Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to the Credit Corp Limited Third 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, then 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 Ferrari, 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. Milagros Cegueña, Investor Relations Officer. And now, it is my pleasure to turn the conference over to Credit Corp's Chairman of the Board, Mr. Luis Romero. You may begin.

Good morning, everybody, and welcome to our Credit Corp conference call. I hope you and your families are healthy and safe. Before Cesar begins the presentation on our results, I would like to share some opening remarks with you. I'm very pleased to join you today in a special period when our strong third quarter results reflect an inflation point in our businesses' recovery and in our digital as well as sustainability journeys. This coincides with a transition in our top management team, and this happens to be Waters and Alvaro's last conference call. I wanted to take this opportunity to express our deepest gratitude to both Walton and Alvaro for their invaluable contribution to Credico. They are genuine leaders who have inspired our teams, transformed our business, and driven our success. Alvaro has had an exceptional 24-year career within the group, including the last few years as deputy CEO overseeing insurance, pensions, investment banking, and wealth management. Over the last two years, he has played an invaluable role in driving and steering our process to integrate sustainability in our business strategy. Alvaro's technical chops, transparency, and humanity have been deeply valued over the years by investors and colleagues alike. Walter has had an extraordinary 28-year career at the group, including the last few years as CEO of Credit Corp, and prior to that, 10 years as the CEO of PCP. With strong vision and steady hand, Walter has led us as we embark on new journeys, including penetrating the microfinance business and even the fast markets, which now represent our main avenues for regional growth. Most importantly, Walter has been an inspirational yet approachable leader who has attracted and developed a talented and professional management team. Alongside these individuals, he has helped build a resilient organization over decades of both challenging and promising periods. It has been our privilege to have Walter at the helm of our group. We have planned and managed this transition process very carefully and are fully confident that Gianfranco has both the skills and experience to lead Trenico to new chores. He will build upon the foundations of the organization before us today, a leading and diversified financial services group with more than 40,000 employees and a solid presence in Peru, Colombia, Chile, Gianfranco knows our organization inside and out and has actively participated in the process to define credit card strategy. Over these 25 years with the group, he has successfully led a myriad of areas at BCP, including corporate banking, investment banking, BCP Bolivia, and retail banking. where he spearheaded the bank's digital transformation journey. Jan Frank is an inspirational leader who energizes and engages his management teams to set the bar higher. We are very pleased to have him as the next CEO of Credit Corp. Again, many thanks to both Walter and Alvaro. Now, I would like to give the floor to Cesar. and the management team who will conduct the conference call on the results for third quarter 21. Thank you. Go ahead, Cesar.

Thank you, Luis. Good morning and welcome to CREDIT CODE's conference call on our earnings results for the third quarter of 2021. I hope you and your families are healthy. Official data indicates that in August, economic activity grew 11.8% year-over-year and 1.6% compared to the figure reported in August 2019. Our estimates indicate that in the third quarter of 21, the economy expanded around 11.2%, topping the pandemic levels. It is worth noting that the construction sector grew 21% with regard to the third quarter of 2019. In addition to statistical rebounds, recovery in recent months has been boosted by a favorable external environment where copper prices stand at historically high levels and Peru's main trading partners are registering an acceleration in growth. 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 not worthy advances in the vaccination program, as 81% of the adult population have received at least one dose. The government's goal is for all adults and children between 12 and 18 to be vaccinated by year-end. We expect the GDP to rebound around 12% in 2021, which is better than initially expected due to strong commodity prices and expansive monetary and fiscal policies. Next slide, please. President Castillo's recent cabinet reshuffle was perceived by economic agents as a signal of potential moderation. This move, coupled with the ratification of Julio Velarde as chair of the central bank, bolstered Peru's financial market and saw indicators improved. For example, The exchange rate has fallen from 4.13 to 4 soles per dollar. Additionally, the 10-year local currency government bonds yields dropped from a peak of 6.8% to 5.9% as November 3rd, while the level of non-resident holdings of soles denominated government debt recovered from a low 14%. for 44% in June to stand at 52% in October 2020. Net worth of national reserves hit $75.4 billion in October after expanding at $71.8 billion in June. It is worth mentioning that the central bank has raised its policy rate by 100 basis points since August to control inflationary pressures. This rate currently stands at 1.5%. On the political front, the new prime minister appeared before Congress to request a vote of confidence for her cabinet. Additionally, the executive branch presented a bill to Congress to request extraordinary powers to legislate on several relevant models. The main points of this proposal include increasing the personal income tax for individuals who earn more than $300,000 a year, extending the application of dividend taxes to domiciled legal entities, creating a new mining tax regime, imposing a sales tax on life insurance policies, enacting measures to adapt capital requirements in the financial system to Basel III standards, increasing the level of economic sanctions that the regulator can impose on financial institutions, and implementing initiatives to ensure a more active role for Banco de la Nación. We will continue to closely monitor political and regulatory events and the impact in our businesses. Next slide, please. Going on to credit cost performance, we continue to foster financial inclusion and business growth through digitalization. while we recover profitability across the board. In line with our ambition to create a more sustainable and inclusive economy in the last nine months, we have included 785,000 individuals in the financial system through YAPE in Iván González, our YAPE equivalent in Bolivia. Complementarily, Millions of individuals and micro-businesses have also benefited from our ABC financial education program at BCP and Pacific. We operate in under-penetrated markets and decide growth opportunities while accelerating our digital transformation. BCP is growing its client base mainly through digital clients which, as of September, accounts for 57% of individual clients. Lancome is already within the benefits of the implementation of this hybrid model in September, with 10% of loan operation worth its worth to our tournament channels. Regarding quarter over quarter results, Credit Corp's loan portfolio holds 2.4% in quarter head balances, boosted by local co-receipt evaluation. Excluding the exchange rate effect, the loan portfolio remained flat given that 1.7% uptick in the structural loss was offset by 8.6% drop in government program portfolio. Core income, which is composed of net interest income, fee income, and FH transactions grew 4.8% due to an uptick in the structural loss and higher interest rates. Additionally, The income was boosted by growth in transactional activity and in turbine transfers. Provision expenses dropped due to improvement in the payment behavior of clients at BCP and Milanko, which led the cost of risk and structural cost of risk to drop to record low levels of 25% and 0.54% with crisis. Insurers and the rightful results recovered After COVID-19, related claims in the life business registered a material reduction, which reflects the improvement in the sanitary situation. In the third quarter of this year, Credit Corp. registered $1,164 million in net inbox and an ROE of 18.57%. Yesterday, ROE stood at 13.46%, which is within our guidance. Finally, our balance sheet remains strong with ample liquidity and adequate capital pressures. Next slide, please. I will briefly describe the results of the lines of business level, but we provide further details in the section on consolidated performance. Universal banking is registering a strong rebound as BCP accelerates its transformation investments. In the third quarter of 2021, BCP contributed 1,058 million soles in earnings with a return on equity of 23.1%. DCP's ROE is quoted as exceptionally high due to the 69% water recorded contraction in provisional expenses, which reflected an improvement in payment behavior that was driven by a pattern that expected a kick in economic reactivation. water recorded, which was mainly driven by growth in structural loans and interest rates and by an increase in transactions, which was fueled by an increase in consumption in interbank and international transfers. BCPS Panalone registered a 14% year-over-year increase in expenses, which was primarily a tribute of over $19.19 and consulting expenses for digital transformation. ROE at BCP for the first nine months of 2021 stands at 19.7%, which reflects a strong rebound from the COVID-19 crisis. BCP standalone's core equity to one ratio remains within our internal limits and stood at 11.1% this quarter. BCP Bolivia's results show little variation in the growth, which reflects a lower risk appetite in an uncertain economic environment. Next slide, please. Macrofinance continues to recover as business activity pickups and implementation of the hybrid model begins to pay off. On Ivanko, the use of data analytics and alternative channels has begun to yield improvements in volatility and has allowed us to streamline loan underwriting for good quality borrowers. Structural disbursement has exceeded pre-pandemic level, things follows. Net interest income grew 7.5% water worth water boosted by a reversal of interest income provisions set aside previously for reprogrammed loans. The increase in net interest income was also attributable to an uptick in origination volumes. Loan provisions dropped slightly due to an improvement in client payment performance and new originations with lower risk profiles. Our hybrid model has helped us control operating expenses and improve origination volumes and in parallel with how to reduce branches and the sales force. In Ivanko, Colombia, results improve the cannot-peak in origination volumes. Microloans are gaining relevance and boosting yields, while the decrease in the level of provisions reflects an improvement in credit quality and risk models. The company is now focused on implementing Ivanko's Peru best practices as it improves the productivity of the self-sourced and developed digital capabilities. Next slide, please. Regarding the current business, Pacific Coast Earnings goes back this quarter and entered a positive range due to a decrease in claims in the life segment and growing premiums in the life and property and casualty businesses. In life, COVID-19 claims dropped 82% quarter reported after IDNR. results were released in a context of a significant drop in mortality. Life results were also boosted by growth in net premiums, which surpassed 300 levels. In product and facility, results were impacted by an increasing claim as COVID-related restrictions of movement and business activities were lifted. This effect was mitigated by an increase in net premiums. Results in our corporate health insurance segment also bounced back into a reduction in COVID-related medical claims. Conversely, medical services were impacted to a decrease in pandemic-related services. In the pension business, Prima Fee remained proficient despite an 18% reduction in under management in a context of pension fund releases. We are closely monitoring the regulatory risk in this business. Next slide, please. Regarding our investment banking and work management businesses, income dropped quarter over quarter, mainly by the capital market and asset management business due to lower trader volumes and asset under management outflows respectively. In this quarter over quarter analysis, assets under management grew 1.6% in local currency but registered a drop of 5.2% in U.S. dollars. Assets under management construction were driven by the asset management business where traditional funds experience outflows. Assets under management in the wealth management business remained relatively stable after Peruvian clients migrated assets to our offshore platforms, where we are growing the value proposition to cater our clients' changing needs. The income contribution of this business decreased 11.4%. This was nearly attributable to the capital markets business as income was affected by the results of proprietary portfolios in a context of rising interest rate and a decrease in transactional activity. To a lesser extent, the dropping income contribution was driven by the asset management business where assets under management contracted. Next slide, please. I will discuss credit course consolidated performance. The interest earning asset mix improved in a context marked by an increase in the structural loan share of total assets and a decrease in reactive loans balances. This was partially offset by a 12.2% worth over quarter contraction in the investment portfolio due to an expiration of certificates of deposit which were not renewed and increased the liquidity assets. A more long-driven portfolio coupled with an increasing market rate leads to rise in outward interest earnings. Quarterly quarter credit-cost loan growth grew 2.4% in ending balances at 4.8% in average daily balances fueled by an uptick in the exchange rate. If we control both the exchange rate effect and the government's program loans, the structural portfolio grew 1.0% in quarter-end balances and 5.1% in average pay-to-balances. On the liability side, a reduction in funding from government loans was offset by an active low-cost deposit, which resulted in a less expensive funding mix. Moreover, interest rate hikes have a limited impact on our funding costs, which is not very sensitive to interest rate movements, given that, Low-cost deposits account for approximately 58% of our funding, and most of our wholesale funding benefits from fixed interest rates are really laughing. Next slide, please. This quarter, both the structural portfolio and trading behavior continue to evolve favorably across all sectors. Consequently, both the structural yield ratio and the cost of risk ratio improves. The indulgence and pain in behavior registered improvements in retail banking and at the bank of this quarter. This positive evolution was attributable to an economic activation and upticking employment, growth in levels of personal liquidity via pension fund withdrawals, and increasing public investments. In this context, credit cards' structural NPL stood at 5.2%, which represented a quarter-over-quarter reduction of 40 basis points. The downward trend in the cost of risk is also not worth it as it represents record low levels. This improvement was seen across all our subsidiaries, driven by better payment behavior and partially offset by an increase in provisions related to an adjustment in write-off policies at MiBanco. In this scenario, Credit Corp's Structural Cost of Risk contracted 69 basis points falling from 1.23% to 0.54% in year-to-date figures. The cost of risk stood at 1.15%. The level of structural allowance of loan losses at quarter end was equivalent to 7.1% of Credit Corp's loan portfolio. It is important to note that the quality of the government program portfolio deteriorated this quarter due to grace period explorations. This deterioration may have impacted asset quality ratios for the total portfolio. Nevertheless, we are not highly concerned about this evolution because the loans in the current portfolio are safeguarded by unbridled state guarantees. Credit course structural yield increased 21 basis points quarter-over-quarter to stand at 4.53%. Recovery was attributable to an increasing yield and a more favorable asset mix driven by strong structural low-mobilization and a reduction in reactive allowance. Risk-adapted mean increased 57 basis points this quarter and reached This metric recorded faster time gain boosted by a significant decrease in provision levels. Core income increased 4.8% quarter over quarter, which was primarily driven by growth in net interest income. Income grew alongside an active in transactional activities in several channels and interbank and international transfers at PCP stand alone. This growth offset the impact of recent regulatory changes which placed fee restrictions for relevant sources of income beginning in the second quarter. This 15.3% year-over-year improvement in core income was primarily attributed to growth in interest income and secondary to an increase in fee income given that the fee restrictions that were in place last year due to the pandemic are no longer in effect. Next slide please. In the first nine months of the year, trade course efficiency ratio improved 120 basis points year-over-year. Improvements were driven mainly by the positive evolution of operating income in the banking businesses, insurance and pension line of business. This evolution offset higher expenses at DCPS and along for digital transformation. Pacifica's income registered growth this year after it won a larger tranche of the Cisco 5 tender for ASPU-related coverage. The premium rate for this tender was higher than offered by the Cisco 4, the previous biannual program. At Durango, operating income grew 19% year-to-date while operating expenses grew only 1%. Expenses remain under control despite a significant increase in units and transformation expenses to implement by hybrid business model. It is well-mentioned that approximately 38% of September loans operations, which represented 9% of total disbursements amounts, were processed through alternative channels. These alternative channels complemented our traditional venues by originating low-ticket cost-efficient loans that boost Medancos operating income. Next slide please. At BCP, we continue to work on key achieve our objective for customer experience and efficiency and ensure our competitiveness in the long term. Regarding technology, in the first nine months of 2021, our software releases increased 87% year-over-year. Our downtime in key channels was high and we made favor in managing the cyber risks. Our aim by year end is to fully comply with all the statements of The FSIPC, Cyber Security Assessment Tool, at the baseline, evolving an intermediate level and fulfilled 90% of all statements at the advanced level. Today, it has fulfilled 84% of these targets. The consumer assessment customer satisfaction has evolved favorably, driven by improvements in key customer governance for both digital and personal processes. Growth in digital clients. which represent the 57% of the total client base this quarter continues to climb. The use of data in real time has helped boost digital sales, which stood at 37% this quarter. PCP's firm progress with driving digital channels use facilitate a 9% reduction in branches over the last 12 months. Digital transactions continue to grow exponentially, and it is worth highlighting how JAPI's share of total transactions has shown up. This quarter, YAPI surpassed mobile banking in terms of monetary transaction level, while just two years ago, YAPI numbers were negligible. Next slide, please. YAPI was launched as a P2P application to allow PCP clients to make a small ticket transfer using the telephone number of QR code instead of using cash. YAPI has seen the world to offer new features and numerous partnerships. Over the last year, YAPI usage has grown exponentially and today boasts more than 7 million users. We expect to reach the 10 million user mark every next year. As the largest small ticket trading ecosystem in Peru, YAPI's vision is to become a super app, which is a third-party distribution channel for companies in Peru. The YAPI card is important there for growing financial inclusion and is used by 34% of YAPI employees who are able to open a digital wallet with a national identification number. No bank account is required. By channeling government social assistance payments to vulnerable families, the YAPI card captures new users, that have yet to be vandalized. YAPI will channel a new grant of government assistance payments to beneficiaries in the fourth quarter of this year. 49% of total users are active on a monthly basis. Of this universe, 61% are visited clients and 19% are SME clients, which have utilized their small ticket collection and transaction to YAPI. We continue to use YAPI have been the transactions of the month compared to September last year. Total transactions have reached 38 million for a volume of 2.4 billion dollars. The app's focus thus far has been on growing the user base and increasing frequency of use. Today, we are initiating the monetization phase before The end of this year, GAPE will launch microloans, mobile top apps, and dynamic UI cultural companies. We are also working on an interesting monetization pipeline, which we will launch down the road. Next slide. As part of our innovation efforts, we have developed several disruptive initiatives to pinpoint exponential growth opportunities with new sources of value. Initiatives have ambition objectives that force us to think out of the box, and success relies on impeccable execution. Some initiatives are closer to our core, and such are developed within specific product segments. Initiatives adjacent to our core, or those that are considered more transformational, are developed through innovation centers and companies, where task force work on product market feeds for interesting ideas. In the pending initiatives invested through CREALO, our firm for invention capital and company leaders at the record level are in the early stages of testing new business models based on a VC perspective. The scale initiatives such as YAPI, which was conceived in DCP's innovation sector, has leveraged DCP's customer base and commercial model to grow its user base quickly, along with its interaction and transactional level Initiatives such as which were developed independently to create a lot of native digital platforms. They have flexible architectures that can be easily adapted for UX, UI, and time-to-market purposes when developing new features. Having learned from different experience, we are now revisiting the strategy for our fintech ecosystem to review aspects relative to investment