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.