Credicorp Ltd.

Good morning, everyone. I would like to welcome you all to the Credit Corp Limited fourth 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, and at that time, instructions will be given as to the procedure to follow if you would like to ask a question. With us today is Mr. Walter Bailey, Chief Executive Officer, Mr. Gianfranco Ferrari, Deputy Chief Executive Officer, Mr. Alvaro Carrera, Deputy Chief Executive Officer, Mr. Reynaldo Llosa, Chief Risk Officer, Mr. Cesar Rios, Chief Financial Officer, and Mrs. Milagros Seguinas, Investor Relations Officer. And now it is my pleasure to turn the conference over to Credit Corp. Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may now begin.

Thank you. Good morning and welcome to the ECOPS conference call of our earnings results for the fourth quarter of 2020. Since our previous conference call, economic reactivation in Peru has continued at a better than expected pace. In seasonally adjusted terms, GDP in the last quarter of 2020 It stands around 3% below the pre-pandemic levels. Our estimates suggest GDP decline around 11.3% in 2020 due to the COVID-19 pandemic, which is better than initially forecast. The job market has also continued to recover as indicated by data on payrolls managed through the banking sector. The external sector has also provided favorably As copper prices have reached levels not seen in almost eight years, we expect the GDP to rebound between 8% and 10% in 2021, underpinned by high copper prices, capital inflows to emerging markets, and expansive monetary and fiscal policies in the local front. Next slide, please. Two significant factors are driving uncertainty in the current context. The sanitary situation generated by COVID-19 has deteriorated in developed and emerging countries over the last few weeks. The world's data on excess mortality reflects this reality. The government has established restrictions, measures based on the severity of COVID-19 indicators, which include the high, very high, and extremely risk levels. On January 28, the government ordered a new localized lockdown from January 31st to February 14th in regions that registered extreme risk levels of COVID-19 indicators, including Metropolit and Lima. The effects of these restrictions will slow down the recovery in the commerce and service sectors, but other sectors, including mining, fishing, manufacturing, and construction, will continue to produce. Downside risks to our current GDP growth forecast of 8% to 10% might arise if the sanitary situation deteriorates further and more restrictive lockdowns are mandated. However, vaccine doses will arrive in Peru in February and the vaccination process will begin immediately. Second, Peru will hold general elections on April 11, 2021. The latest survey showed candidates Your foresight leading voters' preferences with 17 of total votes, followed by Keiko Fujimori, Julio Guzman, Veronica Mendoza, and Johnny Lestano, who are neck and neck for second place as of the date of the poll. It is still early to predict outcomes. The political landscape continues to be marked by uncertainty that will play out in coming months. It is important to note that according to the latest surveys, 25% of voters are undecided, intent to leave the polls blank or will initiate ballots. The second round of presidential election is set to be held on June 6, 2021. Other relevant events in countries in which credit corporate rates include a low path in Bolivia in January 2021, which gives eligible borrowers the option of a six-month grace period. This facility is in addition to the loan deferrals implemented in 2020, which led to both interest revelations and zero interest rates in permanent charge in December 2020. We are closely monitoring the effect of these measures in our business at BCC Bolivia. In Chile, elections will be held on April 11th to elect the members of the Constitutional Assembly, regional governors, mayors, and councilmen. General elections are set for November 2021. Next slide, please. The Peruvian financial system has evolved favorably, hand in hand with economic recovery in the last quarter of 2020. According to data from the central bank, loan growth in December stood at 12.3% year-over-year at a constant exchange rate, the highest growth rate since 2013, and they're finished by the effect of reactive loans. If we exclude the effect of reactive loans, total loans declined 4.6% year-over-year, importantly. there are signals of recovery in loan origination in the retail segment, which includes consumer and mortgage loans. In this context, Peru boasted one of the highest loan growth rates in the region in 2020. For 2021, we expect total financial system loans in Peru to grow around 2% as the effect of reactive loans start to resume and struggle the loans recover. Lastly, we would like to comment on recent events on the economic policy and regulatory . The central bank recently announced monetary measures to expand .

Excuse me, everyone, and please remain on the line as we reconnect with our speaker. Thank you. Thank you. THE END

Thank you.

You are now rejoining the main conference.

One line, but I am not sure if you hear that. Thank you, sir. At the end of December 2020, Congress passed a law on interest rate ceilings. These ceilings will be set by the central bank, which will also set limits on charges for certain fees in the financial system. On February 2nd, the executive branch observed the law and announced its intention to take the matter to the Constitutional Court if Congress insists on passing the measures to the existing venues. Additionally, the Minister of Finance has approved a decree that enables the National Superintendency of Tax Administration to gain access to client deposits information if balances exceed 30,800 soles. Lastly, on January 28, 2021, the government announced the COVID-19 government guarantees program directed to individual SMEs. We will be extended until March 21st, 2021. As explained in our last call, under this initiative, banks can offer reduced interest rate on reprogramming facilities in exchange for additional government loans coverage for very specific segments of clients. We will continue to close monitor these developments to evaluate the impact on credit cards operations. Next slide, please. Economic reactivation described well is evident at credit cards and markets by a significant uptick in the use of digital channels. Demand for financial products in individual segments continue to reactivate. Some products, such as mortgages and bank assurance, registered significant recovery in the fourth quarter of 2020. Digital sales, in particular, accelerated this quarter and on a full-year basis grew 72% in 2020. This expansion took place in a context of growth in the adoption of digital channels due to immobilization measures and social distances. Bank assurance and advancement wages are the products that reported the highest growth in sales this quarter, costing expansion above 400% with respect to January's figures. Analyzing the full-year transactional trends we found, first, average monthly number of transactional groups 51.5% led by digital transactions, which grew 91.5%. Second, digital transactions have come to represent 77.7% of total transactions this quarter. The largest increase in shares of transactions was registered by Yahoo, which represents 19% of total transactions this quarter, compared to 5% in the first quarter this year. This expansion was driven by our new product, YAPI cards, which allows BCP and non-BCP clients to execute transactions. This new product generated more than 1 million new YAPI accounts in 2020 and banned almost 400,000 people during the same period. Next slide, please. Now, I will comment on the highlights of Credit Corp's performance in the fourth quarter and the full year 2020. Results show a quarterly recovery in line with economic reactivation. A summary of results shows in a year-over-year analysis, the loan portfolio grew more than 19% in quarter end balances, driven mainly by loans from the government relief programs. After isolating the effect of these programs, Credit Corp's structured loan portfolio fell 2.2% in quarter end balances. On a quarterly basis, Net interest income registered a contraction of 4.3% due to the impact of non-recurring events and zero interest rate loan impairment charge in Bolivia in particular. If we isolate non-recurring events, adjusted net income fell minus 0.8%. On a full year basis, adjusted net interest income contracted 1%. This evolution was fueled by lower interest rate and less profitable asset means, which was partially offset by the reduction in interest expenses generated by the lower cost funding structure. In this context, full-year structural mean situated at 4.78%. Non-financial income was boosted this quarter by P-income. which increased 20.7% quarter over quarter, in line with more transactional activity and expiration of pre-waivers. In full-year results, non-financial income dropped 10% due to a decrease in transactional activity throughout the year. Full-year insurance underwriting results were impacted by COVID-19-related and incurred but not reported claims in the live business. which was partially offset by a decrease in property and casualty claims. Provision expenses fell considerably this quarter. Better economic expectations and improvements in client behavior led to a structural cost of risk of 2.44% this quarter. In four-year terms, the structural cost of risk was 5.07% in 2012. In this context, Credit Corp reported $653 million solid in net income this quarter, which represents a return on equity of 10.8%. On a four-year basis, Credit Corp generated $347 million solid. If we isolate not recurring events, adjusted net income for 2020 situates at $725 million solid, an adjusted ROE of 3.5%. I will now explain the results of our main operating units. Next slide, please. I will begin by explaining BCP and STANA loans evolution. In 2020, the total loans portfolio in year-end balances grew 18.8% driven by reactive loans while the structural loan portfolio decreased 4.1%. Now, let me explain in further detail the evolution of the average daily balances, which are major drivers of margins. On a quarter-over-quarter basis, loans in average daily balances grew 1.4%, driven by reactive loans, while the structural portfolio dropped 2.5% due to a contraction in the wholesale and SME segments. On a full-year basis, total loan growth in average daily balances of 17.1% was mainly driven by the REACTIVA program, which provided loans primarily to the middle market, SME business, and SME PIN assessments. If we exclude the REACTIVA program, BCT's structured loan portfolio in average daily balances grew 4.1% in 2020. mainly driven by corporate banking, mortgages, and consumer loans, which expanded 7.5%, 7.2%, and 13.1% respectively. BCT's funding structure has improved to active liability management and by the increase of savings and demand deposits. On a full-year basis, total deposits grew 30% led by low-cost deposits. In 2020, BCP materially reduced its funding costs. It has been able to repay more expensive sources of funding, such as YouTube Bank, repos, and senior bonds, and has seized opportunities in a context of low interest rates to implement a timely liability management strategy. Next slide, please. Regarding payment behavior and the reprogrammed portfolio in retail banking at BCP in the fourth quarter, Retail clients registered an improvement in their payment behavior, hand-in-hand with economic reactivation. On-time payments on structured retail loans reached 96% at the end of December, improving from 94% in September. By the end of the year, only 20% of the retail portfolio had current reprogramming facilities, compared to 23% in September. Finally, Our high uncertainty portfolio, which is comprised of loans that are within raise periods for those that have overdue installment, currently represents 9% of the structural loan compared to 18% last quarter. In this portfolio, at the end of the fourth quarter of 2020, only 3% of the structural loans were still within raise period and 6% were overdue. Next slide, please. Now, let me explain the evolution of cost of risk and asset quality indicators. On a quarter-over-quarter basis, the decrease in provision expenses is attributable to an improvement in macroeconomic expectations and updating the probability of default of the specific segments based on latest assessments of transactional and payment indicators. On a full-year basis, provision expenses growth was mainly concentrated in the individual segments. specifically consumer. In addition, higher wholesale banking provision expenses were driven by the evolution of specific clients in the airline, tourism, transportation, and energy sector, which has been highly impacted in the COVID-19 context. In this scenario, the structural cost of rating situated at 2.33% for the quarter and 4.74% for the full year. As anticipated in our last call, figures for asset quality show a deterioration quarter over quarter, particularly in introductory loans in the individual segment, given that credit card and consumer grace periods have expired. This was partially offset by a rebooting of write-offs, which initiated in September after SDS mandated to freeze the county of days of delinquency expired. We expect further deterioration to the first half of 2020, particularly in the SME segment, as grace periods in this segment will expire. In the aforementioned context, the MPL progress ratio situated at 145.1%. Finally, BCC's accumulated provisions represent 7.92% of the total structural portfolio. Next slide, please. Going on to PCP results, net interest income continued to follow an upward trend and rose 5.9% quarter-over-quarter. In full-year figures, net interest income declined 2.4%, impacted by non-recurring events through the year. If we exclude non-recurring events, the full-year adjusted net income Analysis shows, first, a decreasing adjusted interest income of 4.2% due to a drop in market rates and a charge in the asset means, which was partially offset by active investment portfolio management. Second, adjusted interest expenses fell 17.2% due to a drop in interest rates and funding and struggle improvement. In this context, adjusted net interest income rose 0.8% in 2020. In terms of need, the full-year construction of 87 basis points was attributable to the aforementioned variations and to the dilution effects of reactive loans which generate negligible need. Risk-adjusted need situated at 2.28% this quarter and 1.03% in 2020. Regarding non-financial income, in terms of the quarterly evolution, Core items grew 13.2%, an income with economic reactivation. This was the first full quarter free of fee exceptions, and as a result, fee income expanded 12%. Additionally, alongside, an active in transactions gained. An impact transaction grew 18.1%. On a full-year basis, non-financial income fell 11%, mainly driven by fee income and gains on FX transactions, which constructed 12.1% and 11% respectively, due to a decrease in transactional activity over the year. Next slide, please. PCP's efficiency ratio improved year over year, After cost control measures were implemented in 2020, including reducing non-essential expenses and variable compensation, in full-year terms, although operating income contracted 5.4%, BCP's adjusted efficiency ratio remained stable at 14.9%. This evolution was a result of our efforts to speed up the process to implement BCP's transformational strategy which focus on improving the client experience and efficiency levels. The table in this slide shows our progress in leveraging efficiency drivers to move forward on our journey to optimize our cost incorporation. First, we accelerated our IT investments to advance digitalization. The share of digital transactions grew 16% points. As a result, 55% of our clients are digital, and we were able to close 20 branches this year. Next slide, please. With regard to microfinance, let me explain the dynamics of Bibanco's loan portfolio on funding base. In 2020, the total loan portfolio in year-end balances grew 20.5%, while the structural loan portfolio decreased 6%. The structural portfolio construction is explained by the severe impact of the pandemic in the micro-businesses segment and the fact that liquidity was provided by clients to the government programs. Now, let me explain in full detail the evolution of average daily balances, which are major drivers of margins. On a quarter-over-quarter basis, loans in average daily balances grew 9.4%, 9.4% driven by government programs loans, while the structured portfolio grew 1.4%. On a full year basis, total loan portfolio grew 13.4% in average daily balances driven by government programs, while the structured loan portfolio grew 1%. With the onset of economic reactivation during the second semester of 2020, origination levels for Nibanco's structured portfolio started to recover in segments that are still within our risk appetite. Regarding the evolution of funding at Nibanco, demand for saving deposits grew 37% year-over-year, which allowed us to reduce the share of more expensive funding sources in total funding. All these factors led to structural funding costs to fall from 4.2% in 2019 to 3.3% in 2020. Next slide, please. Client payments at MiBancos continue to follow an upward trend, and the high uncertainty portfolio has shrunk considerably. MiBancos' client payment performance level registered substantial improvement And there was a drop in requests for new reprogramming facilities as grace periods spiked in a context of economic reactivation. Moreover, overdue payments remain stable this quarter. Analyzing the structural portfolio reprogramming figures, we note, first, no reprioritization Up-to-date loans increased this quarter to represent 49% of structured loans at the end of December. Second, the overdue portfolio slightly increased this quarter as client facilities sparked and reached 6% of structured loans. Finally, the high uncertainty portfolio, which is comprised of loans that are within grace periods or those that have overdue installments, currently represents 24% of the structural loans compared to 43% last quarter in this portfolio. At the end of the fourth quarter of 2020, 18% of the structural loans were still within grace periods. The majority of these periods will end by June 2021 and the remainder by the end of 2021. Next slide, please. Regarding asset quality indicators. Provision expenses decreased quarter over quarter due to adjustments in our credit risk model after better than expected trends in client behavior were registered in a context of economic reactivation. This improvement was partially offset by an increase in delinquency as grace periods inspired. This evolution, coupled with the expansion of the structured loan portfolio, led to the structural cost of risk situated at 4.7% this quarter. In real terms, the structural cost of risk situated at 10.6% in 2020. In terms of portfolio quality, the structural MPR ratio rose to 10.2% in 2020. Delinquency showed an uptick as grace periods expired and some clients were unable to make payments. The increase in MPLs was partially attenuated by a reboot of chart charts. In this context, Mivanco's MPL coverage ratio increased to 178% in 2020. Next slide, please. Now, let's look at Mivanco's results. Net into a single fell 6.4% quarter-over-quarter after being hit by a poor interest reversal and great fear despite some clients' registered delinquency. In full-year figures, net interest income declined 18.4% impacted by, first, a contraction in the structural portfolio and the influence of the government program loans, the context of lower interest rate, and the interest rate results due to increase in delinquency ratios. In terms of mean, the full-year contraction of 400 basis points was attributable to the aforementioned variations and was partially offset by an improvement in the funding structure. In this context, risk-adjusted means situated at 3.2% in 2020. Regarding efficiency, full year operating expenses decreased 6.3% due to cost control initiatives, including a reduction in headcount, non-core expenses, variable compensation, among others, or bonds. Non-financial income reflected an uptick in bank insurance fees for policy insurance to the recurring portfolio, operating income dropped at a faster pace than operating expenses, leading efficiency to deteriorate. Next slide, please. Now, I will comment on the results of the insurance business. On a four-year basis, net income decreased due to growth in provisions related to excess mortality for COVID-19. This was partially offset by lower claims in the P&C business. The decrease in claims in the P&C business was attributable to a drop in cases, mainly in the cash line and personal line, after movements were restricted to skin contagion. Life net premiums increased through the Allianz channel and due to an increase in sales in the Pancasuran channel. An analysis of the evolution of provisions this quarter indicates that there was a decrease in insurance but not reported provisions in the life insurance business after fewer COVID-19 related cases were reported. On a year-over-year basis, claims increased 59.8% mainly due to the impact of COVID-19. In a quarterly basis, Corporate health insurance and medical services registered an increase in net income. This evolution is explained by lower claims at the corporate health insurance business and higher demand for medical services. On a four-year basis, net income increased due to a drop in net claims in the corporate health insurance, which was attenuated by a decrease in the medical services income due to lower demand. Next slide, please. Regarding the pension fund business, assets under management and the system level dropped year over year due to fund withdrawals under the government-mandated facilities. In the case of Prima, total fund withdrawals amounted to $7.5 billion, which represents 70% of the funds that were available for withdrawal. The loan signed by the executive in November could lead to additional withdrawals the first quarter of 2021 for approximately $3.4 billion. Net income increased quarter-by-quarter due to a recovery in the profitability of the reserve funds in line with market performance. Nonetheless, it was partially offset by a decrease in income due to a decrease in affiliate contributions. On a four-year basis, total fees decreased due to, for example, Higher unemployment, which reduced the level of contribution. Second, contribution exceptions granted by the government in April. And finally, a decrease in assets under management level after funds were withdrawn through government-mandated facilities. Next slide, please. Regarding our investment banking and wealth management businesses, total assets under management caused an increase of 34.5% over the year. impacted by the exchange rate and driven by the asset management businesses in general and the subscription of third-party funds from institutional clients in particular. On a quarterly basis, recurring income grew 4.1% mainly driven by asset management and corporate finance businesses. In four-year terms, the decrease in the earnings contribution was mainly associated to growth in recurring expenses, which was in turn driven by transformation in the operating model and by one-off expenses from new subsidiaries. This was partially offset by growth in recurring income, mainly due to capital markets and asset management businesses. Non-recurring results also contributed in gains of $24 million in a context in which non-recurring income awaited non-recurring expenses. Next slide, please. Now, I will summarize Credit Corp's consolidated performance. An analysis of the balance sheet structure shows that Credit Corp's interest earning assets increased 29% in 2020, driven by both the loan and the investment portfolios. We increased the size and duration of the investment portfolio while maintaining interest rate risk and maintaining a solid short liquidity portfolio. In 2020, credit-cost non-portfolio and year-end balances grew 19.1%, driven by government programs, while the structure of the non-portfolio decreased 2.2%. In average daily balances and in four-year basis, the non-portfolio grew 15.8%, while the structure of the non-portfolio grew 4%. As explained to our lines of businesses, these assets have been financed mainly through low-cost funding sources. Additionally, we executed our inaugural international series bond issuance at holding company level this year to increase our liquidity buffer. Next slide, please. Now, to summarize the evolution of the main risk indicator, there was a significant quarter required to drop in provisional expenses, which was attributable to an improvement in expectation for 2021 and to an improvement in client payment behavior. On a full-year basis, growth in provision expenses reflected the impact of COVID-19, which led to a structural cost of risk was situated at 5.07%. Regarding asset quality, NPL increased quarter over quarter as rate periods expired. Our encoded asset ratio increased year over year, situated at 156.1%. It is important to note that NEEM this quarter was impacted by a zero interest rate loan impairment charge of 148 million soles in a context of regulatory changes in Bolivia. On a full year basis, NEEM contracted and situated a 4.3% due to any contraction in structural NEEM, the impact of government programs, and zero interest rate impairments. Next page, please. In terms of full year efficiency, The cost-to-income ratio situated at 46.3% deterioration was driven by lower income and non-recurring events at most of our lines of businesses. The deterioration attributed to microfinance was driven by a decrease in income from Ivanko, Peru, and the deconsolidation of Ivanko, Colombia. Common equity to one level for both BCP and Ivanko remained above our internal target situating at 11.4% and 18.1% respectively. It is important to mention that the capital ratio of Bibanco increased due to capital contribution of 400 million solid executed in December. As mentioned previously, our curriculum Q1 ratios are calculated at the Peruvian GAAP accounting as such as use local netting configures. Next slide, please. Credit Corp generated 653 million solid net income this quarter, which represents 10.8% of ROE. If we isolate non-procuring events registered this quarter, adjusted net income is 725 million solid, while the adjusted ROE is situated at 12%. It is important to mention that this year, non-procuring events refer to impacts to income and expenses that were registered in our P&L but are not part of our procurement business as charted. we are not expected to recoup on a consistent basis going forward. It is important to note that some variable costs such as variable compensation payments and tax withholding provisions failed this year due to the crisis and to a drop in income. We expect that going forward, these variable costs will reactivate in a context of compulsion removal. To review our expectations, let's go on to guidance. Next page, please. In a context where uncertainties remain, our expectations for 2021 assume that the lockdown will be less strict and shorter than those imposed last year. As one of the economies that was the hardest hit by the pandemic in 2020, we expect to reduce GDP recorded in 2021 and grow between 8% and 3%. In terms of loan origination, we expect our commercial transactions to continue an upward trend to 2021. As such, we project growth between 4% and 8% in average daily balances. For the total portfolio, this will be driven mainly by the retail banking segment and DCPN stand-alone and by demand. Regarding need, we expect the interest rate to remain low in 2021, Our loan portfolio will continue to be impacted by the presence of low interest rate government loans. Accordingly, we expect them to situate between 3.9% and 4.4%. As macroeconomic expectations continue to improve, provisions for loan losses are expected to continue following a downward trend, bringing the cost of risk levels between 1.8% and 2.3%. We expect to recover our capacity to generate income this year and believe that 2021 will be a year of transition in terms of efficiency. In this context, we expect some variable costs such as variable compensation and withholding taxes to reactivate alongside higher income. Additionally, in 2021, we will continue investing in digital channels and in transforming our operating model to boost efficiency in coming years. In this scenario, the efficiency ratio is expected to situate between 44% and 46% this year. Finally, we expect our average ROE to register low double-digit levels this year to stand between 10% and 14%. With these comments, I would like to open the Q&A.

Thank you, sir. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, if you would like to ask a question, please press star one now. We will pause for just a moment to allow everyone the opportunity to signal for questions. We also ask that you please ask only one question at a time. After each question has been addressed by our speakers, you will be allowed to ask as many follow-ups as needed. But again, please only ask them one question at a time. Thank you. Our first question comes from Ernesto Gapiando with Bank of America.

Hi, good morning, Walter, Alvaro, Gianfranco, Reynaldo, and Cesar. Thanks for your presentation and for the opportunity. My first question is on the regulatory outlook. We saw the negative observation of President Zagastri and the government to the potential deal of interest rate caps and also negative observations of the deal pertaining to nationalized private pension funds. However, we have seen that Congress is expected to continue adding pressure on both deals in the next couple of days. So what is the probability that you are seeing a need to pass? And can you share with us which percentage of your loan portfolio is with interest rates above 50%? Thank you.

Ernesto, thank you for your questions. Trying to tackle some of the questions that you posted. I think certainly we have some risk on the horizon. The law that put caps on commissions and interest rates is still going to be to, I would say, a probably lengthy period of discussion. It's probably too early to have an exact assessment, but if this law passes through all the process and debates, probably it's going to impact probably more severely the institutions that operate in the very high interest rate segments that are the specialized institutions and probably are going to be less severe impact in the universal banking institutions in the country. Nevertheless, it's going to damage the access to credit and reduce the access to credit for a significant number of .

Sorry? You can share with us what percentage of your loan portfolio is about 50%.

Excuse me, I couldn't understand the question very well.

Yes, can you share what is the percentage of your loan portfolio about 50%?

I don't have the figure at hand. We can come back with some general guidance further on.

Okay.

Good morning. Why the 50% question? How did you come up with a 50% threshold?

Yes, I believe that it's a small percentage of the loan portfolio, but you have an interest rate of about 50%.

My question is, why 50% not 40% or 75%?

I was thinking that the high interest rate we've seen in other countries just gives you that number, but...

I'm trying to make a point because, unfortunately, if this flow is fast, what is going to happen is it's going to have a huge impact on financial inclusion, and it will actually generate a lot of financial exclusion. And if you understand the dynamics of how the financial inclusion on the asset side works in Peru, it's basically very... very, very, very tiny loans of less than $100 and at high rates that are mostly given by cajas municipales, obviously the bank and institutions like that. And as those guys move forward, the amount of loans are larger and rates are smaller. I was trying to make a point of 50%, because if there is a 50% gap, the whole microfinance industry, 90-something percent of microfinance industry, will get hit very hard.

Okay, okay, thank you. Thank you for these additional ideas. My second question is on the political front. We have seen that Veronica Mendoza, appears in the second position in recent polls. Also, we saw that, unfortunately, the potential successor of the president of the central bank, Robert Hathaway. So this is creating uncertainty on who will be his successor. So I want to read all your thoughts from these events.

Go ahead, Mr. President.

I think probably my first reaction is that we are in Peru, and it's very early to tell. We have several surveys, several polls. Some of them, actually, Veronica Mendoza are in the top position, second, fifth, depending on the polls. But I would say that it's very early to tell at this point. probably we need to have to clear the proposals to go down the road and see how the proposals and the image of the candidates consolidate in the next months.

Just to add on what Churchill just said, the temperature on the elections is very cold. The focus on the population, I would say, is more on the pandemic rather than on elections. And statistically, there are like seven candidates. Now, all of them within the margin of error. So, as I mentioned, it's really too soon to tell. I do believe that we will have to wait at least one more month to have more clarity on the outcomes of the election.

Right. Thank you very much for your thoughts.

Thank you. Again, as a reminder, please ask one question at a time. Our next question comes from James Mullen with Scotiabank.

Hi, this is Jason Mullen. On the question of medium and longer-term asset and earnings growth versus capital optimization and dividends, Walter, you had provided some thoughts at the end of the third quarter call where you spoke about the potential that shareholder returns going forward could shift more to dividends with slower earnings growth versus what in the future versus what we've seen in the past. Have recent trends given you more conviction that this is what will drive future shareholder returns?

Yes. Good morning, Jason. This is Walter. Yes, but we have to take out of the equation this year. This year is somewhat an unusual year. We are rebuilding our profitability, and we do not expect, you know, we haven't made a final decision on the board, but this is not a year in which I would have people waiting for a lot of dividends. We want to rebuild a little bit our capital base. But going forward, yes. The dynamic, the long-term dynamic, is that the country will grow less whilst Credit Corp continues to generate around 17% return on equity, which will be a higher rate than what our risk assets will grow. Thus, we will be spinning off excess capital regularly to our shareholders. That is the dynamic that I think should come back. Next year, not this year.

Thank you very much.

You're welcome.

Thank you. Our next question comes from with Goldman Sachs.

Hi. Good morning, everyone. Thank you for the call and for my question. My question also, I guess, on the longer term, just looking at your guidance for this year and eventually getting back to 16%, 17% ROE, as you mentioned, Walter. I think you saw a nice improvement in the cost and risk, but Medicare's margin continues to be under pressure. I mean, I guess partly due to the reactiva loans. I think previously you've got it for maybe second half of 2022. Is that how long you think it will take? And is it mostly a function of getting your margin back to where it was before? And for the margin to get back to where it was before, is it just the reactiva loans coming off the loan book? Do you need interest rates to go up back to normalized levels to get to that 17% ROE? Just to try to get a sense of the drivers to be able to get back to that long-term ROE. Thank you. Thank you.

Probably, if we consider that the asset base growth at high single digits, we can obtain, as mentioned before, ROEs of high double digits. This growth is going to be driven by a country that is going to grow, let's say, 3 plus percent, and the financial sector usually grows 1.5 times the nominal figure. In terms of margins, what we should expect is that we are going to have at least a couple of years of very low interest rate that affects our overall profitability. And at the same time, we are going to come down with a relative weight of reactive loans that are scheduled to have 2.5 years more standing if there is not any additional changes. So we are going to have, I would say, a couple of years in which we are going to have still very low interest rates and the presence of the reactive loans on the book. At the same time, we expect during this period to have a higher proportion of retail loans loans in our book that carries higher margins with some more risk also. The risk should come down at segment level to pre-pandemic levels adjusted by the changing composition because more retail loans than wholesale loans down the road and the fee income probably is going to grow less vigorously than the assets due to the digitalization that is going to put some pressures on At the same time, we are going to start gaining efficiency within the benefits of the digital transformation that we have embarked on in all the companies of the group. The combination of these factors should lay down a sustainable ROE in the high-end global digits, as Walter mentioned previously. This is the basic dynamic. I don't know if you want some clarification on any specific topics.

Yeah, thank you, Cesar. That's helpful. I guess maybe just a follow-up on the margin side, given just the impact of Reactiva. Do you know, with the guidance you're providing, 3.9 to 4.4, do you know what that would look like if you exclude the Reactiva loans? Just trying to get a sense of, I guess, the normalized margin, excluding that, and then... And it sounds like you would need for interest rates to get back to maybe more normalized levels to get that margin up higher and to get that ROE up higher. Is that correct?

Yes, but I would say reactiva costs probably 80 basis points of the margin. But the slowdown is going to be progressive. And the interest rates also impact because we have a very low funding base that is less valuable in relative terms now. This process I mentioned is going to last at least two years. When all these two factors dissipate, What we are going to have probably is higher margins driven by these factors, but no more competition. We wouldn't expect to reap the full benefits of these two factors due to the competition, but we are going to still remain profitable and with stronger names than now.

But let me add something, Mr. Walter, just to be very concrete. We do not need interest rates to go up to achieve the returns on equity that we have been accustomed to. We can achieve without an increase, a general increase in interest rates. This is a year in which we will be rebuilding our profitability, and we should see the results quarter after quarter until reaching this last quarter, which will give us, you know, good results still below but close to sustainable levels.

Okay, that's very helpful. Thank you, Walter and Seth. And just one final question, just to confirm, the 17%, I think you had previously mentioned you could probably get there second half of 2022. Is that the correct timing, or how do we think about just the timing to get back in?

Definitely not this year. As I said, last quarter this year will be close to those levels, but still below.

Okay, so sometime next year. Thank you, Walter.

Thank you. Our next question comes from George Friedman with the Citibank.

Thank you very much for the opportunity to make questions. Good morning, everyone. My question is regarding asset quality. If, you know, you could give us, you know, some thoughts about when you think that NPLs will peak. We have started seeing the deterioration due to the expiration of grace periods. But, you know, I was even more interested in reconciling this with your cost of risk guidance, which is still above 2019 levels. So just wondering if I know you think this is a new normal or just the cumulative effects of the pandemic and we should have some normalization in 2022 afterwards. Thank you.

Yes, there are two questions. In terms of the expectations on the increase on the MPO loans, we expect them to peak, as I mentioned, by the end of the first semester, by the end of the second quarter. basically because we'll see all the performance on the SME and consumer markets where all the great figures expire. In terms of the projections, I mean, there's still some uncertainty in the market. The health issue is not over in Peru. We have elections. So we have provided, I would say, quite two of the... forecast of what we feel the range could be. That's why you have a range in between 1.8 and 2.3, because there are still some clouds in the sky, and we are not sure what will happen during this year, especially during the first two quarters.

Perfect. And if you allow me just to follow up there, because now you have more than 10% of your portfolio in government programs that have lower risk. And those, according to what I understood in the call, are still expected to last for 2.5 years. So would it be reasonable to expect the cost of risk evolving in 2022 to levels below those observed in 2019?

Thank you. I wouldn't expect them to go below what we had in 2019. Probably, remember there is a changing mix and more important growth in the retail market than in the wholesale market. So we'll probably see numbers somewhere below what our guidance for 2021 has been. Okay, thank you.

Thank you. As a reminder, please press star one if you would like to join the queue. Our next question comes from Jeffrey Elliott with Autonomous.

Hello. Good morning. Thank you for taking the question. Can you help us a little bit on the net interest income? I guess you've given the guide on net interest margin, but the balance sheet size has clearly been pretty volatile during the 2020 due to the pandemic and due to reactive Peru. So can you help us either on the net interest income or on the size of interest earning assets, how that's going to evolve so we can get a clearer idea of what you're expecting on NII?

we have been explaining the basic dynamic. Could you clarify your question, please?

Yeah, so you've given us an outlook on net interest margin, but the balance sheet size, the interest earning asset base that you're calculating that on has been very volatile because of the pandemic, because of reactive So I'm trying to get a clearer idea of how you're expecting that to evolve so we can get a better picture of what you're expecting on net interest income from here. I mean, maybe a better way of putting it is how do you expect net interest income to evolve off the 4Q20 base once we've adjusted for the one-off that you had in Bolivia this quarter?

The NIM this year has been affected, I am going to summarize, by the reduced interest rates that impacts our liquidity and investment income. We have managed the portfolio to increase the long-term income. The wealth also are reduced in the mix due to reactiva. As I mentioned previously, these factors are going to wind down. And the other factor is going to be the change in the composition of the portfolio towards retail. In terms of the cost of funds, we have already made a significant liability management and the costs are not going to be reduced significantly. So the improvement is going to come from the relatively less weight of reactiva and the higher proportion of retail loans in our book. And after some time, they increase in a general interest rate in the markets. But this is going to take a while. Okay, thank you. The size of the book has grown significantly this year due to, I would say, three factors, reactiva loans, a significant increase of deposits that we have invested in liquidity and in medium and low-term bonds. But this starting increase is not going to repeat into 2021.

Understood. Just to follow up on that, in 2020, you had really huge growth in deposits, up 27%. How do you think deposit balances are going to evolve in 2021?

They are going to come down to more historical levels, close to the growth of the loans. The significant increase in deposits this year, in the year 2020, was due to the liquidity provided by Reactiva and the withdrawals from the pension funds. This is a couple of one-off events. In 2021, the trend is going to be similar to the growth of loans, with probably an upward risk due to additional liquidity measures provided by the central bank, but probably not the same magnitude than in 2020.

Okay, that's great. That really helps. Thanks very much.

Thank you, our next question comes from Andres Soto with Santander Bank.

Good morning, thank you for the presentation. Maybe a follow up on in terms of NIMS. I would like to, based on your guidance, I understand that you're expecting NIMS for 2021 to be at the same level as your structural or total NIM before adjustments in the fourth quarter of 2020. So I would like to understand, in terms of the new origination that you are seeing, especially in the SME portfolio, what are the trends that you are seeing? It is being difficult to get rates close to the historical level, given the potential anchoring effect of the reactive allowance?

My initial response is that no. The clients understand the difference. And the volume was driven more by capacity to pay and needs. Probably Gianfranco could give better color, but it was not an anchoring effect of Reactiva. The clients understand that this is a different program.

Yes. Thank you so much. Exactly. And we already have a lot of clients today with clients that ask for Reactiva and ask REACTIVA LOANS DURING MAY, FEBRUARY, AUGUST, SEPTEMBER OF LAST YEAR, HAVE ALREADY GOTTEN NEW LOANS AT, LET'S SAY, NORMAL CONDITIONS. THEY COMPLETELY UNDERSTAND THE DIFFERENCE BETWEEN NORMAL WEIGHTS ON THE MARKET, COMPLETELY RETRAIT, AND THE SUBSIDIZED WEIGHTS GIVEN BY REACTIVA. So that's not an issue for us today. Going forward, what could happen, and there's a lot of conversations right now, is that there are some specific sectors of the economy that have been hit very hardly. An example is tourism. So the Activa program may go extended for some specific sectors. There's nothing concrete right now, but something like that may come in the next couple of months.

Perfect. Thank you, Gianfranco. And previously, you guys mentioned competition as another source of pressure to your margins. Which specific segments are you seeing the strongest competitive environment in these days?

There's a lot of competition. So, Let me go back. There are some sectors or some parts in which we are back on track to pre-COVID levels. And those are the sectors where there's very harsh competition. Typically, mortgages is very competitive now. And the other sector is the whole corporate and The mid-sized companies, but the large mid-sized companies, since there's not too much activity and or investment, where the same usual suspects providing or offering financing facilities to the same client. And there's also a very strong competition from the top corporates and the large mid-market companies. The only competition across all of the segments are the culture is among those two segments.

Perfect. Thank you, Gianfranco.

Thank you. Our next question comes from Alonzo Garcia with Credit Suisse.

Good morning, everyone. Thank you for taking my question. I would like to touch base again on the regulatory front. I mean, you already provided some color on the interest rate caps bill, but could you please share your thoughts on the pension system reform? I mean, what probability do you see of it being approved in Congress? Does the government support this bill or not? The timing and also if AFPs, as we know them right now, would play a role under this new model or not at all. Any color would be appreciated. Thank you.

Okay. Hi, this is Alvaro Correa. There, the question is difficult to answer. There is a lot of uncertainty today. There is a new law that is being passed as we speak, and there's a proposal from a specific commission, a special commission that was created last year. That specific new regulation is a real transformation of the pension system. However, it is difficult to say that it has a strong support from all parties. There is still discussions in Congress about that. And the timeframe for that is also uncertain. Some people say it's gonna come with a final decision in the next, let's say, 30 to 60 days. Other people talk about leaving this to the next government and the next Congress. That means that should be discussed in about six to eight months from now. So a lot of uncertainty, and if it goes through, it definitely has an impact on Prima IFP for sure because the model changes. The funds will be auctioned in an international auction, and we can participate. but it's not for sure that everything will stay as it is today. I mean, it's sure it's not going to stay as it is today. So a lot of uncertainty. We should have more color on that in the next call for sure. Thank you.

Thank you. And lastly, on the expense side, could you please discuss regarding the allocation of OPEX, CAPEX this year related to your transformation strategy. I mean by subsidiary or which specific initiatives you are currently working on.

Thank you. All the companies in Credit Corp are undergoing a transformation process in relative terms for the BCP share is bigger due to the relative size and the evolution of the company. I would say in terms of transformation, probably two-thirds are OPEX and a little bit more than one-third is CAPEX. And the increase from 2020 to 2021 is going to be significant, probably more than 30%. And out of this total, BCP is going to be more than 50% of the total of the entire corporation. But I would like to emphasize that all the companies subject to the reality of each one are undergoing a significant process of investment and digital transformation suited to the specific needs of the specific segment that they serve.

Understood. Thank you very much.

Thank you. Our next question comes from Alessandri with Credit Corp Capital.

Hi. Thank you very much for allowing questions. I had a question regarding the other expenses. You mentioned all the salaries, the administrative expenses, but other expenses that it's a significant point of the increase in total expenses year over year. It's not detailed. If you could give us a bit more view regarding the other expenses within 2020 and its development for 2021, I would be really grateful.

Yes. Usually in other expenses, we record special taxes that are not income taxes that can be contributions to several institutions, operational with related expenses. In the year 2020, we have significant operating expenses relating to two items. One was donations. BCP made a 100 million soles donation at the beginning of the crisis. Ivanko also made a significant donation, Credit Corp Capital, Pacifico. So this is a significant expense this year that is not recurrent expense, of course. And we are also recorded in this item the expenses related to the management of direct expenses to the COVID-19. We are talking about a specific adequation to premises, health, measures, protective equipment, the sum of these two items has been significant this year. And we also have a relative uptick in fraud at the end of the year, but not in the magnitude of the first two accounts that I mentioned.

Okay.

So we could expect other expenses to... Sorry, I would like to clarify something. Down the road for 2021, we still expect to incur in COVID-19 related expenses probably for the first half year, part of the year. Due to the lockdowns, all the security measures that we need to take to protect our teams.

Thank you. Hearing no follow-up, we'll move to our next question from Carlos Gomez with HSBC.

Hello, good morning. Hello, good morning. My question refers to the lessons that you have learned from the last year. Obviously, it's a big shock. For most companies, they say that this has been an acceleration of the change. But have you seen anything that makes you think about a structural change at the company? In the future, would you like perhaps to be more in insurance or less in insurance, more abroad or less abroad? Has the strategy changed in any way? as a result of the pandemic in the year 2020. And I shouldn't resist, but can you also tell us why your tax rate was so low this quarter? Thank you.

Cesar, can you tackle the tax rate and I'll answer the strategy?

Okay, perfect. Relating to the tax rate, we calculate the tax rate based on local accounting figures. In local accounting figures, we have, I would say, two significant factors. One is that we have increased the year, the size of the investment portfolio, and we have then tax exempt securities. And particularly in the last quarter, we have also recorded significant provisions in local accounting figures. So, the combining effect of these two factors has led to a drop in income tax.

Carlos, to answer the second part of your question, actually that was my last closing comment and my remarks at the end. We have not modified our strategies. But undoubtedly, we have accelerated several initiatives, as you well mentioned, because of the accelerated use of digital channels. So what this means is that we will probably deteriorate our short-term efficiency ratios. But we think this is a smart thing to do for long-term results and competitiveness. We have had very extensive reviews of all our strategies with all our business units, and nothing has dramatically changed. The plans that have been laid out have, in essence, just accelerated. And I think that the lesson that I personally take from this is that while you feel that you're on the right path, maybe move faster. But that's my own personal thoughts, Carlos.

Thank you very much.

Thank you. Our next question comes from Jason Mullen with Scotiabank.

Hi. As a second question and maybe a follow-up to what Carlos was asking, on the earnings mix at Credit Corp, considering its banking, insurance, pension, and investment banking and wealth management businesses, in general terms, do you see a change in the earnings growth rate from the different segments that would alter your view of the composition of Credit Corp's earnings going forward?

Okay. Let me take this one, Jason. This is Walter. We have several dynamics. I think that within Credit Corp, BCP will obviously continue to be by far the largest contributor, and we still have a lot of room to grow. In Peru, through BCP and through MiBanco. Of course, this is a year to rebuild the profitability that will grow a lot, but we think that due to the continued still low levels of penetration of the Peruvian population and the banking system, there continues to be a lot of opportunities there. So where will we grow more than vehicle by vehicle? I would say that the segments in which we will grow will be in the SMEs, and in the low end of the consumer side. There continue to be opportunities, both on the transactional side, on setting up platforms, as well as on the lending side. That will continue to be the segment in which we will grow more in Peru, for obvious reasons, because the upper end of the consumer and all the top corporates and middle market companies are fully banked. To complement that, we have wealth management, We continue to have nice opportunities both in Peru, in Chile, and in Colombia. And we have this initiative that we have for microfinance in Colombia, which we will slowly try to see if we can capture the growth. But, you know, in summary, where will Credit Corp grow? In the unbanked segments of the population, which are consumers and SMEs, particularly in Peru.

And how does insurance fit into that outlook, Walter?

It fits quite nicely. We are developing every day, and we get better at it, insurance products precisely for those segments of the population. We've been very successful with our oncological insurance, and we think that there are more oncological insurance that we can take to those segments of the population. Of course, recognizing that in insurance, there's still a lot more room to grow, but it's much more difficult than in banking. The penetration of insurance in Peru continues to be very low, even at some of the higher end levels of the consumer population. So insurance complements quite nicely there.

And is the outlook for pension growth with the changes, I mean, with potential changes or reforms, is that something you think could grow slower in the new context or faster than we've been seeing the growth?

I think that one of the potential, I mean, the potential outcome from the industry will be that it will change dramatically. So I would expect pensions to become a very, very small contributor to credit corp going forward.

I really appreciate your views. Thank you all very much. You're welcome.

Thank you. I would now like to turn the conference back to Mr. Walter Bailey chief executive officer for closing remarks.

Thank you. Um, we are, um, we are very pleased to have left 2020 behind. It undoubtedly was a very remarkable year with Peru having been impacted by the most severe recession in our modern history. We were always very confident. with the strength of our balance sheet, which we felt was more than enough to take us through this severe downturn. This position of strength led us to try, to the extent possible, and with the assistance of our risk group, to fully acknowledge and recognize in our results the expected credit losses in the most vulnerable portions of our portfolio. This with the idea to leave the losses mainframe behind and focus management's attention with the task of rebuilding our profitability while accelerating our delivery of our products via digital channels. Due to our conservative nature, we took the precaution of issuing $500 million in five-year bonds at the holding company level, cash which is still sitting on our books. We believe that this low-rate environment allowed us, at a minimal negative carry, to have a second level of insurance, which has not been utilized. Looking forward, there continues to be two elements of our uncertainty. As it was mentioned, the second wave of contagion, which is currently taking place. We believe that as a country, we have learned lessons from the first wave, and that given that the vaccines are already arriving, we expect the second wave to be less severe. but definitely we will know for certain in the next 30 to 60 days. The second element of our certainty is related to the political situation and elections. The political scenarios continue to be a source of uncertainty, but we will try to navigate those waters as we have had in the past. On the business front, this is the year, as I mentioned, to rebuild our profitability. This rebuilding should happen throughout this year and we should start to see the results quarter after quarter until reaching, as I mentioned before, the last quarter to results and returns still below but close to sustainable levels. We have not modified our strategies, but undoubtedly we have accelerated several initiatives, which probably will deteriorate somewhat our short-term efficiency ratios, but we are confident that these decisions are the smart ones the best for long-term results and competitiveness. Before we finish this call, I would like to announce that we will be publishing our annual sustainability report prior to the end of the first quarter. During the first half of last year, to further strengthen our long-term performance and competitiveness in the markets we operate in, we launched the project to develop a strategy aimed at integrating sustainability more deeply, consistently, into our business strategies as well as in our day-to-day activities. We worked for five months with a dedicated commitment of more than 30 years across six of our largest operating companies to identify sustainability-related risks and opportunities that could create strategic or financial value and growth while generating a positive impact in society for each of our businesses. As a result, we redefined our vision purpose and values, which are now better aligned with our current role in society and businesses and establish our 2020 and 2025 competent to sustainability product. We will introduce this plan to you in our upcoming 2020 sustainability report. We look forward to hearing your comments and further expanding on our program in the future. Thank you everyone for your attention on today's call. As always, the team is available to meet and talk with you more about our performance, operating environments, and strategy. Thank you all very much.

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