Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to the Credit Court Limited first quarter 2022 conference call. A slide presentation will accompany today's webcast, which is available in the investor section of Credit Court's website. Today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. 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. Now, it is my pleasure to turn the conference over to Credit Corp IRO, Milagro Ciguanez. You may begin.

Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our chief executive officer, and Cesar Rios, our chief financial officer. Participating in the Q&A session will also be Francesca Rajo, chief innovation officer, Reynaldo Llosa, chief risk officer, Diego Cabello, head of universal banking, and Cesar Rivera, head of insurance and pensions. Before we proceed, I would like to make a following safe harbor statement. Today's call will contain forward-looking statements, which are based on management's current expectations and beliefs, and are subject to a number of risks and incentives. And I refer you to the forward-looking statement section of our earnings relief and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Gianfranco Ferrari will start the call discussing our strategic initiative, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance, and provide an update on our outlook for 2022. Gianfranco, please go ahead.

Thank you, Milagros. Good morning, everyone. Thank you for joining us today. Let's turn to slide three of our earnings presentation. We were pleased to recently have the opportunity at our digital day to introduce to many of you our holistic approach to continuing to challenge and transform ourselves to maintain our leadership position in Peru and beyond as we expand regionally. Our first quarter results underscored the effectiveness of our strategy as we capture market opportunities capitalized on synergies, and leveraged our brands on scale to deliver on strong operations milestones, financial metrics, and enhanced shareholder value. Despite the current political turmoil, the successful execution of multiple initiatives across our LOBs enabled us to maintain strong solvency and to increase our declared dividend to 15 soles per share for the 2021 fiscal period. Today, we are also adjusting our 2022 outlook for Credit Corp. Cesar will discuss this in more detail shortly. Now, let's turn to slide four. As you all know, when I came to a role of CEO early this year, it was after having spent many years working hand-in-hand with the prior leadership to establish the foundation of what are the key strategic initiatives that we remain focused on today. Two years ago, we announced important additions to our governance and operating structures to ensure that sustainability would remain and become even more a core part of how we do business. In fact, it is one of the three key priorities of our long-term strategy that is guiding the future of credit card businesses and the impact that we want to have on society. At our digital day that took place mid-March, We outlined the governance structure and core initiatives that would also ensure that the early successes in digital transformation we achieved at BCP would be replicated and enhanced throughout the company, all while intensifying our focus on internal and external disruption and innovation to meet and anticipate the needs of our expanding customer base. Finally, everything we do is based on the relationships we have with our customers and and our ability to deliver on the tasks they are putting in us. As such, attracting, retaining, and skilling talent is fundamental to the success of all of our initiatives. Working under a framework guided by these three key priorities will allow us to unlock CraigCorp's full disruptive, scalable, and market expansion potential. Let's turn to slide five to review these initiatives in more depth starting with the acceleration of our digital strategy. As I just mentioned, we've expanded our governance structure by adding two new governance bodies at the credit card level, the Innovation Committee and the BAP Innovation Table, both led by Francesca Raffo, our Chief Innovation Officer. This is designed to enhance our disruptive and entrepreneurship culture while adding an extra layer of support to foster creativity and innovation, while optimizing the return on investment in innovation. Fundamentally, our digital strategy is aimed at facilitating our ability to live our purpose, to contribute to improving lives by driving the changes that our countries need, execute on our values, and achieve our sustainable growth objectives of expanding our total addressable market and strengthening our operational drivers. Our innovation initiatives are taking place both internally through innovation laboratories where we're disrupting ourselves and expanding our tech capabilities and data-driven approach at each of our subsidiaries, and externally through CREANO, the Corporate Venture Capital Center. Please turn to slide six. To successfully meet our transformation and growth objectives, we are committed to continuing to retain and attract the best talent. all by managing their potential development and succession with a comprehensive value proposition that strikes a balance between human and business perspectives. In 2022, our talent strategy parallels our business transformation strategy. This includes focusing on developing an attractive talent with technological and digital capacities while accelerating initiatives for gender equality. We know this is a competitive environment for talent and are committed to evolving our model to offer current and potential employees a proposal that focuses on their personal development, flexibility, and well-being, including specifically addressing executive compensation and a hybrid remote work-from-home approach. This is generating new opportunities and realities for us by facilitating borderless hiring. Moving on. On to an ESG update on slide 7. During the quarter, we were especially active within the environmental and social fronts as we continued to progress along our ESG journey. On the environmental front, we doubled down our eco-factoring products, reaching 4 million sold in disbursements during the first quarter of the year. We also launched green products, such as financing imports and acquisition of electric vehicles at BCH. at DCP Bolivia and continue to develop capabilities on sustainability issuance at . During the quarter, we financially included over 275,000 people through our digital wallet. We also accelerated our gender equality initiatives with our Creative Mujer Fund at Nibarco, Peru, supporting more than 6,000 women. While at Nibarco, Colombia, we issued the first social bond with a gender focus. raising $20 million to fund microloans for Colombian women entrepreneurs. On governance, two of our subsidiaries were recognized by AmeriCorps for their good corporate reputation and were ranked among the top 20 best companies in Peru. You will note that we have included a new section in our earnings report outlining our ESG priorities and approach. We will be updating our progress on a quarterly basis. We were pleased that the progress we are making on our sustainability journey is being recognized by the market. Not only did MSCI upgrade Cracov's ESG rating to the leaders category this past December, but Sustainalytics also improved Cracov's ESG risk score in February 2022. Finally, I invite all of you to review our two recent publications on sustainability. an update on our 2020-2025 sustainability strategy and execution, and our 2021 annual sustainability report. Now, let me turn the call to Cesar Rios, who will provide a brief overview of our operating and financial performance for the quarter. Cesar, please go ahead.

Thank you, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we deliver favorable overall operating and financial results. As I've described the half-lives of the quarter, I will focus on the year-over-year results, which are not impacted by seasonality effects. Structural loans grew 12%, driven by BCP and UANCO, while low-cost deposits grew 3.9% and account for 60% of our funding base. Core income also grew 17.7% compared to the previous period. Net interest income was boosted by a more favorable asset mix, higher interest rates, and an ongoing funding cost control. Fees and gains on FX transactions registered an uptick in line with higher transactional levels and market volatility, respectively. Other income was negatively impacted by results registered in net gain on securities. which was associated with the Pacifico and Credit Corp's LPD fixed income investment portfolios. Cost of risk remains at typically low, while the loss ratio in the insurance business continues to improve. Finally, as I mentioned during our digital day, we expected operating expenses to continue to rise as we accelerate our digital and innovation strategy. In summary, our profits were more robust this quarter. We maintain a solid capital base, and BCP and Mibanco contributed significantly to securing a consolidated ROE of 17%. Please move to slide A, where I provide a brief overview of the macro dynamics in our markets. Monetary authorities around the world responded to global supply chain disruption and mounting inflation by increasing their interest rates. This led rates on funding to rise across countries. The Peruvian economy has remained resilient despite the negative inflationary and social impacts generated by rising commodity prices. The central bank in Peru has been decisive in controlling inflation expectation and has raised their reference interest rates to achieve a neutral real interest rate of 1.5% plus expected inflation down the road in parallel Excise taxes have been substantially reduced for some fuels, and a number of foodstuffs have been temporarily exonerated from sales tax to mitigate the impact of higher prices for imports. Additionally, the minimum salary was recently increased. While expectations are slowly improving, TEN has appreciated 4.5% year-to-date. The exchange rate has dropped from four solids at the end of the year to around 3.82 soles per dollar today. In a context of higher commodity prices for items such as sub commodities, fertilizers, crude oil, copper, and natural gas, the balance of payments has only been marginally affected and Peru is expected to grow 2.5% in 2022. Peru, Colombia, and Chile are all experiencing a challenging political environment while economic indicators are still resilient. The Colombian economy is expected to grow 5.5%, although inflation remains high and interest rates continue to increase quickly. In Chile, the Constitutional Assembly is developing a group of measures that, if approved, are likely to have a negative impact on the business climate and on GDP growth potential. Nevertheless, Recent polls indicate that little certainty exists regarding the outcomes of a vote to approve a new constitution. The Chilean economy is expected to grow 1.5% this year. This macro dynamic has a mixed impact across our business. Most significantly, although rising interest rates increase our margins at BCP, they increase the funding costs for our microfinance businesses. Moreover, high long-term interest rate negatively impact the value of our fixed income investment portfolios across the board and generate challenges for our investment banking and wealth management businesses. While clients' payment performance remains strong, we are closely monitoring the dynamics I just described. Now, I will discuss the performance of our lines of business. Next slide, please. BCP continues to register a strong profitability. On a year-over-year basis, the 18.6% growth in core income was fueled by net interest income, which was driven by rising interest rates and a 14% uptick in structural loans measured in average daily balances. In wholesale banking, structural loans grew 19.7% due to a base effect given that in the first quarter of 2021, corporate clients amortized short-term facilities. In retail banking, structural loans grew 8.8%, driven by consumer and SME payments, where we are penetrating new subsegments by leveraging data analytics and our digital capabilities. Digital sales represented 34% of the total number of units sold this quarter. Additionally, income increased 15% driven by higher transactional levels, particularly through POS and interbank transfers. Gains on APEX transactions increased by 38.4%, which represents a typical growth but nonetheless reflects our capacity to leverage intelligence capabilities in a volatile FX market. Finally, operating expenses grew 19% due to higher investments in our digital strategy and increase in transactional costs due to an uptick in transaction volumes and growth in variable compensation. In this context, the return of average equity stood at 23.5% this quarter. Quarter over quarter, the results were impacted by seasonal effects. This was particularly true for the expenses. Next slide, please. I hope you all had a chance to hear Raimundo discuss IAPE at our digital day. As mentioned, IAPE's goal is to become Peruvian's go-to app. To achieve this, IAPE is evolving into a super app with three main ambitions. The first ambition is to become the main payment network in Peru competing with cash. To accomplish this, IAPE focused on low-ticket payments that are usually made in cash. As of March, IAPE had 5.1 million monthly active users who made 13 transactions a month, on average that amounts to 4.1 billion soles during the month. YAPI's long-term target is to top 10 million active users that transact more than $100 billion solid annually. YAPI's second ambition is to represent in its users day-to-day. YAPI started this journey with the launch of Top Apps in November 2021. In the first quarter of 2022, the number of Top Apps grew 113%, capturing 5.3% of a market of gross merchandise levels of $1 billion a year. In this context, YAPE's long-term objective is to become Peru's number one marketplace for products and services. Finally, YAPE seeks to solve every YAPERO's financial needs. In April, YAPE launched a pilot feature that allows a small group of BCP clients to acquire nano loans to the app The launcher goal is to leverage IAPE to provide financial products and services to more than 2 million users. Next slide, please. At Nibanco, the hybrid model continues to play a crucial role in boosting results by offering centralized assessment and alternative distribution channels. This has led to record-breaking levels of structural loan disbursements on a year-over-year basis. The 28% growth in core income was fueled by an increase in net interest income, which was in turn driven by a 12.6% uptick in structural loans and growth in yields. Additionally, commissions were bolstered by growth in bank assurance loans. Devolution in core income was partially offset by growth in operating expenses, which rose in tandem with an uptick in operating activity after the pandemic subsided. Improvements in the macroenvironment and in client payment performance led to a 24% reduction in provisions. In this context, the return of average equity stood at 17.1% a quarter. On a quarter-over-quarter basis, MiBanco's earnings fell 18%. The slight increase in core income coupled with a drop in operating expenses due to seasonality was largely offset by the return to more typical levels of provisions, which grew 163% this quarter. At Mi Banco Colombia, portfolio growth and quality were strong. Nonetheless, profits fell quarter over quarter in a context marked by more typical provision levels. Next slide, please. Specific insurance and the writing results continue to recover as COVID-19 claims subside and PC claims rise in a more typical operating context on a year-over-year basis. At the live business, net earning premiums increase due to price adjustments and higher elimination. This dynamic was complemented by a reduction in claims as the sanitary situation improved. At the P&C business, net earning premiums increased primarily due to price increases and higher ordination in the medical assistant line and to the positive evolution of digital channels in personal lines. Claims increased mainly in the commercial line due to economic reopening and loosening of restrictions of movements. These dynamics led to total loss ratio to C2A at 69.3%, which stands closer to pre-pandemic levels. On a quarter-over-quarter basis, there was a decrease in net earning premiums. In the live business, net earning premiums were impacted by FX and a contract cancellation in the Allianz channel. In the P&C business, the drop reflected a seasonal increase in policy renewals last quarter. This drop was largely offset by a decrease in live claims. In summary, total underwriting results continue to improve this quarter. It is important to note that Pacifico's results were negatively impacted this quarter by an incurring charge due to a downgrade in some of its fixed income investments. All in all, Grupo Pacifico's return on equity stood at 12.8%. Next slide, please. The investment banking and wealth management line of business is challenged in the current environment. Market volatility and political uncertainty are negatively impacting the proprietary portfolios, corporate finance, and capital market businesses. Furthermore, income in the asset and wealth management businesses reflect the impact of last year's funds outflows. In 2021, lower management fees were offset by anticipated redemption and third-party upfront fees out of short platforms, which buffered the impact of withdrawals. This contrasts with the scenario in 2022 where the impact of lower volumes materialized and market value of assets under management also deteriorated. In this context, reported income dropped both year-over-year and quarter-over-quarter. In year-over-year terms, asset management results were affected by outflows from Peruvian mutual funds, a less profitable mix of third-party and local funds, and a drop in fund market values. which were negatively impacted by higher rates and volatility. Also, our proprietary portfolio registered gains in the sales of securities in the first quarter of 2021. The reduction in quarterly income was primarily driven by lower income from the wealth and asset management businesses. Corporate finance income, in turn, was affected by seasonality volumes as transactional activity tends to be higher in the last quarter of the year. Total assets under management remain stable quarter over quarter, but fell 6% year over year. We are launching different initiatives and campaigns to recover volumes and penetrate new segments to bring in net new money. Next slide, please. I will explain net interest income and net interest mining dynamics within the consolidated results. Our net interest income increased 19.3% year-over-year, driven by an increase of 12.7% in interest income and a reduction of 7.9% in interest expenses. The interest income rise reflects an increase of 62 basis points in the average asset yield with minor changes in total volumes, which was the result of a more profitable asset mix in which structural loans measured in average daily balances increased 12.4% while lower yield asset classes such as government program loans and liquid assets decreased. And yields increased in cash and equivalents and in the investment portfolio, which primarily reflects a gradual increase in the local currency rate of 375 basis points since August of last year. The short-term market interest rate for foreign currency increased only 25 basis points this year and as such has little effect on the foreign currency asset yields. Our structural loans stock average yield is still impacted by disbursement of 2020 to 2021 in a low yield environment and by shorter-term loans for wholesale clients, and the fact that growth in the wholesale banking outpaced expansion in retail banking this quarter. The reduction in interest expenses reflects the base effect generated by a non-recurring liability management charge in the first quarter of 21, and subsequently, lower interest rates on bonds, which was partially offset by an increase in interest expenses on time deposits. The fact that 60% of our funding base is comprised of low-cost deposits has been key to keeping recurring interest expenses under control. All in all, our NIM increased 71 basis points year-over-year to reach 4.44 this quarter. Given that we do not have relevant volumes of floating-rate assets, Going forward, our sensitivity to increasing interest rates will depend on four factors. First, our balance sheet structure is mainly concentrated and growing in local currency and in structural loans in particular. Second, the magnitude of rate hikes, which has been substantial in short- and long-term rates in local currency and has started to accelerate in foreign currency. Third, the pass-through of market rates where more sensitive products are situated in liquid assets and short-term wholesale loans and to a lesser degree in consumer loans. And finally, the duration of our portfolio, where liquid assets, short-term investments, short-term wholesale loans on the asset side and time deposits and short-term funding on the liability side have a duration lower than or equal to one year and consequently reprice faster. Next slide, please. Year-over-year, core income increased 17.7% due to a strong growth in each of its components. E-income increased 7.3% and was bolstered by cashless transaction adoption, which reflected an uptick in consumption through POS transactions at establishment and interbank transactions, which grew 84.8% and 67.9% year-over-year, respectively. It is important to note that growth in consumption was driven by small establishments. Net gains on FX transactions increased 45.8% year-over-year in a context marked by growth in transactions and higher FX volatility. We have leveraged our pricing and distribution capabilities. Quarter-over-quarter, core income increased 0.4% due to growth in net interest income, while fee income on FX transactions shrunk due to seasonality. Next slide, please. We now move to credit card, structural loan portfolio, and quality dynamics. Year-over-year, structural loan grew 13.7%, driven primarily by wholesale banking and retail banking at BCP and Nibanko. The increasing structural loan volumes and an improvement in client payment behavior led the structural NPL ratio to drop during the period. It is worth noting that NIVANCO's NPL volumes continue to evolve favorably and that new disbursements have better risk profiles. On a quarter-over-quarter basis, structural loans fell slightly due to an exchange rate effect and seasonality. This construction, coupled with an increase in structural overdue portfolio, led the NPL ratio to increase 24 basis points. NPL volume froze when clients in the S&P segment with reactive loans that were in grace period and which had not reprogrammed loans initiated the payment cycle. This led to an increase in delinquency that is within the expected levels. Year over year, Provisions constructed in retail banks remain due to improvements in payment behavior.

Pardon me. It looks like we've lost connection with Mr. Rios. Please wait while we reconnect. . . .

Okay.

Is it okay?

Ladies and gentlemen, we can- Yes, go ahead.

Thank you. Sorry for this technical problem. I am going to take at this point. Year-over-year provisions constructed in retail banking mainly due to improvements in payment behavior and due to less whiskey profile of recently originated loans. Provision expenses grew quarter over quarter after registering historically low levels in the whole quarter of 2021. In this context, the structural cost of risk stood at a normally low 0.79%, while the coverage ratio trend towards pre-pandemic levels. Next slide, please. Operating expenses grew 14.2% year-over-year, which reflected an increase in administrative expenses and employee salaries and benefits. Growth in administrative expenses reflects an increase in the transactional cost, which was driven by higher transaction volumes and a kick in the pace of our digital transformation and disruptive initiatives. The salary line was sub-discorded due to an increase in variable compensation in a context of higher anticipated earnings this year. As a result, CreditCorp's efficiency ratio deteriorated 50 basis points year-over-year. Nivanco's efficiency ratio improved 900 basis points, boosted by a hybrid model that has enabled it to increase operating income by 25.6% while keeping growth in expenses in check at just 10% year-over-year. If we exclude OPEX for investments in disruptive initiatives such as YAPE and CREALO, the efficiency ratio stands at 42.5%, which represents a difference of 200 basis points from the reported figure. Next slide, please. With an ROE of 17% this quarter, we continue to consolidate our return to profitability. This positive evolution was driven primarily by our banking businesses. By generating robust and consistent results and maintaining a strong solvency across our businesses, we will be in the position to gradually increase dividend payments. Last week, we announced a regular dividend of 15 soles per share to be paid in June. which reflects a dividend payout equivalent to 39% of our 2021 earnings. As we continue to generate results, secure capital strength, and plan upcoming capital investments, we may evaluate distributing a complementary dividend in the last quarter of the year. Now, I will explain our revised outlook. Next slide, please. Given the current geopolitical situation and the measures adopted by the central bank, we have atypically revised our guidance for 2022. Our GDP growth estimate remains unchanged at 2.5% for this year. Mitae Loans has experienced an uptick, especially in the consumer, SME, and microfinance segments. We now expect the Structurally Loan Portfolio to grow between 9% and 11% measured in average daily balances. And the pace of growth in interest rate increases and our long shift more towards retail with tech mean to accelerate and situate between 4.6% and 4.9% this year. With regards to insurance and the writing results, we believe that a significant portion of COVID-19-related impacts have been absorbed this quarter, and additional impacts should be smaller. We are carefully monitoring the impact of higher inflation on our clients' payment performance and their risk profiles. With information that we have today, we feel comfortable maintaining our cost-of-risk guidance between 0.8% and 1.1% for this year that reflect the different performances across segments. Higher than expected income, not only through net interest income, but also through fees and gains on FF transactions, has led us to adjust our guidance range for efficiency ratio to between 44% and 46%. Based on these results, we expect to achieve a narrowing in the vicinity of the high end of the initial guidance range at around 17.5%. With these comments, I would like to start the Q&A session.

We will now begin the Q&A session. 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 Gabilondi with Bank of America. Please go ahead.

Hi, good morning, Gianfranco and Cesar, and good morning to all your team. Congratulations on your results and your ROE guidance, regardless of the political uncertainty. So my first question is on the macro outlook. Can you provide us some color on the recent political uncertainty if there could be a potential regulation affecting the financial sector?

You're in mute. Sorry, we are having technical problems. One second, please. Now we can hear you, Gianfranco.

Okay. Sorry, Ernesto, for taking a problem. Good morning, Ernesto. Good morning, everyone. Thank you for your work, Ernesto. Difficult question to answer. As you might be reading in the news, there's a lot of political turmoil, a lot of balls that are being juggled at the same time. However, nothing specifically on the financial system as we speak. That doesn't mean that going forward there might be any regulation. We don't see anything specific as of this time.

Okay, perfect. Thank you. So then my second question is on the long road expectations. Considering the high inflation and the higher interest rates, What do you think is the level of interest rates in which you could start to see an impact in long road or maybe some specific products such as mortgages which have long-term maturity and are at fixed rates?

Can you take that question, please? Yes. Ernesto, thank you for the question. I think our guidance has already captured part of the faith. What we are seeing is a very good pace of growth in microfinance and consumer segments in which we are also being able to have some pass-through of interest rate by the long-term operations in general are already challenged. In mortgages, in long-term corporate and middle market clients, you already see a combination of the impacts of higher rates and political uncertainty that deterrents further investments. So different dynamics in consumer, payment, and medium-term operations.

Perfect. Thank you, Cesar.

The next question comes from Jason Mullen from Scotiabank. Please go ahead.

Hello, everyone. Thanks for the opportunity to ask questions. My question is mainly on the outlook for profitability. We talked about guidance for the group, you know, in a pretty constructive range. In this quarter, we had 17% for Credit Corp. And the contribution tells a lot of the story with the bank, BCP, generating over 23%. ROE, the largest contributors, BCP, Mivanco at 17%. Pacifico, Grupo Pacifico at almost 13, and then Prima at a pretty good ROE of almost 20% with a $24 million contribution. How should we think about the evolution of these subsidiaries contributing to the longer-term ROE? Clearly, I would imagine it's CCP. Do you imagine big changes in the 17% ROE we're seeing at Nivanco? The 13% at Pacifico has been, I think, an improvement, of course, and prima to see what's going on. If you can give us a sense of the contributions to the outlook, the profitability outlook, that would be helpful, your expectations in general terms. Thank you.

Good morning, Jason. I'll take maybe a more conceptual answer, and then, Cesar, if you want to add something, please feel free. Actually, we see it as a portfolio. So the end goal is to, as we've talked before, to reach an overall ROE in the high teens. And obviously, depending on the performance and the environment for each of the subsidiaries, to obviously always trying to improve the ROE, but in the end is to aim to that goal. Having said that, what we expect is the banks, specifically BCP and MiBanco, moreover MiBanco rather than BCP, coming back to ROE So pre-COVID ROEs, that's in the midterm. So I would say midterm by year end. And in the insurance business, it's very related or influenced by COVID. This quarter, still in the insurance business, there was some relevant COVID impact on the insurance business. We don't see any further impact in terms of types of the impact going forward. So are we also at the – sorry, the insurance business should improve. I don't know, Cesar, if you want to add anything else.

Yes, probably in the same line, only putting a little bit more color. In the case of BCP, it's as Gianfranco mentioned, in which we are going to have probably higher margins and higher cost of risk and ending up having profitability is probably superior to 20%. MiBanco is improving. In the short term, they are going to have some challenges due to the cost of funds, but overall, the profitability is improving, and we expect to return to levels similar to pre-pandemic. In the case of Pacifico, As Gianfranco mentioned, we are having a good dynamic this quarter. We have been impacted for a couple of factors, still COVID and some impairments. But down the road, we see the business improving profitability in the high teens with significant imports from bank assurance and digital sales. And I think these are probably the biggest business improvements In corporate banking, investment management, we see some challenges in the medium term due to the close correlation between these results and market dynamics. All in all, these operating businesses are going to grow in profitability and sustain that. And we need to consider also the impact, the short-term impact of the disruptive initiatives that cost in the short term around 3% of our cost to income that we are building and creating business for the future. And finally, the impact of the withholding tax that is expected to grow in line with growing dividends. we feel comfortable with the guidance that we are providing with a short-term perspective and in the general ballpark figure that we provide in the digital day for the medium term.

Thank you very much, Jim Franco, and Cesar, that was helpful to comment. Appreciate it.

The next question comes from Tito Labreza from Goldman Sachs. Please go ahead.

Hi. Good morning, everyone. Thank you for the call. I'm taking my question also. My question is on your cost of risk guidance. I just wanted to say, how long do you think you can sustain the cost of risk around these levels? I noticed you didn't change the guidance. But we did see some deterioration, particularly in the SME portfolio. You know, GDP growth is slowing. And your coverage ratio, the structural coverage ratio is in line with historical levels. So, you know, I guess one is the outlook for asset quality from here in MPLs. And then with that, you know, on the cost of risk. I know you have the guidance for this year, but just thinking about on a longer-term basis, when do you get back to more normalized levels on the cost of risk? Thank you.

Regaldo, could you take that one, please?

Yes. Thank you, Tito, for your question. I mean, this year, as we mentioned and respected by the beginning of the year, we will have these below pre-pandemic levels for the rest of the year. Having said, we feel comfortable with the level of provisions today. And we will get back to normal by the second semester of 2023. But we will have to see how the economic conditions of the country develop on the following quarters. Having said that, we are still above pre-pandemic levels. And I want to emphasize the difference between the coverage ratios in the different portfolios. As you see in the presentation, NIRAMCO has a coverage of 143%. And remember, that's a portfolio with almost no collateral. And BPP, it has 117%, which is also above credit courts with pandemic levels, which was around 110. And we have important collaterals in our non-performing portfolio there. So I would say that we feel quite comfortable with the actual levels. still some space for further provisioning without affecting the profitability of this year and on the following years.

Great. Thank you. That's helpful. And just to follow up, I guess, on the asset quality outlook, we did see some deterioration in the SME portfolio, other segments still kind of improving. Do you expect particularly, I guess, these other segments to improve any further? When do you expect some deterioration there? And also on the SME portfolio, I think there was some FX impact on there, but RDC, I'll look for that portfolio as well. Thank you.

Yes, in terms of the SME portfolio, you see an increase in its numbers on the loans. But there has been a special effect during this quarter is that When we write off the SME portfolios, we write off the whole position, including the government background and our own portfolios. So this is a project that takes some months. So we are delaying some of the write-offs of the SME portfolio, both in BTP and NIRANCO, waiting for the actual... authorization of the government to actually write off the loan. So there's someone receiving number in terms of what you have seen in our report. Having said that, we feel comfortable with the performance of the FME portfolio today and it meets below our expectations. Remember, there's a lot of the loans of the government products that are starting to be paid by the clients, and we expected some deterioration of the portfolio. In terms of the other portfolios, I would say the wholesale group would be stable, and the personal loans probably would start to pick up a little bit just because we are starting to underwrite a little of the new segments which come along with our strategy in the real market on personal loans.

Okay, thank you.

The next question comes from Olavo Arsuzo with UBS. Please go ahead.

Hi, guys. Are you able to hear me?

Yes, we got here.

Okay, thank you very much for this. I thought I was having some problems here. So thank you for taking my question. Actually, my question is very in line with that one made from Tito about the delinquency increase in the wholesale and the essence segment. I just wanted to hear from you what you expect or what can we expect for the next quarter along this year for the behavior of the delinquency rate for these two portfolios. Further, I just wanted to hear from you as well about renegotiated loans and signing of credit portfolio. I just wanted to understand because I couldn't find any mention about the signing of credit portfolio or renegotiated loans in the release. So I just wanted to hear from you what is the expectations for the bank going forward related to this? potential renegotiations of more loans and the signing of credit portfolios.

Thank you. I'm watching Reynaldo. He was having some problems in hearing you. I think I got your question, so let me answer it. If that wasn't your question, maybe interrupt me and do it again. Okay, no problem. Two things. One is the overall portfolio going forward, and the second one is how the reactiva program is going. Is that correct?

Yes, yes. It's basically it.

Okay. Reynaldo, did you hear me?

Yes.

I would say, as an average, I mean, the portfolio will probably be stable for the following month or for the rest of the year. I mean, we will have some pickups in some segments, and probably we'll see better results in the whole portfolio. So I would say, in average, things are looking good. And the performance of all the books are better than we initially budgeted by the year end of 2021. When we had the forecast made, that's why you've seen I mean, a cost of which we know our guidance in this first quarter. In terms of reactiva, as of today, I mean, numbers are better than we expected. We had a general number of around 20% default in the reactiva loans, and that's in the low two-digit numbers as of today. So, I mean, government problems are performing well also. And we are trying to help our clients to pay those debts as well because we have a general quality of making sure that clients pay both the government-backed loans as well as our own portfolios.

Okay. Those are helpful. Thank you very much, Raj. Thank you.

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

Hello. Thanks very much for taking the question. The rate environment has clearly shifted much faster than I think any of us would have expected a few months ago. And at this point, it seems very much like it's a positive for you in terms of net interest margins. Can you give us a sense of when you think that benefit starts to decrease as rates go higher? And I'm talking both about the point that was mentioned earlier in terms of credit demand, credit quality, but also is there a point where you think you could start to see deposit repricing accelerate or deposits shift out of non-interest bearing and into interest bearing? I think we all can see that it's positive for now, but is there a level if rates continue to go up, if inflation continues to accelerate, where you'd still see it as less of a positive? Thank you.

That's okay.

Can you take that? Yes. Thank you for the question. Probably I will come back to the main factors that impact our repricing capability. And I think it comes back to the structure of our balance sheet in which we don't have actually variable loans as a significant part of the portfolio. It's also really minimum, the most part are fixed rates. So we need to take to the market the rate increases. What we have had is in SOLID, We have a significant increase in short-term interest rates and in long-term interest rates from the third quarter of last year to now. But in dollars that are relevant particularly for the wholesale portfolios, as you know better than us, the real increase has started to happen only this year. So what we are looking in our books is a combination of solids really impacting our books and dollars only very moderately at this point. We are passing through the interest rate, but we care and carefully because we have parts of the portfolio in which we can reasonably translate the interest rate without affecting the demand. But there are other parts of the portfolio, there is a lot of competition, particularly in the long-term loans, mortgages, as I mentioned, medium and long-term, corporate and companies in which we have challenges with the demand. All in all, what we are seeing, and I am repeating a little bit myself, is a good combination of pass-through and volumes in short-term facilities and a challenging environment of long-term facilities as a general rule. We think that we are going to have this high interest rate in solid for this year and probably half of next year. But after some point, we expect to have to see a decrease in solid interest rates because the nominal rate is too high to be sustainable. The long-term goal of the central bank is an inflation of two. and a real rate around 1.5%. So we should see an increase in this rate and probably starting at the middle of next year, a decrease in rates to don't hamper too much economic growth. I don't know if this helps you.

That does, thank you. And I guess from your comments on expecting rates to go down again, it sounds like you're quite optimistic on the inflation outlook, kind of gone from 2% to nearly 8% in Peru over the last year. And clearly, you know, the truckers are unhappy, we know that. But, you know, is there anything that you're seeing that makes you think inflation might be getting, you know, more entrenched, stickier, harder for the central bank to reverse?

Yes, probably.

Allow me only to make a slight comment. In the international rate, I agree with you. In the local rates, probably we have a difference. It's that a significant part of the inflation is not demand-driven by supply-driven for the price of the commodities, the things that we import. And this was a key driver of inflation in our case. It was not a demand-driven inflation for the most part. Thank you.

The next question comes from Alonzo Garcia with Credit Suisse. Please go ahead.

Good morning, everyone. Thank you for taking my question. My question is on capital and dividends. So you declared announced a dividend last week of 15 soles per share, which represents a payout of around 33% based on last year earnings. which is below what you paid on 2018 and 2019 earnings prior to the pandemic, even though you are still above your internal minimum C2-1 level of 11%, and the fact you are expected to accumulate capital going forward. So my question is, what led you to take a more conservative approach this year? And if we could expect a second payment later in the year, or if you are seeing other uses for your capital, maybe some opportunities on M&A or something, Thank you.

Good morning. As we've always stated, it's a quite simple equation in order to distribute dividends. So out of the profits we made in the prior year, we retain whatever is needed to keep our growth in terms of portfolio, at the banks I mean, safely. On top of that, if there's, as you said, an M&A opportunity, which as we speak, there's nothing relevant on the table, we keep some excess cash for that. And on top of that, everything is distributed. So that's the policy we've been following for a few years now. We stated that, again, several times. I'm being more specific on the second special dividend of the year. We might do it. We haven't decided anything yet. Maybe giving you a more long-term vision regarding dividends, but maintaining the same policy is that we will try to increase Slightly increased dividend as we move forward over the following years.

Okay, great. So it's mostly related to the stronger for long-run, right?

That's correct. That's correct.

Okay, got it. Thank you very much, Antonio.

The next question comes from Gary Fernandez with JP Morgan. Please go ahead.

Hello, Gianfranco, Cesar, Milagro, the entire team. Congrats on the guidance and the results. I have a quick one on the OCI impact on your equity. We saw some increase, I guess, 200, 300 million soles this quarter. And my question is, what do you expect here? Because markets have been very volatile, effects, rates. So I would like to understand the moving parts here of this OCI for your equity growth. And my concern here is the 10 year. Like when we look to the 10 year in Peru, since March, it moved up a lot. So my question is, should we expect like your OCI accounts to keep being impacted during this year? And if this is important for your dividend payment, because I guess you mentioned a potential additional dividend payment later this year. So just trying to understand how this could, you know, have some impact on your payout later in the year. Thank you very much and again, congrats on the results.

Thank you, Yuri. If I got it right, you're talking about the sovereign bond portfolio, right?

Yeah, I'm talking about your shareholders' equity. When you look to the shareholders' equity, you see the OCI that does a lot of things, right? I guess treasury is a big portion of that and there was a negative hit this quarter.

Sure. You can take that one.

Yes, okay. To establish the levels of equity and dividends, we follow the path that Gianfranco explained. And you have the current profits of the period and unrealized gain of losses. And in this regard, in some of the books of the companies, we have a negative effect due to the rate increases as you mentioned. We have had a relevant impact in the first quarter, and probably we are going to have some impacts in the next one, but nothing that we think could change fundamentally our policy or solvency ratios down the road. But you are right, the interest rates are rising, and this affects the prices of our long-term investments. In the several books, that we have in DCP, in Pacifico, and Credit Corp Capital through ASB in particular.

Perfect. Thank you, guys.

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

Hello, good morning. I have a question more on the political side. I mean, in the current discussions, what do you think the probability is that we will have changes in the constitution? And as you mentioned, there has been no discussion about changes to bank regulation, but where are we on the changes to the pension funds or to the mining sector? Thank you.

Thank you, Carlos, and good morning. We completed roulette in order to answer your first question. If you recall, and I met with most of you in March, the change in constitution at that time in March, I mean, was, as I mentioned, not over the table, but the probability was very low. still believe that the province is low. Maybe what has changed from March to today is that the discussion is on the table again. Having said that, our base case scenario is that it wouldn't change because it shouldn't pass through Congress. That's our base case scenario. As we mentioned regarding the financial system, Actually, what has changed is that there has been some regulation promoting more competition, which I believe is healthy for the whole system. Regarding pension funds, yesterday was approved that another withdrawal from pension funds could be released. In our opinion, that's a huge mistake. Actually, the pension fund, the overall system has been, I would say, structurally damaged, not because of this last law, but because of what has been happening over the last few years. Hopefully, a thorough pension fund, thorough and structural pension fund reform comes into place, but as we speak, a lot of damage is being made to the pension fund system. And regarding the mining sector, a lot of noise, but we haven't seen anything regarding any legal changes as we speak.

Okay, so no changes for now. Yeah. Thank you.

As a reminder, if you would like to ask a question, please press star then 1 on your telephone keypad. If you've connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. The next question comes from Andrea Soto from Santander. Please go ahead.

My question is related to the profitability of the non-banking subsidiaries and particularly looking at the insurance and pension management system. I was curious by your comment, Gianfranco, that you said that you see this as a portfolio. And I imagine, you know, based on what is going on in the country regarding pension fund withdrawals and the need for a structural reform, as you just said, probably the profitability that you get from this business and the patient management system is not sustainable. But at the same time, what I see is the insurance one. In the past, we say that the structural array of that unit was Now it is at 13%, even with impairments and some COVID impact. So what should we be thinking about the profitability for insurance over the medium term? And is that going to be enough to offset the impact of any structural reform on the patient one?

Yes. Two answers to that. Actually, there were two questions in one. Regarding the insurance business, we expect high team returns in the I would say in the short run so even this quarter if you take out the impairment from the investment the core of the business has been very healthy so we do expect to the insurance business to be in the high teams to end in the high teams even this year so we are very positive on that a lot of As always in the business, a lot of little initiatives, including digital initiatives, but most importantly, a lot of focus on bank assurance that is helping a lot the insurance business. Regarding pension funds, as I just mentioned, I'm more worried about the pension fund system than the specific results on premiums. When I say we, it's not us at the core, but our politicians, they are putting at risk the whole pension system for millions of Peruvians going forward. That's a concern, a real concern for us. That's where we need to focus and try to be proactive and provocative in trying to come Again, a structural reform that can really build a pension system that is sustainable for the next decade.

Perfect. Thank you for your answer.

The next question comes from Alonzo Aramburu with CTG. Please go ahead.

Yes, hi, and thank you. Thank you for the opportunity. I wanted to follow up one more time on the pension fund withdrawal. Just wanted to ask you, you know, Franco or Cesar, this is the sixth withdrawal, right? So what sort of impact in the short term, and I agree with you, this is certainly not great for the system over the long term, but in the short term, you probably will get an increasing deposit, which is probably good for your funding cost. So maybe you can give us some color as to what could be the impact in the short term of those funds exiting the pension fund and potentially entering the banking system. And a second question related to private investment in general. I believe you have a GDP estimate of 2.5% for this year. Where do you see private investment and what are you hearing or talking to the companies that you've worked with? What are you seeing in terms of private investment moving forward over the next three quarters?

I'll take the first one and maybe Cesar or Diego, I don't know who can take the second one. Yes, so in the end, overall, Trade Corp gets excess liquidity because of these withdrawals from the pension funds. Because those funds end up in deposits and we have a very strong position in the retail department. So as I mentioned before, we're more concerned about what's going on virtually going forward than what's going to happen either for Prima in the negative side or for BCP in the positive side. But going specifically to your question, we get a benefit because of those withdrawals end up in the banking system as we see. We all know because of the market share we have in retail deposits, we've got an important chunk of that. I don't know if Cesar or Diego can answer the second one.

Only probably I can add some small comment to your answer, Gianfranco, probably with a more macro view. What we expect is that this extra liquidity is going to propel a little bit more inflation local interest rates, what is going to be the short-term impact. Regarding private investments, I think we are going to have a couple of factors because with these impacts over the pension fund, you are really taking one key player out of the table in terms of funding, long-term local bonds, because the private pension funds, instead of buying a long-term facility, they are forced to sell to fund the withdraws. And that's an extra layer of uncertainty regarding the rules. In terms of private investment, I would say, all in all, it's a negative one impact.

And also in terms of business sentiment, I would say that most corporate large investments are being held, and they are in the wait-and-see mood, while current investments for maintenance going forward. We don't expect private investment to grow this year. Okay, thank you very much.

It appears there are no further questions at this time. I will now turn the call back over to Mr. Gianfranco Ferrari, Chief Executive Officer for Closing Remarks.

Thank you all for joining us in this conference call. Wrapping up, despite the escalating political turbulence and instability we have been experiencing in Peru, we managed to deliver a solid quarter with strong profitability of credit cards. These results underscore the consistent execution and strong progress made on each of our three strategic priorities discussed during this call. Our sustainability journey our focus on advancing on our digital strategy, and our goal to attract and retain the best talent. Payco's earning power and the recovery experience over the recent quarters have also allowed us to maintain strong solvency across our businesses and deliver the 15 solvency per share cash dividend announced last week to our shareholders. Recent global and local dynamics of high inflation and increasing interest rates generate near and mid-term tailwinds particularly for BCP, but also represents a challenge in terms of funding costs for our microfinance business. Moreover, increasing long-term interest rates negatively impacts the value of our fixed income investment portfolio, and volatile capital markets generate challenges for our investment banking and wealth management business. Looking ahead, we are closely monitoring macro dynamics and their impact on the disposable income and payment performance of our customers. As we have done in the past, we will manage those variables that are under control while navigating market and political volatility. But our reports have resulted, and we expect them to continue to result in strong performance. Unfortunately, the country is missing out on the opportunity to drive higher growth, lower unemployment, reduce poverty, and attract higher credit investment. For our part, we are guided by our purpose of contributing to improving lives by accelerating the changes our countries need. It is infinitely clear to us that achieving this goal is closely tied to increasing financial education and inclusion. With this power, those that are the least included, women, the elderly, people that live in rural areas, as well as those of lower socioeconomic and education levels, can achieve greater levels of security through saving, greater income generation, and economic independence. To this end, we are committed to accelerating our financial inclusion agenda to facilitate greater financial education and access to the financial markets where we operate. A key element of this strategy is the launch of products and channels that involve anywhere and every day package. Again, thank you all for joining us. With this, We conclude the call. Have a great day.

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