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.