Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to the Credit Corp Limited third quarter 2022 conference call. A slide presentation will accompany today's webcast, which is available in the investor section of Credit Corp's website. Today's conference call is being recorded. As a reminder, all participants will be in 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 us by pressing star one 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 your equipment. Now it is my pleasure to turn the conference over to Credit Corp's IRO, Milagros Seguin. Yes, you may begin.

Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer, Francesca Raffo, Chief Innovation Officer, and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Reinaldo Llosa, Chief Risk Officer, Diego Cabrera, Head of Universal Banking, and Cesar Rivera, Head of Insurance and Pensions. Before we proceed, I would like to make the 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 uncertainties. and I refer you to the forward-looking statement sections of our earnings release 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 initiatives, followed by Francesca Raffo, And finally, Cesar Rios 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, Milagro. Good morning, everyone. Thank you for joining us. We reported another solid quarter while executing on our strategic priorities. In terms of financial results, we continue to benefit from long growth with disciplined pass-through of interest rate hikes, a differentiated funding structure in which transactional deposits represent 56% of total funding and high transactional levels. As a result, we saw strong growth again in core income, which includes net interest income, fees, and gains on FX transactions. With improving results across all four of our business lines, we registered an ROE of 19.6% this quarter on the strength of a solid balance sheet and prudent risk management. While there is still downside risk to overall growth in the region, the fundamentals of Peru remain strong, and our estimate of GDP growth is now 2.8% for this year. Unfortunately, the continued political noise is having clear negative impacts on Peru's growth opportunity and deterring public and private investment. This is also detracting from what we should be focusing on with respect to financial inclusion and poverty reduction. Despite the environment in which we work, Credit Corp remains committed to being an agent of change in our communities, and our digital transformation plays a fundamental role in aligning with our sustainability-based responsibilities of financial inclusion, financial education, and developing the workforce of the future, among others. So our strategic initiatives were driving greater engagement and efficiencies throughout the organization to deliver sustainable growth and value creation. We are advancing on our goal of driving growth in digital clients. At BCP alone, digital customers represented 63% of total customers. while over 250,000 individuals were financially included through YAPE and MiBanco. Today, we'd like to highlight the progress we are achieving in the transformation at BCP. For this purpose, we have invited Francesca Rajo, Deputy CEO at BCP and Chief Innovation Officer at Credit Corp, who has been leading this effort since the very beginning, to provide an update on progress today. Francesca?

Thank you, Gianfranco. Good morning. I am pleased to share the progress we have made on the transformation journey at BCP, the subsidiary that began this process first and is most mature. As mentioned during the digital day, our customers are more demanding, want greater speed, simplicity, and want to be delighted. We are accelerating our investments to become the most efficient bank in the region while maximizing the customer experience. These investments are heavily skewed towards our core enablers, data analytics, IT, and cybersecurity, which in turn are driven by the best digital talent. Today, around 50% of our staff functions already have a digital profile. Now, on the next slide, let me share more of our progress around our key enablers. We are a customer-centric, data-driven organization that is creating solutions through capturing data, the application of analytics, and the development of technology within a cybersecurity framework. Starting with IT, our investments in technology have enabled us to increase uptime to world-class standards. We strive to maintain these levels, improving our capability to bring value to the market by increasing the amount, quality, and speed in tech releases. Over the last four years, we have gone from 4,500 to 28,000 releases yearly and increased the average speed from 28 to six days. The flexible and efficient infrastructure we are developing through APIs positions us to Well, to continue advancing on our journey towards becoming a more digital and open bank. We leverage our data analytic capabilities to increase revenue, reduce risk, and improve operational efficiency. Our data lake has more than 28,000 variables which are organized, structured, and can be safely deployed to build analytical and risk models or to develop customized products or service offerings. Our predictive models have enabled projects within the organization to realize more than $400 million in additional gross margin in the last four years. With our APIs and data, we have deployed price discrimination strategies and have generated more than $500 million of pre-approved loans for SMEs. Finally, we are moving to empower our business units through a much more decentralized model. Improvements are required for the cybersecurity space through people, process, and technology. We are combining cyber risk management with a strong focus on customer experience, leveraging customer-friendly and robust security capabilities through multi-factor authentication for digital channels. Moreover, we continuously use advertising to educate and raise customers' awareness of risk and constantly invest in people in employee training. Finally, we have deployed technology for in-depth protection against phishing, malware, data leaks, distributed denial of service, among others. We are attracting, upskilling, and retaining diverse tech talent. We recruit throughout Latin America and hold a talent hub in Spain, Venti, where we are hiring specialized data analytics and IT professionals. In this tech-mindful arena, we practice what we preach and offer our tech talent the opportunity to develop leading-edge capabilities in an environment fully committed to leading in technology. Please move to slide six. We are constantly setting new targets for ourselves based on insights to achieve our strategy of being the principal bank for our customers. This slide shows how we increase engagement with consumer clients. With our digital applications, we collect and analyze data, including client profile, product and channel usage, and preferences. With a deep understanding of our customer behavior inside and out the bank, we adopt our digital strategy and develop a specific value proposition by type and level of engagement for each segment. Our goal is to broaden and strengthen our current relationship with each customer, becoming their principal bank. We have been obsessed with the digital sales and transactions models, and now we'll offer a more comprehensive value proposition integrating service and advisory. On the next slide, we share the progress we are achieving with growing our customer base for individuals. Our disruptive mindset and execution capabilities have contributed to increase our digital customer base for individuals. BCP's individual customers reached approximately 6 million, accounting for 63% of the total individual customers. The relationship with this group is more active in terms of number of digital transactions and digital products purchased. Growth in digital customers is enabling us to improve our cost to serve to income ratio for these customers. This quarter, we are introducing a more demanding methodology to calculate digital customers, which going forward will refer to customers making at least 70% of their transactions through digital channels on a rolling six-month basis. On the top right, you can see how the cost to serve to income ratio for digital clients under the new methodology stands at 23%, better than the prior methodology and significantly better than the 36% of non-digital customers. Reaching 70% of digital customers under this methodology would mean a huge stride towards our overarching North Star cost to income. Now to slide 8. We are deploying a similar approach to the SME segment and are seeing good traction. The primary focus has been on digital sales, bringing those capabilities to market and analyzing customer insights. The next step is to continue digital servicing while deepening our relationship. With our core analytics capabilities in risk management, we are expanding our SME client base and penetrating deeper into the segment. This is particularly the case for SMEs with no to very low indebtedness in the financial system, and thus little to no credit history limiting access to financing. Around half of the new clients financed in this segment are new to the financial system. This is a more digitally oriented and sophisticated SME customer base with a different value proposition from that of our clients at MiBanco, and it is a strong complement. We offer these small SME personalized products distributed through digital channels and have seen an increase of around 50 percentage points in the percentage of digital sales of working capital loans since 2019. Now please turn to slide 9 for an update on YAPE, our most mature disruptive initiative within BGP. Today, almost one in three Peruvians over 18 years of age are active YAPE users. At 6.7 million, We are on track to reach our target of 10 million active users by 2026. Our initial strategy was to gain a large customer base, then to increase engagement on monthly transactions, and now we are focused on generating income. We are seeing sustained positive trends across most of our metrics, including the volume transacted, which grew significantly more than 30 times since 2019 to more than 40 billion soles year-to-date. We are now tracking to our initial 2026 goal of reaching 150 billion soles in transactions by 2024. The number of active users and activity per user continues to grow, while 30% are generating revenues. As one of Peru's most important distribution channels, YAPE is creating new sources of income for Credit Corp. through a marketplace strategy, while also allowing us to distribute financial services products and drive fee growth. Last August, we launched YAPE Promos with 22 sellers. Ten percent of YAPEROS already visited the site in the first month, and also we launched the micro-loans offering, which is showing promising results. We see significant opportunity to increase stickiness in the micro-entrepreneur segment. For example, a taxi driver transacts through YAPE on average once every two days, while the top 5% heavy users transact almost five times a day. In summary, we are a more digitally and tech-mindful organization. We are attracting and retaining the best talent while investing in the key enablers. Every day, we are developing deeper relationships with our customers and becoming a more relevant part of their daily lives and their primary banking relationships. And yet, we are still at the initial stages of this digital journey. I look forward to providing additional updates on our progress across our different businesses in upcoming calls. Now, let me turn the call over to Cesar.

Thanks, Francesca, and good morning, everyone. As Gianfranco mentioned, we delivered solid operating and financial results. I want to start by highlighting some key quarter-over-quarter dynamics. Structural loans grew 5.2% measuring in average daily balances, driven primarily by wholesale banking, consumer and SME business segments within BCP. Deposits resume growth, particularly in time deposits, as clients sought to take advantage of high rates. Low-cost deposits, which have decreased in recent quarters, still represent a significant proportion of our funding base, weighting in a 55.9% share at quarter end. In terms of asset quality, the structural NPL ratio dropped to 4.9% as newly formed NPLs were offset by write-offs. The structural cost of risk rose to 1.44%, reflecting our decision to grow in higher-yield yet riskier SME PMI segments. From a year-over-year perspective, structural loans grew 10.8%, outpacing 2% growth in transactional transacted deposits. In this scenario, core income includes net interest income, fees and gains on FX transactions, registered a strong growth of 22.5% by 6.6% and 6.3% respectively. Provision expenses increased materially, given that levels were atypically low last year. Asset quality remains adequate, and we continue to maintain strong allowances for loan losses, which are equivalent to 5.6% of the structural loans. our coverage level for structural and non-performing loans remained substantial at 113.3%, which is close to pre-pandemic levels. In the insurance business, the loss ratio fell quarter over quarter to 63.6%, similar to pre-pandemic levels. In summary, Credit Corp. obtained a high ROE of 19.6% while maintaining a sound capital base on the banks of gains in profitability across businesses. Next slide, please. GDP growth projections for 2022 situate Peru at 2.8%, Chile at 2.4%, and Colombia, which is expected to be the fastest-growing economy in the region this year, at 7.8%. The central bank in Peru, like so many other central banks around the world, has been decisive in controlling inflation expectations. We believe that interest rate increases are coming to a close. These and other policy measures have had a significant impact on liquidity. Notably, excess liquidity held by local banks at the central bank rose sharply during the pandemic to more than 37 billion soles in January 2021, a mean contra-cyclical policies and fell to an average of 5.1 billion soles in October, still slightly above pre-pandemic levels. In October 20th, Pitch Ratings revisited Peru Outlook to negative from stable and affirmed that the rating at BBB. Just five days later, on October 25th, Standard & Poor's affirmed Peru's BBB rating with stable outlook. Peru's economic fundamentals remain strong. Public debt is one of the lowest in the region and stood at 34% of GDP at the end of the second quarter of 2022, while the 12-month rolling trade balance surplus stood at 5.4% of GDP in August. Fiscal deficit was just 1% of GDP as of September, while net international reserves stood close to 30% of GDP which was the highest print in the region. Next slide, please. The nation's general prosecutor filed a constitutional complaint against President Pedro Castillo before the Congress of the Republic for alleged crimes of criminal organization, influence peddling, and collusion. The government has invoked the Organization of American States to activate the Inter-American Charter in Defense of Democracy. the organization will send a mission to analyze the situation. On the regulatory front in Peru, to increase the efficiency of the digital payments market, the Peruvian Central Bank mandated that payment service network in Peru must be interoperable. In response, the market's primary digital payment platforms, IAPE and PLIN, are expected to be interoperable by March 21, 2023. Additionally, the Constitutional Court of Peru declared that the suit Challenging the constitutionality of withdrawals from private pension accounts was unfounded. In Colombia, the new government's policy proposals are driving Colombian pesos exchange rate and sovereign bond rates to historical highs. The tax reform on the table proposed increasing the income tax rate for financial institutions from 38% to 40% until 2027. and the withholding tax on dividends for non-residents will rise from 10% to 20%. In Chile, 62% of voters in the referendum held in September rejected the new constitution, and it is not yet clear how and when the government will propose a new constitutional process. The executive submitted a pension reform proposal to Congress in coming weeks, and a tax reform is still being discussed. Next slide, please. BCP continues to register strong profitability. Regarding key quarter over quarter dynamics, net interest income growth was driven by an uptick in structural loans, which was mainly attributable to wholesale banking and to consumer and SME business segments within retail banking, a disciplined approach to pass-throughs in the context of rising interest rates, and leveraging a transactional funding base to mitigate the impact of an increase in funding costs. Provision expenses grew 65.4% over a very low base, reflecting an uptick in loan origination in higher-yield segments, particularly in SMEP. On a year-over-year basis, growth in net income was spurred by 31.6% increase in net interest income, which was bolstered by rising interest rates, and a 10.6% increase in structural loans measured in average daily balance. Expansion was driven primarily by retail banking, which registered growth of 14.2% year-over-year, led by consumer and SME payment, where we were penetrating new lower-ticket subsegments by leveraging data analytics and digital channels, and secondarily by wholesale banking, which reported growth of 7.4%. Additionally, FinCon increased 13.8% fueled by an uptick in transactional levels, particularly through digital channels and POS, and by a 4.7% increase in net gains in EFS transactions in a context of lower volatility and improvements in product and channel offerings. Loan provisions increased almost tenfold over a very low base last year. These levels remain low and are expected to stand at three pandemic levels by the end of 2023. Operating expenses grew 7%, driven by higher expenses for personal IT, transactional costs, and more investments in disruptive initiatives. In this context, BCP's efficiency ratio stood at 38.8%, and ROE was 24.3% this quarter. Next slide, please. MiBanco's earnings grew 14.9% quarter over quarter. After record high disbursements in the second quarter of this year, origination is low this quarter, which reflect a more prudent approach to lending. MiBanco's disciplined pricing approach boosted Its net interest income, which grew 2.4%, provision expenses decreased 19.5%. The low-level register this quarter reflects methodologically improvements. This particular set of adjustments will not be replicated next quarter. The structural NPL ratio also dropped due to higher write-offs and stood at 5.6%. Operating expenses were flat this quarter. From a year-over-year perspective, net interest income registered solid growth driven by growth in structural loans and effective pricing strategies in a scenario of rising market rates. These dynamics were partially offset by an uptick in the cost of funds. Other income grew 38.9% in line with an uptick in total bank assurance fees, which was fueled by a strong origination, higher gains, in FX transactions, and a better use of third-party channels. Provision expenses fell 30.8% due to the aforementioned quarter-over-quarter dynamic and environment post-COVID. Operating expenses grew 12% year-over-year, driven mainly by digital expenses. Traditional expenses remain very well controlled. Productivity rose this quarter due to application of the hybrid model which allowed us to increase the structural portfolio in 22.6%, improving our long officer productivity by 12.6% year-over-year. Growth in operating income topped the expansion reported for expenses, which led to efficiency ratio to drop to 49.6%. In this context, MiBanco's return on average equity increased significantly, to 22.1% higher than expected round rate. At Nibanco Colombia, the positive effect of the increase in origination volumes and effective risk control were offset by a decrease in net interest income, where the cost of funds increased faster than our origination repricing speed, with the latter limited by the regulatory interest rate caps in a context of rising rates. Additionally, the Colombian Central Bank has decreased that the rate cap level, which will affect interest income in the coming quarters. Next slide, please. Grupo Pacifico's net income rose 57.7% quarter over quarter, driven by the live business. This increase was associated with an upswing in net earning premiums, primarily through credit life, which registered higher sales via BCP and Banco de la Nación, Additionally, net claims in the live business decreased this quarter due to drop in COVID-19-related claims. From a year-over-year perspective, in the live business, net earning premiums increased, driven by credit life, which registered growth in sales to the bank assurance channel. Group life also evolved favorably due to price adjustments and an increase in sales in the complementary insurance for occupational risk problems. This positive dynamic was further enhanced by a drop in claims due to a drop in COVID-19 claims and reversal of annuity reserve, which reflected adjustments in mortality rates. In the property and casualty business, net earning premiums increased primarily in medical assistance, which was attributable to growing sales of oncological products and to personal lines due to an uptick in sales of home mortgage and car protection products. Claims fell year over year, fueled by the commercial line, which reported a decrease in claims frequency. These dynamics led to total loss ratio to stand at 63.6%, which marked a return to pre-pandemic levels. Grupo Pacifico's return on equity stood at 30.1%. This is important to mention that this particularly high annualized figure was the result of a combination of higher net premiums and seasonal effects, a lower loss ratio and reserve, and a slight reduction in net equity reflecting unrealized losses in the investment portfolio. Next slide, please. The investment banking and wealth management business registered an uptick in quarterly earnings but continues to be challenged by the current environment, where geopolitical issues and a macroeconomic environment impacted asset prices, market volatility, and investment levels. On a quarter-over-quarter basis, assets under management decreased. Despite this effect, earnings from line-of-business rose, boosted by earnings in the capital market business, where gains were registered in the proprietary fixed income portfolio in Colombia. In the year-over-year analysis, assets under management dropped 18.1% driven primarily by a decrease in fund volumes in Peru. In this context, income fell 17% due to withdrawals. a decrease in the market value of funds, and a base comparison effect, given that in the third quarter of 2021, strong gains were reported for anticipated redemptions and third-party upfront fees through offshore platforms. We are conducting a thorough analysis of our business in a context that points toward a more challenging market. Next slide, please. Now, we will talk about credit card consolidating dynamics. On a quarter-over-quarter basis, structural loan dynamics remained strong and grew 5.2% driven by wholesale banking and the consumer and SME business segments within retail banking at BCP. The impact of asset repricing continued to outweigh the effect of an increase in funding costs. As a result, the yield of interest-earning assets increased 82 basis points versus an expansion of 48 basis points in the funding costs. On a year-over-year basis, the structural loan portfolio grew 10.3% driven primarily by consumer, wholesale, SME, PIME, and Nibanco. Within the deposit base, time deposits grew 24.6%, reflecting the migration to higher-yield products. At the quarter end, around 56% of our funding base was comprised of transactional deposits. It is important to note that despite this reduction, we continue to gain market share in this source of funding. In terms of yields, our effective asset repricing strategies led the interest-earning asset yield to increase 180 basis points, which surpassed the increase of 80 basis points in the cost of funds. Next slide, please. Now, I will discuss the year-over-year evolution of core income. Core income grew 17.5% year-over-year, driven by an uptick in net interest income and fee income. Net interest income grew 22.5% year-over-year, in line with the evolution of the balance sheet and the yield dynamics explained earlier. Credit cards' net interest margin grew 108 basis points year-over-year to a stand of 5.3% this quarter, while structural needs stood at 5.6%. Risk-adjusted NIM grew 56 basis points to a stand at 4.5%. Ongoing improvement in NIM was partially offset by an increase in the cost of risk. Fee income increased 6.6% driven by point-of-sales and interbank transfer, which grew 46.9% at 53.4% respectively. Cashless transactions represent 45% of the total transaction amount as of September. The 11.7% increase in parking serving fees was partially offset by a drop in fee income from mutual funds. Net gains on FX transactions increased 6.3% year-over-year in a context marked by a decrease in FX volatility year-over-year, which was offset by broadening product and channel offerings. Next slide, please. I will now move to Credit Corp's Structurally Loan Quality Dynamics. On a quarter-over-quarter basis, our Structurally NPL volumes decreased slightly given that the volume of new entrants to the NPL portfolio was offset by an uptick in the volume of write-offs, which was driven primarily by SMEP and individuals. New entrants to the NPL portfolio were concentrated in SME-PIME clients who took short-term working capital facilities, consumer loans, and wholesale banking related to specific clients in the retail and hotel sector that received refinancing. Note that the asset quality in each segment remains within our expectations and adequately provisioned. Year over year, higher NPL volumes were mainly driven by SME pinning and wholesale banking at BCP for the same reasons described in the quarter-over-quarter basis. The increase in NPL volumes at BCP was offset by a decrease in volumes at Mibanco due to a base effect in the third quarter of 2021, which was impacted by expiration of grace periods for reprogrammed loans. NPL ratios drop across segments with the exception of wholesale banking in this context Credit Corp's structural NPL ratio stood at 4.92%. Next slide, please. Structurally loan loss provisions increased materially over an unusually low basis. Provisions are expected to rise next quarter, particularly at MiBanco, following the expected trajectory. On a quarter-over-quarter basis, growth in structural provision was mainly driven by the growth in penetration of higher yield yet riskier SME PMA segments and a low base effect, particularly within the SME segment. In a year-over-year basis, structural provision expenses increased 197.5% over an exceptionally low base. In this context, The structural cost of risk stood at 1.44% year-over-year and was 1.04% year-to-date. The structural recovery ratio continued to trend back to pre-pandemic levels and stood at 113.3%. Next slide, please. Operating expenses grew 8.2% year-over-year, which reflected an increase in salaries and employee benefits and in administrative expenses. The salary line was subbed this quarter due to an increase in variable compensation, which reflects an uptick in earnings and achievement of commercial goals. Growth in administrative expenses reflects an increase in transactional costs in line with higher transactional levels, an uptick in IT expenses related to cybersecurity, new functionalities, a significantly higher digital transactional volumes, and an acceleration in disruptive initiatives. In this context, Credit Corp's efficiency ratio improved 68 basis points in the first nine months of the year, driven by higher core income. Thanks to its hybrid model, MiBanco's operating expenses were controlled and up only 9% during the first nine months of the year. Operating income was 19% over the same period. MiBanco's efficiency ratio improved 450 basis points in the first nine months of the year. If we exclude OPEX from investment in disruptive initiatives such as IAPE and CREALO, the efficiency ratio for the first nine months stands at 41.3 percent, which represents a difference of 258 basis points from the reported figures. Next slide, please. ROE stood at 19.6 percent this quarter, driven by increased results across our four business lines. Over the course of the last five quarters, our ROE has consolidated in the high teens. Now, I will move on to the outlook. Next slide, please. Despite current political volatility, Peru's macro fundamentals remain solid, and we expect GDP growth to stand at 2.9%, which is above our initial guidance. Loan growth in Bibanco, SME, PME, and consumer loans is expected to continue decelerating. As such, we expect structural loans growth to be at the higher end of guidance at year-end. Given that interest rates continue to increase, the net interest margin should situate near the upper range of guidance at the end of 2022. The cost of risk is also expected to close the year in the upper end of guidance. Asset quality was continued to evolve within our expectations, but nonetheless, we are carefully monitoring the impact of higher inflation and interest rates on our clients' payment performance and their risk profiles. As transactional levels rise, our IT and digital investment increase, given that expenses for these companies are concentrated in the last quarter every year, deficiency ratio will move upward, but close to year-end within guidance. Finally, we expect our lower ROE for 2022 to remain around our guidance around 17.5%. With these comments, I would like to start the Q&A session.

Thank you. 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're 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. The first question comes from Jason Mullen with Scotiabank. Please go ahead.

Hello, everyone. Thank you, Jim Franco, Francesca, Cesar, Milagros for the detailed presentation. Congrats on BAP's profitability and from my perspective, the improvement in the KPIs across BCP's digital base. So my question, my main question is on regulatory changes. First, you referred to it slightly how the cap on interest rates, I want to understand how the cap on interest rates is impacting your business and how do you expect caps to evolve over time? And as a follow-up on regulation, the presentation mentioned that the central bank mandated that mobile wallets must be interoperable. How will that impact YAPE and BAP? And just continuing the regulatory theme, you mentioned the increase in income taxes for banks and taxes on dividends in Colombia. Do you expect higher taxes in Peru? And also you mentioned on the regulatory side the change in pension reform in Chile. How do you see pension reform in Peru? Thank you.

Good morning, Jason. There were like four questions in one, but we'll address them.

Yeah, I'm trying to get it in under one theme, but yes. So feel free to just. Address Juan if you'd like.

No problem, no problem whatsoever. Let me take a couple of them and then I'll pass the other ones, the most difficult ones to Cesar. Regarding YAPE and the interoperability, our vision since the very beginning, and this was, I don't know, four or five years ago, was that the main comparator for digital wallets is not the other banks' digital wallets, but cash. So what we do see is that this interoperability is going to be, it's the right move from the central bank, and it's going to benefit the country, but also the digital wallet. And since IAPE has, there are no public figures, but roughly 70%, 75% in terms of number of transactions, what we do see is that Maybe YAPE will reduce its market share, but the market is gonna grow by an X factor. What I mean X factor is, I don't know, two X, three X, whatever. So we are very positive on the regulation. And on top of that, we're moving forward in our study from basically what started as a P2P application, and as Francesca mentioned, moving forward to becoming Peru's super app. That one is regarding YAPE. I will take the other one regarding pension funds, the pension system, actually, in Peru. I mentioned it in a previous call. I don't remember if it was the previous one or a couple of quarters ago. We strongly believe that the pension system in Peru has been turned down over the last two or three years. Currently, we're not worried about what's going to happen to Prima, to our pension fund, but how the whole pension system should be redesigned and a reform should be put in place. As a matter of fact, both the executive power and the legislative power are supposedly working on something in that sense. Ourselves, we're working in a proposal that we will take public in the, I don't know, maybe next 30, 45 days, so that in order to contribute the whole pension system, again, not focusing specifically on our business. Cesar, could you take the other couple, please?

Yes. Franco, thank you. Probably first address regarding to the interest rate caps. The explicit mention was in Colombia. In Colombia, we have a standard cap that is 1.5 times the average rate. And due to the profile of our portfolio in Banco Colombia, part of the portfolio is this world's close to this limit. And so a slight modification in the regulation is going to affect a part of this portfolio. In the case of Peru, our main market, we also have an interest rate cap that is two times the average rate, and due to the portfolio that we have, particularly in BCP but also in Mibanco, we operate at rates that are substantially below the cap. So in the short term and in the current circumstances, we don't have any particular worries. Beyond that, we explicitly mention in the case of Colombia that we also need to consider that in the case of Colombia, the environment of interest rates is more acute than in Peru. The reference rate is 11%. In Peru, it's 7%. So different environment. And in terms of income taxes, the regulation is specific to Colombia and is part of this broad, very ambitious agenda of President Petro, who wants to collect significant taxes charging particularly oil costs mining, and financial sectors. But I think, again, it's a country-specific effect.

So no expectation of changes in the tax system or structure for Peru at this point? No. Thank you very much for the comments.

Our next question comes from Ernesto. Scarbo Londo with Bank of America. Please go ahead.

Hi, good morning. Gianfranco, Francesca, Francesca, and Cesar, and good morning, everyone. Thank you very much for your presentation, and congrats on your very unexpected net income and your ROE above 19% in the quarter. My question will be on asset quality. We have seen cost to risk is starting to normalize And you were mentioning that we should expect the cost of risk in the upper guidance, so roughly at 1.1% for this year. However, when looking to next year, how should we think about a cost of risk in a context of still high inflation and likely soft economic growth? Thank you.

Good morning, Ernesto. broader answer and then ask Reynaldo to go into the details. As we've mentioned before, our expectations going forward is that the risk-adjusted NIM should go back to pre-pandemic levels. Those have been our comments in previous calls. If you were to ask me today, maybe the risk-adjusted NIM For next year, it's gonna be slightly higher than that because of the current interest rates environment. Obviously, inflation may hit somehow the quality of the portfolio, but specifically in Peru, there are no variable rates loans nor inflation adjusted rates loans. So basically, the bulk of our portfolio is a fixed rate, so our clients, our portfolio, sorry, shouldn't get affected by inflation directly. Obviously, the repayment capacity may get hit because of inflation. Reynaldo, I don't know if you want to complement that.

Yes, I'd like to add two things, Ernesto. First of all, As we have mentioned, we expect in 2023 to get back to normal in terms of cost of risk. I mean, we will provide further details in our guidance for 2023, but at a general number, that's our expectations. And the other thing regarding the inflationary context we're living, remember that in IRS 9, we incorporate the macroeconomic outlook, so we are starting to see those numbers in our projections and incorporate those on our provisions levels as of today. So we are very active and following the macro environment and incorporate those in our models for provision estimations as well as for our underwriting policies.

Perfect. Thank you very much, Franco and Reynaldo. So to think about cost of risk at pre-pandemic levels, would that number be around 1.5%, 1.6%?

Yes, yes.

Perfect. And then just let me make a second question related to the ROEs at the subsidiaries. We have seen BCP Standalone, MiBanco, Grupo Pacifico, AFP Prima, all of them already with ROEs above the 22%. However, when looking to BCP Bolivia, Mi Banco in Colombia, and AS Bank, we continue to see single-digit ROEs. So what will be the strategy to improve the ROEs of those subsidiaries that I think at the end will help also to Credit Corp's ROE at a consolidated level?

Yeah, great question. Three different answers, actually. Mi Banco Colombia is actually in a growth mode, actually. And I totally agree with you, ROEs are still low, but they're totally in line to our projections when we decided to step up the business in Colombia. We're really... positive on what we can do, what's being done in Colombia and the future for Mibanco in Colombia. That's the first answer, sorry. Bolivia is a completely different story. Unfortunately, Bolivia, there are rate caps, there are rate caps both on the deposit side and on the lending side. The taxes are quite high, and unfortunately, the whole system ROE is quite low. So we were trying to optimize the business there. We've been already for 28 years there, but we don't see an improvement, at least in the short term. And finally, the investment banking and wealth management business, or credit card capital, sorry, and Cesar mentioned it before, Going forward, what we see is that the Latin markets are going to be smaller than what we expected. So we're currently in the process of making decisions, actually in the process of a project, so as to define our strategy going forward.

Perfect. No, that's very helpful. Thank you very much, Gianfranco.

Our next question comes from Thiago Batista with UBS. Please go ahead.

Hi, guys. My pleasure for the results. In the slides, in the beginning of the slides, you showed some information about the digital innovation on BCP. When you guys look for Nibanko, do you believe it's only a question of time to see this evolution of the digitalization process or do you believe it's more difficult to really implement these digital innovations on mid-bank operations? And follow up on this, the banks or credit corp's efficiency ratio is already at the low 40s, which is not so different from the pre-COVID level. Your guidance for this year is mid-40s, but when you look for the medium term, what's the target for efficiency ratio of credit corp considering these increasing utilization that probably tend to improve your efficiency ratio.

Yes, Francesca, can you take the one on Mivanco's digital strategy?

Yes. Part of the conversation we'll be having around CREI Corp's innovation strategy and the domains that we shared in the digital day, Mivanco has been working hard towards digitizing their current process and gaining great efficiencies and seeing opportunities for growth. Moving forward, what we see is a definite opportunity for a neo-bank around digital, but because looking at Credit Corp's entire strategy, we have IAPE, which is entering the microentrepreneur segment as well, we still have a way to understand the approach we're going to take. If it's going to be something built on the side, if it's something more of an ecosystem view looking at Greycore. So this is what we're working on and we're going to be addressing during 2023 for sure.

Maybe just to complement Francesca's answer, the main lever for efficiency at MiBanco is workforce, the sales force, sorry, RMs. And actually, what MiBanco is currently doing is what they call the hybrid model under which the core model hasn't changed, but we're adding efficiency to those RMs through digital tools. That's building on what Francesca mentioned. And that's the reason why if you see the cost to income at MiBanco has decreased substantially over the last quarters. Going forward and regarding your question on credit cards, cost to income, it's a tricky question, really. And the reason is, obviously, the digital investments we're doing are helping in reducing our cost to income. Having said that, we really don't know when are we going to stop investing in digital transformation. In digital, I wouldn't call it transformation anymore. in digital investments so as to become more efficient and provide a much better customer experience going forward. As I mentioned in the previous call, we are not going to be shy in terms of investing in order to keep providing the best customer satisfaction in Peru and in the countries in which we operate.

Okay, thanks for the interesting.

Our next question comes from Tito Labarto with Goldman Sachs. Please go ahead.

Hi, good morning, everyone. Thank you for the call and taking my questions. A couple questions. First, just on your guidance, you know, looking at the year-to-date results and the third quarter results, you know, it looks like there could be some upside to your NIM, right, if it's running above, you know, like around 5.3, the guidance year-to-date 4.8. Is there some potential upside, or do you expect any pressure in 4Q? Kind of similar for the ROE, right? Our guidance around 17.5. You're already above that through September. And if ROE stays around this 20%, there could be some upside to that. So just how should we think about the guidance? And then I have a second question afterwards.

Sure. Good morning, Tito. You're right. Obviously, we're in November. We're not going to change the guidance for the next 45 days. But yes, we expect to be in the upper side of the guidance we've provided. Specifically on ROE, our vision was around 17.5. We're currently above that, but still around. Your comments are right. We may end up in slightly higher ROE going forward.

Okay, great. Thanks, Gianfranco. That's clear. My second question, I guess, was on the insurance. You mentioned it's 30% ROE this quarter. You mentioned there were some write-offs that went directly to equity, which impacted that. How much was that, and how should we think about the normalized level of ROE for insurance?

Let me answer the broad question, and then I'll ask Cesar Rivera to compliment me. If you recall, a couple of months ago, what we said was that our program Vision and expectations on the insurance business should be that it should navigate in the medium term around 18 to 20 percent. That's what we do believe it's a sustainable ROE going forward. Cesar, can you compliment me on the specifics of the question for this quarter?

CESAR GONZALEZ- Well, thank you. Thank you very much for the question. Maybe it's important to remember that during the last year, basically, after the pandemic, the main pandemic impact, we strengthened our underwriting policies to reduce our exposure to not vaccinated candidates. We increased rates, we increased premiums, mainly in the group life insurance, corporate insurance, credit life, and mandatory probes, and the disability and survival insurance we have with the AFPs, with the AFPs. And we enforce our ALM control to manage the impact in inflation and the change in interest rates. During this quarter, we have important impacts in some sectionality, new premiums related with group life insurance. that have good results during this quarter. And during this quarter, we have had low ratios, especially in the life insurance business. It means that we have had good results for this quarter because of this impact and because of this action we took during the last year and during this year. And for the future, as Gianfranco said, we expect to be around this 20% of return of equity. And, of course, we need to continue our investment in the capabilities and the technical teams, and, of course, maintaining our discipline in underwriting and investment management. So we expect to be around this 30% of ROE.

Okay, great. That's helpful. And could you just quantify, how much was the specific write-off this quarter that impacted equity?

There was not a, sorry, this is Cesar, there was not a write-off. The mention was to unrealize losses in the long-term investment portfolio was a minor effect, but it's not a write-off. It's only the reflection of higher interest rate in the price of the assets that we have on books.

Okay, perfect. Thanks for clarifying.

Our next question comes from Yuri Fernandez with JP Morgan. Please go ahead.

Hi, guys. Good morning. Gianfranco Cesar with everybody. I have a question regarding margins here. This 5.3 is very close to the previous 5.4 or 5.5 in 2018-19. So my question is, how much more can you expand next year? Because we still see active amortization. You have been repressing our assets. And I guess the concern here is regarding funding costs, right? Because funding costs today, they are running at 2.1, rates are at seven. So this is about 30% of the rates. I know like in Peru, most of the time deposits, they are fixed rates, right? But you reprice your time deposits, right? And I see here, BCP paying around six and a half, some banks paying 90%. So my question is, can you keep funding costs so low? considering this level of interest rates? And again, how NIMS will behave in 2023, 2024? Can you expand above the levels you had in 2018, 2019? Thank you very much.

Cesar? Okay. Jorge, thank you. I will split my question in probably a couple of chapters. First, I would say that we have some short-term effects and others that are more structural ones. Under the foundation, we are not going to provide now a specific guidance. We are going to provide a specific guidance next quarter, but I can give you a general answer that I hope is helpful. In the short term, we expect expansion in NIMS because the repricing process still continues in dollars per is still accelerating, and we expect higher rates in dollars. It's very relevant for us, 50% of our portfolio. And in the case of solids, we expect to have prevailing higher rates for next year. So the rate should be, for these reasons, higher next year. Over the years 24, 25, it should be starting to come down as the reference rate decreases. But there are others that are more structural reasons that would propel our NIMS higher. And it's one, the change in the structural cost of funds, because during the pandemic, as you remember, we increased our share of transactional deposits. And while these deposits could decrease slightly in the short term, in comparison with previous year, are at a higher level. At this point, it's 56% that is substantial, and we expect that it's going to be more structural. And the other change is the composition of the portfolio. We have become more and more a retail group, and inside of the retail industry, the consumer and payment segments are growing faster than mortgage, for example. So these are going to be more structural changes. Summarizing everything, we are going to have higher NIMS due to reference rates next year. And after that, we expect to have still higher than pre-pandemic levels need, but for the structural reasons that I just described.

Just let me complement Cesar's answer, Yuri, from a more strategic vision. At BCP, we've been working on an overall transactional value proposition for years now. I don't have the exact figure, but anything between 40% to 45% of total transactions done in the Peruvian financial system are done through BCP. Obviously in the past years that strategy hasn't paid off because rates were quite low, whereas nowadays we get a very relevant benefit because of that strategy. And that's the reason why we launched YAPE, one of the reasons why we launched YAPE a few years ago, and that's the reason why the answer to Jason, My previous answer to Jason was in that line. We strongly believe that there's still a huge opportunity to enlarge the penetration of non-cash payments in Peru because of the benefits of the population, but also because of the benefits for us in terms of low cost of funding.

No, guys, no, makes a lot of sense. Basically, it's a competitive advantage, right? Like you have any structural change on your transactions, as you said, and like all those initiatives. And now you're seeing the benefits on the funding costs and this should remain. If I may, just a second one, a follow-up from Tito's on insurance. We were checking here the ROE of the insurance business and it was like 13, 14% in 2018, 2019. And I guess you said from 18 to 20 now, like closer to 20% ROE. What has changed since 2018-19 in the insurance business? Is it just the rates that are higher and you have higher financial income? Or is the mix of products, structural lower loss ratio? What explains this higher ROE for insurance now versus pre-COVID levels? Thank you.

Okay. Yes. I think we have a combination of factors. that has changed the portfolio. Again, we are a more retail bank, more digital one. We have a much higher composition of bank assurance in our current and expected portfolio through BCP, through MiBanco, and this product has better margins. And another reason is that overall we have improved the efficiency of the business. So when you combine these a better income generating capacity and a structural efficiency in the business, we can land up in a higher structural ROE.

Perfect, guys. Thank you very much and congrats on the results.

Our next question comes from Andre Soto with Santander. Please go ahead.

Good morning to all. Thank you for the presentation and congratulations on the results. My question is regarding the digital strategy. We have seen impressive results this year. I'm not sure if those are just in line with your expectations or you are a bit ahead of what you were expecting to see when you presented your digital plan that was in March this year. In that sense, when you presented this plan, You said that you expected the income coming from the monetization of these initiatives to offset the cost by 2024, 2025. I would like to understand if there is any change in that expectation, and you are expecting now to see faster than expected monetization of your digital strategy, and from that perspective, if Credit Corp can aspire to exceed 18% ROE earlier than expected. Thank you, Andrés. Francesca, would you take that one?

Yes. We do expect to see some lines of business on new fees or new lines of business doing better, and we're seeing that with IAPE in terms of, for example, financial products being distributed because of the potency of the distribution channel. On the other hand, we are very aggressive and we're challenging ourselves to create new businesses such as marketplace that we talked about in the digital day. And that is very difficult, especially difficult also in the environment where we operate, where things change fast. So I don't see the overall expectancy to be positive by 2024 or 2025 changing very much. But these are plans that constantly are being evaluated, governed, stopped, and new processes initiated because they are plans. We don't execute exactly on what we think because we are very mindful of what works in the market and where customers and product market fit really takes place.

Thank you. I know your ROE expectation overall. I would like to hear your thoughts. We are in a higher-than-expected interest rate environment, and that has definitely helped the margins. You mentioned you have benefits on the funding side. Can we expect Credit Corp. running about 18% ROE in the next few years?

Our expectation during the digital day was around 18%. We maintain that as achievable medium-term target. But as we have been discussing previously, at the same time that we are obtaining higher margins, we are aggressively investing into the future to be more competitive down the road. So we are going to privilege long-term sustainability and profitability over a bump in a specific quarter.

That's very clear. Thank you both.

Our next question comes from Sergey Dubin with HL. Please go ahead.

Yeah, good afternoon, gentlemen. Thanks for the presentation. My question is actually on asset quality. So when I look at your presentation, what I see is that your loans, right, when you break it out between structural loans and reactive loans, so you show that your reactiva loans have come down from 15% in Q321 to 8.8% in Q322. But then when I look at your NPLs, these NPLs have actually went up. I mean, reactiva NPLs have gone up from 726 to 1200. So that's counterintuitive to me. Maybe you can explain the trend Behind that, and then the second question, which is related, is I thought that Reactiva is actually government-sponsored program where you should have zero MPLs or very low MPLs because it's basically backed by the government. The government should pay you if the borrower doesn't pay you. So I don't understand why that issue is even coming up. So if you can address it in totality, that would be helpful. Thanks.

Good morning, Sergey. Sorry. Yes, you're totally right. The Reactiva portfolio is a government collateralized program, roughly 90% collateralized. But it's a matter of processes. It's not that the moment the loan becomes past due, you execute the collateral. It takes time, roughly. I'll ask Reinaldo to go into the specifics. But that's the main reason. Regarding your first question, it's not counterintuitive. It's completely intuitive. The quality of that portfolio, so let me put it the other way around. If those loans weren't collateralized at that moment by the government, we wouldn't have given those loans. So the asset quality, the expected asset quality was lower than what the normal portfolio would have had in a normal situation. Having said that, the behavior of the overall reactiva program has been much better of what everyone, including the government and the central bank and obviously bank, expected at that moment. So, Reynaldo, I don't know if you want to compliment me.

Yes, Gianfranco, sorry. Yes, Gianfranco was mentioning this is a process. You have to try to collect the loan from your client at least for 90 days. And after that period, we just started that process of claiming the guarantee to the government. And that would probably take 30 to 45 extra days. So we keep on the portfolio a part of the reactive loans for almost five months until we finally collect the guarantee from the government. And in terms of the performance of the portfolio, as Miriam Franco was mentioning, at the beginning, the government and us projected at least a 20% default rate on those loans, and the number is closer to 10%. So the performance, even if it's higher, I mean, it's worse than our regular traditional clients, it is still below our expectations. And it has helped a lot of clients who go through the pandemic and be able to pay their other loans with other financial institutions. So overall, we think it has been a very good program.

Okay, okay. So maybe that makes sense. But then I guess just to carry that thought, so what you're saying, I guess what follows from what you're saying is that effectively over, let's say, I don't know, two or three years, so you may see this divergent trend, right, as you – work your Reactiva loans down as a percent of your total portfolio, your NPLs may still, or Reactiva-related NPLs may still go up for a bit, but in the end of the day, in let's say two or three years, both of those, so in two or three years, your Reactiva loans should converge to close to zero, and your NPLs should actually converge to zero from Reactiva because they would be, you know, you would have the time to collect the collateral and just, you know, if you know more anything else, correct?

That's correct, Herde. Maybe it should be sooner than that. Rather than two or three years, it should be one, two years, actually.

Okay. Okay, got it. Okay, that's helpful. Thank you.

Thank you.

Our next question comes from Carlos Gomez with HSBC. Please go ahead. Pardon me, Mr. Gomez, is your phone on mute perhaps?

Hi, my apologies, I think I was mute. Hello? Yeah, sorry for that. Yeah, go ahead. Yeah, yeah, so... I have two questions. The first one is on loan growth. I know that your structural loan portfolio is growing in double digits. However, overall, you're growing 3%, 4%. It would seem like the trend is slowing down. What do you expect in terms of loan growth for the next one or two years and for the next five or six years? In the past, you have said that there's going to be less growth in Peru, and you were pointing to something like 7%. Have you changed that view? And second, on asset quality, we see that your coverage, not a great measure, but it has been going down. It's now around 100%. So the buildup of reserves that you did during the pandemic seems to be exhausted. So should we expect a faster normalization of credit costs in the coming years?

Thank you. Yes, good. Cesar, answer the first one, and Reynaldo, the second one, please.

Okay. Our expectation is around... high single digits, but with different composition, going faster in retail loans and a lower pace in wholesale that are very linked to the investment climate that we have described. So I think this is a reasonable figure that is more or less in line with the long-term trend of 1.4, 1.5 nominal GDP if you take aside this specific moment in which we have an especially high level of inflation.

Fernando? Yes, in terms of the second question, Carlos, yes, our pandemic coverage ratio was around 110, and our structural today is 113, so we are almost there. And you have to bear in mind that NPL today has a lot of refinance loans, basically, on the wholesale market, which have important collateral behinds. So, I mean, we cannot have a fair comparison in terms of the coverage ratio before the pandemic to what we have today because those loans have already been well-provisioned and we don't expect any further provisions on those specific refinance loans. They might grow in the future, but we feel that those are still performing loans even though we classify them in this ratio.

Okay, but still, this year, you're pointing to something like 1.2% cost of risk. Maybe we should expect, again, to go back to the 1.5%, 1.7% that you had in the past. Is that correct?

Yes. As we had mentioned, that would probably be a fair assessment of our cost of risk in the future, yes.

Thank you so much.

Again, if you'd like to ask a question, please press star, then 1. Our next question is a follow-up from Jason Mullen with SocialBank. Please go ahead.

Hi, thanks. Thanks again. Yes, I re-entered the queue to ask another question. Mine is on client engagement. On slide seven, you shared products for clients under a new methodology for digital and non-digital clients. Do you have targets for engagement under this new methodology that you can share with us? Thanks.

Since the beginning of the transformation, our target is to multiply by two the level of engagement, and that's still what we're striving for. We began in the non-digital customers for the consumer segment at 1.2, and now we're at 1.8. So our target continues to be around 2.5, 2.4 as a target for customers. Having said that, We are also looking not only at cross-sell, but the level of engagement, the number of services, and the day-to-day usage that we're seeing. We shared with a YAPE example the number of activities the customers have per month. We have a lot of activities through our mobile banking app, services for top-ups, for payments. how you turn off and on your credit card account and so forth. So we're looking at engagement now at a more broader view than just cross-sell.

Thank you, Francesca.

Very helpful.

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. I'd like to highlight that the fundamentals of Peru remain strong and our expectation for GDP growth is now above our initial guidance, despite the continued political noise. Latin America also continues to be an attractive alternative in terms of global capital inflows based on supportive commodity prices and the steps our economies took to increase rates early on. If it weren't for the political noise and course changes of governments, we could be in a much better position to solve the long-term structural issues such as quality of health, education, and basic services. In this context, we are confident that we will continue to generate robust results into the future as we continue to see loan growth with an ability to pass on rate hikes. a differentiated funding structure, and increasing levels of transactions, all of which drive core income expansion. We're also focused on remaining competitive in the longer term, rapidly scaling and developing new fee and income generating opportunities while deepening our connections with our customers with the aim of being their primary banking relationship. We're upskilling our workforce as well as attracting and retaining the best talent, while accelerating the development of core enablers of our digital transformation strategy, including data analytics, IT, and cybersecurity. We've made significant progress on all fronts, but acknowledge that we are only at the beginning of this journey. Our strategy and position also enable us to be a powerful agent of change. We take this responsibility very seriously and are committed to aligning our business objectives with our sustainability-based responsibilities of financial inclusion, financial education, and developing the workforce of the future. We will continue to deliver our strategy to drive sustainable, profitable growth, advance on our digitalization initiatives, and attract and retain the best talent. Thank you all for joining us and have a great weekend.

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