Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to Credit Corp Limited's third quarter 2020 conference call. We now have all of our speakers in conference. Please be aware that your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow if you would like to ask a question. With us today is Mr. Walter Bailey, Chief Executive Officer, Mr. Gianfranco Ferrari, Deputy Chief Executive Officer, Mr. Rinaldo Yerza, Chief Risk Officer, and Mr. Cesar Rios, Chief Financial Officer. Now it is my pleasure to turn the conference over to Credit Card's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

Thank you. Good morning. and welcome to Pericor's conference call on our earnings results for the third quarter of 2020. Since our previous conference call, the sanity situation in Peru has improved considerably, and the economy continues to rapidly recover. In fact, the evolution of both scenarios has exceeded expectations. Part of that from weekly debt calls has resulted in significant improvements in recent months. Nevertheless, we remain vigilant to track an eventual second wave of COVID-19. In parallel, the Peruvian economy experienced this same recovery throughout the third quarter of 2020. The economic zine has been encouraging over the past few months. According to the latest official data, economic activity in August was only 10% below the figure reported for the same time last year. This compares favorably with the minus 40% registered for the year-on-year comparison in April. This V-shaped recovery has also been observed for several economic indicators. As you can see in the charts, real estate transactions, spending dispatches, and vehicle sales have recovered significantly in recent months. Reactivation is also evident in labor market patterns, including payrolls through DCP. Next slide, please. Although Perú GDP posted its steepest decline in the second quarter of 2020, it is rapidly regaining territory in Latam. Moreover, Martin Consensus has gradually improved its expectations for Perú GDP growth in 2021. Peru is expected to lead economic recovery in the term towards 2021, as we leverage strong macroeconomic fundamentals, high commodity prices, and broad government stimulus packages. In our previous conference call, we expected GDP to drop between 11% and 15% in 2020, and that the rebound in 2021 will situate between 6% and 10%. Our latest estimates suggest that GDP will contract around 12.5% in 2020 and will rebound between 9% and 12% in 2021. It is important to note that a series of elections, referendums, and constitutional changes are underway in the countries in which Credit Corp operates. In Bolivia, Luis Arce from Evo Morales Pari won the general election and will take office on November 8th. In Chile, 78% of the population voted in favor of writing a new constitution. Next slide, please. The positive trend seen for economic data is mirrored in the evolution of data for the financial system. Transactions with debit cards at DCP have exceeded pre-COVID-19 levels, nonetheless, credit card transactions are recovering at a slower pace. During the third quarter, the Reactiva Peru program continues to contribute to loan growth's system-wide. According to data from the central bank, loan growth stood at 14.1% year-over-year at a constant exchange rate, supported by the effect of Reactiva loans. If we exclude the Reactiva loans effect, Total loans declined 2% year over year. It is important to remember that REACIVA loans established businesses of different sizes. After the first phase of REACIVA program was rolled out for $30 billion solid, a second branch auctioned an additional $25.3 billion solid. Disposings of this second phase were primary for small, micro, and medium-sized business. We would like to mention several economic policy measures and regulatory actions that are in effect or under discussion. First, there has been further debate on additional economic figures. According to its last monthly policy statement, the central bank stands ready to expand liquidity injections through a range of instruments. Second, Congress is currently discussing initiatives in several key areas. A proposal has been made by an special commission that contemplates a complete overhaul of the Peruvian pension fund system. If this bill becomes law, it could have a material impact in Prima. Given the scope and complexity of the measures, the commission has requested additional time for analysis. Third, early this week, a motion was approved to impeach the president. The President is expected to present his liberal defense on Monday, November 9th.

4.

A number of bills on pension funds withdrawals have been in play since the first quarter. On November 2nd, another bill was passed giving pensioners the right to make withdrawals against their fathers. 5. a second program of monetary transfers began in October. These instruments, which are known as universal bonds, constitute direct monetary transfers for the government to mitigate the impact of the pandemic. Sixth, the government recently approved a payroll subsidy program, which from the private sector that fulfills specific requirements can access this facility. The program aims to bolster a recovery in formal employment. Lastly, the government has rolled out a COVID-19 guarantee program which is directed at individuals and SMEs. Under this initiative, the bank can offer reduced interest rates in exchange for additional government loan coverage for very specific segments of clients. We will continue to closely monitor developments on the economic policy and regulatory fronts to evaluate the impact on credit cards operations. Next slide, please. At the record, we also see clear signs of reactivation. The reprogramming portfolio has stabilized and there has been an uptick in demand for financial products in the individual segment. Additionally, the pandemic has accelerated client migration to digital channels, which are handling a large portion of the upstream infrastructures. Over the past few months, we have worked to support our clients as they adjust to new dynamics. We have actively offered debt-reprogramming facilities to our clients to bolster their recovery. Today, the recurring APOLU accounts for 17.1% of PrediCorp's total loans and 11% of PrediCorp's total loans corresponding to the retained retirement portfolio in Peru. The new COVID-19 Guarantee Program targets mainly a subset of this portfolio to be eligible. Loans are subject to turn and loan amount caps and the facilities available solely to clients that have received no other government facilities. With these limitations, we do not expect the impact to be highly significant, but we will continue to monitor our client needs to respond quickly to changes. September marked a turning point in loan origination and sales of insurance for retail and macrofinance loans in October. The outward trends have increased. Our client's adoption of digital channels, which was discussed during the investor-based presentation in our transformational strategy, continues to gain considerable traction. All of these help credit corps advanced in its goal to foster a more inclusive economy. Next slide, please. Going on to our third quarter financial highlights results shows that the world is behind us and Credit Corp is on the road to recovery. It is important to note that there were several non-recurring events this quarter. A summary of the results shows In a quarter-over-year analysis, the loan portfolio and deposit base grew more than 21% and 27% in quarter-end balance and prospectus, driven mainly by loans from the government relief programs. After isolating the effect of these programs, credit corporate structural loan portfolio fell in quarter-end balance. Net interest income resumed growth and increased 10.2% quarter over quarter, recovering from zero interest rate loan impairment. An analysis of the year-over-year evolution of adjusted interest income shows that adjusted interest income decreased 8.3% driven by lower interest rate and a contraction in the structural loan partially offset by active investment portfolio management. While adjusted interest expenses fell 19.3%, due to funding of structure optimization. In this context, adjusted net interest income constructed 4.3% and mean situated at 4.05%. Key income increased 54% quarter over quarter, in line with economic regulation. An increase in transactional activity and the expiration of key waivers, insurance and the right of response were negative. driven mainly by an increase in claims for mortality related to COVID-19 in the live business, which was partially offset by lower claims in the property and casualty business. The cost of waste improved this quarter and situated at 3.84%, forward-looking provisional expenses fell compared to the previous quarter. This reflects an upward revision in the macroeconomic outlook and the fact that the probability of default has fallen in most segments, driven by improvements in client behavior. This quarter was marked by several non-recurring charges we will explain throughout the presentation for a total of $185 million after taxes. In this context, Credit Corp. reported $105 million in net income which represented return of equity of 1.8%. If we isolate non-recruiting charges, adjusted net income this quarter was 289 million soles and adjusted ROE 4.9%. I will now explain the results of our main operating units. Next slide, please. I will start by explaining DCPS standalone quarterly results. In a quarter-over-quarter basis, loan growth was driven mainly by the second tranche of the REACTIVA program. Loans, to this day's worth, is grossed primarily in the SME business and SME finance segments. In this scenario, the total loan portfolio across SME segments grew 34%, while the total loan portfolio of BCP grew 4.5%. If we exclude REACTIVA, BCP's structured portfolio of contractors 4.9%, this quarter mainly driven by wholesale banking where clients repay liquidity facilities, this boost at the beginning of the crisis. Although the quarter evolution of the structural loan portfolio in average daily balance is contracted, it is important to note that loan origination in retail banking is gaining traction and is expected to reach pre-pandemic levels by year-end. The total loan and the structured loan portfolio posted 21.4% and 1.9% growth, respectively, in average daily balances year-over-year. DCP's funding structure has improved through active management. In the third quarter of 2020, total deposits grew 7%, quarter-over-quarter, mainly driven by non-interest-bearing deposits and saving deposits, which increased 11% and 8%, respectively. In the year-over-year evolution, total deposits grew 30%. The year-over-year growth in deposits was led by non-interest-bearing demand deposits and saving deposits, which expanded 66% and 38% prospectively. In this context, BCP has been able to repay other sources of funding, such as YouTube banks, web hosts, and senior bonds, which matured this quarter. Additionally, VCP executes a liability management transaction discord test to exchange subordinated bonds maturing in 2026 and 2027 at rates of 6.875% at 6.125% respectively for an $850 million subordinated bond at 3.125% that matures in 2030 and is callable at 2025. Next slide, please. Now, I will comment on the evolution of payments behavior in retail banking at DCP and discuss the reprogram portfolio. In the third quarter, retail clients at DCP registered an increasing in the payment behavior, hand-in-hand with economic reactivation. On bank payments and structural retail loans, you reach 94% at the end of September. improving from 72% in June. An analysis of payment performance shows that on-time payments on structurally paid loans due are different by subjections. In the case of SMEs, the payment ratio for businesses that benefited from reactiva loans was situated at 94% versus 88% for non-beneficiaries. In the case of individuals, the payment ratio is higher or dissipate payroll files, who registered an on-time payment rate of 97% compared to 91% of non-payroll charges. By the end of September, 71% of the structural resale portfolio reported no current reprogramming activity. During the same month, DCP's reprogrammed retail portfolio is traded at 23%, which is far below the figure of 58% registered during the first wave of pandemic. An analysis of the retail portfolio maturity profile reveals that high uncertainty portfolio is comprised of clients that are still within the grace period and have received at least one credit facility or roles that have overdue installs. 18% of DCPs, the structure of each portfolio, falls within this category. As loans come due during the full quarter this year, we will have more information to assess the performance and risk of these loans. Next slide, please. The improvement in macroeconomic expectations and planning behavior indicators led provision expenses to drop this quarter. Nonetheless, asset quality began to deteriorate as grace fields expired and some clients were unable to service their debts. BCP's provision expenses decreased quarter over quarter due to improving in expectations for GDP growth for 2021 and 2022 and fine-tuning of risk models and updating of client information to create a better picture of client situations. Provision expenses for the individual segments registered the highest decrease after significant provisioning in the second quarter this year. This quarter, provision expenses were mainly concentrated in SME finance segments in the retail portfolio after delinquency levels rose among clients that benefited from more than one facility. Finally, Wholesale banking provision expenses increased to cover a small number of clients in the energy and airline sectors. In this scenario, the structural cost of risk secreted at 3.22% for the quarter and 5.33% year-to-date. Deterioration in structural loans was mainly concentrated in the consumer, credit cards and SME payment sector. Raise periods in the individual SME segment will expire from average in October and December respectively. As such, we expect overdue loans to increase in the individual's portfolio next quarter, particularly in the credit card and consumer segments, while overdue loans in the SME PIME are expected to rise in the first quarter of 2021. Credit cost provision level and asset quality this quarter left to MPL coverage ratio to hit a record high of 157%. Finally, BCP's accumulated provisions represent 7.8% of the total structural portfolio. Next slide, please. Going on to BCP's results. Net interest income initiated recovery and grew 10.2% over quarter, recovering from zero interest rate loan impairment. An analysis of the adjusted net interest income evolution over the year shows, first, adjusted interest income decreased 8.2% due to a drop in market rate, which was partially affected by active investment portfolio management, and second, Adjusted expenses fell 27% due to a drop in interest rate and funding optimization. In this context, adjusted net interest income falls 0.5% year-over-year. In contrast, mean and structural mean decreased due to several factors. First, BCP's structural mean decreased 23 basis points for several quarters. The negative impact of lower interest rates was partially offset by active investment portfolio management, which increased central formation while maintaining short-term liquidity positions, and the optimization of the funding structure. Second, the loan lease was marked by a significant increase of reactive loans and a slight contraction in structural loans. And third, the decrease of 19 basis points in EIN due to non-procuring expenses related to a liability management transaction conducted in the line. Risk-adjusted EINs recreated at 1.6% this quarter. In terms of non-financial income, core items increased 38% quarter-over-quarter, hand-in-hand with economic reactivation. The 50% quarter-over-quarter growth posted in CINCO was driven by announcing intrasactions and an active reactivation of P-Wave plus support, in line with our fly-in support plan. We expect this outward trend to continue in coming months, both in non-core items who are driven mainly by expansion in net gains and securities. Next slide, please. Lastly, the officials raised by DCP include quarter-reported. Several short-term cost control measures have been applied, including reducing non-essential expenses and variable compensation. After adjusting operating income for the non-recruiting charges registered in the second and third quarter this year, the adjusting efficiency ratio improves from 39.9% to 38.9% quarter reports. As explained during our investor day, DCP's transformation strategy is advancing and we maintain our aspiration of becoming the most efficient bank in Latin America. In both online, DCP generated 421 million profit contributions this quarter. Next slide, please. With regard to microfinance. Let me explain the dynamics of my bank's loan portfolio and deposit-based disposal. Loan growth at MiBanco was attributable to government relief programs, namely Reactiva. The second phase of Reactiva is its qualifying requirements for micro and small business. And as such, more of MiBanco's clients can access Reactiva. By the end of September, Nibanco has disbursed more than $2.3 billion solid year-to-date under the Reactiva and Pai programs. The aforementioned led loans to grow 15.1% year-over-year measured in average daily balances. If we exclude government loans, the structural portfolio of Nibanco fell 3.4% year-over-year. In September, low elimination in Nibanco's structural portfolio began to recover, bolstered by new campaigns to support clients that are still within our risk appetite. Regarding Nibanco's funding structure, demand and saving deposits grew 26% quarter over quarter and 37% year over year. This evolution coupled with an increase in funding from the central bank to finance disbursements of government loans led the funding cost to fall 56 basis points quarter-over-quarter and 98 basis points year-over-year. Next slide, please. Client payments at Nivanco are trending upwards, and the high uncertainty portfolio has considerably diminished. This quarter, Nivanco saw an increase in on-time payments and a drop in the facilities near the budget cloud. By the end of September, the breakdown of our structured portfolio was as follows. 61% of loans were reprogrammed and up-to-date, 35% were non-reprogrammed up-to-date loans and 4 points compared to the last quarter, and finally 4% were overview loans. As mentioned previously, the high uncertainty portfolio is comprised of clients that are still within the grace period and have received at least one credit facility or those that have overdue installments. This portfolio has evolved positively at MiBanco as on-time payments increase. Next slide, please. The COVID-19 environment continues to impact MiBanco's provisional status. Growth in provisions was attributable to a prediction of the probability of the fall rate after Australian risk assessments were updated. This was partially offset by an improvement in the macroeconomics estimates of our forward-looking model. Expansion in provision expenses coped with a contraction in the structural loan portfolio led the structural cost of risk to secrete at 6.1% on annualized basis. In terms of portfolio quality, the structural NTR ratio rose to 9.3% in the third quarter. This was mainly attributable to an increase in refinancing for some clients that, as of February 29, had less than 15 days overdue and delinquency among clients that did not use financial relief facilities. In this context, MiBank's NCL coverage ratio increased and situated at 206.5%. Finally, Nibanco accumulated provisions represented 19% of the fossil structure portfolio this quarter. Next slide, please. Now, let's look at Nibanco's performance. Net interest income and need were negatively impacted by the loan mix, with low margin government loans rather than structural loans drove growth. This negative effect was accentuated by accrued insurance revulsions after grace periods expired and some clients registered in delinquency and a decrease in interest rates. If we exclude the effect of government programs, New Banco's structure remains situated at 12%. This quarter, non-financial income began to recover, driven by an uptick in bank assurance policies and fees. Operating expenses decreased 7.3% year-over-year, which was attributable to cost-saving programs. Nonetheless, income decreased at faster pace, leading to a deterioration in efficiency. Going forward, additional initiatives to improve efficiency include optimizing the network, centralizing processes, and improving the productivity of relationship managers through technology. In the bottom line, Nibanco generated a loss this quarter, which was mainly due to the contraction in net insurance income and an increase in provision status. Next slide, please. Now, I will comment on the results of the insurance business. This quarter, Grupo Pacifico's net income was negative due to higher net claims in ID&R insured but not reported provisions in the life in business, especially for the credit life and disability and survivorship problems, which were heavily impacted by the increasing mortality due to COVID-19. The property and casualty business was told to improve year over year due to a decrease in net claims mainly in the car business due to mobility restrictions during the pandemic. In the quarter-over-quarter analysis, Net premiums in the property and casualty business registered recovery due to new sales and renewal, mainly in the car and medical assistance business. Of course, the health insurance business improved year over year, driven by a drop in net claims after the demand for out-of-pocket services fell during the pandemic. The health provider business registered a decrease in the demand for services, due to occupancy limits at clinics and the fact that clients prefer to delay appointments in the COVID-19 context. Pacificos regulatory capital coverage ratio increased from 1.3% at December 2019 to 1.33% as of September 2020, which was attributable to the earnest capitalization. Next slide, please. Regarding the pension fund business, assets under management remain relatively stable quarter over quarter. Fund withdrawals under government-mandated facilities were gradually lost by the combined effect of an increase in monthly contributions and growth in fund profitability. It is important to note that a bill passed on November 2nd, which allows additional withdraws will impact assets under management for an estimated $3 billion. Net income decreased quarter-quarter due to a decline in the profitability of the Resort Fund, in line with a decrease in market profitability and non-recurring expenses related to fee and the withdrawal of facilities. This was partially updated by an increase in fees after three extensions were listed this quarter. In the year-over-year analysis, total fees decreased, given that a significant number of individuals in the affiliate base lost their jobs during the pandemic. Finally, a congressional commission is still evaluating comprehensive pension system reform. It is very difficult to predict how this will impact in our business. Next slide, please. Regarding our investment banking of wealth management risk, total assets under management hosted an increase of 7.8% quarter over quarter, which was fully breached the gap produced by COVID-19 impact in assets under management in the first quarter of this year. Regarding profit contribution, recurring income grew 13% quarter over quarter. This increase was mainly given by a recovery in our corporate finance business in line with economic reactivation in NGO countries. Projects within the pipeline were executed in the third quarter, including relevant and structural loans and bonus changes. Regarding non-recurring results, there were two charges this quarter. First, There was a mark-to-mark reduction in a proprietary investment at ASB. This led to unrealized losses of $33 million solid this quarter versus significant unrealized gains last quarter. Second, there was a non-recurring provision expense for illegal contingency at ASB for the model fees, which offset the year-to-date unrealized gains on the aforementioned proprietary investments. Next slide, please. Now, I will summarize Credit Corp's consolidated performance. Credit Corp's loan portfolio grew 19.6% in the over year in average daily balances and 21.3% in quarter end balances bolstered by loans under government programs. If we isolate the effect of government program loans, the structured loan portfolio grew 1.8% year-over-year on average daily balances and fell 0.3% in quarter-end balances. An analysis of the balance sheet structure shows that credit cards interest earning assets increased 28.5% year-over-year driven by both the loan portfolio and the investment portfolio. In the investment portfolio, we have optimized excess liquidity returns while managing interest rate risk and maintaining a solid short-term liquidity balance. Credit Corps also optimizes funding structure by optimizing the deposit mix, paying off other funding sources, and executing a liability management strategy to optimize the maturity profile and reduce the cost of BCP subordinated bonds. Consequently, Credit Corps' structural funding costs fell for basis bonds year-to-date to 2.0%. Regarding non-interest earning assets, there was an adjustment to run compact. This is good with this quarter for $64 million. It is important to note that we have acquired this business prior to the crisis and, as such, the current estimated value has varied from our initial projections. Nonetheless, we still see significant potential value down the road. which can be leveraged through credit risk management and an improvement in efficiency and productivity. Next slide, please. Now to summarize the evolution of the main indicators. In land, with the improvement in savings and economic reactivation, provision expenses dropped quarter over quarter after hitting a peak in the second quarter. We expect this downward trend to continue. Asset quality deteriorated remain unable to service the debts. Nonetheless, our coverage ratio increased year-over-year and traded at 169.9%. Net interest income increased 10.2% quarter-over-quarter. The analysis of adjusted net interest income on year-over-year basis indicates that adjusted interest income decreased 8.3%, while adjusted interest expenses fell 19.3%. Consequently, adjusted net interest income contracted 4.3%. Because net interest margin this quarter secreted a 4.05%, it was negatively impacted by a decrease in the structural mean, the current and program's structurally long mix And finally, non-recruiting charges related to bond exchange transactions. Structural needs were situated at 4.46% for the quarter and 4.93% year-to-date. Finally, risk-adjusted needs and structural risk-adjusted needs situated at 1.6% and 1.87% respectively. Next slide, please. Non-financial income. expanded 8.6% quarter over quarter driven mainly by a 54% increase in finkoing due to significant growth in transactional activity in DCT. Additionally, effect transactions grew 3.8% quarter over quarter. Growth in these four items was partially offset by a contraction in the net gain on securities related to a mark-to-mark reduction in a proprietary investment for approximately 23% million soles in the trading portfolio and ASB and an impairment charge of 23 million soles after a downward adjustment was made to the value of a private equity investment. In terms of efficiency, the cost-to-income ratio situated at 45.9% year-to-date. Adjusting income for non-recurring events, the adjusted efficiency ratio secreted a 44.5% year-to-date. The year-over-year deterioration of 160 basis points was mainly driven by macrofinance, and about half of this drop was attributable to the consolidation of back-up activity. cost control measures have included reducing non-essential expenses, variable compensation, and the footprint of face-to-face channels. These are challenging the limits of our operating models to optimize the physical distribution network, support functions, organization, and IT architecture. Next slide, please. At the profitability level, credit costs adjusted net income and adjusted ROE He traded at 737 million soles and 3% points respectively this quarter. This quarter, several non-recurring charges were reported for a total of 185 million soles of their taxes. If we exclude non-recurring charges, Our adjusted net income for this quarter was 289 million soles, while the adjusted return of average equity was equated at 4.9%. Common equity 3.1 levels for both DCT and MiBanco remain above our internal taxes, equated at 11.5 and 16.5 respective. As mentioned in our last conference call, our Core Eclipse 2.1 ratios are calculated under Peruvian Java accounting and attached use-netting configures. In the past, it was not necessary to discuss this issue because local and IAO configures were in various and even priorities are relevant in the current. We want to draw your attention to this point. Now, let's look at our outlook. Next slide, please. In this environment, we can offer a clear picture of the median term. We expect Peru's GDP to grow between 9% and 12% in 2021. In terms of low-moving nature, our commercial activity is accelerating. By December of this year, we expect to return to pre-pandemic levels in the individual segments and hit 75%-85% of pre-pandemic levels in the CME and microfinance segments. Regarding NIM, the negative impact of the borrowing and progress of NIM should level off, while structuring NIM will benefit from a decrease in the funding cost and active management of the investment portfolio. Ease and property and casualty premiums should continue to increase but will be partially offset by life claims. Provision expenses are expected to continue to follow a downward trend next quarter and 2021. We will continue to control expenses in 2020 and are fine-tuning BCP's operating models to determine structural measures for the medium term. In microfinance, measures are underway to optimize the branch network and improve the productivity of the sales force. Finally, we expect our ROE to return to the high teens by the second semester of 2022. With these comments, I would like to open the Q&A, please.

Thank you very much. Ladies and gentlemen, at this time, we would like to open the floor for questions. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad now. If you are using a speaker phone, please make sure your mute button is functioned 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 for questions. We also ask that you please only ask one question at a time. After each question has been addressed by your speakers, you will then be allowed to ask as many follow-ups as needed. But again, please only gain questions at a time. Thank you. Thank you. Our first question will come from Ernesto Gabaldondo, Bank of America.

Hi, good morning, Walter, Fran, Jose, Charlotte, Bernardo. Good morning, everyone. Thanks for the presentation and thanks for the opportunity. My first question is on provision charges. So we saw that they started to normalize to 1.3 billion dollars in the quarter. So this is a level we should continue to see during the last quarter. And then my second question is on your reprogram portfolio. As you mentioned in your presentation, the retail banking reprogram portfolio is showing that 6% are casual loans while 12% still in the grace period. I also noticed that you are presenting the same breakdown for individuals, F&E fitness, and F&E business. So, by any chance, if you have the number of the reprogrammed portfolio at a consolidated basis, indicating how much is overdue and how much will be resuming payments in the next month, considering the overdue loans in each segment and the portfolio that will resume payments, Do you think that the preventive provisions created during the first half of the year will be enough to cover that portfolio? I just want to know if you have already created enough provisions. If you have a few provisions, is your team okay? And then my final question is on insurance revenue, which were affected by higher claims in life insurance due to the COVID-19. So I would like to see your expectations for the insurance revenues in the next quarter. Thank you.

Thank you, Ernesto.

Regarding the questions on provisions, as we expected, we've seen quite an improvement in the levels of provisions during this third quarter as compared to second quarter. We expected to have a number closer to what we did in the first quarter. And the positive trends, both in the macro environment as well as in the performance of our clients, will make us feel quite positive towards the level of provision for next quarter. We don't have a precise number today, but we see that positive trend continue in the same directions. In terms of the reprogrammed portfolio, this is a long journey, and we've seen and we've been helping our clients to reprogram their loans, and at a gradual pace we've seen our clients, both SMEs and individual clients, started to pay their loans at a better level than we expected initially. So in terms of if we've done enough provisions, I mean, we are in the right trend towards provisioning what we need to do, and that positive trend is expected to continue as I mentioned during the next quarter and especially during 2021.

Thank you very much. Our next question will come from Jorge Currie, Morgan Stanley.

Hi. Good morning, everyone. Two questions, please.

The first one is on your operating expenses. Your outlook slide says that the operating model is being challenged to conduct structural median term measures. What exactly does that mean in terms of expense growth for 2021 and 2022? Your expense could have been over the last few years of around 6% to 7%, which you may end up with around, I'm guessing, 7% to 8%. Does that mean that we're not going to see a slowdown in that level of growth for 2021 or 2022?

And especially given the context of the very weak revenue growth, do you think that

there's maybe an opportunity for you to try to offset that through being more aggressive in cutting expenses, particularly next year.

What we aim is to have income growing and faster pay than expenses, and these structural measures that we have mentioned are going to have a gradual impact in 2021 and more visible in 2022. short-term time continuous improvement measure has been taken in the last year at the same time that we spend more heavily in transformation, but these additional more structural measures are going to take some time to mature. So, just to nail it down, in terms of expense growth, does this mean that your expenses will grow similar to the last two years, 7-8% or more than that? We expect to be in this range probably a little bit lower in line with the increased level of activity in the transactional activity and the offering of new and different products. What I try to manage more than the line by itself is the ratio between income and expense growth. Thank you.

My second question is on

on on provisions and so you're you build a a very sensible i think amount of excess provisions given the um npl outlook and overall contraction in economic activity and at this point do you think it's possible to return to

1.5%, 1.6% cost of risk for the second half of 2021.

I'm assuming you're still going to be with probably elevated cost of risk in the first half of the year, given that you're going to start to see a wave of NPLs from forbearance programs rolling off.

But again, given the and take a look at the amount of reserves that you've filled, you know, can we see that sort of like towards the second half of next year?

We are going to converge to a, let's say, more normal level of provisions at the end of next year. but we also should consider that we gradually are changing the composition of the portfolio to more detailed ones. So even with the same line-by-line, business-by-business level of provisions, the mix are going to conduct to a slightly higher structural cost of risk due to the relative weight of the business. And so we understand what you're saying. say, 2018 and 2019, your cost of risk was 1.5%, 1.6%. Given the mixed composition shift, what would be the equivalent cost of risk? I would say a little bit more than that at the end of the next year. But it's going to be a gradual recovery as Reynaldo mentioned. It's not an on-off effect. You have a significant impact in the second quarter of this year, and after that, a gradual improvement. So you think your cost of risk, say, 2022, which, you know, hopefully, knock on wood, is a normal year, is around 2%?

Is that kind of like the way I'm reading through the lines? I mean, it's a little bit lower. Yes. Sorry, I didn't hear you. Sorry, what?

Go ahead.

No, I want to mention that this figure is probably in the upper bound back for 2022.

All right. Thank you.

Thank you very much. Our next question comes from Thiago Batista, UBS.

Yeah. Hi, guys. Thanks for the opportunity. I have one question on the margins. You had mentioned in the guidance that the government loans is pressure your margins. So my question is, do you believe that when those programs end, the clients will be able to pay the same credit they used to pay

before those problems.

So, will the threat return to the normal level when all those programs are ended? And the second question is about Mibanko. When do you believe Mibanko should achieve the break-even? And also, if you have any guess on when the profitability of Mibanko should return to the high theme level? First, regarding to the first question, I think, when the government programs started to mature, the second part of next year, you are going to have probably clients of clients. Clients who have go through the process and they are starting to have normalized conditions. Clients that even with this support have become insolvent or unable to continue in business. And probably a third category, the clients are going to need additional support, probably in the form of longer-term facilities. And I think that the clients in all the categories have understood that these are special conditions, and when the facilities mature, they need to pay market-grade conditions based on their performance size on credit risk. That's our belief. This is a very special condition with special funding?

Very clear. I don't know if this helps for the first question.

No, very clear, very clear. Okay. And for the second question, is starting to recover also, as we mentioned. the government programs and the programming they started a little bit a later uh after bcp in fact the government program a favor the bianco claims mainly in the second wave the first wave there were very few frames who could apply to that so the recovery is going to happen but uh a little bit after the case of of bcp and next year we are going to have uh a much more positive year, of course. But the delay is going to, the recovery is slightly delayed in the case of Mivanko for the reasons I already mentioned.

Perfect.

Thank you very much. Our next question will come from Tito Lavarta, Goldman Sachs.

Hi, thank you. Good morning, everyone. First question, following up on your margin, I would have expected a bigger increase in your margin. I remember last quarter you had some frozen installments, and that had about a 70 basis points impact, if I remember correctly. But your margin didn't really recover that much this quarter. Is that mostly because more of the EVA loans, or just to understand the dynamics there?

um maybe another way to think about it if you excluded reactiva what would your margin have been without the reactive allowance um actually uh i think the margins are cleaning out as we expected and we as we provide guidance i will differentiate two different things one is the name and another thing is the net interest margin as a figure of a number in terms of me the figure is significantly diluted by the huge amount of reactiva that has almost zero margins or very low margins and was designed as such because it was a relief program. This is one part of the equation. But thinking in the net interest margin, it has been impacted and is recovering And the dynamics were explained. You have a sudden shock of lower reference rate, more than 200 basis points for a significant part of the cure that has a severe impact in your short-term facilities, and you have also uh some smaller portfolios in the case of slightly smaller in the case of bcp and a smaller portfolio in the case of nevando so you have this impact in the amount of margins when we start to originate at a faster pace a process that has already begun we are starting to recover volumes with higher margins and the need is going to expand The other impact that was positive this quarter was the reduction in interest expenses, and the effect of this reduction is going to be carried out the next quarter because a significant part of the process has already been done, but throughout the semester. I don't know the results. Yeah, that was very helpful, Seth, and thank you.

So then maybe leading into my second question, to get back to the high-team ROE that you expect by 2022, what's going to be the main driver of that? Is it your margins normalizing? How dependent will that be on higher interest rates? I know there's a lot of moving parts, but is it also your provisions normalizing?

it's cost cutting just to get a sense of what will it take to you know what do you think to get to that 15 roe by 2020 yes but i would like to emphasize that is in the second half of 2022 not for the whole 2022. that's a a relevant expectation and the effects are going to be from it i would say the markets are going to be recovering in line with the factors we have been discussing, the provisions are going to be much more normalized and more in line with the new portfolio composition. And we are starting to gain efficiency due to the execution of several initiatives. It should be noted that the general profitability is impacted in VCP, MiBanco, and all banks of the world for this lower or lower interest rate. This impact is compensated by a number of measures that makes a difference in our thoughts. And our assumption is that the interest rates are going to be still lower in 2022, locally and internationally. So we expect to regain levels of profitability but with an underlying less profitable basic margin in federal business due to lower reference rates. Great. That's helpful.

So just to clarify my last point, you can get back to the high CRV with interest rates where they are today? Is that correct, or do you need interest rates to increase?

I think we can go with a lower interest rate by applying these three kind of levels that I have mentioned. The portfolio composition, higher efficiency.

Perfect. Great. All right. Thank you, Tessa.

Thank you very much. Our next question will come from Jason Millman, Scotiabank.

Hi. Hi, everyone. Thanks for the opportunity. You've addressed my questions on margins, provisions, costs. But maybe I can ask a general question on the outlook and the risk to that outlook of 9% to 12% real GDP growth and everything that follows on there. I mean, you've been seeing the reactivation. We've all seen it. It's been pretty impressive, but from very low levels. What could derail this recovery? Is it a second wave of COVID-19? and lockdown, what are the risks to this outlook, I guess, if you can help frame that, and how is the group preparing for this kind of scenario, thank you, a negative scenario?

Okay.

I think one significant risk, and I think not only for the report but globally, is a second wave not only in terms of infection but mortality that will lead to some kind of shutdowns with severe impact in the business activity and economic activity in general. This is one risk. We are ensuring one encouraging sign that we take very prudently. is that already the level of infections in peru are very high different studies conducted using different different statistical methods suggest that the level of infection in peru can be as high as 50 so even if we have a second wave probably the impact in total infections and mortality should be a generation but this is a significant risk and the other potential risk is the changes in regulation. We have elections next year. So far, it's not absolutely clear who is going to be the winner. We need probably much more time to have a clear picture. We don't expect significant changes, but the risk is already there. The best protection for our business is to have a very strong balance sheet, solid capitalized business, prudent risk management, and efficiency that allows us to operate even in less favorable environments. We are working in this direction.

That's helpful. Thank you very much.

Mr. Rivera, your line is live if you had any comments.

Okay, thank you. Yes, there was a question related with the projections in insurance. And maybe it's important to know that Peru has been one of the countries with the highest infection or contagious rate of the world. And that fact has two sides. On the other side, the high number of tests, as you have known, with a direct impact in our life portfolio. We have an important life portfolio in Peru, and it includes individual life, mortgage protection insurance, great life insurance, in general, for great cars, small business owners, and across all the social economic segments.

But on the other side, with that high contagious rate, we expect to be reaching normal or regular rates in a few months.

During, for example, July and August, we have the highest levels of deaths in our country, more than 2.5 times against the average, and during October,

The number of excess of deaths was similar and increased lower than the number we had in March, the first month of the pandemic in Peru.

So, we expect this trend continues in the same direction. And for the next month, we can see low reductions in the life loss ratio. In the P&C business, the situation has been the opposite. The lower economic activity and important part of our clients working at home office decrease the claims frequency and reduce the loss rate.

Thank you very much. Our next question will come from Jeffrey Elliott, Autonomous.

Well, hello. Thanks very much for the call and for taking the question. Can you help a little bit more on net interest income? When is that expected to start inflecting and moving up on a recurring basis?

Is that going to happen soon or do we have to wait a little bit longer?

Sorry, I couldn't hear the first part of the question very clearly. The net interesting, when is that expected for this job increasing again on a recurring basis once you've taken out the bonus? Actually, the process has begun. In line with that, it's already sustained. What's happening is that this is starting to gain traction, but at a slower pace due to the reduction in reference rates. So, just to be clear, so even though aboriginations are going to be lower than they were pre-COVID, you still think that the 4Q recurring NII can be higher than the 3Q recurring NII? Just because you start with a lower base, okay. At the level of origination that we are, we are increasing a structured portfolio in DCP and in NIVANCO. So, starting from a lower base, I repeat this point, we are starting to build up a structured portfolio at this moment. That's great. Thanks very much.

Thank you.

Our next question will come from Brian Forrest, ILPP.

Hi. Thank you for the opportunity.

We wanted to know how are you thinking about structural NPLs going forward, particularly as you said, second half of 2022?

Thank you.

Well, we'll probably see in the following quarters an increase in the entry levels, because actual problems with loans will appear in all segments, especially in the EFME and in the area of finance.

But on the other side, we'll see an increase in the level of write-offs.

Remember, during the first half of the year, due to regulatory constraints, we didn't make the adequate levels of write-offs. So, I mean, on the net effect, because of the number of clients that were impacted, we'll see a shift to higher NPLs. But in general, it will be at a good level compared to what we are expecting today.

Thank you. And just a quick follow-up. Is any particular segment of your portfolio concerning you? based on the trends you are observing right now?

There are no surprises in this quarter. We don't expect further surprises in the following quarters. I mean, we see constant trends on both the FME and credit card segments of our portfolio, but not important shifts towards what we've seen as of today.

Thank you very much.

Thank you. Our next question will come from Carlos Gomez Lopez, HSBC.

Hello, good morning. You could comment about the legislative initiatives that could impose either lower fees or caps on interest rates at the Peruvian banks. We know that the proposal was approved at the committee level. We are not understanding what you think the chances are and the potential impact on your numbers. In a small follow-up, you have had additional questions for NAIDOC in ASB. Is that a one-off, or are there any outstanding contingencies that we might still see in the future?

Thank you. Yeah. Regarding the, this is Gianfranco Ferrari. Good morning, everyone. Regarding the first question, there are some, as you said, some initiatives at commission levels in the Congress. It's too soon to tell if any of these initiatives may go into discussion to the Congress, and if so, if they're approved, and if so, how to calculate an impact. Our vision is that what Peru needs is the financial system in Peru needs is more financial inclusion, and any of these initiatives would generate financial exclusion. which is exactly the opposite impact. But as I mentioned before, it's too soon to tell if any of these initiatives will become a law, and if so, what the impact would be.

Thank you. And I'm ready.

Hi.

Yeah. Hi. This is Walter. Regarding mail, we have made a provision because there was a recent ruling by the Supreme Court that was not necessarily in our favor, so we decided to make this provision, and we think that this is the end of it.

Thank you so much.

Thank you. Our next question will come from Piyadat Alessandri, Credit Corp. Capital. Hi, thank you very much for a long question. I wanted to know regarding corporate cases announced, if you could give us a bit more detail on those cases you announced on the energy and the airline taxes. And did you see any segments behaving this year?

No. As you probably know, we don't get into specific details in terms of the specific cases of our clients in the corporate world.

Having said that, we can confirm you that we have established all the necessary provisions to cover all the expected losses in those two cases.

And we don't expect any new big cases in the future, in the near term.

Okay. Thank you very much.

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

Good morning. Thank you for taking my question. My question is related to the deal that was approved one month ago regarding reprogramming and guarantees for retail loans, including SMEs. I understand you guys already mentioned you don't expect a material impact from that deal. By that, I understand that when you refer impact, you mean that on the balance, it will be a negative one, considering that it reduces your net interest income versus the reduction that you will get via the guarantee in your cost of risk. So I would like to confirm that that's the case, that you're expecting that on the balance that that will be a negative one, even if it's a small one. And in the end, this will depend on what is the level of adoption or enrollment that you guys take in your client-side portfolio. So I'm also curious on what is the level of the rate of adoption that you are assuming to expect that this is going to be marginally impacted.

Thank you.

Hi.

We expect to have, as we mentioned previously, a modeling practice. It's difficult to say exactly what because it depends on the level of adoption and the specific type of clients that are going to access to the facility. But I would like to emphasize that you are going to capture the cost and benefits in different lines and probably in different moments in time. What do I mean? you are going to have an immediate reduction in margins, and you are going to have a deferred benefit in cost of risk. I don't know if it is felt.

Yeah, it does, it does.

The question was, you know, this is voluntary on the back side, but really there is a lot pressure on the banks in general to provide facilities to the clients. So I'm just curious of any person that you can give us in terms of involvement of clients in this new program. Yes, I think we are going to do something that is sensible for us but good for our clients. I think it's an additional facility that some flights are going to benefit from. an imbalance, I think the net effect is going to be moderate.

Just to complement what Cesar just mentioned, because of the amount that was assigned, we don't see, so these are twofold answers. Because of the amount that was assigned, we don't see that this is going to be a massive program, was assigned by the government, I mean. On the one hand. On the other hand, we basically restructured all of our portfolio, all of our clients that needed a restructuring facility. So we don't see a large demand on our clients. Having said that, we do, we're going to work proactively helping the clients that need it and obviously trying to balance that with the demand to other relatively smaller financial institutions that have not been as proactive as DCP in disfreshing the clients' loans before.

Perfect.

Thank you so much.

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

Thank you, Valter, Jean-Francois, and everybody. Thanks so much for the opportunity of asking questions. I had two. The first one is a follow-up on the margins. I understood the message that you should kind of stabilize or even improve a little bit from the current levels, but I had some doubts here regarding first, The overdue loans should increase, as you said, right, like the non-accrual loans, or repayment should increase this, the next quarter, and for FTEs, it's 2021, the first two is 2021. And you also have the government program that I understood maybe the bank will not be super vocal in the program because, again, you have a lot of negotiations already. The size of the guarantees is not that big, but still there should be a headwind for margins, right? So I just would like to confirm that, yes, margins should move slightly up from the current levels, and that we're taking into consideration those two, you know, small moving parts, the non-accrual loans and also the renegotiated program. And my second question is regarding allowances. I understand shared jobs are not there, right? Shared jobs need to accelerate. But still, you are in Latin America, the bank with the biggest delta in allowances, right? Allowances almost double versus 2019 on your balance sheet. You have, I don't know, 4.6, 4.7 billion solids. in higher allowances than you had last year. And so far, the data in your programmation, like in the relief, it seems to be tracking okay, right? We have a 94% collection in DPP, 84% collection in banco, renegotiated loans are coming down from the peak. So the point is, couldn't we discuss in 2021 the versions of those provisions? Not only, you know, like a lower cost of it, but I don't know, the banks, Yes, I take the first one regarding margins. Of course, in our calculations, we are considering the known accrual of delinquent loans. This is going to negatively impact the margins. That is part of the assumptions that we have when we provide this guidance. The process is going to be gradual because what's happening in accounting terms is that you accrue and when you have actual default, you revert the accrual and this diminishes the income. So, this is going to happen gradually as has been happening in the last quarter. I think this is part of the question. I don't know if you have another complementary question regarding the, sorry. no no that means i was just trying to confirm because uh i understood the need to shift but i was not sure about you know the normal ones but but thank you for for your question yes it's clear for me yes and in terms of the levels of provisions for allowances for unknowns uh have been mentioned throughout the call. I mean, the news have been positive and the trends have been better than we expected or than we initially expected. Having said that, there's still a PPP and what we call 18% higher uncertainty portfolio.

We've had clients that, for example, haven't still started paying their debts yet. I mean, they are in great figures. And even for that number, it's higher, around 43%.

So, I mean, your question regarding if there's an opportunity for reverse information would depend on the performance of these higher uncertainty core policies for these institutions.

Okay, perfect. Thank you.

Thank you very much. Yes.

If only to add some story to... to contribute to the answer of Reynaldo. For example, in the case of GCP in September, we have a retail portfolio of around 42 billion soles. Out of them, 34 billion soles already had the obligation to make a payment during the month. For that reason, we talk about an uncertain portfolio because not every client has the obligation to pay due to the reprogramming process.

Thank you. Our next question will come from Sarita Gooden, Harding webinar.

Yes, good morning, gentlemen. Thanks for the call. Two questions from my side. The first one, just a clarification, you mentioned something about capital ratios calculated according to Peruvian standards, or the capital ratios calculated to Paris, I guess, or some other standards. Can you, you know, clarify exactly what the differences are and what's been passed on these ratios?

You know, what are you showing in the presentation, you know, on slide 30?

Are those alterated according to prudence, IFRS? What is it? What's the difference? What's the impact? That's the first question. Thanks.

Okay. Okay.

Okay. So, okay. The reason is that in normal times, the difference between incurred losses and forward-looking provisions is very small, and so we don't make any difference. To give you an idea, in the case of BCP, at the end of September, the difference between local and international accounting in terms of provision is 1.2 billion solid. out of 7.7 billion solid so in local accounting you have lower provisions and you have a higher a profit and this impacts the level of of capital uh i can see probably uh an accurate budget the difference can be around 50 60 basis points in the case of mibanco The relative difference is slightly higher. The difference is 100, 500 million solid out of 1.8 billion solid in provisions, so you have more than 300 basis points in difference when you consider local and international accounts. Does this clarify the question, or if you have another petition, I'm happy to provide it. yes i mean partially clarified it but i still have a question so what you show on the presentation in slide 30 basically these graphs show that bcp standalone ch1 is 11.5 percent and mudanko cc1 is 16.5 percent do these are these numbers that you just show calculated according to ifrs or calculate according to No. Peruvian local standard. It's local accounting. It's local standard.

So, the number is going to be lower.

Right. So, for Peruvian, that's what you show. For IFRS, it would be 11.5 minus 60 bits, and for Medanto, it would be 16.5 minus 300 bits, correct?

Yes, more or less.

Okay. Okay, that's how it goes. My second question is on NAIDOC. Again, this is one of those issues where I'd like to have some more clarity. It looks like you have 71.9 legal contingency.

How did this contingency arise and why, I mean, NAIDOC scandal happened 12 years ago.

why are you just showing this now what what's what can you give some background and some color around this whole issue sure uh jl tackle the the nato uh this relates to uh mr picard who is the court appointed liquidator and i was trying to uh articulate clawback uh initiatives against some of the I guess it's about 400 of them. And recent rulings by the Supreme Court of the United States are not favorable to the utilization of the extraterritoriality arguments.

So we found it prudent to create provisions just to get over that.

So, does it mean that you would be... Just to clarify, does it mean that you would be liable... Like, you think that in a worst-case scenario, you could be liable to pay $72 million to this court-appointed trustee for NATO cases?

Is that correct?

Well, we hope not, but we thought it was prudent to create the provision.

Okay, and I guess it's a rose because you advised your client to put money in NAIDL, and then the client is now who you are asking you to make up that difference, essentially, right?

How did it originate in the first place?

Yeah, no, you've got it completely wrong. This is the clawback provision. Clawback provision, the concept here is that the court appointed liquidators is uh asking people that have had withdrawals from the fund uh in months or a certain short period prior uh to the uh uh the whole scandal being blown up that those people that withdrew funds from this fund didn't have valuations that did not reflect reality therefore they applied flow back which means you sent the money back to the fund The fund incorporates into the fund and then redistributes the money back. We have long, long time ago settled with our customers and we bought them back. We bought back the investment at a certain negotiated value to them. So our customers have nothing to do with this. And since we bought back their participations in the fund, the drawback applies to us.

Okay, okay. Now that you said that, that's very clear. But before, it was very vague. So now that you clarified that, that's good. Okay, my last question has to do with the insurance, sorry, the assets under management in your, you know, fund management business. You said there could be something like $3 billion solid withdrawals. Can you just again explain why that is? Is that because of the new legislation that's being passed? Or can you just give some more color around that particular issue? Okay. I take this. We are talking about PRIMA. PRIMA is a private pension fund manager, and there is a new legislation that allows clients to withdraw funds. estimated amount of the new funds that are going to be withdrawn according to this new legislation is $3 billion solid.

Okay. And is that, again, is this a worst-case scenario that if everyone who can withdraw chooses to withdraw, or is that your estimate of realistic scenario?

It's our best estimate. It's our best estimate based on The previous withdrawal authorization process. It's not the first one. Gotcha. And this $3 billion will be how much of your total AUM?

What percentage? It's going to be... Sorry?

I think it's about 7% separate, I think. 7%. About 7%. Okay. Got it. Got it. Okay. Perfect. Thank you very much.

Sanjay, just an additional verification. Please refer to the 20F where all this MEDA stuff is fully disclosed here, and you can get a lot more information there if you need.

Okay. Okay. I will do that. Thank you. Will do. Thanks. You're welcome.

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

Thank you, Chantal. Well, thank you to all of you.

This has been a very encouraging and important quarter for us. We now have shown the market evidence of what we have been perceiving in the last couple of months, namely that we are past the inflection point on several fronts. On the health side, the numbers reported are very encouraging, and hopefully they will continue this way. The economic activity on the second front is coming back to normal levels.

On several fronts, we are already there, and we estimate that by year end or the first quarter of next year at the latest, we will be substantially on pre-COVID levels on a monthly basis.

The third and last inflection point refers to the impact of this very severe downturn in our portfolio.

The numbers we have shown for this last quarter clearly indicate this inflection point and we continue to see improvements week by week.

We are emerging from the most severe economic crisis in the last 100 years and we think it is unrealistic to expect the situation to get normalized in one or two quarters. The recovery path is laid out and as we have indicated in our guidelines, we expect to to returns on equity in the high teens in the second half of 2022.

Our franchises continue to be strong. The path to change and evolve our business models and distribution to digital technologies has accelerated and continues to be a key element of our strategy.

We thank you very much for your continued support and with this I conclude our Fortale Phone Call. Thank you very much.

Thank you very much, ladies and gentlemen. This now concludes today's presentation. You may now disconnect your phones and have a great weekend. Thank you.