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.