Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to Credit Corp LDT first quarter 2020 conference call. We now have all of 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 up 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. Alvaro Correa, Deputy Chief Executive Officer, Mr. Ronaldo Llosa, Chief Risk 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 Corp's conference call on our earnings results for the first quarter of 2020. Thank you for attending today. I hope you and your families are healthy and faring well in the challenging environment generated by COVID-19. We are experiencing an unprecedented phenomenon. Despite these trying times, we could not be more thankful for our impress with the drive, engagement, and collaboration of our teams. Employees at all of our operating units have rolled up their sleeves to respond as needed to the pandemic. And as an organization, we are protecting and supporting our employees, clients, and communities. Our top priority has been our employees. We are focused on guaranteeing that our thousands of employees remain healthy and continue to work in optimum conditions. Our more than 19,000 frontline employees have received protective equipment and are working in secure environments. Additionally, incentives and performance indicators for employees at branches currently prioritize client service over sales. Ninety-five percent of our employees at the office level are working remotely from home. we have implemented programs for employees to ensure the physical, emotional, and financial stability of the credit card community. As a customer-centric organization, we are aware that many of our clients are experiencing significant duress. More than 1.5 million of them are benefiting from initiatives to alleviate financial pressure across Peru, Colombia, and Bolivia. Currently, we are offering a number of measures through our operating units, including debt and insurance premium reprogramming, cost-free cash management services, COVID-19 health and life insurance coverage, and partial reimbursements of premiums on car insurance. Moreover, clients are taking advantage of our digital channels. We have managed the continuity of each of our financial services and health businesses. which are basic services that shore up the economies where we operate. We have taken preventing physical and cybersecurity measures and focused on capacity management to ensure operating continuity across channels. At the same time, we are actively managing liquidity and solvency to maintain our solid financial condition in each LBO. Finally, Having faced several crises in our 130 years history, we have demonstrated and will continue to show clear commitment to supporting our communities. During this crisis, 160,000 impoverished families in Peru will benefit from BCP's donation drive, Yo Me Sumo, which collected 126 million soles, 100 million soles from BCP, 10 million soles from Mibanco, and 16 million soles from other companies and thousands of individuals. Moreover, frontline national emergency workers, including health professionals, police, and the Peruvian Armed Forces, now have life insurance policies thanks to a donation of 5 million soles from Pacifico. Finally, we have been working in close coordination with the health and finance ministers, giving support during crisis response to design measures for subsequent execution to our health and banking network. This includes providing health services to public sector patients to our health network and distributing government cash payments to our banking network, all of which benefit thousands of families. Next slide, please. In this challenging context, our clients have been able to rely on the strong relationships we have built and have been benefiting from our digital networks. During the lockdown period, volumes both in loans and deposits have materially increased. In the second half of March, corporate and large enterprises, as defined by the superintendency, increased their short-term funding needs in this segment. loan growth, which was situated at 15.7% outpaced expansion of 12.3% hosted by multiple banking. This dynamic boosted BCP's total loan portfolio growth to 11.9% compared to 9.6% of the multiple banking level. Part of the fresh liquidity obtained by the aforementioned segment has been maintained at the bank as demand deposits. And from February to April, our wholesale deposits increased by almost $3.6 billion solid. Eighty percent of these funds were held in demand deposits. Our retail client deposits increased almost $3.6 billion solid, where growth to approximately $4 billion in savings deposits was offset by a decrease in other types of deposits. This context has also been an opportunity for our clients to benefit from our digital channels. YAPI welcomed 580,000 new users from January to April this year. And as of April, the monthly amount transacted through this app has grown fourfold in one year. Moreover, our BCP digital channels have registered a material gain in their share of our distribution network due to in use during lockdown. As of the end of April, our digital sales of individual saving accounts increased from representing 2% of these product sales to reflecting 27% of the same in just one year. Additionally, the digital channel share of our retail transaction was situated at 73% versus 48% last year. The digital channel's share of collections and serving payments in wholesale banking was situated at 60% this year compared to 32% last year. Next slide, please. Peru's government has stepped up to face this crisis. President Vizcarra took quick and stringent measures to control COVID-19 contagion through a countrywide lockdown. The lockdown duration is data dependent. As of today, it is expected to last 56 days until May 10th. To its credit, Peru exhibits some of the strongest macroeconomic fundamentals of all emerging markets and has maintained a stable credit rating outlook over the past few years. The government has instituted an ample package of measures to mitigate and stimulate the economy for the equivalent of approximately 16% of GDP. The ability to implement measures of this magnitude is directly correlated with the prudent macroeconomic policies that have been carried out for decades. The economic measures taken have primarily focused on containing immediate economic damage due to loss of income at the individual and company levels. that these measures are moving in the right direction as they provide support for companies and households that have suffered extreme durance. In particular, the government has targeted the business sector to two government-backed programs, Reactiva Peru, a liquidity program to provide 30 billion soles in funding to small and medium-sized companies, and the Enterprise Support Fund, known as PIE, by its Spanish initials to provide up to 4 billion soles in financing for small and micro firms. We will discuss this briefly in the next slide. An additional measure of note is a law that targets access to private savings and allow patient affiliates to withdraw up to 25% of their pension funds up to a total of 12,900 soles. by deducting the withdrawal of 2,000 soles previously approved by the government. Finally, the central bank has lowered its reference rate 200 basis points to 0.25%, a historic minimum, and has provided liquidity for six and 12 months to repopulations for a total of almost 17 billion soles since the beginning of March. Central Bank has also implemented measures to mitigate exchange rate volatility. Additionally, the superintendency has authorized credit extensions for up to six months with no effect on client credit ratings. Next slide, please. From COVID-19 contagion, we lead the world to experience the greatest economic hardship since the Great Depression. In Peru, economic indicators such as electricity demand and public investment registered significant declines at the end of March and April. Last Sunday, the government declared that it would enact a stage-based economic reopening in four phases from May to August. Twenty-seven economic activities in four economic sectors will restart their operations in May as part of the first stage. Nonetheless, there is still considerable uncertainty regarding the magnitude of GDP contraction that will be seen in 2020. Our estimates suggest that 2020 GDP may contract between 7% and 13%, depending on the degree of economic recovery registered in the second half of 2020. It is important to note that the government's swift economic response will help esteem effects on the financial system down the line. Without these measures, the negative impact would surely be greater. In particular, Reactiva Peru, the government-backed liquidity program for 30 billion soles represents around 4% of GDP and will help mainly small and medium-sized companies obtain fresh working capital and continue to operate. The coverage level for these loans varies between 80% to 98% for loans between 30,000 soles and 10 million soles. Loans have terms of up to 36 months with a grace period of up to 12 months. In parallel, PHI program enables banks and microfinance entities to provide small and microbusinesses loans for up to 4 billion soles with coverage levels between 90% and 98%. This amount represents about 9% of the loan portfolio for SMEs system-wide. Given that the environment is constantly shifting, the effect on loans in the financial system has yet to be determined. Our estimates suggest total loans in Peru may experience anywhere from 4% contraction to a 2% expansion in a context marked by government loan support as discussed earlier. Next slide, please. Now, let me explain where we stand, financially speaking, to face this crisis. As a conservative and disciplined financial group, we operate through exigent management standards. This has provided a solid platform to weather the storm of COVID-19. In terms of our liquidity, the regulator monitors the 30-day liquidity coverage ratio, and as shown at the graph, BCP has maintained levels well above the regulatory minimum. However, for management decisions, we use a more stringent indicator, relying on liquidity coverage ratio of 15, 30, and 60 days, whose standards are aligned with Basel III. In this context, we have maintained our high-quality liquid assets at adequate levels. Regarding capital, each of our subsidiaries maintains adequate capital levels which ensures the solvency. As March 2020, the core equity tier one of BCP was situated at 11.9%. In the case of Mibanco, the core equity tier one as of March 2020 is 14.5%. Next slide, please. We are managing exposure at each asset class and client segment. Current volatility has impacted the financial assets in our investment portfolio. It is important to note that 90% of our investment portfolio is comprised of fixed income investments, which primarily consist of investment-grade sovereign bonds. Moreover, only 11% is considered part of the trading portfolio. As such, most value changes do not impact results but directly affect equity. Regarding our loan portfolio, we would like to share some of our metrics for exposure by segment and economic sector. It is important to note that we have developed and widely disseminated a complete set of short-term liquidity facilities to support our clients as the COVID-19 scenario evolves. This dynamic and consistent approach will mitigate credit risk, firstly, 47.6% of personal loans at BCP stand alone, and 17% of its SME PIME portfolio were paid on time in April. In the second half of March, we offered skips, which consists of debt reprogramming options that change interest, that charge interest later in April. we developed and offered debt freezing facilities, which consists of two frozen installments financed at zero interest rate. It is important to highlight that as of April, we had already reprogrammed the following loan portfolio shares, 38% of the Mibanko portfolio, 71% of BCP SME PYME portfolio, and 50% of BCP Individuals portfolio. Finally, As a complementary measure for business clients, we are participating at Reactiva Peru program, where BCP has been awarded a significant share of the account auctioned. The bank is currently in the process of disbursing these funds. To identify BCP standalone exposure in economic sectors that are highly exposed in COVID-19 environment, we estimate that 20% of our wholesale portfolio and 25% of our retail portfolio SME, P&E, and business is highly exposed. In this analysis, high exposure sectors include retail, vehicle, real estate, oil trade, airlines, tourism, microfinance, transport, and restaurants. Next slide, please. When analyzing credit core performance, it is important to understand the drivers that will impact credit core results through 2020. The macro environment I just described coupled with the special interest-free and cost-free solutions offered to clients and a market decline in business activity during the lockdown will impact our sources of income. Secondly, it is important to note that we are using IFRS in light of the coronavirus uncertainties. Foundation report to estimate provisions. We are using judgment and adjusting our approach to determining expected losses in different circumstances. We are not applying our existing expected losses methodology mechanically. Finally, we are measuring expected losses based on reasonable and supportable information. Consequently, in the first quarter this year, we have registered our best estimate, which assumes a severe impact at the macroeconomic level that will be partially offset by reprogramming facilities and by government mitigation measures. It is important to note that IFRS and local reporting standards materially differ. Under local regulation, debt reprogramming does not change client risk classification and deterioration is recognized later on when losses are incurred. Finally, in order to manage expenses, we are precinct recruiting and salary increases adjusting variable compensation, and working to preserve our talent. We are also putting the brakes on NACA strategic projects and looking to identify savings in a context of short-term decreasing business activity. Next slide, please. Going on, on our first quarter 2020 financial highlights, you will see that results has been offset mainly by forward-looking provision. In upcoming slides, I will explain our metrics, but at this point, I would like to highlight both. Our loan portfolio and net interest income have performed excellently, posting 11.4% and 8.3% year-over-year growth respectively. The COVID-19 outbreak has negatively impacted our results and mainly manifested to a decrease in non-financial income. material forward-looking provisions, and one-off expenses, all of which offset profitability in the first quarter 2020. Next slide, please. To explain BCP standalone quarter results, I will start by reviewing loans' asset quality and the evolution of deposits. Despite the lockdown during the second half of March, BCP's average daily loan grew 8.4% year-over-year. This was driven by retail banking, which grew 11%, labor consumer, and credit cards, which increased 14%, and mortgages, which expanded 12%. It is important to highlight that measuring quarter end figures, the loan portfolio grew 12% year-over-year, and 5.4% quarter-over-quarter. In the current context, corporate clients sold fresh liquidity at a higher spread, which was mainly retained at the banks as liquid deposits. Growth in retail loans decelerated due to COVID-19. As I have explained, although asset quality has remained stable, we have shore-up provisions based on changes in macroeconomic expectations and an increase in the probability of default. This measure led the cost of risk to increase 230 basis points year-over-year to situate at 4.44%. Retail banking MPLs ratios deteriorated quarter-over-quarter, mainly in SME payment and credit cards. But since provisions posted a higher increase, the coverage ratio of BCP standalone has situated at 118% compared to 105% in the last quarter of 2019. Total deposits grew 16% year-over-year, led by non-interest-bearing demand deposits and saving deposits, which grew 23% and 16%, respectively. During this quarter, total deposits grew 8% in the context of COVID-19, where corporate clients grew down and held liquidity, and both individuals and businesses spent less and maintained larger balances in their accounts. Next slide, please. Now, I will comment on BCP standalone quarter P&L figures. This quarter, the downward trend in interest rates became steeper. The negative impact of this driver on NIM has been offset by a more favorable funding structure after liability management measures were executed in the last two quarters of 2019 and new, less expensive short-term funding has been taken. This has allowed the net interest margin to remain stable at 4.7% year-over-year. Higher provisions, however, led the risk-adjusted NIM to drop to 1.5%. both core and non-core non-financial income decrease in year-over-year and quarter-over-quarter terms. Regarding core items, the reduction of 10 percent quarter-over-quarter in both fee income and net gains from FX transactions reflects two weeks of lockdown out of 12 weeks in the quarter. The decrease in business activity, including a 43 percent drop in monetary transactions in April, The implementation of cost-free solutions to clients and an increase in digitalization adoption will generate greater negative impact in non-financial income next quarter. The efficiency ratio deteriorated seven basis points year over year, mainly due to a disacceleration in income generation, while expenses go in line with seasonality and include $15 million in COVID-19-related operating expenses. Finally, BCP includes a $100 million non-deductible charge for COVID-19 donations in other expenses. Overall, BCP's results are offset mainly by provisions and the one-off COVID-19 donations. Next slide, please. MiBanco's quarterly performance was impacted by forward-looking provisions. This quarter, MiBanco posted 7.3% growth year-over-year in low measures in average daily balances. MiBanco's portfolio is primarily composed of small and micro businesses and constitutes Credit Corp's most exposed portfolio. Skips at MiBanco still require that clients interact with loan officers to execute reprogramming. As such, as of March, the operating unit has reprogrammed 22% of its total portfolio. Regarding asset quality, MiBanco posted a slight year-over-year improvement in its MPL as a result of origination and collection measures taken in recent quarters. COVID-19 forward-looking provisions have led the cost of risk to increase 315 basis points and situated at 6.7%. Consequently, MiBanco's NPL coverage ratio situated at 157% this quarter compared to 138% in the first quarter last year. MiBanco's NIN increased 50 basis points to situate at 15.2% this quarter. This was a triple-two for an optimization in the funding structure and the cost of funds. Additionally, changes in insurance fee recognition reduced non-financial income. Finally, due to higher cost of waste, quiz-adjusted NIEM fell 240 basis points year-over-year to situate at 9.5% in this quarter. MIBANCO registered a slight deterioration in its efficiency ratio year over year, which was mainly attributable to an increase in the bank's headcount to effectively manage and strengthen relationships with clients. Administrative expenses were down this quarter, driven by the implementation of cost-savings programs and some delays in execution. Finally, a non-deductible charge for $10 million solid for COVID-19 donation has been reported in other expenses. Overall, MiBanco performance was negatively impacted, mainly by provisions. Next slide, please. Now, I will comment on the main drivers and results related to our insurance and pension fund businesses. Grupo Pacifico's net income improved year over year due to mainly to an improvement in the underwriting results of the property and casualty businesses and to a lesser extent to an improvement in the life business. This was the result of a decrease in net claims for car insurance after circulation decreased and there were fewer reported cases during lockdown. Regarding the life business, we registered an increase in total net earnings premiums for the credit life product after sales increased through our alliance channels. Health insurance and medical services registered a decrease in activity and therefore reported lower claims during lockdown. All of the aforementioned result in an improvement of 620 basis points year-over-year in the lowest ratio. Our investment portfolio has good credit quality and is concentrated mainly in fixed income assets. In terms of liquidity and solvency, Pacifico maintains comfortable liquidity and debt-to-capital ratios. There are two one-off COVID-19 related charges that impact Pacifico's results this quarter. First, as a financial relief measure for clients, we are reversing 50% of the car insurance premiums for the months of March and April to individuals that are up to date in their payments. The impact as of March is around 8 million soles in premium reimbursements. Second, Pacifico donated 5 million soles in life insurance policies to cover health service professionals, policemen, and Peru's armed forces who are directly exposed to the virus during the quarantine. In terms of pension funds business, the negative contribution to credit coordinate income is mainly attributable to a decrease in the profitability of the reserve funds given market conditions. Commissions will be negative affected next quarter given that pension fund contribution will be waived for April. Assets under management withholds in the government decree a withdrawal facility for some affiliates, and afterwards the Congress approved a law which enables affiliates to withdraw up to 25% of the pension funds with a ceiling. As a result of these specific material changes in the system, we expect our income before reserve funds profitability to be reduced by 11% this year. Next slide, please. Now, I will comment on the drivers and performance of investment banking and wealth management businesses. Total assets under management posted a reduction of 9.6% quarter-over-quarter, a 5.1% year-over-year. In wealth management, the results mostly affected by a mark-to-mark affecting match as an important client outreach effort attenuated withdrawals. In the case of the asset management, a slight decrease in assets under management was seen in the last two weeks of the quarter due to withdrawals from transactional funds, mainly at Combal, Colombia. Regarding income contribution, based on the year-over-year analysis, the results are as In the wealth management businesses, the slight fall is mainly due to lower deposit balance and lower income from family offices in Peru. However, income in Colombia and Chile increased due to the diversification of the product portfolio. In the asset management business, given that alternative funds and distribution of third-party products' income rose above expected, the negative effect from March was absent. In the corporate finance business, the contraction is attributed to an unfavorable situation for the execution of operations, including those that were already identified within the first quarter 2020 pipeline. The capital market business was the most severely impacted by the reaction of the markets to the global crisis, significantly affecting the results in trading positions and credit core capital. In this context, trading portfolio was reduced by 60% to mitigate volatility affecting March. The proprietary investment portfolios of local and international fixed income from ASB registered losses. However, the sales business achieved higher than expected results in equities driven by an increase in the volumes traded. Likewise, as markets recovered, the losses have started to reverse in April. Regarding other businesses, the deduction was mainly from the treasury business due to a negative exchange difference originated by positions in foreign currency. Finally, it's worth mentioning that although the long-term strategic portfolio has not generated losses in P&L, the unrealized losses were 77 million soles as of March. Next slide, please. I will summarize Credit Corp's consolidated performance. Now, in a context of market volatility and low asset prices, by the end of March 2020, the investment portfolio share of our interest-earning assets increased to 20% from 19% in December. The loan portfolio boom 11.4% year-over-year in quarter end balances and 7.8% year-over-year measured in average daily balances, boosted mainly by BCP. In terms of funding, deposits grew 15.3% primarily due to demand and saving deposits, which grew 22.2% and 14.9% respectively, mainly at BCP. Wholesale financing grew 7.8% after funding was provided to corporate and medium-sized companies. In this context, credit courts' funding costs fell 25 basis points. Next slide, please. As explained earlier, credit courts' cost of risk posted a significant increase of 268 basis points quarter over quarter, mainly due to COVID-19 forward-looking provisions. which were mainly concentrated in BCP Standalone and MiBank. It is important to note that the change in economic expectations affected all of our line of businesses, but mainly retail banking and microfinance. Additionally, 34 basis points of increase in the cost of risk was related to a deterioration of a specific business segment at BCP Standalone, namely SMEP and Credit Card. which was offset by an improvement in the cost of risk. Our non-performing loan portfolio has quoted growth that was significantly lower than the expansion seen in provision due to debt facilities that Credit Corp subsidiaries have offered to clients to cope with these difficult times, which translated into an improvement in the coverage ratio. Credit Corp's net interest margin reached 5.35% remaining relative stable year-over-year, the increase of 5.4% in interest income, which was driven by an increase in interest on loans, and a decrease of 2.5% in interest expenses due to a more favorable spending structure, was offset by the large increase in average interest earning assets. As mentioned earlier, The decrease in NIM at BCPS standalone quarter-over-quarter, which was driven by a decrease in market rates, was offset by an improvement in Nibanco's NIM after a new pricing strategy was implemented to improve loan rates. Finally, risk-adjusted NIM deteriorated 197 basis points quarter-over-quarter to situate at 2.33%. This was primarily driven by the aforementioned increase in provisions. Next slide, please. The 18.8% year-over-year contraction in non-financial income was mainly attributable to non-core items. Key income and net gains on effect transactions, both core items dropped after transaction activity in the banking business decreased during lockdown. FinCon and net gains on effect transactions decreased 10% and 14% quarter over quarter, respectively, and driven mainly by BCP stand-alone omnibus. The net gain on securities lost 120 million soles after the global COVID-19 crisis generated a marked downturn that impacted proprietary investment portfolios. In terms of efficiency, the cost-to-income ratio deteriorated 100 basis points year over year, mainly due to the deterioration in macrofinance. Most of the deterioration in macrofinance is due to the inclusion of Banco Compartir and more personal expenses while decelerating operating income at MiBanco. Grupo Pacifico also reported a slight deterioration, which was attributable to car premium partial reimbursement. This was mitigated by an increase in net earning premiums in the live business. Next slide, please. And so, the result of consolidated profitability at credit core primarily reflects the negative impact of BCP, which was in turn attributable to charges related to COVID-19. To wrap up our performance this quarter, we continue to register with ceiling growth in loans, deposit, and net interest income with 11.5%. 4% and 15.3% and 8.3% year-over-year growth respectively. Our customers have ramped up the use of digital channels in the new context, and as such, our digital capabilities stand as a competitive advantage. The COVID-19 outbreak negatively impacted our results primarily by decreasing non-financial income and increasing forward-looking provisions and the existence of one-on-one expenses all of which offset profitability in the first quarter of 2020. Credit Corp is well positioned to face this crisis in terms of both liquidity and capital. We reduce dividends of all subsidiaries to strengthen operating units capital-based. Given the level of uncertainty regarding the global economic impact of COVID-19, we are suspending guidance as of today. When we have a better sense of the impact of this phenomenon, we will provide guidance. Next slide, please. We are aware of the level of uncertainty we are facing, and at the same time, we feel confident about our capability to adapt our businesses and organizations in a changing environment. In this context, We are reviewing our strategic initiative on a constant basis. In BCP, we are focusing on engaging with customers to understand their situation post-COVID-19 and financial needs, implementing Reactiva Peru program, adjusting risk management measures, and designing medium-term restructuring initiatives. We are starting sales capabilities coupled with dynamic pricing and accelerating customer digital adoptions and rethinking the new operating model. In Bolivia, we are engaging with customers, adjusting risk management measures, and fostering the use of digital channels. In microfinance, we are working on engaging with customers, assessing new needs and risks, and executing refinancing initiatives, implementing five programs to provide fresh working capital and support our clients' short-term liquidity needs. Accelerating the path to the hybrid decision-making model, leveraging the use of data and analytics. Redefining the new remote operating model. And finally, finalizing and combating merger by the third quarter of 2020. In insurance and insurance, we will work on restarting insurance sales force coupled with digital capabilities. Adjusting Pacifico's new operating model. managing the liquidity and profitability of the pension investment portfolio in a context of expected withdraws, actively participating in pension system reform. In investment banking and wealth management, we are focusing in developing business opportunities in wealth management and asset management by offering a diversified portfolio. developing the corporate finance pipeline, improving our efficiency by reprioritizing operation expenses and investments, finalizing the integration of UltraServe FinCon by the first half of 2020, defining our support functions and technological platforms to improve the customer experience and enable future growth. At the corporate level, To further strengthen our long-term performance and competitiveness in the markets we operate, a project has been launched this month to develop a strategy aimed at integrating ESG more deeply and consistent in our business planning and activities. To take advantage of the new opportunities, specific initiatives of CREALO are being selected in order to be accelerated. With these comments about our quarter performance, 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're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Please state your name and company before posing your question. Again, press star 1 to ask a question. We also ask that you please only ask one question at a time. After each question has been addressed by our speakers, you will then be allowed to ask as many follow-ups as needed. But again, please only ask one question at a time. Thank you. We will pause for just a moment to allow everyone an opportunity to signal for questions. We'll take our first question. Caller, please go ahead.

Hi, Ernesto Gabilondo from Bank of America. Hi, good morning, Cecil, and good morning, everyone. Thank you for the detailed presentation and for the opportunity to ask questions. My question is on provision charges and cost of risk. After more than doubling your provision charges in one quarter due to the expected loss from COVID-19, do you think you have reached the peak of provisions? or do you think it will be more tangible next quarter? And how much of the provision charges of the quarter are considering the client's applications in FME, T-MEN, IVANCO, and individuals? And what level of your DSP from minus seven to minus 13% is considering the expected loss model? As you have mentioned, you will not follow the expected laws mechanically, but I think it will be very helpful to understand the assumptions that you are considering to build the provision charges. Thank you.

Hello, Ernesto. How are you? This is Fernando Llosa. Yes, definitely, this has been a tough quarter, and to our best estimate, At the end of March of this year, we have estimated this is the loss of provisions. As Cesar has mentioned throughout his presentation, this is a forward-looking estimate. Our numbers, our baseline for them was a weighted average fall in GDP of around 5.25%. We will need to update our projections in the following quarter. Having said that, there are a lot of other initiatives in terms of reprogramming and all the initiatives of the government, sponsored by the government, would probably give us a better outlook of what will happen with provisions throughout the year. But definitely this is going to be a tough year.

Okay, thank you. And then my second question is on long road. We noticed an important acceleration due to the current depreciation. but also I think from some withdrawals from companies anticipating to have liquidity. However, I would like to know your strategy in the short term. Are you going to focus in your own client base, or are you also going to provide credit to new clients? Also, any color in which portfolios do you expect to be more selective, and which ones will be the ones delivering the growth will be very helpful. Thank you.

We'll take our next question. Caller, please go ahead.

Hi, this is Jason Mullen from Scotiabank. My question is related to slide seven, asset exposure and mitigation. I thought that was very helpful, the way you showed the most exposed, the chart with the most exposed to the less exposed. You showed Mibanko and SMEs on the top and wholesale on the bottom. If you could talk about giving us – if you could talk a little bit about the expected loss in those most exposed and less exposed, and I guess is that average what – it wasn't that easy to hear, but is that kind of – previously, is that kind of where you're coming out with your expected loss cost of risk in the quarter? And also on this slide, if you can just give us some details on the Reactiva Peru project, program, and you do mention that you have an important share through BCP and Mibanko. Is that similar to your market share in those markets, and how do those options really work? Thank you.

Well, in terms of expected losses levels for the specific segments, we don't have a rough number. You can understand that for this specific estimation in terms of the end of the first quarter, we were basically considering the impact it would have in the macro level. So we have worked very closely with all the segments in trying to estimate a general impact in the portfolio. And we are not able at this time to provide a specific level of expected loss for each of the portfolios. And in terms of the... Participation of market share of Actia Peru, I would say it's somewhat above our average market share. Sure.

We'll take our next question. Caller, please go ahead. Caller, your line is live. Please ask your question. Hearing no response, moving to the next question.

Caller. Hello. Hi. Jorge Cury from Morgan Stanley. Thanks for taking questions. Can you remind us your sensitivity on net interest margins to movements in rates, and is there a particular expectation that you have for NIMS by the end of this year. Thank you. And I guess we also would appreciate if you tell us what your expectation is for reference rate at the end of the year. Thank you.

Hi. The reference rate is already at the minimum historical level of 0.25%. And the interest rate has already been passed through in the new transactions. So we wouldn't expect a significant change in reference rates during the year. Even say that probably the markets are going to be a span capturing in the new transactions in the new origination and a higher expected probability of default. But I would say both in and dollars, we are in a low level in terms of reference rates, and probably we are going to have some expansions or margins, but based on probability of default, not reference.

Sorry, I didn't really mean adjusted risk margins. I meant just net interest margins. No, I'm not sure I understood the point about probability of default.

No, yes. What I am trying to tell you is the reference rate is already in historical lows, both in soles and dollars. So the new marginal rates are going to increase based on probability of default. So the margins are going to increase slightly based on these new originations. You should also consider that new originations are going to be particular in retail banking and a slower pace than historically has been happening due to the decreased demand in the short-term period.

Ivan, if I may, I have a second question. Can you talk about what you can do on the expense side to try to provide some offset to the downturn on revenues, both in 2020 and 2021? Thank you. Yes.

We are already working in a number of measures, as I mentioned previously. We have adjusted variable compensation. We are increasing in most of the companies of the group, probably with the exception of investment banking in terms of hiring and salary increases. Some of the expenses are going to be naturally adjusted based on the level of activities, particularly during the second quarter. And additionally, we are working very disciplined and a very disciplined way identifying expenses that are not absolutely necessary in the short term, but we are maintaining investment, developing core capabilities, particularly in terms of digitization and intelligent decision making.

Thank you. This is Gianfranco. Good morning, everyone, and just to add a few words on what Cesar just mentioned. You are all aware that we've been working heavily in developing our digital capabilities. Obviously, due to this crisis, the demand on digital channels has stepped up dramatically, and another lever of that we are currently analyzing is how to rethink our distribution channel. And the main objective there is not to reduce expenses, but to provide a better service to our clients. But obviously, a consequence of that would be that our footprint in terms of branches should be drilled down in the next couple of years. Thank you.

We'll take our next question. Caller, please go ahead.

Hi. Hello, everyone. Thanks for the opportunity to ask questions. . I just want to follow up on your front-loading of provisions, the more than $700 million in the quarter. Can you just tell us what was the GDP assumption that was considered in the models for debt provisioning? I understand you say you expect between minus 7% to minus 13%. GDP this year. Is that something that was already fed into the model? Just to understand how much has already been factored in of that scenario. Thank you.

On the March estimations, we used a weighted average fall on GDP of around 5.3% for the year.

Okay. All right. That's very clear. And for next year, is there any, in terms of the duration of the crisis, I mean, how was the duration, let's say, taken into account? What sort of recovery was taken into account, you know, for, let's say, 2021 from an economic growth standpoint?

Probably if I can comment on that, as Reynaldo mentioned, we have used for the close of March a weighted average of 5.3% GDP. Now we think that the GDP is going to decrease more, but we expect a significant uptick in 2021 in the term of probably 5%, 6%. increase next year after a decrease in this year in the range probably between 7.5% to 11 as basic scenarios for this year. This has been impacted because during the last weeks, the lockdown has been extended, and this impacts directly in GDP levels.

That's right, Theo. Thank you so much.

We'll take our next question. Caller, please go ahead.

Yeah. Hi, guys. I have just one follow-up, again, on the expected losses. So you mentioned that you did the provisions with a GDP of 5, a decline of 5. Now you have something close to 7% to 11% of decline. So is it possible to say that you need to do more provisions in the next quarter, or at least if you need to define a provision today, you need to do a huge amount of provisions again in the next few?

Well, basically, based only on the macro calculations, obviously we need to do some extra provisions. We expect that to happen. Having said that, there are a lot of things we are doing on the other side, as I mentioned and Cesar mentioned, in terms of reprogramming and government-based initiatives that would probably let us concentrate in some terms the levels of provision we would need to do in terms of this more steep or more dramatic microenvironment.

Okay, okay. Thank you.

We'll take our next question. Caller, please go ahead.

Thank you very much for the opportunity to make questions. My question is related to understanding a bit further how the IT transformation program continues in such an environment. I think more and more it will be needed. But at the same time, you have to work on the cost containment strategies. So just for us to understand if there is any change in the development of the program. And in parallel with that, to understand how much of your transactions have been originated in the digital channels and how much continues to be originated throughout these co-channels. Thank you very much.

Maybe I can take this question. Thank you for your question, Carlos. On the template, actually, as I mentioned before, which is obvious, and I would say each and every bank in the world has happened the same, the digital demand has spiked. And actually, we're investing, and more importantly of this time, developing faster applications in order for our clients to interact more through digital channels with us. As I mentioned at the beginning of the presentation, a very good example is what has happened with YAPE, that even though transactions across channels at the beginning of the crisis were reduced by over 50%, in YAPE, the amount of transactions increased. So what we've seen is that the trend of our clients using more digital channels has increased dramatically over the last couple of months. Therefore, our plan to keep investing in digitalizing both front end and back end of the bank, It has become more important. The way in order to cope with that investment, additional investment, is how to reduce cost in physical channels, plus how to be more efficient because we are digitalizing also the interaction with our clients.

No, perfect. Just a follow-up there. By the way, this is Jörg Fridman from Citigroup. Sorry for not being introduced myself. But just a follow-up to understand, you know, in terms of cost. what do you believe will happen going forward with the IT transformation program, if it is accelerated, or on the other hand, to contain costs, is there any parts of the project that can be freezing for a while? Thank you.

Probably I can make... Sorry.

Go ahead.

Go ahead. Go ahead. Yes, as I mentioned before, we are tanking a number of measures that are going to contain costs, focusing on variable compensation, reducing non-strategic initiatives, and being very fast and focused on developing digital capabilities. We see that the direction, the strategy will break, but this crisis has told us clearly that we need to go deeper and faster and more focused. So we are redirecting costs overall, reducing the expenses, but redirecting costs to improve the capabilities and go faster in developing digital capabilities. As a result, you are going to see less overall costs, but we are going to go deeper and faster developing these capabilities, not only thinking in the year 2020, but into the future. The crisis has shown how powerful are these tools and the clients really need these tools to interact with us in a more efficient way.

That is very clear. I really appreciate. Just a final follow-up there, if you allow me. How many branches are open nowadays, and I know that you are in full lockdown, or how many branches you expect to open after May 10, and how many were open by the end of March? Thank you.

Let me answer that question, Cesar. The original plan was to stay set in terms of number of branches for this year, for 2020. The plan was to basically to open, I believe it was 10, 12 branches this year, and obviously to close a similar number. Again, as of today, we haven't decided how to really shift this plan, but my educated guess would be that by year end, we should have a lower number of branches. Currently, and this is because of the crisis, we are operating with 70% of our branches. The remaining 30% remains, but it is because of the crisis. That is perfect. Thank you very much.

We'll take our next question. Caller, please go ahead.

Hello, and good morning. This is Carlos Gomez from HSBC. I want to ask about the evolution of your equity. If we look at your consolidated shareholders' equity, it declined 11.6% in the quarter. We imagine that is because of the valuation of securities. Can you give us an update as to how that has evolved after the end of March, if you have recovered somewhat or it remains at those levels? And also, if you could reconcile the capitalization figures that we see on page 42. So you have the tier one at 11.9%, sorry, the tier one. at the level which is 10.3%, which is 1.6% lower than the CET1. I know that there's an explanation about how the calculation is made, but it still is a bit against common practice.

Sorry, I take this one. The decrease in shareholders' equity at credit corp level is mainly due to Two factors. First is the declaration of dividends. There's a significant amount. It's around $2.4 billion that has already been registered as liability and is going to be paid today. And the other factor is the decrease in unrealized gains. The unrealized gains decreased during March and has been recovered in a meaningful way in April. And you have another question that I couldn't take notice of.

Yes, this comes from before. Is the difference between the CET1 and the TR1? In almost any bank, the CET1 is less than the TR1. In your case, the TR1 is below the CET1. Could you reconcile that difference?

I don't have these figures at this moment. Sorry, I can come back with you with a specific answer.

Again, to ask a question, please press star 1. We'll take our next question. Caller, please go ahead.

Hi, my name is from Capital. I wanted to ask about Bancompartir and Colombia's operation. If you could give me a bit of your view on Colombia's operation and your future plans for them. Thank you very much.

I can answer this one. This is Walter Bailey. The second part of the question, we have no future plans at this time. At this stage, we're focused on our existing operations and businesses that we have. There's a lot of work to do, and this is not the time to change focus from where we are focused today. We are clearly not at the end of the crisis yet. We do not feel there's an inflection point. Thus, we're extremely focused on what we have today. Our operations in Colombia have been working aggressively refinancing their customers and are doing similar protocols to what we do domestically, obviously with some differences. That's all I can mention about it.

And regarding Bancompartir?

I was mentioning about Bancompartir.

Thank you very much.

Okay.

We'll take our next question. Caller, please go ahead.

Yeah, good morning, gentlemen. This is from . Thanks for the call. My first question is with regard to your skips and the, as you call it, reprogramming of the loads. Are you saying that these, you know, are these loans considered basically performing? Are they in any way factored into your NPL ranges? And also, each seven you show, for example, that you reprogrammed 50% of your BCP loans for retail, but it looks like it's only really, you know, 25% of retail that's highly exposed. So my question is, how are you deciding what to reprogram and what not to reprogram. That would be the first question. Thanks.

Yes. Basically, in terms of the initial aid we have given our clients, we have basically concentrated on all those clients that required some kind of support during the crisis. That's what we were basically Both reactive and proactive in giving some kind of short-term facility, either a freezing of two installments or the skips between one and three months for the next one or three payments. Having said that, our challenge here is the next phase, which will be to be in contact with all those clients and approach them in terms of their needs of a further programming initiative. that will require just their installment program to their ability to face their loans given the crisis. And in terms of the portfolio, yes, I mean, that's the macro numbers in terms of the exposed clients, but everybody has been to a certain degree affected by this crisis. So as I was mentioning, we have been actively, reactively, and proactively addressing these reprogramming initiatives in the short term, three steps and three initiatives.

Okay, thanks. And then the follow-up question, you know, you talked about your level of provisioning, which is correlated to your assumption of GDP contraction, which sounds like it was 5.3%. But we also have this Reactiva Peru program that kicks in and helps, you know, whether the government takes 80% to 98% of the risk. So how do you – so the two questions there is, first, I didn't really understand the explanation how these auctions work. If there is multiple banks involved, and obviously everybody wants to get part of this program, does it mean that it's allocated based on market share or? If you can really explain that better, it would be helpful. And then the second question is, with respect to your credit loss assumption, how do you factor, obviously you have your own models, but you also have these government support, which is fairly significant. So how do you factor those, you know, those supports in your credit, you know, credit metrics and credit loss assumptions?

The way the funds are assigned, what the central bank has done is the central bank does auctions based on the coverage by the government. The central bank has set a fixed rate for the funding for the banks, and banks participate in those auctions, and therefore they get the amount. The one that auctions the lowest rate for that branch is the bank that gets the amount auctioned. After that, each bank provides that funding to its clients. At the top, you have the rate that was offered by the bank in the auction. Reynaldo, please compliment me in terms of the risk part. Yes.

To be clear, I mean, the action is based on what bank offers the least final rate to the client in different brackets, depending on the size of the loan, as well as on the level of coverage by the government in their guarantees. In terms of the impact of RACIA Peru, we think it's going to be a positive impact, of course, but we will see that number reflected probably on our estimation of provisions in these following quarters. We haven't considered that effect yet in the closing numbers of the first quarter.

Okay, gotcha. And the very last follow-up, I didn't hear your response. So these reprogrammed loans that you have, these are still considered performing loans, correct? They haven't really been you know, classified as an MDL in any way, right? So the MDLs are pretty much the same as they were. Yes. Okay. Okay, thank you. Yes, that's correct.

They are considered performing loans. Yes. That's correct. Got it. Our base, all the performing loans.

Okay, thank you.

We'll take our last question. Caller, please go ahead.

Thank you, gentlemen. Yuri Fernandes from JP Morgan. I would like a follow-up on margins. I understood from what you mentioned that margins, they could move up in the next quarter as you are repricing some loans up, even the higher risk. But still, I don't know if I got it properly, like that margins should go up because you have like Reactiva Peru that should hurt a little bit the needs, even though it's a good program. You have like wholesale likely growing more than retail. And also the lower rates. I think like lower rates, that should be somewhat negative for your security book. And finally, I guess renegotiated loans, you are doing some renegotiations for credit cards and other products with zero interest rates. And about 50% of your retail book was renegotiated. So my point is, how can we see margins going up? And regarding the renegotiations, should we expect a big pressure on them in the second quarter?

Yes. Let me go for parts. And probably my answer was relating to, I would say, the standard portfolio, not including Refinancia Peru, because you are right, Refinancia Peru is going to come with very thin margins. In other words, the interest rate has been around 1% with cost of funds of 0.5%. In average, you are right. If you consider refinance of Peru, the average is going to go down definitely for this factor. Relating to the other parts of the portfolio, what is going on is that you refinance loans. Part of the loans has been refinanced at an interest rate of zero, and probably we are going to make some kind of impairment charge between some interest rate and zero for this instance in particular, but the other parts of the portfolio tend to be refinanced and rate similar to the original rates, but you spend longer terms. And the new origination that is going to be smaller than has been in the previous quarters are going to be originated with higher spread. Down the road during this year, we should see this aspect. But you are right, if you consider the effect of Refinancia Perú, the average blended is going to go down for this factor. I was referring to the more structural portfolio.

No, super clear. No, super clear. Final question. Finally, just if I may, on Reactiva Peru, is there any seniority on the debt? Do the clients need to pay Reactiva Peru before they pay previous lines of the bank?

The idea of Reactiva Peru is to provide new fresh working capital and They intended not to repay or prepay another debt, but to provide fresh working capital to clients. That's the intention of the program. If you combine all the measures, you have a very comprehensive package. You, facing the uncertainty, you offer the client skips and free things. After that, you provide Reactiva Peru to have fresh working capital and down the road-based or in specific circumstances probably there's going to be a new refinances but more tailor-made based on the performance in the following quarters.

Thank you very much.

Yuri, do you listen? Yeah, I'm here. Yeah, just to add on what Cesar mentioned about Reactiva, it's correct that the idea is to provide fresh working, new working capital However, the only limitation regarding paying previous financing facilities is not to pre-pay any credit.

In the case the client didn't survive down the road, which credit has seniority? Your loan that was done before or the Reactiva Peru? You need to collect this I don't know, any kind of money that was remaining.

So how it works is that obviously 80 to 98 percent of the ActivaPeru loans is backed by the sovereign risk, and then we have to collect whatever can be collected from the client. If the financial institutions have any collateral that was placed as a collateral for a previous loan, that collateral is not shared.

Okay. Thank you very much.

We do have one more question. Caller, please go ahead.

yeah often previous discussions so essentially the way to decide how much the rocks and how much you know to to allocate you know how much lending to do it in a one percent rate is based on your stress test of your clients right so if you see that the client is very in a bad position, and, you know, it's better to extend 1% or even 0% loan to them as opposed to them getting bought, then you could do that because that would save potential with the client and save you from recording NPL, even though you may sacrifice interest things, essentially, right? So that's how you decide how much to dial up or dial down this participation in the program.

Is that correct? Your assessment is correct. The objective for us regarding the Reactiva Peru program is to provide most of the benefits to our clients. And obviously, this profile of our clients due to this new working capital facility at extraordinary rates and conditions, improve the risk profile of our portfolio. But so far, what we expect is that the Reactiva Perú has already, over two-thirds of the program has already been auctioned. What we expect is to satisfy demand of almost all of our clients.

Okay, and the same goes for FIE, as you mentioned, that's for micro-businesses. Is that the same mechanic that banks participate in the auction? I mean, obviously, the loan limits may be different, but is it essentially the same idea? It works the same way with Reactiva, right?

The FAE is targeted more to the microfinance. As you may be aware, there's a high correlation with formality and the microbusiness. So the typical client of a microfinance institution didn't qualify for the ATIA because of the lack of formality. So the FAE, the target is basically for informal crimes. But despite that, the process is similar.

Okay, understood. And then the very last question was a discussion on interest rates and NIMS. You said that So, obviously, rates have dropped by 280 points in the last month or so. It looks like, if I'm interpreting your disclosures correctly, you guys have essentially, you know, when the rates drop, you have income increases, right? Is that correct? No.

Sorry. 100%. Under normal circumstances, it doesn't happen because you have already some funding at very low rates like demand deposits and savings that we pay low rate. So in normal circumstances, what you have is lower interest rate, less margins because you can have smaller margins. What Diane mentioned is that due to the change in the risk profile, we are going to originate loans with wider margins in order to reflect higher probabilities of default. But in normal circumstances, lower rates means lower margins because you already have a funding very close to zero.

Okay. So you're just going to price your loan higher, essentially, than you would have otherwise. And so would everyone else in the banking system, right?

Yes.

Okay, understood. Okay, thank you.

We'll take our next question. Carlo, please go ahead.

Thank you, everyone. Sorry for, you know, jumping in late, but I have a follow-up. So let's just give an example here. If there is a 40 million loan to a client, and you land an additional 10 from, you know, government lending lines. It defaults, and there is only 40 million in collateral. Who gets the 40 million? You or the line that goes to the government? And my second question, if I may, is also a follow-up on NII. When you do not charge interest on the renegotiated line for two months, do you recognize zero NII in that quarter? So second few now is going to be zero. Or do you reprogram the entire loan and you start recognizing in a different accrual method where your second cue is not as impacted?

Probably I take the second question. Yes, I take the second question. What we are doing conceptually in the case of zero interest rate is to originate a new loan to pay the older installments and originate a new program in the case of BCP is in several installments. And in the case of MiBanco, in most of the cases, it's a balloon. And what you are going to do in the second quarter is to recognize some kind of impairment between a certain interest rate and the zero rate that you are going to charge. This recognition is going to be all through the time offset because you are going at the end to have no specific loss in one time, but a lower interest rate that is zero through the time. I don't know if this helps.

It does help very much. So you don't have two people in the second queue. It's clear. And in the other one about the collateral? Yes.

I can take that one. Yes. If the collateral was pledged before the appeal alone, that collateral is not sure. Let's say it wasn't pledged, but there are assets that can be taken as a collateral or as a way of collecting, then you will share on a party-passive basis. Obviously, regarding groups, the bank gets 80% to 98% right away the credit support. I believe it's three months. After that, we have the responsibility of collecting for both ourselves and the government.

Very clear. Thank you very much.

We will be taking our last question now. Caller, please go ahead.

Hello, Carlos Gomez again from HSBC. I have a macro question. You said that you expect government to start releasing restrictions at the end of the month. anybody who follows the numbers in Peru. Unfortunately, we continue to see an increase in cases and an increase in deaths. What is your realistic expectation as to when the lockdown will be eased? And have you already included that in your 7% to 11% expectation for CTP decline? Thank you.

Yes, what we are assuming so far Sorry, what we are assuming so far is that the economy now is working around 45, 50 percent, with the initial release is going to go up to 70 percent, and after that, gradually to up to 100 percent. What is difficult to estimate is how effective is going to be the comeback of specific activities, not only based on regulation, but based on behavior of the customer, let's think in tourism or restaurants. So when we are talking about this ample range of GDP expectations, we are considering the, in the first case, sudden reopening that follows the schedule and in the most pessimistic figures of 13% that is a more gradual or less effective reopening process. But as you can notice, the range is very wide and has been moving based on decisions taken in terms of extension of the lockdown and methodology of the opening the economy.

All right. Thank you very much.

Thank you. Now I'd like to turn the conference back to Mr. Walter Bailey, Chief Executive Officer, for closing remarks.

Thank you, and good morning to all of you. These are clearly unprecedented times. Some of us have gone through several domestic and international crises, and they all have been somewhat different. The key aspects to understand better, to better understand the current and forward-looking scenarios and what makes this current situation different in my mind are the following. One is that health and humanitarian concerns are the drivers. Second, it is extremely difficult to predict, as Cesar was saying, the ramp up of production after a quarantine, which will not necessarily be in a straight line, but could have setbacks along the way. Three, the capacity of the government to execute public health and public works policies has limitations. And last but not least, This crisis impacts practically all sectors of the economy. The strength of our balance sheet, liquidity, and franchise is tremendous and gives us the resources not only to weather this crisis, but to emerge from it earlier and stronger, thus allowing us to capture opportunities in a post-crisis scenario. Our conservative nature and balance sheet strength has led us to front-load an important portion of the impact in our credit portfolio. That line of action has proven to be effective over and over and will definitely be our line of action in the months to come. As mentioned by Cesar also, going forward, we are reviewing our strategies, projects, and initiatives in each line of business to prioritize and adapt to the new scenarios they're still work in progress here to finalize we thank our shareholders for your support and personally are extremely thankful to all of the credit corps collaborators which have once again demonstrated tremendous commitment to our customers and institutions thank you very much for this call and we look forward to meeting with you during the months ahead. Thank you and goodbye.

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