Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to the Credit Corp Limited Third Quarter 2019 Conference. 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. Gianfranco Ferrari, Deputy Chief Executive Officer, Mr. Rinaldo Yosa, Chief Risk Officer, Mr. Cesar Rios, Chief Financial Officer, and Mr. Guillermo Garrido-Leca, CEO of Health Insurance and Business. 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 Corps Conference Call on our earnings results for the third quarter of 2019. Before we review Credit Corps' performance, I would like to highlight some important matters regarding recent events in the local environment. As you are aware, President Vizcarra dissolved the Congress on September 30 and called for parliamentary elections, which will be held on January 26, 2020. It is important to note that the Constitutional Court of Peru will rule on the constitutionality of the dissolution of Congress. Thus far, the financial indicators have registered little reaction to this event. Penn actually appreciated, and the yield on Peru Sovereign bonds decreased. Despite these events, we believe that Peru will continue to report strong macroeconomic fundamentals. These fundamentals are prudent macroeconomic policies, trade openness, and integration in the global market, and a masterfully legal framework. Moreover, although economic activity has decelerated in 2019, Peru will remain one of the fastest growing economies in the region and inflation is expected to be low. We expect Peru's GDP to grow 2.5% in 2019 and 3% in 2020. Second, economic activity accelerated in the third quarter of 2019. As you can see in chart, 2. After a 1.7% year-over-year expansion during the first half of the year, our estimates suggest GDP expanded around 3.3% year-over-year in the third quarter of 2019. Non-primary sectors actually accelerated and grew 3.3% year-over-year and underpinned Peru's expansion as one of the most dynamic in the region. Finally, the central bank reduced its monetary policy 25 basis points in November 2007 to 2.25%. In recent weeks, the government has announced several measures through legal degrees. Third, the government has established a special regime to reinitiate work on public investment works that has been paralyzed by arbitration disputes. Moreover, it has put together packages to bolster public spending in the last quarter of 2019. Regarding taxation, income tax exoneration for operations on the local stock exchange will continue to 2022. Furthermore, The government approved a mergers and acquisitions law which reduces the transaction amount that triggers a review process by regulators. Lastly, the Prime Minister has announced an increase in the minimum wage in the first quarter of 2020. The minimum wage currently stands at 930 soles and was last increased in 2018. Next, I would like to review recent events in the economies in the region, none of which It's expected to have a material impact on credit card results. In Bolivia, according to the National Electoral Tribunal, Evo Morales won the presidential election in the first round. The Organization of American States will carry out an audit of the elections due to procedural controversies, and authorities in Bolivia have stated they will respect the decision. Protests continue in this country due to the alleged electoral fraud. In Chile, social unrest was struck by an increase in public transportation first. Despite announcements from President Piñera, protests continue. In this context, which is marked by both external and internal risks, the Central Bank of Chile has reduced its reference rate to 1.75%, the rate has fallen 125 basis points since March 2019. This event, although relevant in economic, political, and social terms for Bolivia and Chile, are unlikely to significantly impact Credit Corp, whose main business are located in Peru. Slide four, please. Regarding our quarterly year-end Year-over-year performance. There are important aspects of credit quarters I would like to mention. First of all, this quarter credit court declared a special dividend of 8 soles per share to be paid in dollars in November 22, 2019. This dividend represents a payout of 16%, which together with the ordinary dividend pay in May represents a payout of 56% of 2018 earnings. In the case of universal banking, in the third quarter of 2019, average daily loan balances at BCP posted 7.5% growth year-over-year. The retail banking portfolio grew 12.3%, while the wholesale banking portfolio expanded 3.3%. The loan mix and the currency mix favored the evolution of NIM, but in a quarter-over-quarter and year-to-day terms. In September, BCP rolled out a liability management operation, which is corporate bonds to optimize its maturity profile by reducing the funding cost curve, both in local and foreign securities, as we will review later on. The cost of risk grew quarter over quarter and year over year, mainly due to an increase in the expected loss reported by SME and consumer segments. BCP Bolivia reported a good level of long roll and a reduction in provisions. with regard to microfinance. The focus on retail deposits resulting in an improvement in the funding cost. Our focus on fine-tuning risk management has temporarily impacted loan growth. Regardless, we expect to see a recovery in the next quarter. Net interest margin was expanded after we stopped originating loans in some riskier segments. Finally, it is important to note that the newly hired sales force is still on a learning curve and such we expect productivity to rise next year. With regard to insurance and pension funds. The insurance and the writing result increased this quarter. This was primarily due to the evolution of the life insurance business, which posted an increase in its net earning premium level. The property and casualty business, however, experienced an increase in its net claims. Corporate health insurance and medical services, which we manage in association with UnitedHealth, continue to improve. The pension fund business registered an improvement in its results after posting a recovery in operating income and efficiency. On the other hand, quarter over quarter, the profitability of the business legal reserve decreased. In investment banking and wealth management, on November 1st, after receiving the approval from the regulator in Colombia, we complete the acquisition of 100% of the capital stock of Ultrasurfing. In the third quarter of 2019, corporate finance activity recovered after registering lower results in previous quarters. These upticks occurred after important loan transactions and M&A deals involved both Peru and Colombia were closed. The sales and trading business grew at a slower pace than in previous quarters in a context marked by an increasing volatility at the capital market level. The asset management business continues to focus on growing its international platform of funds for institutional investors in Latin America and other regions. Finally, in wealth management business, we have expanded the portfolio of products available to clients in Chile and Colombia, where assets under management have grown by 22% year-to-date. Slide 5, please. I will comment on Credit Corp's performance highlights in the third quarter. First, regarding profitability measures, Credit Corp reported net income of 1,093 million soles, which was 0.5% lower than the second quarter's results. This figure led Credit Corp to report net income of 3,292 million soles year-to-date. 8.8% higher than the figure posted last year. Results year-to-date represented a return on average equity and average assets of 17.6% and 2.4% respectively. The low portfolio accelerated this quarter, registering year-to-date growth of 6.8%. The cost of rates increased in this quarter, mainly at BCPS standalone through retail banking. In this context, The cost of risk situated at 1.59% year-to-date, 16 basis points higher than the figure posted for the same period last year. The pace of pricing adjustments went somewhat out of step, which led risk-adjusted need to fall to 4.3% year-to-date, 5 basis points lower than the figure posted for the same period last year. In terms of operating efficiency, the cost to income ratio fell 40 basis points. This was due in large part to the fact that Pacifico won a tender for disability and for labor shift policies for sanction funds. Nonetheless, after lots of research, the impact of the tender Finally, core equity to one ratio at BCPS stand alone increased quarter over quarter and year over year and stands of 11.95%. Slide 6, please. As of September 2019, our loan portfolio accounted for 66% of our interest earning assets. Regarding the year-to-day evolution of loans measured in average daily balances, as you can see in chart number 1, total loans grew by 7% year-over-year. Loan growth was mainly driven by retail banking and BCP stand-alone, as you can see in chart number 2. The mortgage loan book led expansion in the retail portfolio, accounting for 40% of total growth. The majority of the remainder of growth was attributable to the credit card consumer and SME segment. It is not worth it that the credit card loan growth continues to grow at a faster pace under the register and expansion of 21% year-over-year growth. In terms of currency mix, loan expansion was mainly driven by local courts. In this context, loan growth was led by higher margin sets. Slide 7, please. In terms of funding, as you can see in chart number one, credit card funding structures grew 9.1% year-over-year, driven mainly by deposits on bonds and notes issues. As shown in chart 2, our deposit base shows quarter-over-quarter growth was led by demand deposits and driven mainly by wholesale clients, both through interest-bearing and non-interest-bearing deposits. Year-over-year, growth was laid above demand and saving deposits, which grew 11.3% and 10.8% respectively. It is important to note that growth in saving deposits is concentrated in individual accounts. bonds and notes issue reflect the impact of PCP's liability management strategy to improve its maturity profile while reducing the funding cost cure in both local and foreign currency. In fact, the dollar-denominated five-year bond issue was priced at the lowest interest rate ever achieved by a Peruvian issue. Due to a strong demand and attractive interest rate, new money was issued in both currencies and at such bonds and notes issued registered growth of approximately 2.1 billion soles quarter over quarter. It is important to note that there is a one-off charge in derivatives and exchange difference related to the liability management transaction, which affect total non-financial income this quarter. Nonetheless, new money will replace more expensive debt and, as such, will favor our funding costs in coming months. The slide page, please. As you can see in chart number one, this rate grew 8 basis points a year today due to the sale of loan portfolio and the legal collection. Year-to-date, the portfolio sold total approximately 170 million solids, which generated an impact of 14 basis points in the NPL ratio. In chart number two, you can see the year-to-date evolution of the cost of risk, which increased 16 basis points. This was primarily due to, first, increasing provisions in BCP's retail segment. As we mentioned last quarter, our SME team and medium-term loan deteriorated more than expected. We have already taken pricing, origination, and collection measures, but the full impact of portfolio adjustments will be evident next year. Moreover, we are penetrating risky consumer segments through digital channels, where the increase in the cost of risk is compensated by higher margins. Second, the deterioration in the debt service capacity of a specific client in wholesale banking in the first half of the year. It is important to mention that this loan is already provisioned, and as such, we require no new provisions in common works. Third, the change in Peru's growth prospects led to adjustments in the parameters of our risk models. Additionally, Nibanco's cost of risk increased quarter over quarter as we continued to adjust for the e-nation and collections process. The full impact of these measures will materialize in coming months. Slide 9, please. Net interest income rose by 0.9% quarter over quarter and 6.5% year over year. Year to date, net interest income grew by 7.7%. This performance is a result of, first, the positive evolution of interest income, which was mainly driven by growth in loan volumes and more profitable mix of business segments and currencies, as mentioned earlier. This was partially offset by a decrease in interest rate and higher competition, particularly in wholesale banking and microfinance. Second, growth in interest expenses, which was driven primarily by an expansion in the deposit volume via time deposit. NIMS deteriorated by 8 basis points quarter-over-quarter and 13 basis points year-over-year to situate at a level of 5.4% in the third quarter. Nevertheless, year-to-date, NIMS rose 6 basis points, reaching a level of 5.37%. Finally, risk-adjusted NIMS decreased 18 basis points quarter-over-quarter and year-over-year in a context marked by a higher-than-expected cost of risk after the market behaved somewhat differently than anticipated in our pricing models. Adjustments are underway. In the year-to-day evolution, risk-adjusted mean decreased five basis points to trading at 4.3%. Measures taken which will improve risk-adjusting mean in the following quarters are fight tuning of our pricing strategy to compensate for higher risk in the consumer segment, adjustment in origination and portfolio management guidance for SME team segments, and adjustment to origination and collection guidance at MIBAC. Slide 10, please. Regarding non-financial income, of non-financial income, which is standard 11.5%. This was driven mainly by two factors. First, by an increase in the net gain on securities in the trading portfolio as BCP stand alone following the sale of Peruvian government bonds. Second, Albit to a lesser extent got an increase in fee income, a core item in non-financial income. In chart 2, we can see that the year-to-date evolution of the income registered and expansion of 4.2 mainly at DCP stand alone. This was mainly attributable to an increase in the gain of drafts and transfers and payments and collections. Slide 11, please. In the year-to-day analysis of operating efficiency, the cost-to-income ratio decreases 40 basis points, excluding the effect of increase in net income and premiums due to disabilities through bibleshifts and burial expenses policies. For the private pension fund system, the operating efficiency ratio at credit card increased 20 basis points. In the following chart, you can see the contribution of each subsidiary to the variation in the efficiency ratio. First, Grupo Pacifico caused an improvement in its efficiency ratio. This was primarily attributable to growth in net earning premiums, which was mainly driven by the fact that Pacifico won two out of six tranches in the last tender process for disabilities, survivorship, and real expenses policies for the private pension fund system. This represented an improvement of 60 basis points in deficiency ratio. However, it is important to mention that increasing net earnings was offset as net claims associated with, which are not part of deficiency ratio, but impacted net income. In the case of BCP standalone, improvement in operating efficiency was attributable to an increase in interest income in line with growth in retail banking loans, which offset increasing salaries and employee benefits. At Nibanco, the efficiency ratio deteriorated. This was driven by an increase in personal expenses in the first semester of the year. As we mentioned earlier, our newly hired sales force is still on a learning curve, and as such, productivity should increase next year. The impact of other subsidiaries was attributable to a deterioration in the efficiency ratio at Credit Corp Capital, which registered a drop in its derivative results. It is important to note that the derivative result was offset by the net gain on securities, which is not included in the efficiency ratio. Slide 12, please. Regarding profitability, Our return on average equity of 17.6% year-to-date is impacted by reserve funds and unrealized gains. Credit Corp. had a reserve fund of approximately $1.9 billion at the end of September 2020. This balance impacts our return of average equity by 124 basis points. As we have communicated, we will pay a special dividend of 8 soles per share in November 2019, which we translate in a payout ratio of 16% and will increase our total 2018 payout to 56%. Additionally, we acquired Casern Finco and we expected to close the acquisition of Banco Partir this year. The total amount of both transactions will be around $120 million. While these payments will reduce the volume of our reserve funds, future dividend payments and subsidiaries will partially offset this movement by increasing the fund balance. Another factor that impacts our returns on average equity are unrealized gains. Thus far, in 2019, the unrealized gains of our fair value through other comprehensive income investments have posted an increase of 160% in a context of lower interest rates. As the unrealized gains are part of credit card equity, this increase has impacted our return of average equity. This effect is more relevant for Pacifica Studios because this subsidiary has a long-duration investment portfolio to hedge its long-term liabilities, mainly related to the life insurance business, where assets but not liabilities are mark-to-market according to current accounting principles. As you can see below, excluding the increase in unrealized gains on equity, credit corporate turn of average equity year-to-date increases by 40 basis points. It is important to mention that the application of IFRS 17 in 2021 will reduce this effect, but measuring liabilities are held back. Slide 13, please. On this page, you can see our current guidance for full year 2019. First, internal macroeconomic indicators. Given the economic activity remains below its potential and was less dynamic than expected at the beginning of the year, our estimate for real GDP for 2019 is 2.5%, which marks the lower end of the range for GDP indicated in our previous guidance. The last revision of guidance that we posted contemplated a series of potential uncertainties relative to the political and macroeconomic outlook for 2019. We will not modify our guidance for 2019 at this time. Slide 14, please. Our aspiration is to be the number one bank for customer satisfaction in Peru and the most efficient in the region. To achieve this, we have been investing in customer experience differentiation in our physical self-service, and digital channels. In this process, we have optimized the most important customer journeys and developed a digital offering that provides agility, simplicity, and service anytime, anywhere. We currently lead the market for customer satisfaction in all segments. In the consumer segment, we have jumped in the satisfaction ranking from fourth to first place in just 15 months. In the period from December 2018 to September 2017, we increased our digital client base by 42% to reach 3 million clients. This represents 38% of our total universe of clients as observed in chart number 2. It is important to note that digital clients are those that need any of the following criteria. They conduct 50% of the monetary transactions to digital channels, conduct at least 50% of non-monetary transactions to digital channels, or purchase at least any product digitally in the last 12 months. Growth in the digital client base is the result of migration both transaction and sales from traditional to digital channels. This strategy has already optimized the cost structure in our distribution network. As you can see in chart number 3, digital transactions increased to 57% in September 2019 from 41% in 2016. In chart number 4, year-to-date digital sales increased to 12% as of September 2019 from 6% as of September 2018. Referring to the monthly figures, digital sales represent 15% of total units sold in September 2019 versus 8% in September last year. At the product level, the most important product sold digitally is the Advanced Own Rages product. Digital sales for these products have accelerated and currently account for 43% of year-to-date sales versus 23% in the same period last year. Our efforts to differentiate our customer experience and digital product offerings represent the first step in our strategy to capture new client segments, increase cross-selling, and subsequently boost growth. Slide 15, please. PrediCore's platform, YAPE, has grown its number of users significantly. In 2019 alone, YAPE has more than tripled its users to reach 1.5 million clients at the end of September. We expect to reach 2 million users by the end of the year and our aspiration is to reach 10 million users in 2021. YAPE allows users to make payments in a simplified, fast and secure way, solely by identifying the name of their recipient from a list of contacts or by reading the user's QR code. In this feature, YAPE attracts 130,000 users monthly, of which 40,000 represent new clients for BCP. A new YAPI user is twice as likely to acquire more BCP products and to receive sales leads than a non-YAPI user. We have a roadmap to add new features so that YAPI can become the most used application in the room, excluding social networks. Peruvians currently conduct 85% of the transactions in cash. Our goal is to capture a significant share of these transactions by building the largest platform for small payments in the country. To achieve this, we are leveraging credit card distribution network, which includes branches and agents and encompasses more than 7,500 points of service to fuel our goal to have 10 million Japanese users by the end We are targeting 4 to 5 million unbanked customers through the digital payments card that we will embed in JAPE in the first quarter of 2020. This will be the first digital card in the market and will contribute significantly to financial inclusion in the country, allowing newly banked clients to receive disbursements and make balance inquiries, transfers, service payments, etc. We will incorporate value-added services to attract middle-market companies with JAPE for Business, and in just over a year, we will be able to make NanoLoan through this platform. JAPE brings a differential experience to small payment users and represents a new alternative in the transactional offering and credit card. We are about to launch JAPE for MiBanco clients, Kulki, an online and physical payment solution provider. We facilitate... peer-to-peer micro-business YAPE payments. Finally, these transactional alternatives complement credit and debit card payment methods. Our goal is to create an integrated ecosystem of complementary payment methods to offer customers the best solution for their needs anytime, anywhere. Slide 16, please. Regarding credit card governance, I would like to discuss a recent organizational change. Alvaro Correa, who shares the role of Deputy CEO Freddy Corwin and Franco Ferrari, will no longer be the CEO of Pacifico. Cesar Rivera will assume this role. With this change, Alvaro will be able to directly manage the consolidation of the insurance and pension fund businesses where we are seeking to integrate joint operational and commercial capabilities and develop new ones. In line with growing opportunities in wealth, and asset management in the region and integrating each of the four businesses at the regional level. 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 now. 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 1 to ask a question. We'll pause for just a moment to allow everyone an opportunity 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. And again, as a reminder, that is star one to ask a question. Our first question will come from Jorge Friedman, Citibank.

Thank you for the opportunity to make questions. Good morning, everyone. So my question comes into the broad pictures that you are expecting for the coming year. I know that you still did not provide but just wondering, in terms of the macro lines, how you see the different forces affecting the banking system in Peru, driving your results next year. You have a convoluted political scenario. I'm not sure if you saw this affecting or not business, and if you see room for acceleration and long growth. You mentioned the actions that you are taking to, you know, fix asset quality issues. For this year, cost of risk is already close to the upper limit of the guidance. So just wondering if you see room for this to stabilize next year. And in terms of margins, you have, you know, started an important monetary easing in Peru, 50 basis points already. You should see pressures coming from net interest margins next year on top of that. Thank you.

Jorge, good morning. This is Gianfranco Ferrari. Actually, you made three questions in one, so I'll answer the first one. Actually, political noise, I would say that as of today, there's much less political noise than what we had maybe on the last conference call. As you may know, the Congress has already been shut down. There's already a date, which is January 26, I believe, for elections of a new Congress. The parties have already presented their list, so everything is underway.

What we see now is that actually the government is focusing on trying to speed up public spending and work on a lot of public investment that was so because of judiciary or arbitration problems with basically, mostly with the Brazilian construction companies in Peru. We see that as positive, and what we expect is that the remaining couple of months of this year, and most importantly, the first semester of next year, public spending should speed up. Having said that, as of today, we haven't seen any important pickup in private corporate investments.

On the region side, we are quite comfortable with the level of growth we're having for the year.

And maybe, and I will ask Reynaldo here on cost of risk, but we have been measuring over the last couple of quarters that we actually didn't see the cost of risk at the level that we reached. Basically because we're targeting new segments of the population and the cost of risk should be higher at those segments. What is important, though, is that the risk-adjusted means, which is the way we manage, has lowered, and I would say that measures are being taken in order to solve that issue. Basically, raising prices where appropriate and or managing risk adequately. I don't know, Reynaldo, if you want to add something. Yes, probably so. I mean, if you see the performance of our portfolio, except the SME market, I would say it's quite stable. But what Franco was mentioning is correct. I mean, we are underwriting clients with a higher risk profile than we used to underwrite before, and that has a direct impact in our provision level because the provisions are recognized On the other hand, the margin that these clients would provide comes over time. So that has an impact in the short term. Also, don't forget about the anticipating nature of IFRS 9. I mean, as long as we get that quality in our consumer portfolio, that will also have an impact in the overall provision level. And finally, as long as we see an expected GDP growth level decline, that will also have an impact in the provisions level. So yes, as you were mentioning, we are on the higher side of the range. We expect to have a final level of this year around that number.

Thank you very much. Our next question will come from Jason Mullen, Scotiabank.

Hello, everyone. Thank you. My question is related to the overview of Credit Corp's business lines that you show on slide four of your presentation. I think it's very helpful to understand the drivers for your main businesses. You show, of course, year-to-date BCP stand-alones. increasing its return on equity from 20% in 2018 to 21.5%. MiBanco, on the other hand, showed a material decline in the return on equity, and you did a good job of trying to give a snapshot on what's driving that. And Pacifico, we had a decline in the ROE. That accounts for the majority of your earnings for the group. If we look forward, I mean, what are the dynamics here for, especially, I think, with the decline in profitability of Mibanko, and you talked about the impact of the new sales force and perhaps getting out of some of the riskier segments. How should we think about the big picture profitability for these three main subsidiaries of Credit Corp. going forward? Can we see the bank continue to increase, or at least maintain the trend in the last year to increase, and can we see Nivanko turn it around, Nivanko and Taxifico turn the profitability levels around? Thank you.

Okay. Probably in terms of universal banking, mainly PCP, the main drivers are going to be the significant increase in the retail banking segment due to... the trends, but also the incursion of new segments, as we have already mentioned, and we are positive that this is going to result in healthy need-adjusted means, and we are going to manage the efficiency ratio balancing the efficiency in the current business and investment for the transformation that we are embarked on. As I know, we are in general transpositive in the trends. In the case of microfinance, as we have been discussing previously, 2019 was a year of adjustment that was mainly originated that created issues in which we incursion assessments with the appropriate accuracy in our nation policy And as a result of that, we could play the role of the portfolio and at the same time increase our sales force. The next result during this year is that you have lower margins, higher provisions, and higher costs. Going forward, we expect that we are going to be able to manage better the net interest margin reduce the risk profile and starting to gain efficiency where with this significant amount of new people that we have incorporated, starting to produce a full capacity. Given that it is a competitive market and we are positive, but probably the final markets are not going to be as high as were two years before. In the case of insurance, In the case of the insurance business, you can expand. Basically, I think that we're working on different things in Pacifico for the insurance business as a whole. First of all, I think something that has been more evident as quarter by quarter goes by, is the increased profitability of the providers. As you know, we bought a large number of providers some years ago, and we've been working diligently to make them more profitable, and I believe that today, most of them are at profitable levels. We do have some land banking there that kind of portrays profitability, but over the next few years, we will build on this land and we will make it produce so that that will also contribute to the profitability. Additionally, we are a specific insurance group as a whole in all the companies. We are working very aggressively on the efficiency ratios. Currently, we've been reducing that significantly, going down from levels of about 18 to 16%, and we'll continue to do that with a target of being below 14%. So right there, we would generate additional efficiencies that will also contribute to profitability and obviously to the ROAE. We're also working, one of the things that we've been working diligently also over the past years is in reducing our commissions and our sales. And through that, we are aggressively targeting e-channels or e-commerce. We are working that with a new platform. This year, we've launched e-insurance or e-commerce for ALCO, SOAT. home insurance, and next year we'll be rolling out also for health insurance. And that not only brings new sales to us, but it also reduces the cost of these sales, less commissions, and also more efficient sales. We're also working very close with the other companies of Credit Corp. to increase our sales in different products. A very good example of this is that we have worked closely with Ivanko, for example, to sell an indemnizatory oncological product, which last year we had none in the market, and we've reached the sale of about 36,000 products, and we are working to increase that. And I think that the other thing is also, you know, we're working on increased health and also better underwriting to reduce our loss ratios, which I think has been evident in the auto and in the health insurance business.

Thank you very much. Ladies and gentlemen, as a quick reminder, if you would like to ask a question, you may press star 1 on your telephone keypad now. Our next question will come from Ernesto Gaviranda, Bank of America.

Hi, good morning, Walter, Giancarlo, and Cesar, and thanks for the opportunity. My first question is also to know your point of view on the recent political noise. I just want to know if this is affecting credit demand. Do you think that the delay on infrastructure projects is limiting wholesale loans growth? And do you think this could have an impact in consumer loans at some point? As you mentioned, the new Congress is going to be placed early next year, so what is the chance to think about presidential elections during the middle of next year, or do you think this is already discarded? Do you think the new Congress in place could implement potential changes, reforms that are needed in the country? Or do you think this is likely to happen after there is a new government in place, that it could happen next year or in the next couple of years? And then my second question is a follow-up on the provision charges. So as you mentioned, maybe the cost of risk for last quarter should be around 1.8%. But thinking about next year, do you think we should think about this 1.8 as a new recurring level, or what will be the elements to think about that you can return to the dearest guidance for this year of around 1.4, 1.6%. Thank you.

Hi, this is Walter. Let me tackle the kind of political environment and then I'll pass it back to Cesar on the specific numbers you mentioned. The scenario that we see going forward with this election for Congress in January is that we will have a Congress which will not have a majority from one party, but rather will be a Congress in which several political forces will balance themselves out. So in reality, we expect a lot less belligerent or aggressive Congress where there will be no majority. So from that standpoint, we think it will be a quiet period where really the political focus will be more on presidential elections and what happens in Congress. We are not concerned because what I just mentioned that the incoming Congress will be able to articulate any dramatic changes to legislation or constitution or anything that relates, that has serious impact on on the model which the country operates. Presidential elections very early to tell. We have an estimate of what are the different potential candidates. And it is very early to tell, but there is nothing in the horizon that really makes us worry tremendously at this stage. And again, it is very early to be very clear about what the future will bring regarding presidential elections. We're still, you know, almost two years ahead. Back to you, Cesar, on the specific questions. Or Reynaldo. Yes. In terms of our expectations for relations for next year, It will depend on the portfolio made. I mean, if we see our corporate loans growing again, it will probably help us reduce the cost of risk that we have today. But within the retail portfolio, definitely the fact that we are underwriting and measuring people with a higher risk profile, that will have an impact in the retail portfolio. And if we are successful in underwriting those clients the overall cost of risk in the retail portfolio will increase marginally. But that should be more than compensated by the difference in pricing and also by the fact that we underwrite those clients through digital channels and that's a lot more efficient than the traditional channels. So in terms of a number, we don't have a guideline today, but it would probably be around what we have today, around 1.6. Franco, is it...

I would like to add on what Mr. Gianfranco and Reynaldo just mentioned.

Two matters. One is that we don't manage the credit decision by cost of risk solely. We manage by risk-adjusted means. So the cost of risk may go up, but if the risk-adjusted means goes up, it's a good decision. So it's not cost of risk by itself. That's one issue I would like to clarify. And the other one is what Reynaldo just mentioned.

If you go line by line at the P&L statement, what we're seeing is that the further we are able to distribute through digital channels, the cost of distribution reduces dramatically.

we may end up with a higher cost of risk but a better bottom line because of this level of liberty.

Thank you. Our next question will come from Gabriel Norberg, Citibank. Thank you.

Hi, everyone. Thank you for the opportunity to ask questions. And another question here on our side. We have seen that the interest rate has decreased from around 2.75 to 2.25. So here I am just trying to understand what is your sensitivity to this decrease. Maybe if you can give a sensitivity of around 100 beats decrease. And also, as we go into 2020, you You have been saying that you are seeing an increased loan demand for Almito. Do you believe that the improvement in your loan mix could offset the pressures from the coming down of the reference interest rate? Thank you.

Yes.

Probably we will address this question with two different approaches. The first is the underlying assumption that we have is that we are going to change our mix in the portfolio. from more wholesale to more retail and amount retail to higher margin, higher risk segments. And the other change is from more dollars to more solids as a result of the previous change. This will result as an average and an increase in margins. As a counter force, you have the general trends of the interest rates in the system, in solids and in dollars. As a general rule, you can see that the combination of the duration of the portfolio and the pass-through effect means that more or less one-third of the top line increase or decrease in interest rate I translated in the bottom line to the period. What is the result of a combination of almost immediately pass through in the whole sale short term operations as a very mildly translate in the higher segments revolving credit lines. I don't know if this answer helps to understand the process. The combination of everything is that we think it's going to be net positive.

Thank you very much. Once again, ladies and gentlemen, as a quick reminder, if you would like to ask a question, you may press star 1 on your telephone keypad now. Thank you. There are no additional questions at this time. I would now like to turn the conference back over to Mr. Walter Bailey, Chief Executive Officer, for closing remarks.

Thank you. We continue to navigate in a macro environment, both local and international, with negative headwinds and increased uncertainty. Our 8.8% increase in accumulated net income is a very good result. With the backdrop of this environment that tremendous investment we are doing to better serve our customers incorporating technological innovation to ensure our long-term profitability. Our year-over-year improvement in efficiency added to the increase already mentioned in profitability is a very good indicator that we continue to successfully balance our short-term and long-term priorities. It is unavoidable that the slowdown in the Peruvian economy will impact short-term results. But this should not distract us from our medium-term focus and view. There continues to be very interesting growth opportunities in the Peruvian market, but it is also true that competition and technology will pressure margins and profitability. And it is with this view that we have to continue investing and preparing our different subsidiaries to be very well positioned to capture the growth in this challenging competitive environment. I would like to address the specific microfinance unit in which there were a couple of questions. Yes, profitability is down. We had returns of equity of almost 56% last year. That is clearly not sustainable in the long run. This year, the results are closer to 20%, but we think there continues to be upside, and the return on equity we can obtain in the microfinance business should be at least equal to that that we obtain in the universal banking. So, yes, we are continuously investing in microfinance and continue to see potential for growth and increased profitability. We thank you for your continued support and interest in our confidence that the positive results will continue to be delivered by us over time. With this, I conclude the presentation and thank you very much again. Good morning.

Thank you, ladies and gentlemen. This now concludes today's presentation. You may now disconnect.