Credicorp Ltd.

This is a recording for the Credit Corp teleconference on Thursday, February 6, 2020, scheduled for 8.30 a.m. Central Time. Good morning, everyone. I would like to welcome all of you to Credit Corp Limited fourth 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 at that time and start as to the procedure to follow if you would like to ask us a question. With us today is Mr. Walter Bailey, Chief Executive Officer, Mr. Alvaro Carrera, Deputy Chief Executive Officer, Mr. Ronaldo Llosa, Chief Risk Officer, Ms. Francesca Raffo, Transformation Officer, and Mr. Cesar Rios, Chief Financial 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 Core's conference call on our earnings results for the fourth quarter of 2019. Before we review Credit Core's performance, I would like to highlight some important matters regarding the local environment. First, following the dissolution of Congress by President Vizcarra on September 3rd, 2019 congressional elections took place on January 26, 2020. Voting results point towards a fragmented Congress with nine political parties. A simple majority required 66 votes, while an absolute majority required 87 votes, which means that parties will have to form a consensus to pass legislation. Members of Congress will assume their roles on March 2020, and their term will end in July 2021. Second, the executive branch has taken measures to bolster public investment. Among the emergency decrees handed down to stimulate public investment, the following are not working. the reactivation of paralyzed projects, measures to increase execution of prioritized infrastructure projects, a prioritized public investment regime, and loosening the fiscal deficit rule to achieve a 1% deficit of GDP by 2024 instead of 2021. These measures are expected to have an effect on economic activity toward the second half of 2020. Next slide, please. Third, economic activity decelerated during the last quarter of 2019. As you can see in chart one, our estimates suggest GDP expanded around 1.6% year over year in the last quarter of the year. With these results, GDP expanded 2% in 2019, while non-primary GDP grew around 3%. The lackluster result for 2019 is primarily attributable to a decline in the results reported by the primary sectors, particularly fishing and mining. For 2020, GDP is expected to accelerate and advance 3%. However, this recovery will mostly be attributable to a rebound in the primary sectors and to public investment. As you can see in chart 2, according to analyst consensus, Peru will remain one of the most dynamic economies in the region in 2020. Lastly, banking sector loans decelerated in 2019. As you can see in chart 3, banking sector loans grew 6% in 2019, which falls below the expansion register in 2019 and represents the lowest figure registered since 2017. With total loans, corporate loans reported the highest deceleration, posting growth of 2.9% in 2019 compared to 9.7% in 2018. Consumer loans, however, accelerated, advanced 14.8%. Next slide, please. Regarding full-year performance, there are important aspects of our lines of business that I would like to mention. In the case of universal banking, In 2019, average daily loan balances of DCPs stand alone posted 6.9% growth in a context of ongoing strong pressure on pricing and a decrease in the overall demand for financing in wholesale banking. Loan portfolio growth at BCP was driven by retail banking segments in local currency. This evolution in the portfolio mix had a positive impact in both NIM and risk-adjusted NIM. In 2019, BCP began to offer consumer loans to new segments through digital channels. BCP is now targeting broader segments of the population and specific needs such as very short-term loans and small immediate disbursement problems. As BCP grows in this regard, the organization has developed the capabilities to maintain adequate levels of risk-adjusted meaning. BCP has significantly increased expenditures on transformation while maintaining a sharp focus on cost management. As a result, its cost-to-income ratio improved 100 basis points. In 2019, BCP Bolivia celebrated its 25th anniversary in a complicated political environment. Nonetheless, the bank registered good levels of loan growth and engaged in a very disciplined cost management, which had a positive impact on the efficiency ratio. with regard to microfinance. In 2019, MiBanco experienced downward pressure on margins due to a strong competition. Moreover, having taken risk adjustment measures, the bank has focused on targeting lower risk profile segments through the year. These two factors combined led NIM to drop 76 basis points. In addition to focusing on short-term measures such as fine-tuning risk and collection models as well as pricing, Mibanco has embarked on a multi-pronged risk management program in which they are developing additional capabilities with ambitious goals. These efforts have already begun to reap benefits, which is evident in the fact that the cost of risk of Mibanco decreased 47 basis points in 2019. Regarding efficiency, the cost to income ratio at Mibanco deteriorated in 2019. The bank expanded its relationship management and sales force to build capabilities to sustain business growth and strengthen its analytical and innovation capabilities. It is important to note that Mibanco is migrating to hybrid model, leveraging the use of data and analytics to originate loans based on models while gradually relying less on loans officers for loan originations. Finally, in December, Credit Corp finalized the acquisition of Banco Partir in Colombia. It has also been working on preparing the merger with Encumbra to consolidate its presence in the country's microfinance sector. With regard to insurance and pension funds. the insurance and the writing results increased on a full-year basis. This was primarily due to the positive evolution of the property and casualty business, which posted an increase in its net earning premium level, offsetting growth in net claims. Additionally, net interest income increased, including investment gains. In the case of the live business, there was an increase in net premiums and in net claims after Pacifico won the Tender for Disabilities, Survivorship, and Boreal Expenses policies for the private pension fund system. Nonetheless, this product reported higher claims than the other products in the live business. Additionally, operating expenses grew less than operating income, which led Pacifico to increase its contribution to Credit Corp. The pension fund business registered an improvement in its results due to an increase in fees through both flows and net balances. The profitability of the business legal reserves increased in line with more favorable market conditions. In investment banking and wealth management. In 2019, the proprietary portfolios posted better results in comparison to 2018 in a context of favorable market conditions. Both the trading books and the available-for-sales portfolio reported higher earnings, which were driven mainly by devolution at ASB, which realized gains while decreasing the size of its investment portfolio. During the year, assets under management increased particularly in Chile and Colombia in local currency, which fueled 6% growth in assets under management in 2019. The asset management business continues to focus on growing its international platform of funds for institutional investors in Latin America and other regions. Corporate finance registered a decrease in 2019 versus 2018 which was attributable mainly to the performance in Chile. However, total income in this segment recovered considerably in the fourth quarter, mostly driven by activity in Peru. After receiving approval from the regulator in Colombia, Credit Corp. completed the acquisition of 100% of the capital stock of Ultraserfinco and has begun the process to prepare the merger. Next slide, please. Now, I will comment on the highlights of Credit Corp's performance in the fourth quarter and full year 2019. First, at the profitability level, Credit Corp reported net income of 973 million soles in the fourth quarter of 2019, which was 11% lower than the third quarter's results. This was the result of seasonality. In operating expenses, mainly at BCPS standalone, which were not offset by growth in risk-adjusted mean and such, return of average equity dropped to 14.9%. For the full year 2019, Credit Corp. reported net income of 4,265 million soles, 7.1% higher than the figure posted last year. These results for the full year represented a return on average equity and average assets of 17% and 2.3% respectively. The full year average daily loan balances grew 6.6% driven primarily by DCPS standalone retail banking portfolios. The cost of risk increased 22 basis points in 2019 and situated at 1.6%. The increase was reported at retail banking in BCP standalone in line with the shift in the portfolio mix. MIM at Credit Corp increased 11 basis points to situate a 5.39% in 2019. The improvement in BCP was partially offset by the deterioration of MIPANCO. The risk-adjusted mean decreased four basis points in 2019 impacted by MIVANCO's results. This was partially offset by growth in BCP standalone's risk-adjusted mean. In terms of operating efficiency, the full-year cost-to-income ratio improved 30 basis points. Improvements were driven by BCP standalone and Pacifico, which contribute with a reduction of 80 basis points and 100 basis points, respectively. These contributions were partially offset by the 70 basis points impact of MiBanco. Core equity tier 1 ratio at BCP increased by 34 basis points year-over-year to 12.35%. Next slide, please. In the analysis of the evolution of earnings and profitability, the following is not clear. is worth nothing. As you can see in chart 1, some additional expenses at the corporate level have led to a deceleration in earnings growth at Credit Corp. First, the group spent more in withholding taxes in 2019 after more provisions were set aside for taxes for dividend distribution for fiscal year 2019. As you know, the dividend per share paid in 2019 was 28 soles compared to 14.17 soles in 2019. It is important to mention that withholding taxes had late impact in 2018 earnings because fewer dividends were upstreamed from subsidiaries, seeing additional cash was obtained from the sale of BCP shares from Credit Corp to Grupo Crédito. Second, there was an increase in CREA loss business expenses and in other administrative expenses at the holding level. Regarding ROAE, as you can see in chart two, the ROAE was positively impacted by the evolutions in universal banking, insurance and pensions, and investment banking and wealth management. But this effect was partially offset by the results for microfinance and the impact of corporate expenses. Next slide, please. In a context of market deceleration, at the end of 2019, the loan portfolio share of interest earning assets situated at seven at 67% in 2019, down from 68% in 2019. Regarding the full year evolution of loan measure in average daily balances, as you can see in chart one, total loans grew 6.6% in 2019. Loan growth was mainly driven by retail banking at BCPS standalone. As you can see in chart two, The mortgage loan book led expansion within the retail banking portfolio, accounting for 40% of total growth. The majority of the remainder of growth was attributable to the consumer credit card and SME sector. It is noteworthy that the credit card loan book continues to grow at a faster pace and registered expansion of 19% year-over-year. Loan expansion was mainly driven by local currency and higher margin segments, which led to an increase in the cost of risk. Next slide, please. In terms of funding, as you can see in chart one, credit course funding structure grew 4.2% year over year, driven mainly by an increase in deposits. In this context, deposits increase their share of total funding, while wholesale funding reduces share. It is important to note that BCPA standalone improves its wholesale funding maturity profile reducing the funding cost curve in both local and foreign currency due to the liability management strategy that was made in the third quarter of 2019. The new money issue allowed BCPS standalone to replace during the fourth quarter more expensive debt such as a corporate bond that expired and a perpetual subordinated debt that was called. In Chart 2, for deposit by type, year-over-year growth was situated at 7.1%, which was primarily attributable to time-saving deposits, which grew 8.7% and 7.9% respectively. The cost of funding increased by 12 basis points, which was mainly attributable to currency mix effect, given that growth in local currency funding accounted for 90% of the pension registered in total funding. Next slide, please. As you can see in chart one, The IOL ratio increased four basis points due to deterioration in the SME business and in the middle market segments. It is important to note that these loans have been adequately provisioned. Additionally, corporate refinance loans decreased as clients from the construction sector partially paid their debt. In this context, the NPL ratio decreased nine basis points. In chart 2, you can see that the cost of risk increased 22 basis points. This was attributable to an increase in provisions in retail banking and BCP standalone. In the case of consumer segments, provisions grew impacted by the incursion in higher risk segments through digital channels. Nonetheless, the increase in the cost of risk was offset by higher margins. In the credit card segment, provisions were also increased after the probability of default rose in a context of system-wide increase in client indebtedness. Finally, medium-term loans in the SME PIME segment deteriorated as has been the trend in recent quarters due to a misalignment in the risk model for a specific segment. Accordingly, provisions deteriorated more than expected. Pricing, origination, and collection measures have already been taken, but due to the duration of this portfolio, the results of the adjustments will materialize later this year. It is important to mention that increasing provisions and BCP stand-alone retail portfolio was partially offset by reversals of provision in wholesale loans portfolio. Additionally, at Mibanco, the efforts made late last year and in the first semester of this year led to an improvement in the quality of origination and in the collections processes. Next slide, please. In 2019, Credit Force MIM increased 11 basis points. This was attributable to the positive evolution of MIM at BCP stand-alone which rose five basis points quarter over quarter and 26 basis points in 2019. This was driven mainly by loan growth and by more profitable mix by business segment and currency. The aforementioned was partially offset By the reduction in Mibanco's NIM, which fell five basis points quarter over quarter and 76 basis points in 2019, Mibanco's portfolio has been affected by the economic downturn and by higher competition, which pressures margins downward. Additionally, MiBanco decided to focus on segments with better risk profiles, which negatively impacted NIM. Finally, risk-adjusted NIM and credit card increased six basis points quarter over quarter and decreased four basis points in full year 2019 after the improvement of BCP stand-alone was offset by deterioration at MiBanco. Next slide, please. regarding non-financial income. In chart one, you can see the evolution of non-financial income, which expanded 11.1% in 2019. This was driven mainly by two factors. First, by an increasing net gain on securities, which was attributable to growing gains in the proprietary investment portfolio at Atlantic Security Bank and BCP standalone. Second, outreach. To a certain extent, expansion was due to an increase in the fee income. Combined, these two items represent 82% of the increase in non-financial income in 2019. In chart two, we can see that the fee income registered growth of 3.4% in 2019, mainly at BCPS and alone. This was primarily attributable to an increase in the gain of drafts and transfers and payments and collections, and secondarily, to an increase in the fee income at MiBanco, due to a change in the accounting recognition of the fee related to insurance and loans, which were previously accrued over 12 months, but now were registered when the policy is sold. Next slide, please. In the following chart, you can see the contribution of each subsidiary to the variation in the efficiency ratio. BCP stand-alone improved its operating efficiency with an increase in interest income. This was attributable to growth in retail banking loans, which offset the increase in administrative, general, and tax expenses. At Nibanco, the efficiency ratio deteriorated. This was driven by an increase in personal expenses in the first semester of the year. As mentioned earlier, our newly hired sales force is still on a learning curve, and such productivity should increase this year. Grupo Pacifico posted an improvement in its efficiency ratio. This 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. This represented an improvement on 70 basis points in the efficiency ratio. However, it is important to mention that the increase in net earnings premiums was offset by net claims, which are not part of the efficiency ratio but impacted net income. In the investment banking business, the efficiency ratio deteriorated due to an increase in salaries and employee benefits, mainly at credit or capital. In the full year analysis of operating efficiency, the cost-to-income ratio decreased 30 basis points. If the effect of increase in net earning premiums due to disability, survivorship, and burial expenses policies for the private pension fund system is excluded, the operating efficiency ratio at credit court increased 40 basis points. Next slide, please. As mentioned in the past, BCP's aspiration is to become the number one bank for customer satisfaction in Peru and the most efficient in the region. To achieve this, BCP has been investing in customer experience by differentiating at physical, self-service, and digital channel levels. BCP currently leads the market for customer satisfaction in all retail and wholesale segments. In 2019, BCP increased the digital consumer client base by 57% to achieve a total of 3.3 million clients. This represents 41% of consumer banking clients as observed in chart 1. The faster-growing digital channels and the subsequent increase in digital users has reduced the marginal fees normally obtained through traditional charts. It is important to note that digital slidings are those that meet any of the following criteria. They conduct 50% of the monetary transaction to digital channels, conduct at least 50% of non-monetary transaction through digital channels, or have purchased any product digitally in the last 12 months. In line with the strategy to increase banking penetration, BCP is now able to pre-approve credits to 36% of the total economically active population. The aspiration is to be able to do this for 50% of the total economic active population by 2021. Also, as you can see in chart three, in 2019, Digital sales measuring units have increased 2.4 times with regard to last year's figures. In this context, digital sales represent 13% of total sales. The most important product sold digitally is advanced on wages, where digital sales accounted for 46% of the total sales in 2019 versus 25% in 2018. In the case of YAPI, you can see in chart 4 that the number of users continues to grow significantly. Additionally, transactions through YAPI in 2019 totaled more than 18 million, increasing five times compared to 2018's figure. Finally, in January 2020, YAPI totaled 2 million users and expect to reach the 10 million user mark by 2021. Next slide, please. In terms of the long term evolution of key financial indicators, In the past 10 years, Credit Corp has consistently rose its net income at a compound annual growth rate of 10%. This has been achieved despite the economic slowdown in play since 2014. In 2019, net income at Credit Corp rose 7% despite headwinds steaming from a highly uncertain political context, lower market rates, and higher competition. Moreover, Profitability levels have been strong and consistent throughout the years despite variations in economic cycles. As we have recently communicated, Credit Corp. is working to bolster its governance framework. with two main objectives to drive long-term stakeholder value and to demonstrate leadership in corporate governance within our operating region. As such, the Board has agreed on the following. First, to simplify the committee structure by migrating from seven committees to four, which are the risk committee, the compensation and nominations committee, the corporate governance committee, and the audit committee. We believe the reduction in committees will allow us to populate committees more effectively, increasing the diversity of views represented by increasing committee member size and independence. Second, Regarding the chairperson of the committees, after the election of board members at the annual general meeting, the chairman of the board will no longer chair any standing committees. Two, he will continue to be a member of the risk committee and be a member of the newly formed compensation and nominations committee. Third, The Board has designated the Corporate Governance Committee the task to redefine the criteria for independent directors to ensure that we meet the highest international standards for good practice. Four. the Board will submit a proposal to expand the size of the Board of Directors from eight to nine directors. As per credit cards by laws, this proposal has to be approved at the annual general meeting of shareholders by the affirmative vote of two-thirds of outstanding shares. Credit Corp proposes this expansion in order to enhance the independence and diversity of its directors, as well as to expand the skills and experiences represented on the board. Finally, the board has designated the CFO the task of instituting more stringent policies and procedures at the holding companies. Next slide, please. Going to Guidance. Credico's key indicators for the full year 2020 is based on the following. Despite some episodes of political uncertainty and poor growth in the primary sector in Peru 2019, the macroeconomic and political context is expected to slightly improve in 2020. This will have a positive effect on the economy and boost on the banking sector. The following contains credit course guidance for key indicators. Loan growth for 2020 to situate between 8% and 10%. This will be driven mainly by the retail banking segment and BCPS standalone and by Nibanco, where efforts will continue to fine-tune the business model. In terms of cost of risk, the figures are expected to range between 1.6 to 1.8% in 2020, as the group focused on growing in riskier segments. These riskier segments are expected to bring higher margins. We will help reduce the effects of an environment characterized by lower interest rate and higher competition. As such, guidance for NIMH will increase to a level between 5.4 and 5.7%, and guidance for risk-adjustment remains flat at a level between 4.3 and 4.6%. Efforts will continue to implement our transformation programs for BCP Pacific Omnibanko. In this context, the efficiency ratio is expected to remain stable in comparison to 2019 figures. Higher costs are expected to be offset by better income generation. Regarding capital, DCP will remain its internal limited for a minimum common equity tier 1 of 11% in the first quarter every year, as this quarter is when ordinary dividends are declared. Average return on equity is expected to range between 16% and 18% in 2020. Credit Corp has expanded the range for this indicator while assessing how to optimize the reserve fund that has been accumulated over the past few years, considering potential acquisition. Finally, Credit Corp is confident that when the full effect of each transformation initiative materialize and the capital optimization process is fully implemented, the target level of return of average equity of 19% is achievable. With these comments, I would like to open the Q&A, please.

Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. We'll pause for just a moment to allow everyone the 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. Our first question will come from Horg Friedman, Citibank.

Thank you for the opportunity. One point on the guidance, please, and one point that is implicit in the guidance, but I know you did not comment. So on the asset quality, we have seen that cost of risk as guided for 2020 is on the range of 1.6 to 1.8. So the floor would be the level posted in 2019 and you mentioned that this is due to the origination in riskier segments. However, over the past two years, you have already been focusing strongly in riskier segments, but in 2018, for instance, your cost of risk declined. So my question is, what is different now because the activity seems to be picking up and your NPLs are already coming down? So why to keep, you know, higher guidance of cost of risk? Are you, you know, willing to build up coverage, which is, you know, below historical average? This is the first point. And the second point, just for me to understand what, you know, drove the fee income compression or is low down in 2019. You grew 3.5%. which is below even the level of credit growth, and that was at 6.6%, and what you have for 2020 in terms of expectations for fee income. Thank you very much.

Hi. I will give you initial comments, and probably Reinaldo, We have came down for the last four years from around 2% to 1.6, while we have been improving several variables in our risk and management models. Going forward, we have two factors to consider. One, the incursion of higher risk segments and the momentary effect of the deterioration of the premium portfolio at BCP. During 2020, we are going to fine-tune the results of this PIME portfolio, and at the same time, we are going to purposely take more risk in new segments as we have been mentioned previously. In relation to fee income, We have stated previously also that the expected is that the fee income is going to grow less rapidly than the margins because as we incursion in new margins, we are going to go, for example, in consumer loans, digital loans that tend to have healthier margins but usually no fee income related. And there is a strong competition in the payment systems also. So structurally, we are going to expect a lower fee income growth down the road.

Regarding the coverage of our NPL, I would like to add that it is around 113%. It's been stable around that number. It's even picked up a little bit during this year. And I would say that that happens because, I mean, that level of loan is basically a loan backed up by real estate collateral. So, I mean, that doesn't reflect the fact that there is an important recovery value in this specific loan. So, with that level of coverage, I would say we are pretty healthy.

Okay. Thank you.

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

Yes, hello. Hi, everyone. Good morning. Credit Corp showed a quarter-on-quarter and year-on-year increase in non-interest expenses. And in your release, you stated that an important part of the increase is due to consulting and market expenses. Can you help us quantify that and understand if these will be ongoing expenses or not? And in relation to that, looking at your return on equity outlook and the sustainable return on equity outlook, you mentioned that the sustainable ROE of 19% will be once you've optimized, I guess, the capital and the transformation program. If you can talk about, particularly on the capital side, is this more on earnings improvement, perhaps from efficiency on the sustainable ROE, or is it more about optimizing capital? Thank you.

Okay, probably first relating to expenses. Particularly at BCPA standalone level, we have a strong seasonality in the fourth quarter. I wouldn't say that there's any particular effect in advisory fees for this year. What's happening is that in many cases, you register the final invoices in the last two months of the year, and this is a seasonal effect. I think is mainly the reason. When you have extraordinary gains that coincide with this period, you offset, but in this case, we have only, we'll say, the trend. In the case of return on equity, what we are having now, I will say, are three main effects. First, we have the impact of the reserve fund that, in general terms, costs us north of 100 basis points. If we put these funds to work or make another decision, you, I would say, automatically increase 100 basis points of return on equity. We are talking about around $600 million at this point. The other factor is the transformation. Now we are in the phase of investment, investing a lot, spending a lot in the transformation, and we expect to start gradually gaining more ongoing tangible, not only operational, but financial rewards for these investments, and this should pay off down the road. And third, and not less important, the effect of the withholding tax. We have increased significantly the withholding dividends from 2018 to 2019, and we expect to continue increasing dividends over time. So, for example, from 2018 to 2019, Almost 2% of the decrease in earnings growth was attributed to marginal more withholding taxes. The money that we ship upwards from Peru to Bermuda to pay dividends pay a withholding tax of 5%. If we pay more dividends, we pay more withholding taxes. The rate of the withholding taxes can increase also. When we start to operate in a more sustainable levels of dividends, the marginal factor of this increase is going to diminish. A change from 14 to 28 is very significant. Down the road, the changes shouldn't be as dramatic as this on a continuous basis. If you put factors together, you have a reasonable expectation of higher ROEs. Thank you, Cesar. Thank you.

Our next question will come from Ernesto Cablando, Bank of America.

Hi, good morning, Cesar. Good morning, guys. Thanks for the opportunity. So GDP growth is expected to improve this year by public investment and a rebound in the primary economic sectors. However, we continue to see tough competition, especially in wholesale loans from international players and in the microfinance sector. So how do you see the challenges for your long road of 8% to 10%, especially in a year with a divided Congress and almost one year ahead of the presidential elections? And then I will make my next question.

Okay. I will say that we are going to face probably two different realities. The retail, the BCP retail portfolio and the banco portfolio growing at a faster pace. not only competing, trying to capture the same specific markets that we have been dealing, but probably addressing with new products different markets. So we are not only competing in the same specific field, but expanding the potential markets going downward or creating different products. So we are positive about that. The counterpart is, as you rightly mentioned, in the wholesale segment that we expect tougher competition both in terms of volume and margins. The combined effect produces an expectation of between 8% or 10% as we have provided in the guidance.

Perfect. Thank you. And then my second question is, how do you see the net income growth this year? Are you expecting double-digit growth, or it should be more in the high single-digit growth? And what will be your assumptions for the dividend payout ratio to achieve the 16%, 18% ROE guidance? And then my last question is on your M&A activity. Do you continue to see opportunities in the region, any sector or country where you are more interested? Thank you.

Okay. Ernesto, okay, I think there are probably three questions, if I can address one by one. I think in terms of NIM, our implied growth and NIM are going to give you the answer, combining the loan growth with the expected NIM give you the answer, and probably it's going to be in the vicinity that you already mentioned.

This is the- Sorry, it's more in the net income growth.

In the net income, if you combine all these figures, probably we are going to be in the single digits.

In the single digits, and your payout ratio, do you think it could be the same as in 2019? Because I believe you consider a special dividend in 2019.

In the case of the payout, we are, I would say, it's a split answer in the sense that we expect to continue paying higher dividends, but in addition, we are now analyzing, and we have not reached a conclusion at this point, what to do with the reserve funds that were set aside mainly for M&A purposes. Based on these decisions, a potential additional special dividend will be declared.

Perfect. And then in my last question of the M&A activity, as you were mentioned, you can use these reserve funds. So any sector or country where you are seeing more interest?

Hi, this is Walter. How are you doing? Regarding M&A, we continue to regularly review opportunities both domestically and in the countries that we have targeted, which we have well commented with all our shareholders. Frankly, we're not finding a lot of potential assets that are interesting for us. So probably in the first half of this year, we will have to review and take a decision as to the size or continuity of such reserve fund. This is all work in progress. I do not want to create expectations, but we are managing this aggressively vis-a-vis opportunities in the market and value created for our shareholders.

Perfect. Thank you very much, Cesar and Walter.

Thank you.

Thank you. Our next question will come from Alonzo Garcia, Credit Suisse.

Good morning, everyone, and thank you for taking my question. My first question is on the CET1 level. Excuse me, I couldn't hear you very clearly. Okay, sorry, I will start again. Sorry. My question is on capital. I mean, you are targeting a sustainable ROE of 19%, so my question is, what kind of CET1 ratio is embedded in that 19% target? And my second question is, Well, I can ask my second question afterwards.

Okay. I would say that in fact with this expected ROE can be a payout ratio north of 50%. If you assume that the business growth, let's say 80%, and you have an ROE around 18%, 19%, A very simple mathematics gives you that the payout is going to be a little bit north of 50%.

Okay, but just to clarify, this 19% implies capital structure with a 51 close to your target, your internal minimum of 11%? Is that correct?

Yes, the basic foundation is to have each company appropriately capitalized. That is the foundation, and that's the basic assumption. After that requirement is fulfilled, we have extra funds to pay dividends. And at this point, with the analysis that we conducted, in the case of BCP, the core equity tier one in the minimum point is 11%.

Okay, understood. Thank you. And my second question is on OPEX. Is it, I mean, based on your guidance, is it fair to, correct to assume that you are anticipating an acceleration in expense growth from 6.7% growth in 2019 to a high single lease this year? And what is the timeframe for your investment plan? I mean, is it like two, three years of intense investment, four years? When should we expect output flows to normalize after this investment plan?

What we are targeting in average is maintaining the efficiency ratio with an internal transformation of some variables. What we expect is as a product of the transformation, we became much more efficient down the road but spends more on technology and new digital capabilities and less on the traditional expenses. Actually, embedded in our numbers, at a significant shift, is spending more in IT and new capabilities and less in traditional expenses. In the short term, the effect is going to be neutralized, and down the road, what we expect is better efficiency, but continue investing aggressively in new capabilities. It's not going to be a three-year plan that is going to end. We expect that this is a trying framework to reap the benefits, but we are continuing to transform the capabilities to be a more digital, more data-driven institution.

Thank you very much.

Thank you. Our next question will come from Andreas Soto, Santander.

Good morning. Thank you for the presentation, Mike. The question is related to Bolivia. This operation represents almost 7% of your loan book, and you highlighted some macro and political uncertainty in this country. And when I look at your coverage, I see that only 3% of your loan book in Bolivia is currently covered. So my question in relation to your cost of risk guidance is what level of coverage are you assuming in this guidance and to what extent you see some downside risk in your guidance based on your Bolivia exposure? Thank you.

Probably Reynaldo is going to compliment me that as a general rule all our past due loans are appropriately covered. In the case of Bolivia, it's no exception. What you have in Bolivia is a structurally lower past due loans that implies in relative Peru a smaller relative amounts, but the past due loans are appropriately covered.

And just to add to what Cesar has mentioned, when the crisis started in Bolivia, we were quite concerned about the potential impact it could have in the portfolio. However, we have been positively surprised on the evolution of the portfolio. We haven't seen any significant impact in asset quality in Bolivia. And we have to take a closer look at what happened in that country in the following month in terms of the elections. So today we don't have any major concern in terms of the potential impact it could have in our guidance of provisions to other countries.

Andres, this is Walter. Yes, we are concerned with Bolivia. Even furthermore than the political volatility is the need in the country to do some financial adjustments that will undoubtedly have an impact on the macroeconomic stability of the country. We are hoping that those adjustments are gradual and start soon. Otherwise, a more volatile situation could come down the road. It is not material in the portfolio of Credit Corp. and our portfolio and bank in Bolivia is more than adequately capitalized, and we feel that we have taken the appropriate measures to prepare ourselves if such hopefully unlikely scenario of more disruptive macroeconomic conditions appear during this year.

Perfect. Thank you guys for the insights.

Thank you very much. Ladies and gentlemen, as a quick reminder to ask a question, You can press star 1 on your touchtone phone now. Our next question will come from Carlos Gomez, UBS.

Hi, it's Carlos.

Carlos, go ahead.

Hi, this is Carlos Gomez from HSBC. Two questions. One question. On the corporate change, you want to increase the size of the board. Could you comment a little bit as to why specifically for May 2-9? What is the rationale and could you have in mind for the position? Second, a technical question. On the page four of your press release, you show the profitability by company. There is a growing item, which is others, which is now minus $175 million. as large as Prima. Could you explain exactly what there is in that particular line? Thank you.

Hello, Carlos. This is Alvaro Correa. With regard to the size of the board, that's the outcome of an assessment that has been performed and has to do with the diversity and a more balanced distribution of board members in the committee, and on top of that, the need to increase the number of independent directors. So the conclusion was basically to have one board member, and that will help a lot in this governance improvement process.

Okay. The second question. Yes, probably the last question is in relation to the already mentioned withholding taxes, the company builder unit, CREA law, and some corporate expenses. But the main factor is withholding taxes. As I mentioned before, when you increase dividends, you need to reserve more money for withholding taxes. The dividend from one year to another was increased twofold.

Sorry, as a follow-up, is there anything that you can do about these withholding taxes? I mean, would retailing the company save you some money in any way?

Carlos, this is Walter. Yes, we are continuously evaluating, and obviously because of the increase of the amount of this withholding tax, we are bringing the issue back to the table. It is extremely complicated because it involves selling assets and moving assets from one country to the other, which have huge consequences from a tax perspective. So yes, we're looking at it, but so far we have not been able to find an alternative which seems to be a better structure than what we are today because of the cost of moving from one place to the other. I don't know if I explained myself.

No, no, you explained yourself, and obviously there is no simple answer to this. So I guess we need to get used to effectively a higher tax rate going forward.

That is unfortunately true.

Okay. All right. Thank you very much.

Thank you. Our next question will come from Yuri Fernandez, J.P. Morgan.

Thank you, gentlemen. I have a question regarding your guidance, more specifically your risk-adjusted meme. It points to a 0 to 30-bit increase that is similar to your margins, but your possible risk should be from 0 to 20-bits higher. So my point is, like, what's your confidence level that the risk-adjusted will increase? Because about this mixed shift towards consumer and local currency loans, This trend is not totally new. We saw this in the last one, two years. My point is, how should we think about the risk-adjusted mean for 2020? Should it be more in the low end of the expansion, or are you confident that we can see a surprise here?

We have different ranges. In the ranges are the expected outcomes. Something that we need to consider is that the basic of calculation is not identical. Cost of risk is based on the loan book, and the NIM is in the entire portfolio, including investments. So it's not absolutely linear.

Got it. Thank you. I would like to add, I mean, that... The underwriting process in the new segments of the market is taking every year a larger share of our total portfolio. So we expect to have the cost of risk increase a little bit, but a net interest margin adjusted to risk increase more than what is the negative impact on the cost of risk.

No, I mean, just like if you have like your NIM increasing like 10, 20 bps and your cost of risk moving in the same direction, in the end, like the risk-adjusted NIM can be flattish, right? So that was my concern when you try to put together the NIM with the cost of risk.

Okay, I think we are usually quite conservative on our projections, and we see we are very optimistic on the level of growth on these new segments. So that's why we projected a higher cost of risk for the year.

Glad you guys. Thank you very much.

Thank you. Our next question will come from Arvind Gal, TRG Management.

Hi. Thank you for taking my question. I had a question on cost. It seems you're guiding for your cost-income ratio, et cetera, to be flat in 2020 versus 2019. But I know you've had an aspiration at BCP to dramatically improve your efficiency ratio. So is that going to be harder to do now? And You know, you've spoken about the cost for the technology transformation program, so I was wondering what those costs were. And then finally had a question on loan growth. You know, you got into a big pickup in loan growth. Have you actually started to see this in early 2020, or is this more of a hope and aspiration that, once the political environment improves, spending starts coming through, you'll eventually see it? Or has this been something you've already started seeing in 2020? Is there evidence of this?

Okay. Our guidance is related to efficiency, not cost. So that implies a numerator and a denominator both growing. In terms of the impact of the transformation, as already mentioned, is a medium-term effort, and we are starting to see the benefits. And in the particular case of BCP that explains almost 70% of the results of the group during 2018, despite growing investments in the transformation that almost doubled during the year, we have improved cost-to-income ratio 100 basis points.

So how much are... I'm sorry. how much are the investments you're making in this transformation roughly?

Excuse me?

How much is the quantity of investment in the transformation?

At DCP level, we have directly as an expenses, dollars and investments. In terms of expenses, We are in the vicinity of 200 million soles, but the investment is significantly higher than that figure, and we are going to see, through depreciation and amortization, the impact of that down the road. And the benefits also.

And then on loan growth, I was just wondering, have you actually started to see an improvement in loan growth in 2020, or is this something that you're hoping will come through as the year progresses? And sorry, I just had one more thing I was curious about. You said something about $600 million in reserve funds that you could get more interest on, and you talked about that as something you could deploy these funds to improve your sustainable ROE in the about what you meant by that.

Okay. In the case of loans, our expectation is, I mentioned to you, between eight, 10%. This is a little bit higher than the 6.6% average daily balances that we grew during this year. We expect some pickups in specific segments, but especially we have significant expectations to grow market share in special niches through new products, new channels, as we have stated before. So it's a combination of both.

Regarding the reserve fund, the intent for that fund was mainly to be able to have the liquidity available to capture opportunities that we think could be found in the markets and in the businesses in which we have strategically focused Credit Corp futures. In order to have that liquidity, obviously it is in very low yielding, very liquid assets. Thus, the return obtained for that excess capital has obviously been very low. If we were to assume that that fund totally disappears, which is not something that is quite on the table right now, this would mean a distribution of funds that would increase the return on equity by about 100 basis bonds. Those are the funds that were made in the prior question. Going forward, as I mentioned in the prior question as well, we are starting to believe that there are no significant opportunities that seem to be available And during the first half of this year, we will reassess the size and whether or not we want to keep that fund. At this stage, we have not made the decision. My only comment is that we will reassess this during the first half of the year and take the decision that obviously generates more value to our shareholders. If we are going to keep a cash fund for that size, it doesn't make any sense. If we can redeploy it, improve the profitability, and vital generation for our shareholders, if that makes sense. Those were the comments. I don't know if I explained myself. No, perfect. Thank you.

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

Thank you very much. A quick comment on each of our four business lines regarding the last year's performance. At BCP, we have seen strong results, growth on loans driven mainly by the retail banking, thanks to improvement in the value proposition, and the bank targeting broader segments of the population while implementing new risk data and analytics models. Very intense competition on the wholesale side Fortunately, the margins are not on that side of the business. In the microfinance, it was a challenging year for Mibanco due to a combination of increased competition and portfolio deterioration, which led to pressured margins. As a result, Mibanco has strengthened its risk model and is in process of developing a hybrid business model, leveraging data and analytics to be able to originate better and distribute more efficiently our loans. This is an ongoing process, and I will talk a little bit more about it. On Pacifico, we have improved profitability at the group and at Prima. Pacifico won the tender for two tranches of the contract to cover the cost of disability survival and burial for the AFPs, and Prima had a very strong performance driven by cost control and portfolio gains. Credit card capital, a boost in profitability of the investment banking and asset management business due to favorable financial market conditions, which allowed the group to achieve gains in preparatory portfolio. Going forward, PCP will continue its strategy focused in customer experience and efficiency in all segments. Investments in digital transformation are already helping to increase bank penetration. We are starting to see the results. They are still not absolutely meaningful within the site, but we think that this is the way to go and we will pursue this path going forward. In microfinance, as I mentioned, the efforts are focused on consolidating this new hybrid model and in creating business alliances to be able to originate loans with the help of partners such as YAPE and Uber to scale the business without increased costs. And additionally, this year we have the effort to consolidate the investment we have made in Colombia and merge it with our operation there and be able to create an avenue of growth, a path for growth for Ketikorp in that country. In the insurance and pension business, efforts will continue focused on strengthening the bank insurance strategy to develop the group synergies. In investment and wealth management business, we will focus on strengthening regional offerings in order to continue gaining market share in Colombia and Chile. Additionally, we are consolidating our back office and IT architecture to have a more scalable business and a more solid platform, and focusing on the recently acquired business in Colombia. Just a quick word, we have presented preliminary measures to bolster our governance framework with the aim to be aligned with the highest international standards. And finally, we are convinced that our strategy focused on long-term transformation is the path we need to take in order to outpace market growth while sustaining short-term profitability. Again, with this, we conclude our call. And as usual, I really want to thank all of you for your continued interest in our company. Thank you very much and look forward to having a continuous dialogue with all of you. Goodbye and thank you.

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