Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to Credit Court Limited's second quarter 2021 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. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. With us today is Mr. Walter Bailey, Chief Executive Officer, Mr. Gianfranco Ferrara, Deputy Chief Executive Officer, Mr. Alvaro Correa, Deputy Chief Executive Officer, Mr. Cesar Rios, Chief Financial Officer, Mr. Reynaldo Llosa, Chief Risk Officer, and Mrs. Milagro Siguenas, Investor Relations Officer. And now, it is my pleasure to turn the conference over to Credit Corp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

Thank you very much. Good morning and welcome to Credit Corp's conference call on our earnings results for the second quarter of 2021. I hope you and your families are healthy. Official data indicates that the economy grew around 20% in the first half of 2021 and came close to hitting pre-pandemic levels. It is noteworthy that the construction sector grew 15% with respect to the first half of 2019. In addition to statistical rebound, recovery in the past few months has been boosted by a favorable external environment where copper prices remain high and our main training partners have resumed work. Regarding the sanitary situation, mortality rates have fallen considerably after reaching a peak at the beginning of the second quarter. This improvement has been driven by a noteworthy uptick in the vaccination rate in June and July. Currently, around 37% of the adult population have received at least the first dose. Although this rate lags behind that registered by some peers in the region, the government's goal is that all adults and children from 12 to 18 years will be vaccinated by year-end. All in all, we still expect that Peru GDP to rebound around 9% in 2021 due to a strong commodity crisis and expansive monetary policy and fiscal policies. Political uncertainty in Peru has generated a negative impact on financial indicators. The exchange rate has depreciated more than 12% year-to-date, and the dollar has reached a record high despite the central bank's move to sell almost $6 billion year-to-date in 2021. An active intervention in the index market via multiple instruments. Furthermore, sovereign grades in domestic currency as exhibited at the table, has also climbed to levels above the peak register in 2020. Despite the pandemic and political shocks, Peru continues to perform peers in the region in terms of macroeconomic indicators. Our net international reserves currently represent 35% of GDP, our annual inflation rate stands at 3.8%, and our public debt which represents 37% of GDP, is among the lowest in the region. Additionally, our banking system maintains high liquidity. Current political instability is rooted in decisions taken by the new government. Beginning with the move to appoint a highly controversial cabinet with limited technical chops, Questions regarding the direction that monetary policy will take as well as who will lead the sector continues to loom. Announcements have been made indicating that higher levels of state intervention are on the horizon via new public credit facilities, free regulations, increased regulation for private health insurance, and structural changes in the private pension system. The executive ability to implement this radical agenda may meet with significant obstacles and resistance. First, Peru Libre has only 37 seats of 130 in Congress, and its allies can contribute only five more votes. Second, it is worth noting that in the first round of elections, Pedro Castillo secured only 19% of valid votes. which represents 10% of registered voters, and in the second round, won by an extremely narrow margin of 44,000 votes, less than 0.2%. Additionally, a recent data survey conducted between the second and the fourth of these months indicates that Castillo's approval rating is 39%, one week into his term, one of the lowest initial ratings registered by an American president in recent history. In the same survey, only 5% of those polled indicated that the Constitutional Assembly should be the government's top priority. In fact, the Assembly is ranked sixth among seven priorities on the list, where the reactivation of the economy, Improvements in the health system and improvements in the quality of education were ranked third, second, and third respectively. Going on to credit card results, let me highlight our quarter-over-quarter evolution. The loan portfolio rose 4.4% in the quarter and balances, driven primarily by an uptick in structural loans in the wholesale banking and SME business sector. Net interest income grew 8.7%, driven by an increase in structural loans, a drop in funding expenses, and the fact that a one-off expense was reported last quarter for a liability management operation. In this context, NIMS resumed growth and stood at 4.01%. Provision expenses fell after client behavior registered positive performance across sectors. which led the cost of risk and structural cost of risk to secrete at 1.02% and 1.23% respectively this quarter. Core non-financial income, which is composed of fees and index transactions, grew 8.4% due to a considerable uptick in transactions. This evolution was offset by a contraction in non-core non-financial income driven mainly by BCP, which sold long-term bonds at a loss to reduce the interest rate and fidelity of the available wholesale portfolio. Insurance underwriting results continue to be impacted by COVID-19-related claims and incurred but not reported provisions in the live business. From April onwards, however, the trend has improved. Deficiency ratio improved 30 basis points, boosted by income recoveries. Net income at Credit Corp totaled 699 million soles in the second quarter of 2021, which represents an increase of 5.9% quarter over quarter. Our return on equity continued its upward trend and situated at 11.3% at quarter end. In the first half of the year, ROE stood at 10.9% within our guidance range. Our balance sheet remains strong with ample liquidity and adequate capital wages. I will briefly describe the results of the lines of business levered by provide full detail in the section of consolidated performance. Universal banking drives our recovery. BCPS standalone contributed $726 million in earnings, registering a return on equity of 18.1%. Core income registered notable growth at 8%, quarter over quarter, which was mainly driven by an uptick in structural loans, a contraction in the funding costs, and growth in transactions. BCP sold available-for-sale long-term bonds at a loss to reduce interest rate sensibility and partially offset the negative impact through a U.S. dollar loan position. This strategy results partially offset core non-financial income growth. The main driver of an uptick in profitability this quarter was the 83% quarter-over-quarter contraction in provision expenses, which reflected an improvement in client payment levels, efficiency, deteriorated 10 basis points quarter over quarter, mainly driven by higher digital marketing and mileage fidelity program expenses, in line with growth in digital sales and debit and credit card usage. BCP Bolivia's ROE stood at 8.2%, which reflects a decrease in the appetite for risk and relative stability in the loan portfolio in a context marked by large-scale government-mandated loan reprogramming. Results were impacted by provision reduction due to the inclusion of guarantees in the consumer portfolio, which was partially offset by new provisions to cover delinquency. The provisions leveled were equivalent to 4.72% of the total loan portfolio. NIVANCO registered clear recovery this quarter. net interest income rose due to an uptick in origination of lower-risk structural loans, a drop in the funding cost, and a rebirth of interest income provisions made previously for program portfolios. This positive evolution, indeed, was partially offset by regulatory restriction on fees. Loan provisioning normalized in a context of an improvement in payment performance and growth in transactions. We are closely monitoring the 12% of the structural portfolio that is still within race periods or past due. Colombia's results improved due to an uptick in disbursement, although origination volume has slowed due to social tensions. The focus is currently on maintaining adequate risk management, workforce productivity, and efficiency at the commercial level. regarding insurance and pensions. This quarter, Pacificos' contributions continue to be impacted by higher COVID-19-related and IV&R provisions in the life business. Losses in this business have negatively affected a return to profitability at the group level. It is important to note that at quarter end claims, IV&R provisions began to fall in line with a drop in COVID-19 mortality. In property and casualty, growth in net premiums was offset by an increase in claims after mobility restrictions were lifted and activity levels rose. The corporate health insurance and medical services were affected by higher claims quarter over quarter due to an increase in health care demand as the economy bloated. At Prima, assets under management contracted 2.2%, quarter over quarter, which reflects fund withdrawals for a total of $1.8 billion solid as of June under government-mandated facilities in May. This represents 15% of total funds that are available for withdrawals. We expect assets under management to continue to contract in the short term, given that VFP withdrawals can be made through the year. Despite this, fees have remained stable due to growth in contributions from affiliates. In investment banking and wealth management, the quarterly evolution indicates assets under management contracted minus 0.5%, which was primarily attributable to Peruvian-based fund outflows from the asset management business due to political uncertainty. In wealth management, assets under management remained basically stable after local funds migrated abroad and to an offshore platform. The contraction in asset management was attenuated by a devaluation in local currency. Income contribution expanded 15.8%, driven primarily by positive results in capital markets and wealth management. The gains of TIC was fueled mainly by growth in the sales of securities and upfront fees from entering third-party funds to international platforms. It is worth noting that the investment banking and wealth management presence, and 76% of its assets under management are held outside of it. The recent migration of funds to offshore platforms represents an opportunity to broaden investment options for clients. Now, I will discuss Credit Corp.' 's consolidated performance. Quarter over quarter, loan portfolio growth was 4.4% in ending balances and 2.2% in average daily balances. This evolution was driven primarily by an uptick in structural ordination and wholesale banking through campaigns in the fishing and agricultural sectors. Expansion was also spurred, albeit to a lesser extent, by growth in SME business, mortgage and consumer loans, and by the evolution of the exchange rate. The mix of interest-earning assets improved, marked by 7.8% quarter-over-quarter construction in the sovereign bonds and reduced exposure to long-term interest rate risk. The deposit mix improved and reflected an uptick in low-cost demand and saving deposits in foreign currency that was partially offset by withdrawals of time and severance indemnity deposits. Additionally, the funding mix in foreign currency grew to low interest borrowing and through the execution of the remaining may hold redemption from a liability management operation. The consequent funding structure, coupled with lower interest rates, led the funding costs to fall and stand at 1.18%. Both payment behavior and the structured portfolio provide a ball favorable this quarter. In retail banking, on-time payments on loans due stood at 95% in June, driven by an uptick in the SME PMA segment. Quarter over quarter, the high uncertainty portfolio, which is composed of reprogrammed loans that are still within grace period and overdue loans, increased slightly and represented 10% of structural loans. It is important to note that this increase was driven by loans that were less than 15 days delinquent, which are considered the most recoverable. At Nibanco, Contact payments improved in a context of lower expirations and growing transactions and income due to economic reactivation. The high uncertainty portfolio contracted from 19% to 12% this quarter due to the positive evolution of payments. The government program loans for governments which are primarily under Reactiva Peru began to expire in June 2021. By the end of the month, the balance was 7% lower than the record high in the fourth quarter of last year. The retail banking government program portfolio represents 65% of the total government program portfolio. By the end of June, 54% of the retail portfolio was still within grace period. 30% had made the first payment, 14% had been reprogrammed, and 2% had become overdue. In the chart on the right-hand side, you can see the profile of wholesale banking and formivango. It is important to note that the new government reprogramming facilities expire next year, so the real deterioration levels will not be fully evident until 2022. It is important to note that the government guarantees back a substantial percentage of these portfolios. The NPL ratio for structural loans in the wholesale banking registered no variation after the deterioration of a small number of middle market clients was offset by the increasing loan volumes. In retail banking, the ratio evolved positively in the individual segment but was slightly attenuated by an increasing overview of SME loans. At Nibanco, positive payment behavior and higher write-offs drove an improvement in NPLs. As a result, credit courts' structural NPL dropped from 6.05% to 5.38%. The downward trend in the structural cost of risk was not worth it. This improvement was driven by BCP standalone, where the ratio dropped 46 basis points, situating at 1.11% in a context marked by a decrease in the probability of defaults. In this scenario, Credit Corps' structural cost of risk contracted 69 basis points from 1.92% to 1.23%. In year-to-date figures, the structural cost of risk stood at 1.51%. At the end of June, the provision's stock was equivalent to 7.7% of Credit Corps' structural loan portfolio. Ledicorp's structural need increased 14 basis points quarter over quarter to stand at 4.32%. Recovery was attributable to a more profitable asset mix, which was generated by growth in structural elongation and improvement in the funding mix and a decrease in interest expenses. The positive evolution in need was mainly driven by DCP. Risk-adjusted mean increased 64 basis points this quarter and reached 3.38%. This metric is recovering faster than mean in line with the normalization of provisions of non-losses. Core income, which is composed of net interest income, fees, and FH transactions, was situated close to pre-pandemic levels. The increase in net interest income was primarily attributable to growing structural loans and a decrease in the funding cost. Fee income grew alongside and uptick in transactions and foreign transfers at BCP and in brokerage fees at credit core capital. The first transactions also increased in a context of high demand for dollars. Non-core, non-financial income this quarter results reflect a management decision to reduce interest rate sensibility in the investment portfolio at BCP as indicated earlier. Additionally, we executed an active derivative trading strategy at BCP on credit core capital, both of which rendered positive results. Ensured underwriting results continued to be severely impacted this quarter, which was mainly due to an increase in COVID-19 claims in the live business and to a lesser extent to higher claims in the property and casualty business after mobility restrictions were lifted. On a quarter-over-quarter basis, regarding net earning premiums, there was a slight contraction in live business. associated with a decrease in sales of products in amateurs and seasonal effect of renewals in insurance for high-risk occupations. In property and casualty, there was an uptick to renewals in the medical assisting line and an increase in cars due to new sales and renewals. In the life business, COVID-19 claims reached a peak in April before beginning a March downward accompanied by an ongoing decline in ID&R provisions in a context of declining mortality during the quarter. If the sanitary situation continues to improve, we expect this trend to continue. It is important to note that on a year-to-date basis, net earning premiums grew in the live business through Cisco 5, which expanded the affiliate base for fees and contemplated a more favorable fee structure. This is a pension fund-related business. the risk of a third wave appears imminent. Nonetheless, vaccination rates and double masking mandates may mitigate impacts this time around. In the first half of 2021, credit courts' efficiency ratio improved 250 basis points year over year. Improvements were driven mainly by the positive evolution of income in the microfinance and insurance and pension lines of business. Nibanco's interest income was halved due to growth in structural loans and a decrease in the cost of funding, while expenses remain under control. Pacifico's income was boosted in the first half of this year due to repricing and the fact that it won a higher proportion of the Cisco 5 channels. The record just shows an operating leverage of 6 percentile points in a conflict in income acceleration and control growing expenses. Year-over-year growing operating expenses during the first half of this year reflects our commitment to digitalization and was generated primarily by cybersecurity and IT. Regarding distribution footprint resizing, it is worth noting that BCP's standalone and debacle reduced the number of total branches by 9% and 2%, respectively, year-over-year. In terms of liquidity, Even after country outflows of foreign currency, BCPS, Tanalong, and Ivanko have maintained high levels of liquidity well above regulatory and internal limits. Regarding capital, each of our subsidiaries maintains adequate capital level, which ensures solvency. A slight increase in the core equity tier 1 of BCPS, Tanalong, and Ivanko was attributable to an uptick in retained earnings. which was driven by recovery of both subsidiaries this quarter. At BCP, we continue to work on key digital initiatives to achieve our objectives for experience and efficiency and ensure our competitiveness in the long term. Alongside initiatives to accelerate digital investment, we seek to improve time to market and operating stability without losing sight of cyber risks. The number of new software releases more than doubled year-over-year this semester, and the downtime for key channels fell 54% in the same period. Our aim for year-end is to fully comply with all the statements of the FFIEC cybersecurity assessment tool at the baseline, evolving an intermediate level, and fulfilled 90% of all statements at the advanced level. Today, we have fulfilled 82% of this target. Client satisfaction was negatively impacted by an uptick in the demand for services, which coincided with a reduction in on-site service capacity due to the pandemic. We moved swiftly to replenish our service capacity by leveraging digital services to improve the client journey. Consequently, we have recovered satisfaction levels and are now shooting to exceed expectations. The effectiveness of our efforts to execute digital initiatives is reflected in the evolution of the pool of digital clients, which represented 55% of the total client base this quarter and continues to fuel growth. Exponential growth in digital transactions coupled with an increase in digital sales in recent years led us to rethink and resize our distribution model. Consequently, we reduced our branch network by 9% in the last 12 months. At Credit Corp. level, we are developing different fintech initiatives and ecosystems to boost the group's potential. Later this year, we will be able to give you a much more detailed overview. Right now, I would like to comment on our progress with three specific initiatives. YAPI, which reached the 6.6 million user mark by June 21, and has added 1 million new clients to the banking system since 2020. Transactions grew five-fold. with regard to the figure reported for the same period last year. Increasing integration with NUVIS and EasyPay opens the ecosystem to payments through points of sales which will propel an additional increase in transactions. Indicators such as frequency of use, cost of acquisition, and MPS continues to improve, and we expect that this will be the case moving forward. In the second half of this year, we provide an interesting monetization pipeline. We will share more information on this point as new features are released. YAPI is now better prepared to operate independently at DCP and the decision-making over source, culture, and operating levels. Nonetheless, we have no intention of divesting this business in the foreseeable future. Kempo is the only fintech with a digital wallet solution in Chile. Within a year of its launch, 10.2 is the second largest solution in terms of number of users, with a client base of 537,000 affiliates, with an inter-monthly growth level for process transactions that stands at 30%. High volumes and a strong NPS performance indicator of 68%, we expect positive trends to continue. This represents an opportunity to continue growing our customer base as we consolidate in this market. Finally, TIBA, a digital initiative that began in Colombia to offer low-ticket investments, has hit the 293,000 users mark this quarter, with $89 million in assets under management. TIBA still has significant room to grow in Colombia. Additionally, TIVA was launched this quarter in Peru, where we expect it to grow faster as we leverage our lending position in the market and extensive knowledge base. Now let me talk about our sustainability learning. We have stated that honing our social focus is the core objective of our sustainability program. Our efforts have speeded up, and in the first half of 2021, we progressed towards several milestones. On the environmental front, we are pushing the group to mitigate and reduce carbon emissions to three problems, carbon neutrality, environmental policy, and environmental management plan. It is worth noting that on June, BCP was recognized by the Ministry of Environment for reducing the carbon footprint and was the first bank in Peru to earn the Level 3 awards. With the support of industry experts, we have made progress in assessing our ESG risk management framework. Additionally, we have launched an eco-factory line with a sustainable textile company. In the social fund, YAPI and Nibanko drove our financial inclusion efforts, and 1 million citizens and 35,000 SMEs were brought into the banking world. Financial education programs at BCP and Pacifico have also reached millions of people. We implemented a program where female board members meet and exchange views with female senior executives with an eye on strengthening networks, increasing the visibility of female talent, and addressing gender equity challenges. We have also established directional goals to improve our gender balance and are including a gender perspective in our succession plans for senior executives. On the government front, we have included sustainability goals in corporate-level incentive programs and have made further improvements on the compliance front. By year-end, we expect to report progress on relevant ESG initiatives and adhere to international reporting standards. We expect our overall ROE of 2021 to remain within guidance given that favorable results in the banking businesses are expected to offset the less than favorable scenario in the insurance business. Peruvian real GDP growth is decelerating and our estimate for the end of the year is within range. Low portfolio growth in average daily balances is expected to decelerate given that the uptick in the second half of 2020 was generated by reactive adjustments. Current uncertainty may impact low dynamism year-end. Net interest margin achieved an inflection point, but recovery will be gradual. As such, we expect mean in 2021 to situate at the lower end of the guidance. The cost of risk, however, has improved faster than expected given the positive evolution of client ratings. In this context, we expect to register a cost of risk below our guidance range this year. Regarding efficiency, the 43.9% ratio posted in the first half of 2021 is slightly below our guidance. Nonetheless, we expect the levels to increase, albeit with an expected range, as higher year-end expenses are reported. The outlook we are sharing today is for 2021. Although uncertainties remain on an extended horizon, after evaluating different scenarios, we will affirm our long-term business strategy. We are carefully monitoring the evolution of specific variables and are poised to make tactical changes to adapt to challenging situations. We will continue accelerating value generation through the digital strategy in each of our businesses, which coupled with our sustainable journey will ensure that we sustain growth efficiently. With these comments, I would like to start the Q&A session.

Thank you, sir. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. 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 our speakers, You will then be allowed to ask as many follow-ups as needed, but again, please only ask one question at a time. Thank you. Our first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.