Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to Credit Corp LTD's second 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 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 of Mr. Gianfranco Ferrari, Deputy Chief Executive Officer. Mr. Alvaro Correa, Deputy Chief Executive Officer. Mr. Renato Loza, Chief Risk Officer. Mr. Cesar Rios, Chief Financial Officer. Ms. Francesca Raffo, Deputy CEO of BCP. And Ms. Milagros Siguenes, Investor Relations Officer. It is now my pleasure to turn the conference over to Credit Corp's Investor Relations Officer, Ms. Milagros Cingüenes. Ms. Cingüenes, you may begin.

Good morning, everyone, and welcome to Credit Corp's conference call. Before our short presentation, I would like to invite you to our Credit Corp Day event, which will be held virtually on October 1, 2020. the same month that we will celebrate the 25th anniversary of the listing of our stock on the New York Stock Exchange. Next week, we will be releasing our formal save the date. But in the meantime, please bear in mind that the event will be at 9.30 a.m. Eastern Time on October 1st, 2020. And we look forward to seeing all of our investors in the news. Thank you very much. Go ahead, Cesar.

Thank you, Milagros. Good morning. Good morning. and welcome to Credit Corp's conference call on our earnings results for the second quarter of 2020. Since our previous conference call, the COVID-19 pandemic has continued to wreck havoc worldwide, and certainty remains regarding the course that COVID-19 will follow. The urban economy activity was severely hit during the second quarter of 2020. In April, economic activity fell 40% year-over-year, and in May declined 33% year-over-year. Our estimates suggest a contraction around 20% year-over-year in June. Nonetheless, there are already clear signs of economic reactivation. First, electricity demand has begun to register a gradual recovery. Last week, demand reflected only a 4% decrease in year-over-year terms after falling around 31% year-over-year in the worst weeks of April and May. Second, our aggregated week indicator, which includes transactional data, suggests that household consumption has recovered 77% of its pre-pandemic level. Third, employment indicators deteriorated notably in the second quarter of 2020. The occupied economically active population in metropolitan Libya registered an uptick in June. All in all, in our opinion, GDP figures for the third quarter of 2020 should show significant improvement compared to the second quarter of 2020. If a new lockdown were necessary, we expect it to be focalized. As such, the world appears to be behind for GDP figures. Next slide, please. In the current context, we expect the economy to show lower levels of year-over-year contraction in the months ahead. Specifically, we foresee upcoming quarter-over-quarter expansion after the decline in the second quarter. Our estimates with available data suggest that GDP may contract between 11% and 15% in 2023. For 2021, we expect that GDP to rebound between 6% and 10%, underpinned by the economic measures adopted. In terms of growth, Peru is positioned to register the highest rebounds in the region, driven by large-scale economic stimulus programs, which represent around 26% of GDP. In our last conference call, economic measures represented approximately 20% of GDP. Since then, additional measures have been announced, most of which focus on economic reactivation. The most recent economic measures include Arranca Perú, a role maintenance and temporary employment program that represents almost 1% of GDP. Importantly, the program aims to create around 1 million temporary jobs in the short term. In addition, The government plans to bolster investment projects through the government-to-government scheme that was used for Lima's 2019 Pan American Games. The scheme will be used to reconstruct the north of the country and to drive investment projects in the health and education sectors. All of these investments are equivalent to seven points of GDP over time. Other new measures, since our last conference call, include the implementation of liquidity provision programs, such as the new PIE, Sponsored Enterprises, and this includes PIE Tourism and PIE Agro, which adds 3.5 billion soles of fresh working capital. We believe that this will lead to a collective recovery in Latin America towards 2021, due to both economic measures implemented and the country's strong macroeconomic fundamentals. Next slide, please. The country's economic reactivation is reflected in the recovery of the financial system. Transactional data for credit and debit cards indicates considerable acceleration from the lows of April and May, both in the financial system and at DCP. This trend is expected to continue in coming months. Additionally, the financial system is currently highly liquid. In this case, highly liquidity has been driven, among other factors, by the implementation of the Reactiva Peru program, which is currently in its second phase. This program consists of two phases of 30 billion solid each to provide working capital loans with government-backed guarantees and liquidity provided by the central bank. The liquidity held in central banks who are in account by the banking sector currently stands around 20 billion soles, where the liquidity indicator stood around 3 billion soles in normal times. The Reactiva Peru program has supported private sector loans, and as of June, total loans of this segment grew around 13% year-over-year, as we exclude Reactiva loans growth drops to around 4% year-over-year. The central bank expects private sector loans to increase around 15% in 2020, spewed by the Reactiva Peru program. Next slide, please. Despite these trying times, our priorities remain unchanged. As a leading organization, we are committed to protecting and supporting all of our stakeholders. Regarding our employees, we are providing personal medical coverage for COVID-19-related illness. At the branch level, we continue to protect occupational health and have balanced performance indicators to monitor service, loan portfolio management, and sales. Finally, 95% of our support functions employees are working remotely and will continue to do so at least through 2020. Productivity remains high during this period. Our focus is on alleviating our clients' financial duress. We have offered medium-term solutions as structural programming facilities and continue to offer skills. We are helping SME clients boost their sales by offering no-cost advertising to our digital channel and providing free business education platforms. In addition, all Pacific Health Insurance clients have been guaranteed 100% coverage for COVID-19-related illness. We have worked to ensure business continuity in this rapidly changing scenario. This has been possible thanks to the commitment of more than 35,000 employees who have worked tirelessly to provide essential services. We have taken target security measures and are bolstering capacity management across channels. Finally, we have actively managed liquidity and solvency to preserve the solid the financial conditions of our businesses. Excuse me for the interruption, Milagros. I think there is some problem with the line. Could you confirm that, please?

I can hear well.

Okay, thank you. Our commitment to community support is unwavering. We have already distributed the donations gathered through BCP's Yo Me Sumo campaign. Additionally, our health provider business works in close coordination with the health ministry and has joined in a sector-wide effort to provide flat rate hospitalization services for COVID-19 patients with public health coverage. Finally, In addition to the 135 million solid in donations collected by the Yo Me Sumo campaign last quarter, Prima, Pacifico, and Credit Corp Capital contributed 4 million solid this quarter to equip our health system with medical oxygen. Next slide, please. In this context, we have adapted with remarkable agility liberating our scale and digital capabilities to fulfill the accelerated demand for digital services. In DTP, our individual digital clients reached 50%, or 4.3 million clients, 1.7 million clients more than the same month last year. This growth has driven by an increase in digital sales and transactions. In terms of digital transactions, the channel that possesses the highest growth were YAPE and mobile banking. In June, we see the 3 million user mark and the YAPEROS, meaning transfers, during the quarter top 985 million soles compared to 170 million soles the same quarter last year. In mobile banking, we have 3,200,000 users and monthly transactions doubled in comparison to last year's figures. We are about to launch a new version of our mobile banking app and have changed the infrastructure, graphics and transactional flow to optimize the user experience. With regard to digital sales, the share of digital sales of total sales of savings accounts will considerably year over year rising from 2.7% in 2019 to 42.3% in 2020. There is still significant potential to leverage these channels to boost digital adoption and financial growth. To have this opportunity, we have trained 2,100 agents BCP to educate clients about YAPE or mobile banking. Our goal is to reach 1 million clients through these partner agents by year-end. In insurance and pensions, our apps and client portals have stood out as the best means to handle client questions and requests remotely and quickly. Self-serve digital transactions stood at 54% and 91% respectively. Finally, at New Hampshire, 85% of our loan officers are using Murpy, a mobile app that provides online access to information on clients. sales leads, loan disbursements, and other functions. This boosts agility, improves the client experience, and optimizes our advisor productivity. The change in the behavior of our users is proof that our transformation strategy is moving in the right direction to harness potential for growth and inclusion across business segments. Next slide, please. Going on to our second quarter 2020 financial highlights, you will see that we have leveraged our balance sheet strength while maintaining a conservative approach. This temporarily compromises results that will allow us to absorb most of the impact of the crisis by year-end. I would like to highlight our loan portfolio and deposit base are growing at a significant pace. more than 21% and 25% year-over-year rate respectively, driven mainly by loans from the government relief programs Reactiva and PAI. After isolating the effect of these programs, Credit Corp's structural loan portfolio grew 7.7% year-over-year. The cost of risk was highly impacted this quarter and situated at 7.76% after forward-looking provisions were set aside in a more challenging macroeconomic outlook due to COVID-19 and updates were made to the probabilities of the fall in each segment. Our coverage ratios improved to situate at 167.5% back By a solid capital base, we are prepared to face potential negative outcomes from this crisis. Our mean situated at 4.03% this quarter due to several factors, which we will explain in detail later on. If we exclude extraordinary charges and the impact of government progress we are given by, the structural mean situated at 4.88% this quarter. The decrease in transactional activity during the quarantine negatively affected fee income, but was partially offset by gains in the investment portfolio. Additionally, the contraction in income outpaced the reduction in expenses, which were 2.6% lower than in the second quarter last year. In this context, Credit Corp posted a loss of $620 million solid this quarter. which represents a return of equity of minus 10.7%. I will now explain the results of our main operating units. Next slide, please. I will start explaining BCPS and alone quarterly results. BCP loan portfolio and deposits base has been growing at a faster pace than the banking system. This quarter, loan growth was mainly driven by reactiva loans, the government program loans. To BCP, we have been supporting our existing and new clients by disbursing more than 40% of the first $30 billion solid reactiva tranche. This portfolio is mainly concentrated in SME business and middle market segments. Regarding the year-over-year evolution, the total loan portfolio posted 18.6% growth in average daily balance. SME business and SMEP grew 30.6%, of which 90% was attributable to reactive loans, while wholesale loans increased 21.3% year-over-year, driven by structural loans to corporate clients. If we isolate reactivist effects, the structural portfolio grew 10.4% year-over-year. In second quarter 2020, total deposits grew 9%, quarter-over-quarter, driven mainly by growth in lower-cost deposits. This led to a reduction in higher-cost time deposits. In the context of the quarantine, corporate and SME obtained fresh liquidity from reactive loans, which were subsequently retained in bank deposits. Clients that have their wages deposited in payroll accounts retain funds in saving accounts reflecting a contraction in consumption. Regarding the year-over-year evolution, total deposits grew 26%, led by non-insurers viewing demand deposits and saving deposits, which grew 67% and 32% respectively. Next slide, please. Now, I will comment on the initiatives that we have been implementing to manage DCP standalone loan portfolios. In retail banking, we have conducted surveys of FME PNED to understand the impact that COVID-19 has had on their business. We have provided facilities such as installments recent to May, skips to June, and more recently, we have offered mainly structural reprogramming in the form of medium-term solutions. The retail portfolio reprogramming profile in the figure shows the composition of our retail portfolio as of July 27. 71% of the retail and vanishing portfolio is up to date 24% received a reprogramming facility during the second wave, and 4% is overdue. The reprogramming portion of this portfolio, which accounted for 5-8% during the first wave, March and April, has fallen significantly to 24% in the second wave, June to August. The SME PIME portfolio is the most impacted, given that 54% of the portfolio is up-to-date and 40% is reprogrammed. Now, analyzing the payment performance of the retail portfolio due, we see clearly signs of reactivation in every segment. The percentage of the portfolio that is due and paid each month increased from 35% in May to 88% in July. Although this payment performance data is encouraging, you can also see that the percentage of the total portfolio that is overdue each month increased from 1% in May to 6% in July. It is still too early to reach a fully informed conclusion on portfolio health, given that some reprogramming facilities offer have not yet due. In the wholesale business, we are managing loads on a case-by-case basis. 20% of the wholesale portfolio is associated with economic sectors that are highly exposed due to COVID-19 crisis. Next slide, please. To buffer the effects of uncertainty, we have set aside forward-looking provisions in a context where our expectation for a contraction of GDP has deteriorated in the second quarter of 2020. we have updated the probability of default for all of our segments based on impact assessments. Provisions are mainly concentrated in the individual and SME client segments in the retail portfolio. Provisions in wholesale banking are associated with specific clients that are highly exposed in the COVID-19 crisis. In this scenario, Provisions at DCP increased by 79.3% quarter-over-quarter and 510.7% year-over-year. This led to a structural cost of risk of 7.99% for the quarter and 6.28% year-to-date. Regarding asset quality, the NPL for the structural loan portfolio deteriorated particularly in the individual segments given that clients who were Delinquents prior to the lockdown were not eligible for reprogramming facilities. As a result, our NCL coverage ratio reached a record high and situated at 160.3%. Total accumulated provisions represent 6.6% of the structural portfolio. Next slide, please. Going into BCP results. BCP's mean was impacted by several factors. First, two extraordinary factors triggered by the evolution of our long portfolio in the COVID-19 environment. a one-off impairment charge associated with the installment freezing facilities offered to clients, and a negative mixed effect, which was generated by incorporating regular active loans with measurable mean levels. Additionally, the wholesale portfolio grew faster than the retail portfolio. Regarding the one-off impairment charge, in April and May, we offered federal interest rate loans to finance up to two frozen installments. For these types of loans, IFRS 9 requires us to recalculate the gross carrying amount and recognize a modification loss. This one-off charge of $150.7 million at BCP represents a temporary difference that will be amortized over the remaining term of the Zero Interest Rate Facility. The disbursement of 14.2 billion soles for the REACTIVA program reported with negligible NIMS generated an additional downward pressure on NIMS. If we exclude both impacts, the impairment charge on REACTIVA DCPS's structural NIMS decreed at 4.34%. Second, the increasing liquidity at significantly lower interest rates in both currencies also drives NIMS downward. The reduction in cost of funds, while significant, did not offset the above-mentioned factors. In terms of non-financial income, core items contracted 31% quarter-over-quarter, which reflects three months of lockdown. The temporary fee exceptions offered to clients and an increase in the use of costly digital charges. Treasury items posted positive results, driven mainly by an expansion in the net gains on securities. Deficiency ratio deteriorated year-over-year, which was attributable to the extraordinary contraction in income. Expenses were 9% lower than those in the second quarter last year. If we adjust income for the one-off internment charge, the efficiency ratio secreted a 39.9%, improving 20 basis points year-over-year. Next slide, please. With regard to microfinance, first, we will review the dynamics of MiBanco loan portfolio. MiBanco's loan growth this quarter was mainly attributable to government relief programs, HiPini and Reactiva Peru. That 7.9% year-over-year growth measured in average daily balance is mainly attributable to reprogramming facilities in the structured loan portfolio. The first phase of Reactiva loans was for formal business. which limited Nibanco's participation. Nonetheless, Nibanco has been awarded a higher share of loans in the second phase of the REACIVA program in July. As of May, the contraction in the structural loan portfolio at Nibanco fell below the microfinance system average. Next slide, please. Nibanco portfolio constitutes Credit Corp's most exposed portfolio. We have engaged with micropanel clients and conducted surveys to assess new risk levels. After providing skips and installing freezing solutions, more recently we have offered mainly structural reprogramming as a medium-term solution. Nibanco's portfolio reprogramming profile in the figure shows the composition of the loan portfolio by the end of July. 31% of the portfolio is up to date, 54% currently holds a reprogramming facility, and 4% is overdue. The reprogrammed portion of this portfolio, which accounted for 82% in May, has fallen significantly to 64% in July. Now, Analyzing the payment performance of the portfolio due each month, we see clear improvements. The percentage of portfolio due that has been paid increased from 52% in May to 91% in July. Moreover, The percentage of the total portfolio that was registered as overdue each month decreased from 17% in May to 3.5% in July. However, this is still too early to come with a complete assessment of the health of Ivanko portfolio. We expect to have a better understanding of portfolio risk in September when most of the loans that were reprogrammed come due and will be properly assessed. In terms of our portfolio quality, the structural end-year ratio increased 160 basis points year-over-year to reach 8.1% in the second quarter due to client reprogramming delays that took place in July and were classified as FACU in June. Provisions led the cost of risk to increase 11% points and situated at a record high of 15.1%. growth in provisions were driven by the downward change in the GDP outlook and by an update to the probability of default rates following an assessment of risk profiles. Consequently, MiBanco's NPL coverage ratio increased 44% points year-over-year to situate at 100.3%. Next slide, please. We will talk about NIVANGOS performance. NIVANGOS are impacted by two extraordinary factors on NIVANGOS. A one-off internal charge related to the spamming freezing facilities offered to clients and a negative mix of pay, which was generated by incorporating Fage and Relativa loans, which means are negligible. The one-off internal charge, in this case, totaled 168 million soles and represents a temporary difference that will be amortized over the remaining charge of zero interest rate facilities. Secondly, the disbursement of loans for the FI and Rehabilitativa Peru government programs in the quarter will generate additional downward pressure If we exclude both impacts, the Inferment Charge and the Effect of Government Program, the NINCO, Ivanko, Extractor Portfolio, situate at 14.2%. The deterioration in efficiency at Ivanko was mainly driven by income contraction. Adjusting income by the one-off Inferment Charge efficiency situate at 47.3% compared with 54.1% last year. Deterioration is attributable to revenues due to the decrease in net interest income explained earlier and to a drop in non-financial income, which was associated with a drop in fees for bank assurance policies. Operating expenses were down 6.4% year-over-year driven by the implementation of cost-saving programs. Next slide, please. Now, I will comment on the results related to our insurance and pensions business. This quarter, Grupo Pacifico's net income improved year-over-year. This was mainly driven by an increase in the underwriting results for the property and casualty business after a drop in net claims due to the lockdown, which restricted the movement. The positive impacts in property and casualty offset the results of LIFE, where net earning premiums decreased. This decline was driven mainly by the evolution of the credit LIFE product, which was affected by a decrease in fees to bank assurance and the alliances channel, and by an increase in net claims due to COVID-19. Pacificos regulatory capital coverage ratio increased from 1.27 to 1.35 quarter over quarter, which was attributable to a decrease in capital requirements due to lower claims. In terms of pension fund business, net income growth due to an increase in the profitability of the reserve fund in line with the market's partial recovery. This offset the decrease in fees. Asset under management fell year over year despite a partial recovery in market prices. This decrease was attributable to government measures to allow affiliates to draw down their pension funds. As of July 23rd, total asset under management has contracted by 7.5 billion soles, by which represents around 70% of total funds that were available for withdrawal. Finally, a congressional commission is still evaluating pension system reform. Currently, it's very difficult to predict how this will impact our business. Next slide, please. Regarding our investment banking and wealth management business. Total asset standard management costed an increase of 13.8% quarter of a quarter in wealth management. Growth is associated with new money, while in asset management, a significant expansion in asset standard management was driven by growth in traditional fund portfolios. Higher asset standard management in both businesses were also attributable to mark-to-market effects, in line with the recovery in global markets and to exchange rate differences. Regarding income contribution, the current business grew more than 42% quarter over quarter, while including the non-recurrent business this quarter, growth situated at 92% quarter over quarter. Non-recurrent income was attributable to an IPO from a proprietary investment, which led to an unrealized gain of 96 million soles. Our current income increase this quarter was mainly related to the recovery of the capital market business, in line with the recovery in global markets. The increase in income is mainly due to trading positions in critical capital. In addition, the proprietary investment portfolio of local and international fixed income from ASB also released a positive performance. Next slide, please. Now, I will summarize Credit Corp consolidated performance. The loan portfolio grew 21.4% year-over-year on quarter-end balances. Growth was primarily boosted by loans under government programs. If we isolate the stakes of this loan, the structured loan portfolio grew 7.7% year-over-year in quarter-end balances. In average daily balances, the portfolio grew 16.8% year-over-year The structural loan portfolio grew 9.8%, mainly driven by an spike in corporate disbursements. In terms of funding, deposits expanded 25.7% year-over-year, primarily due to expansion in demand and saving deposits, which grew 63.8% and 30.5% respectively, namely at DCP. It is important to mention that DCP is non-interest-bearing demand deposits, our least expensive funding source accounted for. for 69% of increase in total deposits. Finally, wholesale funding grew 42.8%, which was mainly attributable to low-interest funding from the Central Bank for Reactiva program. Next slide, please. Going on to asset quality and margins, let me summarize the evolution of the main indicators. We reaffirmed our conservative approach, and we are looking to absorb the cause of the crisis as fast as possible. We added more forward-looking provisions this quarter to reflect the macroeconomic scenario and probability of default following internal assessments. In this context, Credit Corp's cost of REITs situated at 7.66% in the second quarter at 5.85% year-to-date. After adjusting for government programs, the structural cost of REITs situated at 8.41% for the quarter and 6.48% year-to-date. We expect provisional expenses or loan losses to drop in coming quarters, but to remain at levels higher than those seen pre-pandemic. Our structural year ratio deteriorated, which was mainly driven by individual clients and retail banks. Nonetheless, our coverage ratio increased year-over-year, situated at 107%. Redicult's net interest margin this quarter situated at 4.03%, meaning a BCP standalone at Mibanco was negatively impacted by two extraordinary factors, which when isolated results in an structural mean of 4.88% this quarter. In terms of year-to-date figures, the structural mean reached 4.5.1%. Finally, risk adjusted mean situated at minus 1.19% this quarter. Next slide please. Moving on to non-financial income, the stopping fees and net gains on FX transactions driven by a significant decrease in transactional activity was partially offset by results in net gains on securities. In this context, non-financial income expanded 6% quarter over quarter. In an income and net gain and effect transactions decreased 33.8% and 10.6% quarter over quarter respectively, but mainly at ECPS standalone and mainly due to a net decrease in transactional activity. The increase in net gains on securities of 332.6% quarter-over-quarter is mainly related to the recovery of global markets and to a non-recurring income of 96 million solid in the trading portfolio at ASD. In terms of efficiency, the cost-to-income ratio situated at 50.1%. If we adjust income for the one-off impairment charge this quarter, the adjusted efficiency ratio situated at 45.9% in this quarter. The deterioration of 280 basis points was mainly driven by the decrease in operating income at MiBanco and DCP. Additionally, the efficiency ratio for the microfinance line also deteriorated after expenses for Banco Partir were consolidated. Finally, the efficiency ratio for our insurance and pension fund businesses also deteriorated due to a decrease in the income. In the short term, we have decreased variable compensation and optimized administrative expenses. We are reassessing employees to areas that are working at full capacity and continuously investing in these capabilities, accelerating work on mobile banking, and digital education, which are proven drivers of growth. Next slide, please. Our solvency and liquidity allow us to take the measures needed in a rapidly evolving scenario. We have every intention of emerging from this crisis stronger with a focus on recovering profitability. The evolution of our equity was primarily the result of the distribution of dividends this year, given that unrealized losses from the first quarter this year have already been recovered. Our common equity tier 1 levels for both BCP and IVANCO remain over our internal targets, situated at 11.22 and 15.3% respectively. Our core equity tier 1 ratios are calculated under Peruvian GAAP accounting, and as such, use net income figures in local accounting. In the past, it was not necessary to further discuss this issue, as local and IFRS net income figures have always been very similar. But given that temporary differences are relevant in the current environment, we want to draw your attention to this point. Regarding liquidity, in June, we issued $500 million senior 2.75% notes, which are due in 2025 as a conservative measure to build a buffer for managing the current situation. BCP maintains a regulatory liquidity coverage ratio well above its internal limit of 100% with a regulatory LCR of 207% at the end of June and 157% in local currency and foreign currency respectively. BCP applies conservative and disciplined policies that reflect its rigorous approach to risk management. As I have mentioned in the past, management decisions are made with most streaming indicators relying on liquidity coverage ratio for 15, 30, and 60 days, whose standards are aligned with Basel 3. Next slide, please. Going some steps back and analyzing our long-term performance, in the past 10 years, Credit Corp. has consistently grown its net income at a compound annual growth rate of 10.2%. well above the 3.6 percent growth registered for Peruvian GDP during the same period. This is evidence that Credit Corp is poised to maintain strength in the long term. The diversity and strength of Credit Corp's line of businesses have translated into consistently positive results across different economic cycles. Our preceding track record is stacked By the strength of our businesses and our relationship with clients, the current situation is no exception. We are expecting, experiencing a steady growth in our number of clients. Elevated levels of client trust showed by accelerated growth in our deposit base. Acceleration in demand and stable customer satisfaction across charts. We expect recovery in coming quarters. where transaction levels will increase as the economy reopens. Next slide, please. Despite uncertainty, we are confident that we have the talented and committed team we need to adapt our organizations in a changing environment and drive our long-term strategy. Regarding our commercial initiatives, we are focused on managing the most exposed segment of our long portfolio. adjusting risk management measures, and implementing debt restructuring initiatives. We have also restarted our sales efforts by leveraging dynamic pricing and skewing both our clients and sales force toward fuller adoption of digital alternatives. We continue to define our new operating model and have identified specific opportunities to optimize operations, such as sizing our footprint of the branch level and relying much more on remote work, which triggers flexible agility and efficiency. Given current uncertainty, we have suspended guidance, but I would like to mention some key dynamics we foresee in the short term to provide a more comprehensive outlook for the short-term results. First, our estimates suggest that GDP may contract between 11% and 15% in 2020. Secondly, we foresee continuous pressure on income while we deploy the second phase of the ACTIVA. The liquidity portfolio resets with current rates, and we return DCP retail at the bank origination level to prepandemic levels. and see income recovery in line with economic reactivation. Third, regarding provisions, in our basic scenario, forward-looking provision expenses in the second half of 2020 will decrease in comparison to those seen in the first half of the year. Finally, we will continue our efforts to control expenses and optimize operations. In terms of capital, we expect to maintain a sound capital base. With these comments about our office, I would like to open the Q&A.

Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone the opportunity to signal for questions. As we pause, 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 go to our first question. That comes from Ernesto Garlando of Bank of America. Please go ahead.

Hi, good morning, Cecil, Walter, Alvaro, Gianfranco, and good morning, everyone. Thank you for the opportunity and for your detailed presentation. My first question is on provision charges. As you have mentioned in your presentations, provisions should normalize in the next quarters. So, would it be reasonable to assume provisions normalizing to the levels that we saw in the second half of 2019? Or more to the level that we saw during the first quarter of this year. But that will be my first question and then I will make my other questions. Thank you.

Renaldo, you take this?

You take this?

Yes.

Hi, Ernesto. Well, we, as Cesar has mentioned, we've done an important level of provisions during the first half of the year, especially the second quarter. In terms of your questions, the second quarter, Semester, we expect a lower level of provisions than what we've done in the first semester. Having said that, at this time, we wouldn't expect to be as good as it was in the last semester of the previous year. But we have some indicators that the performance of the portfolio might be improving. So at this stage, it's quite difficult to give you a precise estimate of the level of provisions in the future.

Okay, understood. And then you mentioned that in your wholesale loan portfolio, there's around 20% with high exposure, and that around 5% of the provision charges that you have created were allocated to this exposure. So after evaluating all your portfolio where you have made an important effort in individuals and SMEs, Do you think higher provision charges could come from the wholesale loan portfolio?

No, I would say that in that specific case, we've done a one-to-one analysis on every specific client. We've seen positive results in the last weeks in terms of the level of payments they were offering, so we don't expect an important charge in wholesale banking provisions for the following months.

Perfect. Thank you. And then my last question is on the political and regulatory outlook. We have seen a lot of changes in the cabinet with less than one year ahead presidential elections. And then we were hearing this potential banking bill that was trying to present an interest amount gap. So can you provide us some details on what are the last updates on the political and regulatory fronts, as well as the withdrawal of pension funds? Thank you.

Thank you. Gianfranco? Yes?

Can you hear me? Yes, we can hear you.

Sorry, can you hear me? Okay, great. Sorry about that, Ernesto. Regarding the political models of all of us right now, especially in Congress, there are three... potential legislations in Congress. The aggressiveness, I would say, of the regulation has lowered over time. I do believe and I'm positive that the Congressmen are understanding the impact of these measures on the banking sector, not only the banking sector, but especially in the microfinance sector, which is the most vulnerable part of the whole financial sector, and obviously of the economy. So as we speak, there are three initiatives. One is the best one, which is creating like a specific commission involving all the financial the relevant stakeholders regarding interest rates and how to provide more facilities to debtors. That's the studies on political matters. As you know, the government has, actually yesterday it has been appointed I would say that the structure of the cabinet is quite similar to what we have had in the previous cabinet, so we are positive that the structural measures that are being taken will stay going forward.

Thank you. We will move to our next question. That comes from Tiago Batista with USB. Please go ahead.

Yeah, guys. I have one question about the margins. You already mentioned that the NIN should contract because of Activa Peru. But I want to double-check if the impairment of the zero facility that you booked in the second queue, these will not repeat, will not happen again in the third queue. And also, if you believe that NII, in solace terms, not in margins, can return to the level of the last Qs if the last Qs is the new normal of NII or if this second Q is the new normal of NII.

Okay. Tiago. Probably I would like to review the composition of the margin for every key component. In terms of lungs, We have been impacted for this one-time event, and the result is the loans starting to pay according to schedule is that you are going to have a reversal of this initial charge. Already it has been happening in the main of June because most of the impact has been registered in May, and we are starting to reverse this initial provision. Under the current circumstances, this is one on-event, one-off event. Another factor in the loan portfolio, thinking about no margins, but total income, is the composition of the loan book. For some months, we have been very focused on restructuring, reprogramming loans, and offering Reactiva products to our clients, and due to the change in the risk profile, we have been originating at a slower pace than previously. This dynamic is starting to change in July, and gradually we are starting to originate to reach the previous levels. The impact in the short term is that we are going to have a smaller portfolio in the retail part of BCP and in Nibanco because, as you have seen, we are having very good levels of payments. So for some months we are going to have more payments than new disbursements. And over time, probably at the end of the year, we are going to balance out this effect. The other dynamic that is going to affect our income in the short term is the reset of the liquidity portfolio rates. We have, for example, titles of the central bank at 2.2%, 3.5%, 2.5%. that are coming due and renovated and at rates that are much lower due to the decrease in the reference rate. This is going to impact at least for one more quarter. And after that, we are going to stabilize this part of the portfolio. In the expense side of the book, what we are doing is resetting the cost of funds and a very good pace but we are going to have one and one of events due to the issue in bcp of the uh a new uh subordinated loans it's an important amount 850 50 billion dollars uh in which we have a change the bonds that mature next and the following year for new ones with a significantly lower interest rate. But we are going to register a one-off charge due to the premium that we pay for the interchange. But coming down the road, this is going to be a reduction in the cost of funds. I would say that this is the general dynamic that we are going to see in the coming quarters.

No, very clear. Thanks.

Our next question comes from Gabriel Mombrega with Citigroup. Please go ahead.

Hi. Good morning, and thank you for having me. I'd actually like to ask my first question regarding your refinance linebook. Could you maybe give us a bit more color of what is the current risk profile of these clients? What are the collaterals that they have? were the clients that were maybe paying before? And also, if you could explain to us how you were accruing interest on your own. Thank you.

You're putting it in what specific portfolio? Excuse me. Sorry, the renegotiated portfolio. I didn't get you on what specific portfolio?

Yeah, on the renegotiated portfolio, which you have been giving . Yes.

I mean, we've been quite active during the, especially the first quarter of the year in April, restructuring a lot of the loans, both in the SMEs and individual loans. As you've seen in the charts, this demand for further reprogramming has dropped quite dramatically, especially on individual loans. And we've seen still an important level in the SME market. We have both loans with collateral and without collaterals. But the trends we've seen in terms of payments of the amounts due in the recent months have been surprising for us. We expected them to be more affected and to request even further programming, which we haven't seen. And I would say we have both, in both segments, SMEs and individuals, loans with and without collateral. So I would say it's a fair representation of our portfolio in both segments.

All right. Thank you. Can I ask for my second question? Looking at your expenses, we saw that you did some cost containment during the quarter, but I imagine that during COVID, a lot of your clients started using much more of your digital bank and also adding to this that you were already investing in your IT platform. I would just like to understand for the remainder of the year if you still plan to continue on investing in your IT platform or are you already starting to collect some efficiencies from your investment? Thank you.

I think we have two different dynamics. In the more traditional income, we have an impact due to the decreased level of activity. A number of these collections have related to transactional activity in most of the traditional channels. And as the economy reopens, we have seen already an uptick in this regard. And in the case of the digital channels, it's core of our strategy. We continue to invest And what we are going to get out of this is a much lower operating cost down the road. So, we are continuously investing in digital channels that are going to provide us with significant efficiencies down the road.

Thank you very much.

Thank you. Our next question comes from Yuri Fernandez with JPMorgan. Please go ahead.

Thank you, gentlemen, for the presence of making questions. I have a more mid-long-term question here regarding your ROEs. And I totally understand it's very tough in this kind of environment to think what's going to happen in 2021, what's going to happen in 2022. But when do you expect ROEs to go back to those 18%, 19%, more sustainable ROEs, if that's still the case. And if you can comment a little bit about the diluted impact of reactive loans, because I understood that you have a lot of one-offs on your margins this quarter, but most of those reactive loans, they have like 36 months term, and they should stay on your balance sheet for a while. So my question is, even if like economy rebounds, even if the cost of risk normalizes in 2021, Should we continue to see ROEs lower for a longer term, given you have, like, this pressure from , this diluted impact on your margins for a while?

Thank you.

We are not providing exact guidance at this point, as I mentioned previously, but the dynamic that we see is that we are going to have, for a couple of years, while the interest rates are especially low, reduce margins, but we are working actively in efficiency to return to profitable levels down the road. But this is going to be an adjusting process because the immediate effects of the reduction interest rate, you need to recover gradually. And in terms of reactiva loans, we have mentioned that the main effect of the reactiva loans is to reduce the structural risk of the a portfolio because provides fresh capital to the client. And effectively, we are going to have this loan for three years, one year without payments, and after the 13 months, a gradual repayment process. So, in terms of need, this is going to be a structural effect, but in terms of the total amount of income should stabilize once we finish the disbursement process during the third quarter.

Just to complement what Cesar just mentioned, how I see the dynamics is that the main leader in order to return to improve our ROE going forward is how the provision account moves. I do believe that the impact on margin because of RACIA should be managed by the reduction of cost so that should should be uh zero something the key lever here is how to manage uh provisions and that's the underlying reason why we've been so uh not only active but also proactive in the reactiva program in order to keep our our clients um and be coherent with our long-term vision of these relationships.

Okay. Thank you. Thank you very much.

Our next question comes from Pito Labarca with Goldman Sachs. Please go ahead.

Hi. Good morning, everyone. Thank you for the call. And following up on provisions, just to understand a little bit more how you came up with the level of provisions that you booked. I mean, I understand you're expecting GDP to fall anywhere between 10% to 15%, but you also expect a strong recovery in 2021. So just to understand, I guess, a little bit of the thought process or some of the analysis you did behind the provision levels, like how much of this is just preventative in 2021? and being cautious, because if we look, I guess, at least regionally, you have the highest cost of risk amongst most banks in Latin America. Just to understand, I guess, is it because the short-term risks in Peru are very high given the level of COVID infections, but, you know, you also mentioned how much government stimulus, like 26% of GDP. So just to understand, like, how much of this is sort of a short-term preventative measure, and how, as well as how much you are concerned about how much you're going to have to eventually write off and what's going to become non-performing. Just trying to get a little bit more color on how you came up with the level of provisions that you booked in the quarter and also considering you had already a high level of provisions in the first quarter. Thank you.

Yes, Peter. Thank you for your question. Basically, what we've done this quarter is we've mixed two approaches. the one we did in the first quarter, which was basically a macro-level approach, top-down, to try to estimate the impact that changes in GDP would have in our portfolio. There has been a further deterioration in the expectations of the GDP growth, I mean, drop for the year, so that has certainly had an impact on what we expect will happen in the following months. In this quarter, we have complemented that analysis with a bottom-up approach by which we have, as Cesar mentioned, surveyed an important part of our clients, specifically in SMEs and individual clients, as well as the most important wholesale clients to try to estimate the impact that COVID might have on the portfolio. We have also included some some demographic information, economic sectors to see the different impact that COVID has had on these economic sectors independently, and also some early warning systems that measure changing the level of deposits, changing the level of debt, or changing the use of other facilities' credit lines. All together, that has given us, I would say, a good estimate as of today of the provisions required by the end of the first semester of the year. Having said that, the key information that we would require to have a more precise number in the following months is the level of payments that we would see in the reprogrammed part of our portfolio. The first indicators are very positive, as you have seen. But there's still an important share of our portfolio that we can do in this quarter and in the fourth quarter of the year. By year end, we would probably have a more precise estimate of the level of provision that would be required and the level of impact that would have on non-performing loans.

Okay. Thank you. That's helpful. Maybe just to follow up a little bit there, I guess, You know, based on what you're seeing, at least initially so far, and what you've done, I know you said provisions should be lower than the first half of the year, but even that kind of gives us a very wide range. I mean, do you think it could be even lower than the first quarter when it cost you $4.50? Like, even that was a bit elevated. So, it's going to go somewhere between where you were in 2019 and what the first half was, or... It's just relative to the first half of the year where the cost of risk on average is around 6%. So, only because of the wide range, just trying to see if we can narrow it down a little bit in terms of how you think, based on what you've seen so far, at least that level of provisions can go to.

Yes. One thing we need to incorporate in the analysis that Gianfranco was mentioning was the impact of the REACT-UA programs and the reprogramming efforts that PAN has done to the portfolio. In general terms, I would say it would be probably around what we've done in the first semester, but there are a lot of uncertainty still on that number.

Okay, but that's also around the level that you saw. Yeah.

On the first quarter, not on the first semester. The first quarter, not the first semester.

So around 4.5% cost of risk, you know, given what you're seeing today, is at least in the short term sort of a reasonable sort of assessment, you think?

Yes. The information we have today is probably a fair assessment, yes.

Okay, perfect. Very helpful. Thank you very much. Sure.

Our next question is coming from Jorge Curry with Morgan Stanley. Please go ahead.

Hi. Good morning, everyone. Thanks for all of the commentary around delinquency and provisions. I actually just have another one on that same topic, and maybe similar to the previous question but asked differently. Your expected loss model that's driving your provisions What is the expected loss that you're assuming that drove the provisions that you have as of now? Your MPL ratio is at 3.8%. I believe, where does that peak? in this expected loss model? And I think that'll help us understand the magnitude of the provisions that you have and the room for either being able to lower provisions or the other way around. That's our first question, thanks.

Yes, I would rather give you, I mean, we have different expected loss for the different portfolios. Definitely our main concern today is the SME market because it's the one that has been most impacted and where we have seen the highest level of reprogramming. I wouldn't like to provide you a general number of affected losses in terms of NPL, but I would probably try to work a number and get back to you.

I'm sorry. I'm not sure I understood your question. Your answer, I'm sorry.

No, I mean, at this time, and usually we don't provide these numbers on a forecast basis, I am not able to provide you what is our NPL levels expected for the second half of the year.

All right. Okay. Let me ask something that is probably a bit more under your control. On expenses, which we've seen most banks in the region rightly so trying to be as aggressive as possible on managing expenses to offset some of the top-line challenges. What is the commitment of the consolidated bank, the consolidated financial conglomerate in terms of

expense growth for for this year and next year thanks yeah um so let me let me answer your question in two stages so maybe for the first three four months we weren't as concerned as in our focusing in expenses we were focusing in the health of our beliefs, the health of our customers, and due to the massive deprogramming specifically in retail loans, we really focus on that. As you've seen, the expenses have gone, despite that, expenses have gone down basically because of the slowdown in the economy. Going forward, I would say there are like three main levers. One lever is what Cesar mentioned in his presentation, that we've seen in the bank, we've seen a massive movement by our clients in adapting digital channels and digital paths. The second one, which is, because of that, we are going to reduce our footprint this year, I would say by anything between 4% to 6% of our footprint. And the third one, which is a more structural one, is I strongly believe that, and this goes beyond BCP or Peru, but the banking businesses, the margins will be lower going forward, so we are going to start an efficiency program that may take anything between six to 18 months in order to implement. Something similar to what we did, attacking other users, but something similar to what we did five years ago.

So when you put it all together, what do you think your expenses on a full year basis will grow or decline this year? And same question for 2021. I'm just looking for a number.

Yeah, sure, sure. On 2020, it's quite difficult to answer. So, again, the expenses we are looking at, current expenses are, we have a decrease of 9%. I would say that's the number. But it's quite difficult to provide a specific number. In 2021, our ambition is to return to the capital income level we had in 2019.

Okay. Thank you.

Our next question comes from Jeffrey Elliott with Autonomous. Please go ahead.

Hello. Thank you very much for taking the question. Can you give us a little bit more detail around your expectations for Autonomous loan growth from here, maybe kind of breaking it down into the retail components of the structural portfolio, the wholesale, and then the government-guaranteed reactiva portfolio. A bit more detail on how you think each of those is going to grow.

Yeah. It's quite difficult to... I would say it's too soon to answer that question. in detail, a breakdown. What we're seeing, and I believe Reynaldo mentioned it before, economic activity is picking up. So a lot of macro-living indicators, I don't know, like energy distribution, and also micro-living indicators, like daily counts, usage, or amount of cycle daily count, Plus, several conversations we are currently having, especially with our corporate customers, provide us a good feeling of what the economy is going to be, how it's going to perform in the second half of the year. So we are positive on that. Having said that, the counterforce is we still need to manage the performance of the portfolio that was hit by COVID. So we are trying to gather between growing the portfolio and at the same time maintaining or improving the quality, the roof quality of the portfolio. So it's quite difficult to provide a specific number in terms of growth for the rest of the year. Regarding the question on the Antigua, In the first tranche of the idea, which was 30 billion dollars or close to it, we got market share close to 30%. In this second tranche, our participation is going to be lower. 20%, 20-something percent, you have to bear in mind that the second tranche of Activa, and maybe I can jump into Ivanko, that the second tranche of Activa is more targeted for the microfinance, so that microfinance institutions can provide that facility to the clients.

Great. Thank you very much.

Our next question is coming from Jason Mullen with Scotiabank. Please go ahead.

Hi. I have two questions, somewhat follow-ups. I wanted to return to your bank's BCP's North Stars for 2021 that you had talked about in the past extensively and the key objectives there. Number one, in customer experience, cost-income ratio in the mid-30s, double the cross-sell, you know, be the number one in employee experience. If you can give us an update, and actually I would say I think on the digital side, you're probably moving very quickly, but if you can give us an update there and how this current COVID situation has adjusted those North Stars if they have. And then my second question is, also related to provisions where you talk about the base case scenario that provisions will be issued in 2020. Can you frame that with a bull case scenario? What happens if things go better? What would drive that? And perhaps the bear case scenario, how bad things could get? Thank you.

Let me take the first question. So the objectives we made public maybe a couple of years ago, a year and a half ago, they're the same, certainly the same. Some of them we may not reach them by 2021 because of what is going on with the crisis. But still, structurally, we strongly believe that the toy is to provide the best customer experience and to be the most efficient toy in the market. So those goals and that strategy is still the same. Again, maybe we will have to redefine time. What I would add, and that's what really and will change maybe more is that we, and I'm talking about DCP here, and maybe Walter will mention a little bit about the report also, is that the crisis has reflected us that there are some social gaps in Peru that need to be solved. because of the relevance of BCT in the Peruvian economy, we need to get more connected regarding those caps, and obviously we're not going to solve them by ourselves, but we do believe that we can play an important role regarding those differences, and including stakeholders that maybe weren't as perfect in our strategy before. So I would say, going back to the question, I would say that the main change that we will see and we will make public in a short period of time will be that. I don't know if Reynaldo you can take the question regarding the restoration foundation.

Yes. I would say that the key issue that is going to either provide us a more pessimistic or optimistic view in terms of the provision required for the second part of the year is the ability of the government and the countries at home to control the sanitary problem. I mean, we've seen in this since the economy started to feed up and some sectors started to operate, very positive numbers in all, in transactions, in level of activity, in that amount of loans. But, I mean, if we need, as a country, another big lockdown, overall lockdown in all regions of the country, specifically in Lima, that would probably provide us a more gloomy outlook for what is happening in the next... I would say that's this. And, regarding 2021... I mean, we have elections on April, and that's also a big question mark in terms of what could happen for the country on that long term.

Thank you very much.

Our next question comes from Sergey Dudin. Please go ahead.

Yeah, good afternoon. Thanks for the opportunity. I have two questions. The first one is, You guys are speaking about economy getting better gradually. You're also talking about how we see that the new program is giving fresh capital to the borrowers, which is going to help them. And then thirdly, you also said that, you know, these basically reprogram the loans, which means you deferred installment payments, et cetera. So all these things suggest to me that you should see an improvement and do it you know, in a provisioning cost and cost of risk, but your provisioning level suggests that you actually see the opposite. So I'm having trouble reconciling these statements that don't seem internally consistent to me. So my first question is, how can you help me reconcile these statements in your provisioning plot with the skyrocketing?

Yeah, great question. We're also struggling with the issues because Well, there's a lot of evidence that the economy is performing better. I would say on the macro side, the worst is over. And definitely, those reactiva at the, let's say, the corporates, at mid-size companies, and now at the SMEs companies also, have played a very important role. there are some sectors that is going to have structural problems, but in general, what I would say that the payments flow in the economy haven't stopped, which is very positive. On the route of business and the personal business, again, there has been a lot of liquidity that should affect the long-term stability of those people, which is the pension funds, but have provided a lot of equity into the market. So yes, there are like two forces here. One is that the huge that we have taken as a country in the second quarter of this year, which has probably been a little bit, but there have been two or three macro actions by the government that are having a positive impact. The other variable that is quite difficult to assess is the health variable. Unfortunately, the management of the health prices in Peru hasn't been good. This is completely public. Any ratio that you can Compared to other countries in the world, we're among the worst performers, so that's the only issue. But yes, I would say we're still struggling. We are, I am in positive going forward, but it's quite difficult to provide specific figures for the next couple of quarters.

Okay, so... If I could add something to what Gianfranco has mentioned, I mean, as we've mentioned, we've seen some positive indicators in both macroeconomic numbers and specifically on the level of payments of our clients. But you will see in one of the charts, still 25% of the retail portfolio has required some further reprogramming, specifically in the SME market. And there's still an important size of the portfolio overview. So the key question here is how this portion of the portfolio, which is a portion of the total retail portfolio is gonna perform in the following months. So that's what makes us uncertain of exactly what the numbers would be for the next six months. So that level of confirmations of their payment ability in August, September, and the rest of the year would provide us the necessary information to have a more precise number in the second half of the year. That's why we cannot, as of today, change our perspective in terms of the provisions required for the portfolio.

Okay, that is helpful. My second question has to do with your NIMS and specifically your funding costs. So, You talked about how Central Bank of Peru has cut interest rates, which has pressured your asset yields, but it should also help you on the funding side, in terms of funding slots. So can you discuss, I think you might have touched briefly on this earlier, but can you give a more comprehensive answer and just walk through how quickly your loans were priced, how quickly your deposits were priced, and what the net effects of that are, given obviously the, you know, the pressure that you face from the reactive loans, which are sub 1%, but all in, you know, how should you think about your funding costs and unions?

Yes, probably going further in the explanation that I gave previously, talking about the funding costs, we need to consider that we have already, before the crisis, a very a cheap funding cost, around 60 billion soles at DCP between saving accounts and current accounts that already were paying close to 0%. So you have a significant part of the portfolio that cannot improve given the new relative interest rates of the market. That is a key issue. And of course, we are repricing the additional parts of the portfolio, the time deposits, some short-term funding, i mentioned also a the subordinated loans but in the other side you have a short-term and almost i would say almost immediate impact from the liquidity portfolio that has been invested at a rates closely to the to the reference rate that has been adjusted very fast and the other a factor that uh i mentioned previously was the gradual readjustment of the loan portfolios that are starting to pay down, but the origination for some months is going to be less than the payment that has improved significantly in the last month. I don't know if that's helped.

Okay. So, overall, would you, you know, how long do you think that loan pressure is going to continue, and when would the NIM stabilize?

I think we are going to have a NIM pressure in the remaining of the year, and it's going to improve as soon as we started to originate more retail loans with higher rates.

Okay. Okay. My third question is on capital. You mentioned that you raised $500 million bonds before the, as I understand it, before June. So does your capital adequacy ratio that you show for the second quarter, does that include, I assume they've gone into a tier two capital, so does this capital adequacy ratio include that $500 million in there?

Yes. Talking about BTP, we have a sound capital base at the end of the second quarter, but in the Core Equity 1 measures and in the regulatory measures, more than 11% and around 15% in BIS. The issue of the bond is going to improve the BIS ratio for the marginal $130 million tranche that was issued that is going to be around 30 basis points. of course, is not impacted for this transaction.

Okay. So, I'm sorry. I misheard. You said that the bond issue would improve car ratio by 130 bits. Is that correct?

No, no. No, no, no. The bond issue is going to improve the BIS ratio because it's a tier two. for around 30 basis points, because you are substituting one with bond with another one for $720 million, and only the marginal amount, that is $130 million, improves the figure.

Okay, so the marginal improvement is 30 DIFs for BIS? Yes. Okay. Okay. And then the last question has to do with, again, I think you spoke about it, but the connection was very bad, so I didn't hear the answer well regarding the potential interest rate cap on, you know, that's being proposed in the legislation, I guess. Can you talk about exactly what the proposals are and what do you think is likelihood that they will pass? And if they do pass, how would you deal with that sort of issue? Sorry, could you repeat the question? Thank you. Yes, yes. The question is regarding the proposed interest rate cap. I believe you touched on that before, but I hadn't heard the answer because the connection was very bad. So I'm asking just if you could repeat and elaborate a little bit as far as the likelihood of them passing and what's your response.

Yeah. Thank you. Well, there's a project or proposal at Congress regarding interest rate cuts. That's the status. And obviously, we have to go through the process. And after that, we, but actually we, the whole financial system, We'll see if it's legal, if it's according to the Constitution, and things like that. It will hit very hardly, especially the microfinance industry. But we're working on that and trying to educate and create awareness on the negative impact that measures like that will take on not only the financial system, also in the reactivation of the economy. But that is not the stability.

Right. So, you know, is there any sort of expectation or can you give us some sort of a timeline maybe? You know, let's, you know, is that something that...

It's very difficult to assess. As we speak, it's a project. Not every project becomes a law, and if it becomes a law, it goes through a process that has to be approved or not by the executive power. And if it's approved, we're still evaluating if it's according to the present constitution or not.

Okay. All right. Thanks.

We will move now to our next question from Andre Suplo. Please go ahead.

Good morning to all, and thank you for the presentation. My question is regarding the REACTIVA II program, the second phase of the government guarantee scheme. Gianfranco already commented 20% market share in that one, mostly dedicated to MiBanco. What I've heard is that the process for disbursement of this money is taking much longer than in the first phase. So I would like to understand how much of this money that I understand from the central bank, they have already awarded 70 of that how much of that money has already reached your clients and when would you expect um these these uh to be completed uh that would be my first question um

have much more complicated, not on our side, but more on the COFIDA side, which is the government institution that is doing the diligence on the file, plus the number of loans, since also targeted to microfinance institution loans. I would say it will at least triple. So it will go from 77,000 loans to over 250,000 loans. The whole system, not DGP. I don't have the exact data, but I don't know if you have it top of mind. I can look it for. Out of the 30 billion sellers, maybe There has been options for around $20 billion or $17 billion, but I can double-check and provide that. But the speed of this version is quite, quite slow. So, and again, it's a matter not on the financial institutions, but it's a matter on the consumer, which is the government institution of these divisions. Thank you, Gianfranco.

My second question is on dividends. Obviously, this is going to be a tough year for Medincom, but when I look at your numbers at the holding company level, you still have $500 million as a rainy day fund that at some point you were discussing to use for M&A, but you say that those opportunities are not there anymore. So what are your thoughts about this money? Are you giving your strong capital levels a lot of your subsidiaries and giving the most and more positive outlook for 2021? Can shareholders still expect given distribution this year?

Okay. As we have stated, This is a precautionary fund. As you remember, we were operating the previous year with reserve funds of around $600 million, $2 billion solid. We continue with the payment of the dividend at corporate level, but we use the dividends at an operational business unit. So we have an equity fund, and we have an extra layer as a precautionary measure. When we have a better assessment of the risk, we will again see opportunities for using funds. But in the first hand, it's an extra layer as a matter of precaution.

Got it. Hi, this is Walter Bailey. Let me add something to the dividend question. I think that this is not probably the right time to start thinking about dividends. we are, we will have to rebuild the capital of all our banking subsidiaries. So, if we would not expect the banking subsidiaries to send any substantial dividends to Credit Corp. Thus, if we distribute any dividends, it will be a marginal number.

Thank you. Understood. Thank you, Walter.

Our next question comes from Carlos Gomez Lopez with HSBC. Please go ahead.

Thank you. Two questions. The first one refers to the change in your equity. As you mentioned, you paid the dividend, but I was still surprised I did not. have more of a recovery in this quarter. Is there something else that we have not seen beyond the movement in security? Did you sell the securities when they were low? In the second, I think, Walter, I'm going to answer this one. You have obviously made huge, big provisions. You have given a lot of thought to it. But you have probably provided two to three times what other banks in the region have provided. So I think three possibilities. Either your circumstances or your portfolio are different. or you are more conservative than perhaps you should be, or the others have not really taken the crisis to the extent that they should, which would probably, which do you think is the most likely explanation?

Thank you.

I was talking about the equity and the unrealized gains. During the first quarter, we had an unrealized loss of 730 million solid. And in the second quarter, we have 792 unrealized gains. So a significant change in this number. And we also realized some gains that you can see impacting possibly briefly in the P&Ls. Actually, we have increased the size of our investment portfolios.

And in terms of your question of provisions, I would say there are several issues. Peru has been hit very hard as compared to other countries in the region. Also, I mean, we, as you know, are conservative and we take that approach, always estimating the expected loss. We are based on models, and we try to be as conservative as we can. And as it was mentioned also, we will try to absorb all the potential losses this year, or at least most of them. And finally, we have an important share of our portfolio in the SME market, which is a very sensitive market in terms of losses when these scenarios occur. So I would say it would be a mix of the different things you mentioned.

Thank you. We will move to our final question, and that comes from Brian Flores of Citibank. Please go ahead.

Hi. Thank you for the opportunity. Just a quick follow-up. In a previous question, you know, I had some connection problems, couldn't hear very well. You mentioned some figures for OPEX. Could you please repeat them? I think it was for a colleague called Lane Horowitz.

And speakers, do we still have you?

Sorry, could you repeat the question? I think we failed to understand your question. And Cesar, could you please answer? I think it's referring to OPEX, but I wasn't quite sure because of the connection. Could you please repeat, Brian?

Okay.

Sure, no problem.

In a previous response to a colleague, you mentioned some figures that could help us understand the developmental focus going forward.

My connection was a bit bad, so I'm just asking if you could repeat those figures, please.

Okay, yes. We mentioned that during this year, we have control costs in several non-essential projects and also reducing variable compensation so this is going to be a the reality during the year and now we are starting to work in a new efficiency program that is going to give results between 6 and 18 months to control in a more structural way the cost structure, leveraging the digital capabilities that have been evident during this pandemic period in which the clients have moved aggressively towards digital channels. One of the measures, for example, could imply to reduce the footprint of the distribution, the traditional distribution network, use more remote work, and we are working also in another dimension like relations with suppliers and so on. The expectation is to maintain a similar cost-to-income ratio next year than the 2019, but leveraging different levers, working in expenses, and being conscious that the needs are going to be somewhat impacted in the short term due to the reduction of general interest rates in the market.

Perfect. Very useful. Thank you.

Thank you. And now I would like to turn the conference to Mr. Walter Bailey, Chief Executive Officer, for final remarks.

Thank you and good morning to all of you. Undoubtedly, this has been an extraordinary quarter with GDP falling by about 33% when compared with the same quarter last year. This is without precedent, not only in Credit Corp's history, but in the last 100 years of Peru's history. And as you are all aware, this is the worst performance of any Latin American economy. In this context, our results should not be surprising, and on the contrary, should be reassuring in that our balance sheet allows us to front load what our models indicate will be the required provisions, rather than differing the bulk of the impact over time. Looking forward, we are watching three points of inflection as key indicators of the future. One, the level of economic activity. As mentioned by CESA, we have solid indicators that that inflection point is already behind us. The remaining recovery of economic activity should take place in the coming months and will largely be determined by the health situation. The second inflection point is precisely the hell situation. Clearly, we are not there yet in Peru and in the world, as the opening up of the economy is creating a spike in infections. We will have to watch this very closely. And the third inflection point relates to our sense that the damage to our portfolio is behind us. Reynaldo has explained very clearly how we arrived at our provisioning level. We stopped down models based primarily on how GDP reductions affect the different segments of our portfolio, complemented with some qualitative data on the retail and some hard data on the wholesale. As mentioned, we are not sure that the impact of the stimulus package, which are quite substantial, is fully reflected in our model. Initial data, still not deep enough from a statistical point of view, indicates that our model is conservative. But real bottom-up data will only be available by the end of this month. We are focused not only on the impact on our portfolio, but on accelerating our digital initiatives and reviewing our physical footprint. There are relevant opportunities in both initiatives. To finalize, we are confident that our decision to front load the bulk of our provisions is the right one. Our experience in prior crises have showed us the benefits of this course of action. We will come out stronger and with our franchise in a stronger position. Thank you very much and look forward to the next Orchard Conference call. Thank you and good morning.

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