, as we will review in the following slides. Outside of our established business lines, CREALO acts as Credit Corp's open innovation arm to create, invest, and manage index. Finally, in terms of potential in organic growth, we have set up a specialized team to analyze and value investment opportunities. This team follows strict guidelines to determine which countries, sectors, and businesses are the best fit for Credit Corp. and its investment focus. We have set up a reserve fund for potential acquisitions of approximately $500 million. Next slide, please. As we have shared before, PCP's transformation program is focused on offering our clients an outstanding experience while gaining efficiency. Looking at our key digital results, our digital sales in consumer banking have improved from 5.1% in the first half of 2018 to 9.6% in the first half of 2019. In terms of digital clients in consumer banking, our number of users stands at 34% for our total client base. which represent a 13% point increase over the figure posted at the end of 2016. Finally, off-branch transactions have increased representing 96% of total transactions, 58% were executed through digital channels, and 38% through self-serve channels. This figure shows an important evolution in three years. As a specific digital success stories, I would like to mention that our consumer loan digital monthly sales has doubled the product disbursements in the quarter while achieving a six-fold cost reduction compared to the traditional brand channel. Moreover, the number of YAPI users, our peer-to-peer payments have grown significantly to more than 1 million users as of today. We are accelerating its growth by being focused in increasing its use. The 44% of YAPE users pay using YAPE at least one time in the last 90 days, with an average use of 3.8 times per user. Regarding scaling Agile, we are implementing Agile methodologies while improving speed, employee experience, and efficiency. As of today, we have five tribes and two centers of excellence in operation, as well as eight tribes and two centers of excellence on design. We expect to finish implementing our Agile at Scale program by mid-2020. Next slide, please. Regarding PACIFICO transformation program, we have focused on making PACIFICO the number one of the insurance industry in three objectives. growth, experience, and efficiency. To this note, we have set nine aspirational key targets for 2021. We are working on six enables to advance in this journey. Consumer experience to offer a unique and extraordinary experience to our clients. Digital marketing to promote digital communities and brand reputation focused on digital performance with positive business impacts. Smart processes to focus on intensive technology use to increase productivity, efficiency, and a quality service. Agility, to guide the agile mindset adoption process in the company. Data and analytics, to strengthen decision-making through big data and analytical models. Digital IT, to build digital architecture to scale digital solutions using DevOps to provide continuous and efficient delivery of value and strengthening cybersecurity. In the process of going agile, we have 11 squads and one center of excellence working with agile methodologies. We are developing new roles and capabilities in the organization, which will enable us to scale agile. Regarding specific stories we are currently working on, first, we have developed self-service tools for our brokers, ensuring that 59% of the information requirements have an automatic response. Second, we launched the digital life advisory model, which seeks to improve customer experience while achieving efficiencies. As of June 2019, 62% of the applications are registered through this model. Finally, we are working on increasing self-managed transactions by customers and digital sales. Next slide, please. In Nivanco, we define our transformation program as evolving our culture, changing our mindsets, innovating in a customer-centric business model, using new technologies and ways of working to achieve our aspirational purpose. We are focused in making Nivanco number one in growth and experience and becoming a benchmark in the microfinance business model. All of these are set to meet our purpose of transforming lives while writing together our progress stories. We are working in five enables to advance in this journey. Consumer-centric, to offer an extraordinary experience to our clients by understanding their needs. Digital business model, to develop digital capabilities to improve customer experience and evolve into a cost-efficient business model. Collaborative organizational culture, to ensure customer-centric attitude, leadership, and transformation commitment in our teams. Data-driven, to support our core business and decision-making processes through advanced analytics. IT and digital risk, to build digital architecture to support our transformation process and strengthen cybersecurity. We are currently adopting agile methodologies. We have 16 squads and one tribe in our digital channels. Going into specific stories regarding digital innovation, we have developed Urbi, an app that facilitates credit evaluation and collection on the field. This Salesforce tool acts as an information and communication source, which aims to improve customer experience and Salesforce productivity. Moreover, we have built a strategic alliance with Uber and Memo Technologies. This is a new digital model test focused in targeting a specific Uber driver segment as potential clients. and evaluating them using MO big data mining skills. Positive results will open opportunities to new alliances to access other new segments. Lastly, the use of advanced analytics models is boosting highly effective leads generation, which improves the productivity and efficiency. Next slide, please. Under our growth strategy, we set up CREALO in 2018 to build, invest, and manage fintechs that provide digital products and services beyond the current initiatives and their way at our other subsidiaries. This will bolster the value proposition that Credit Corp can offer to current and future clients across its subsidiaries. CREALO is focused on structured strategies of company building and partnerships through the creation of new fintechs for investing and building on existing fintechs in Peru, Chile, and Colombia. In Peru, we have invested in Kulki in late 2018 to develop a broader solution in the payment ecosystem. Kulki online gateway has currently more than 5,000 registered users, which process sales for a monthly amount of over 27 million soles. Kulki is currently piloting its end-post solution for physical payments in several merchants and getting ready for a rollout in late 2019. In Chile, we have acquired Multicaja's digital business in March 2019, including two operating businesses with over 800,000 online users, PayPal withdraws and deposit services, and top-up services. Besides the aforementioned, the transaction includes a prepaid account company in process of obtaining regulatory approval to operate in the Chilean market. In Colombia, we founded Tiva, a digital investment application based on an omnibus account with a robo-advisor solution with the objective of providing access to low-ticket investment to customers. TIBA is currently finishing its MVP and is in the process of obtaining regulatory approval to launch the product in the Colombian market. Continuing our regulatory approval, CREALO expects to have all three MVPs live in their respective markets by year-end. Moreover, we expanded our open innovation initiative through CREALO and we will reach $30 million in total disbursements for 2019. Next slide, please. Finally, I wanted to give you some information about the recent acquisitions we have made in Colombia and the rationale for each of them. First, in February, we acquired Ultraserfinco to complete our existing credit core capital business to become indisputed leader in equities and fixed income trading in Colombia. Ultraserfinco has an attractive wealth management business with over $500 million in assets under management and more than 50 years of experience in the industry. Additionally, this acquisition complements geographically our client coverage, since Ultraserfinco has a significant presence in Medellín. Second, we acquired Bancompartil in June, with the objective of expanding Credit Corp's microfinance business in the region. Colombia has attractive macroeconomic fundamentals, a significant potential for this model, and a fragmented microfinance market, which provides consolidation opportunities. With Banco Compartir and Encumbra, Credit Corp is well positioned to become market leader. Banco Compartir is Colombia's number four private microfinance bank with a nationwide footprint, comprised of 104 branches and covering 27 out of 33 departments. Finally, Bancompartir will leverage OmniBanco's capabilities to improve commercial productivity, risk management, and financial performance. It is important to highlight that for both of these acquisitions altogether, we will pay approximately $120 million. 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 one on your telephone keypad. If you're 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 an 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 Ernesto Gabilondo of Bank of America.

Hi, good morning, Walter, Cesar, and Gianfranco. Thanks for the opportunity. My first question is on your expectations for long road per segment. We have seen the economy has been impacted by the temporary suspension of Las Bambas, the every four-week investments seasonality in regional and local governments. We have seen the strikes in Arequipa. And in addition, the political turmoil of celebrating presidential elections next year and the escalation of the global trade war. We believe somewhere or in some cases are temporary impacts, while yesterday's interest rate cut could help a little bit to improve the economic activity. However, we think there could be likely some delays in some construction and large infrastructure projects and some impacts related to the uncertainty of the global trade war. So we have seen your downgrad revision for long growth. but how do you see loan growth per segment? Should we expect wholesale loans to be modestly growing and retail loans being able to maintain its double digit based growth? Thank you.

Yes, this is Cesar. Thank you, Ernesto. I think we will expect that the trends are going to continue. Due to the mention that you have pointed out, probably is going to be challenging to grow in the corporate segment, but the retail segments continue with a very good dynamic, and the adjustments that we foresee are, as I mentioned during the presentation, adjustments in pricing, in risk, and probably the market is going to conduct something similar. So in terms of retail banking, we foresee a good trend in the following months, but some challenges in the corporate segment.

Ernesto, this is Gianfranco. Just to complement what Cecil just mentioned, specifically in the retail segment, you have to bear in mind that actually the third quarter, the fourth quarter, the last part of the third quarter and the fourth quarter are very strong in the SME business. This is a reality. We've seen it over the last few years. basically because of the year end campaigns. So we are positive there. And on the consumer lending business, we are leveraging on digital tools and new channels in order to tackle new segments of the population. So yes, we are positive in SME and consumer lending. And on the corporate, we will see that the portfolio is going to be flat or really a small growth due to what you mentioned in terms of investment.

Thank you, Cesar Gianfranco. And my second question is on your transformational plan. We know these expenses were under control during the quarter, below the 8% overview guided. And we noticed that despite you are revising downward your GDP growth, long growth, NIMS, and expecting a higher cost of risk, you are maintaining a change on change your expectations for the efficiency ratio. So I just want to know if you are delaying some of the transformational projects or should we expect OPEX to trend up in the next quarters? And can you share with us some of your advances in the digital transformation? For example, what are you doing in terms of QRs, and biometrics and fintechs. And I don't know if KoolKey, Tempo, and Tiva will be the key businesses to follow. Thank you.

Yep. I'm going to talk about, this is Gianfranco again, I'm going to talk about BCT's transformation. We haven't changed our plans. As I mentioned in the previous conference call, this is a long-term strategy, and we're seeing that there's a lot of value we are bringing a lot of value because of the transformation. What we don't foresee any deterioration in the cost to income ratio, and the main reason is that despite the fact that we won't stop any of our investments, we are getting benefits of the transformation so far. We've already closed some branches, due to the Agile, to escalating Agile, or scaling Agile, sorry, we're gaining efficiency there too. In terms of QR, actually, this is a more structured strategy on payments. The YAPI, which Cesar just mentioned, started as a P2P application. Today, it's also a P2M application. as of today we may have anything between eight to 10,000 proprietary QRs already deployed. VisaNet is also deploying each QR and our mission is to have 150,000 QR codes by the end of the year. We are doing a further analysis on YAPE and the collateral benefits we're getting in terms of deposits usage of debit cards and so on are very positive, so we will continue investing specifically in YAPE. Regarding fintechs, I would say it's a twofold strategy. One is the one Cesar mentioned, that is prelo, either building or buying companies, and in addition to that, we at DCP also have a study in terms of either or both buying, partnering, or testing new distribution models, risk models, and things like that with fintechs.

Thank you very much.

Thank you. We'll take our next question from Jason Muin of Scotiabank.

Hello, everyone. Cesar, thank you for the detailed presentation. I want to ask about BAP's guidance for return on average equity this year and return on average equity on a sustainable basis. To keep the ROE outlook of 17.5% to 18.5% for 2019, what's going to offset the changes in guidance, the lower loan growth, NIM, and higher cost of risk? And today you also reiterate your sustainable ROE of 19%. BH reported 18%. In the quarter, BCP was an impressive 21.5%. Mipanko at 20%. Pacifico at 13.6%. Prima at 33%. That accounts for almost all the earnings. Can you talk about your confidence or BAP's confidence in this sustainable ROE outlook? in particular with Peru's 10-year local bond yields. Now I think it's a five-year low. We reached in July a 4.3%. Maybe in that context, let's talk a little bit about how BAP management looks at the group's cost of equity today versus the past. And in that, comment on the strategic decision to use excess capital to invest in opportunities outside of Peru. So maybe putting that all together. I think the most important to me is understanding the views on the long-term ROE.

Okay, I am trying to address because there are several very relevant questions. If you see our result, we already have significant results that are not contemplated in the mean nor in the efficiency ratio that are related to gains on sales of securities. We have booked significant amounts in the P&L, but I would also like to mention that from the close to 2018 to June, we have increased our non-realized gains in around $800 million. So we have an impact in the balance sheet. We have increased the equity for this factor that temporarily has lowered our return on equity. Down the road, probably these gains are not going to be as substantial. The other important factor that compels us to reform our sustainable ROE is that this reserve fund that is starting to be deployed has an impact of more than 100 basis points in the profitability so far. So taking into consideration these factors, I think we have confidence that the short-term ROE is achievable and the sustainable ROE also when we deploy and start to get in profitability with these excess funds.

Maybe talk about the cost of equity. Do you think that BAP's cost of equity is lower today than it was? Do you think long-term rates will be low? And therefore, I mean, the premium that, BAP is generating over what I would consider, what I estimate the cost of equity is substantial. And I think over the long run, just a general comment would be perhaps returns need to come down if rates stay low for longer. Maybe some comment there.

I think in the cost of equity, we clearly see two different forces. The reference rates are lowering, and these will tend to lower in the the cost of equity that probably due to the situation, the environment, the risk premium will increase somehow. As a result, we probably think that the cost of equity is going to remain relatively stable due to the different forces. And regarding the impact of lower interest rates, we have conducted several analysis Of course, our books are sensible, but while we transition for a more retail portfolio, the portfolio is less sensitive to the reference rates. The wholesale portfolios are very sensitive and translate interest rates very rapidly. The retail portfolios tend to be much more resilient.

Jason, hi, this is Walter. You know, the points you mentioned are very valid, and the question is, what is the cost of equity of Credit Corp going forward? You don't take short-term and long-term decisions based on short-term cost of equity movements. So the question, which is a very valid one, which you're putting on the table is, what do we expect to be the long-term cost of equity for Credit Corp? Clearly, there's no clear answer for that, but I think it is premature based on movements in the markets in the past month or even less than that to take long-term decisions. I don't think the world has changed dramatically from one day to the other because there were short-term movements in rates, and it is not clear the scenarios going forward. So we will be cautious. We have not changed our long-term view, our long-term strategy. We continue to work on long-term decisions based on the cost of equity that we have always determined around 11%, and until we see more permanent changes In the macro scenario, both domestic and international, which at this stage, again, I'm not sure we have enough perspective to determine that they are long-term changes, we will not change. We do not have at this stage any indication that our sustainable return on equities, both of the short or long-term, are not reachable or obtainable, and we continue to work under those premises. I don't know if we answered your questions.

Yes, that's very helpful. Thank you.

You're welcome.

Thank you. We'll take our next question from Andres Soto of Santander.

Good morning. Thank you for the presentation. My question is related to capital deployment. You mentioned before that you are setting aside $500 million for future acquisitions. In the past, you mentioned that microfinance in Colombia was a key target. We've seen the acquisition of Banco Compartir, and this is, you know, from that perspective, it's a small acquisition, and so not clear to me going forward what is going to be the focus in terms of M&A, if it's going to continue consolidating the microfinance industry in Colombia, entering into the microfinance space in other countries, or additional investments in the fintech space.

Sure. Again, sorry, this is Walter Bailey. I'll tackle your question. I think we have been extremely consistent in explaining to the market that, one, inorganic growth is a complement to organic growth, not the driver of growth at Trevi Corp. Number two, that it is the best practices in the world to have a continued presence in exercising the M&A muscle of inorganic growth to do series of complementary acquisitions. We have had a set up a rigorous process through which we analyze and determine where we want to be. We have made some very important decisions where we want to play and what we want to play. That's point number one. Point number two, the fund that was so funded, we have determined which currently is around $500 million. is not exclusively for the use of M&A. It is a reserve fund which is there for a rainy day and potentially for inorganic acquisitions. It is not exclusively dedicated. So if we decided not to pursue any inorganic growth, that fund would not be zero. Third, yes, we think that Microfinance in Colombia is a good alternative for us for several reasons. One, we believe that we have a domestic model which can be exported. Second, as Cesar mentioned in his presentation, we think that the macro conditions and regulatory conditions are good for the development of microfinance in Colombia, and furthermore, we see a fragmented market. I've been there for almost three years with an operation that we started from zero called Incumbra where we dedicated our time to understand the market and how do we need to adjust our current models to the Colombian market. After three years of being there, we felt it was right for us to take the next step, which we did, and we acquired a more relevant position. It will take us a year, a year and a half or two before we can take another step because we need to incorporate what we have done, merge with our existing operation over there, and do the work that we need to do internally. So this is not a 100-meter race. This is more a marathon. So we do not expect to do anything further in microfinance in Colombia for the time frame that I already mentioned. Again, we are going to be very disciplined in where we go, what we do. Number two, the $500 million are not exclusively dedicated to inorganic growth. And number three, we will take some time to digest and incorporate. We have not even paid for it yet to incorporate what we have just acquired. I don't know if I answered your questions.

That's very clear, Walter. And following up on the Banco Compartir acquisition, you know, the microfinance space in Colombia is basically dominated by NGOs, so they are not very focused on profitability. Banco Compartir itself delivers 7% ROE. I'm not sure what is your target there, how much you can believe you can improve this ROE. And a more specific question on the funding structure, I see that 25% of Banco Compartir deposits are from the cajas de compensación, so the selling shareholders. Is this money going to remain there? If not, what is going to be the funding for this company? Okay.

The current status of the microfinance industry in Colombia is not dissimilar to what we found in Peru several years back, where the market was basically in the hands of NGOs, which even though they do not have a for-profit driven, they are there to generate and be self-sustained. So there is a bit of a lack of understanding of what non-for-profits drive them. We have been in the market and we think that It is compatible to be a for-profit organization, but very focused on driving and improving the quality and the spiral of growth of those customers. So we see zero conflict in us having a return on equity-driven objective with competing with NGOs. What return on equity do we expect? Obviously, above the cost of equity for Credit Corp, for which we had a couple of conversations before that, but there are periods of time in which we need to adjust the model, et cetera. We think that this transaction, though small, will be accretive for Credit Corp shareholders. And about the funding, it is a relatively small operation. They are self-funded. And we are there, of course, if more support is required. But if anything, the capital strength and the perception of market strength of Banco Compartir has dramatically increased when you have a relevant shareholder like Lady Corp behind it. So we foresee no difficulties in achieving and obtaining the required funding going forward. Not the similar situation to what we found when we acquired the edificare in Peru.

Great. Thank you for your response. You're welcome.

Thank you. We'll take our next question from Alonso Garcia of Credit Suisse.

Thank you. Good morning, everyone. I just wanted to ask on the banco, as the ROE year today is considerably down versus last year, I mean, I understand you had some of the quality issues last year that might be affecting this year and that you are growing your base of employees. But my question is when these pressures on profitability should subside and what would be a reasonable sustainable ROE for Mivanco once this is left behind? And also on Mivanco, if you could elaborate on the competitive environment in microfinance in Peru and the level of investments of clients in that segment, it would be appreciated. Thank you.

Yes, this is Gianfranco. Regarding your first question, there are like three forces in the microfinance industry and within Mibanco today. On the macro side, this competition has been harsher today than it was years before, basically because the whole business is not growing, as fast as before. That has led to a squeeze in margins. So that's one force. The other force is that the specific for Vivango is that as Cesar mentioned before, we have hired close to 1,000 people over the last 12 months. The idea here is that we already achieved the productivity that we do foresee is the right productivity in terms of balancing commercial productivity and collections productivity for each R.M. You have to bear in mind that, as a matter of fact, our R.M.s have this dual role of commercial part and the collection part also. So with the current model, we believe that we've already reached the productivity the balance productivity that can be achieved and obviously we're working in Mimbanco in how to deploy new digital tools or digital mechanisms in order to further improve that productivity. And third, having said that, even though the cost to income at Mimbanco has deteriorated this semester, if you compare the level of cost to income that Mimbanco has as compared to the main competitors in the microfinance industry, we are playing anything between 500 to 1,000 basis points lower. So we do believe that we have a competitive advantage there. The new RMs we've hired over the last year, normally a new RM gets or achieves the right productivity level after nine months. So the new vintages of, maybe this is not the correct word, but the new vintages of RMs will start getting the benefits, I would say, by the first quarter of next year. I'm sorry, and that will lead us to similar ROEs that the ones we had before, a couple of years ago had been banned.

Just only adding to that, the increasing has been significantly in the last – this year has been 1,200 people. And we are paying the salaries of these people, and the productivity is going to be full next year.

Wonderful. Thank you. And just one final question. In running capital, you mentioned – I mean, you have discussed the M&A front. However, despite this semi-activity that you have had over the past months, you continue to accumulate capital at a nice pace. You have now a C21 of 18.8%. So my question is if, based on this level of capital, an extraordinary dividend is or could be potentially under discussion from here to your end to maintain capital at optimal levels?

Hi, this is Walter. As you mentioned, yes, it is potentially something we might do. We have not made a decision and obviously has to be taken to the appropriate approval levels.

Thank you very much, Ernesto.

Thank you. We'll take our next question from Gabriel Nobrega of Citibank.

Hi everyone and thank you for the opportunity to ask questions. I actually have a question on credit quality. Looking at your provisions, we note that they increase them significantly more than 40% over a year. However, your NPO ratios were relatively flat on a quarterly basis. While I understand that part of this could be due to the fact that you increased your write-off a lot, could you just share with us what you're seeing in terms of risk in your portfolio, and is there any segment that is worrying you more, and if also this is one of the main reasons why you are increasing your cost of risk guidance? Thank you.

Yes, this is Reynaldo. Yes, as you were mentioning, provisions have grown quite a bit in this specific quarter as compared to the first quarter of this year. Having said that, we don't see any dramatic changes in the quality of our portfolio. We have seen specific deteriorations in some specific portfolios, specifically credit cards and some part of the SME segment. And as such, this reflects, this is reflected in the provision, in our provision estimates. Having said that, I think that our provision level today is within our risk appetite limits. So, I mean, what we are doing is basically taking the adequate measures in terms of underwriting, portfolio monitoring and collections to change of our portfolio. In terms of wholesale, it's quite stable.

We haven't seen any big cases in this specific quarter. All right. That's very clear. Thank you.

Thank you. We'll take our next question from Carlos Gomez of HSBC. Hello, Carlos. Your line is live.

I have two brief questions. The first one is, what is your expectation for long growth in Peru over the medium term, over the next three to five years? And second, since you are looking at M&A possibilities and you have a fund, did you look at the transaction in Paraguay?

Thank you. This is Walter Carlos. The answer to Paraguay is no doubt. Long growth, I think we have some guidance.

Yes, we usually state that in the medium term, the expected growth is 1.5 times nominal GDP. So if we have a medium term real GDP of between 3% and 4%, that I think is achievable. And 2% inflation, we are going to have around 8%, 9% growth. And this is the sustainable growth of the market. Probably we can do something a little bit better increasing the penetration in low segments within new digital capabilities.

Okay, any final follow-up on Paraguay? That would not be a market for you or that would not be the type of institution you would like to look at?

We have, Carlos, this is Walter again. We have never been very close to Paraguay. Our people in Bolivia do believe that there is a potential to do some trade transactions, and that is as far as we will go at this stage. We do not know the country, we do not have customers, so we believe that that is not an intelligent way to go in a country which is just going by the way. If anything, we want to know the country, and we will do that through our Bolivian operation, where they do have a certain amount of trade relations, and maybe several, underline several, many years on the road, we might do something. But at this stage, it is clearly not on the table.

Thank you very much. Thank you. You're welcome.

Thank you. We'll take our next question from Yuri Fernandez of J.P. Morgan.

Thank you, gentlemen. I have a question on fees. It was a bit light this quarter, especially like the banking fees was growing around 3% over a year. And you mentioned in the report that the negative, it comes mostly on the retail fees, on credit cards, accounts, maintenance, those kind of things. So my question is, what is happening there? Like, why are you seeing a decrease in consumption of those products? Are you seeing a retailer client moving to another bank? is something like this, or is there an explanation for the decrease on the fees on those products? Thank you.

Yes, two issues. One is that macro environment doesn't help fees. There's a very high correlation in terms of, you have to remind us, we have a lot of, we are a very transactional bank, so a good bunch of our fees come from the transactional business. That's one issue. And the other issue is that clients And as I mentioned, clients are migrating to digital channels, interacting more digitally. Normally those channels, we charge much less on those charges or not charge at all on those channels. And that's the reason why you're seeing a reduction in fees. Obviously, the cost to interact with those clients is much lower when they interact through digital channels. So these are the two main reasons why the fee income business hasn't grown that much.

Okay, so just to follow up, no decrease in the number of clients. And can you provide a number for the year? I know you have the guidance of efficiency remaining flat for the year, but any call on how much banking fees can grow this year?

Not really, but just on your first part of the question, as a matter of fact, due to both the digital and the self-serve channels we've deployed over the last couple of years, we are seeing, on the contrary of what you just asked, we're gaining a number of clients. Last year, the number of new clients we got into the bank was something that we've never seen before over a million times, yes.

No, it's very clear. Thank you very much.

Thank you. We'll take our next question from Sergei Dubin of Hardin-Ludner.

Yes, hello. Just one question on your NIMH trajectory. I understand what you said about BCRP cutting rates by 25 basis points, but at the same time, you have always talked about how your retail NIM is, you know, as you weigh your portfolio towards more of a retail loans as opposed to corporate, your NIM should expand. So I'm kind of wondering how I should quantify these various impacts, what's the impact from the decline in BCRP reference rate versus the shift to higher NIM loans. And do you see, how do you see NIM trajectory over not just this year, but over 2020 and possibly in 2021? Thanks.

Okay, probably two different questions. If we make a very static sensitivity analysis Each 10 basis points of reduction in interest rates impacts the NIN in around 20 million dollars. This is assuming an instantaneously income. But the most important forces that are already in play are the change in currency and the mix of the portfolio. So we think that we can counterbalance the negative effects of lower interest rates with the change in portfolio and the change in currency composition.

Okay. Can you elaborate on that a little bit? What does it mean, currency and change in portfolio? Are you referring to On the change in portfolio, you're referring to segments like retail versus corporate? Yes, I am talking about that.

Probably going step by step. In Solace, we usually have higher margins than in dollars. And the long-term trend of our portfolio has been a change from U.S. dollars to Solace. And it has been driven for the second factor that I am going to mention, that is in the change in the composition of the loan portfolio from a more corporate portfolio to a more retail portfolio. The retail portfolio usually have not only higher structural, higher interest rates, but are more resilient, are less sensitive to shorter movements in the interest rates. When you have an adjustment of 25 basis points in the corporate portfolio, the next disbursement is going to have a reference that is 25 basis points lower. For a credit card, it's much more stable as it's more driven in function of the risk of the client, the segment, the value offering. So, doing this movement from wholesale to retail, I think we can improve the risk-adjusted name over time.

Well, exactly. So, here is my question, I guess. When, you know, as your loan book, especially on the corporate side, reprices downward, you know, from, tomorrow or whatever, you know, basically, because it's floating rate loans. So your base is going to reset. So the end of the year, most of your corporate loans, all of them will be repriced. And then retail will probably take some time to reprice, depending on, you know, their floating or fixed or whatever. But, you know, starting from January 1st of 2020, because as I understand it, and you've been talking about this before, that you're continuing to shift your focused towards retail lending because the corporate spreads are very low. So that's exactly my question. Assuming BCRP doesn't do anything on the rates and the rates stay flat, how do you see your meme evolution for 2020?

I think...

We've already provided guidance on both NIEM and risk-adjusted NIEM, and as you may see, those are slightly lower than our previous guidance.

Right, but I'm asking for next year. I understand the dynamic this year. I'm trying to understand where we need it. Yeah. I'm just trying to understand the dynamic, the trajectory.

The dynamics are what Cesar mentioned. Since we are shifting our portfolio towards more retail portfolio, and within retail, the portfolio is more skewed on Solace, the need should be higher. The cost of risk is going to be higher, too. Therefore, what we expect is that somehow a similar risk-adjusted team as we are expecting for the rest of this year.

Okay. Thank you.

Thank you. At this time, there are no additional questions in the queue. I would now like to turn the conference over to Mr. Walter Bailey, Chief Executive Officer, for closing remarks.

Thank you very much for joining us in this conference, folks. Negative headwinds regarding domestic GDP growth expectations is definitely the most important factor affecting our current and short-term forward-looking results. The obvious impact will be, on the one hand, the lower than expected loan growth, and on the other hand, some deterioration of credit quality. We believe neither of the above alter the fundamental growth potential for Credit Corp, but are likely to impact short-term results. Domestic political volatility has been around for quite a while, and we believe its only impact is related to the already mentioned impact on lower GDP growth. With this overall context, Credit Corp's Quarterly results have been very solid and are an indication of what we see going forward and of the fundamentals of Credit Corp, namely strong franchises, strong capitalization, solid risk management, and continued cost control, and good fundamentals in most of the countries in which we operate that continue to offer growth potential. Our agenda is full. we continue to be focused in improving the products and services we offer our customers in adapting our business models to incorporate shifts in customer preferences and technological advances. In short, we have gone through short-term domestic and international volatility before. We believe we are prepared to weather the international and domestic headwinds, and we continue focused in pursuing our medium-term objectives to maintain customer preference while generating value for shareholders. Thank you very much for joining us in this conference call, and we look forward to seeing you in three months' time. Thank you and goodbye.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

You may now disconnect.