Credicorp Ltd.

Good morning and welcome to the Credit Corps Second Quarter 2023 conference call. All participants will be in listen-only mode. Should you need assistance, please signal conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then on your touchstone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Milagros Sionia. Please go ahead.

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 Raffo, chief innovation officer, Reinaldo Llosa, chief risk officer, Cesar Rivera, head of insurance and pension, and Carlos Sotelo, CFO at MiBank. And Diego Cabero, CEO or head of universal banking. 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 expectations and beliefs and are subject to a number of risks and identities. And I refer to you to the forward-looking statements section 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 commenting on the highlights of our strategy, followed by Cesar Rios, who will comment on the macro environment in which we work our financial performance and provide on an update of our outlook for 2023. Gianfranco, please go ahead.

Thank you, Milagros.

Good morning, everyone. Thanks to all of you who were able to join us during our June 20th investor day, where you heard directly from our leadership team on the progress of our businesses. It was also a highly valuable opportunity for us to hear from you. I'd like to take a few moments before discussing our Q2 results to recap some of the key takeaways. First, we're taking a disciplined approach to investing in businesses that we expect will begin in the midterm to further decouple our performance from that of the macro context. Two undertakings include expanding the share of retail business across our portfolio, as well as increasing our non-interest income through adjacent businesses. While generally our disruptive initiatives have a long term orientation, YAPE stands out as a venture that plays a pivotal role in this strategy in the shorter term. It has already shown very promising results, with income approaching cash costs and is on track to reach breakeven by 2024. Thus, we intend to further invest in expansion, as well as in other disruptive initiatives with the potential to generate value across our businesses. We heard your request to provide more information on YAPE's trajectory and have increased our disclosure on the business. Our goal is to provide you with meaningful updates as YAPE continues to evolve. Second, while we're proud to be the market leader, we don't take that position for granted. We're strengthening our competitive modes by becoming increasingly digital and harnessing the power of data. Our top priority is and will continue to be attracting and retaining the best talent so that we maintain our competitive edge. Finally, we're committed to enhancing our governance and transparency while continuing to pursue social impact initiatives. We aim to exert a progressively greater influence on our clients and communities to strengthen their sustainability efforts while playing a crucial role in financing the energy transition. Now, let's turn to this quarter's results. While the political scenario in the second quarter improved, the impact from the social unrest, the disruption from cyclone Yaqu as well as the added effects from the coastal El Niño resulted in a stagnant first half of the year in Peru. Despite this backdrop, Credit Corp turned in favor of results this quarter. Net income expanded .6% year on year with ROE for the quarter at 18.6 driven by strong in the universal banking and insurance businesses as well as a modest recovery in the microfinance business. Low volumes, however, experienced a slight drop as we managed on the retail side and wholesale demand showed reflecting the economic climate. And even though we saw a decrease in low cost deposits along with a system wide contraction, we continued our market leadership in capturing these deposits thanks to our long-term standing client relationship, trusted brand and extensive reach. Our strong balance sheet provides us sustained resilience to navigate the current weak macro backdrop as we continue to execute our value creation strategy. Cost of risk has increased primarily due to SME, IME and the most vulnerable subsegments in individuals. MiBanko's cost of risk is still high but diminished this quarter. This evolution reflects the impact of an environment of lower internal demand, high inflation and high interest rates on payment capacity of clients. We have strengthened credit risk management and remain focused on maintaining stringent origination standards and disciplined loan pricing. Our disruption initiatives continue to gain traction during the quarter, driving the inclusion of a growing number of provisions. Nonetheless, having registered strong income at BCP and Pacifico this quarter, we have managed our cost to income ratio. Regarding macro perspectives for this year, CSER will elaborate further, but social and climate events resulted in a tougher first half than we expected. At this time, our GDP growth forecast for 2023 is 1%, even though we foresee a rebound of around 2% growth in the second half, driven by stimulus measures taken by the government. During the second quarter, sea surface temperature anomalies associated with El Nino Costero motivated the cancellation of the industrial anchovy fishing session and also impacted the agricultural sector. The El Nino Costero phenomenon is expected to continue until the summer of 2024 as a consequence of the high probability of development of El Nino in El Pacifico Central. For the summer of 2024, the highest probability scenario today is that El Nino Costero will have a week to moderate magnitudes. As the situation unfolds, we will keep you up to date on the expert outlook and its potential impact on our businesses. It is important to remember that Peru's macroeconomic fundamentals remain strong. After El Nino Costero's transitory shock, Peru will be in a favorable position to converge to Latin America average income per capita level. The speed of catch-up will depend on Peru's ability to promote and unlock private investment, which has been the most important growth driver in the past. Thank you, and let me now turn the call over to Cesar.

Thanks, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable overall financial results. I will start with a brief comment on -over-quarter dynamics, but will focus on the -over-year evolution. On a sequential basis, structural loan growth in retail banking at BCP and the Banco was offset by a contraction in wholesale banking. On the funding side, the deposit mix continued shifting towards higher yield deposits. Low-cost deposits fell across the system and at credit core. Nonetheless, we maintained our indisputable leadership position in this funding source with 41% market share. Asset quality metrics deteriorated, reflecting the impact of challenging macro dynamics in the first half of the year. From a -over-year perspective, NII grew 21.5%, driven by raising interest rates and structural loan dynamics, and partially offset by higher funding costs. Structural loans rose 5.5%, measuring average daily balance, fueled primarily by retail banking at BCP and MiBanco. We are managing our asset quality metrics with a challenging backdrop. The structural costs of risk increased 127 basis points to 2.3%, driven mainly by SMEP individuals at BCP and by MiBanco. Allowances for loan losses were equivalent to .7% of the structural loan. The insurers and the writers rose 53%, which reflected increased profitability in the life business and a stable -over-year result for property and casualty. Operating expenses increased 9.1%, driven mainly by core expenses at BCP and disruptive initiatives, while operating income increased .6% fueled by BCP and Pacifico. The efficiency ratio improved 310 basis points and stood at 44.6%. In summary, this quarter positive results and an ROE of .6% over a sound capital base were driven mainly by universal banking and insurance businesses. Having said this, a note of caution is in order. As I will explain when I present our updated guidance, we expect softer results in the second half of the year. Next slide, please. For the second quarter, the Peruvian economy is expected to have registered a slight contraction impacted by El Niño Costero, which pushed growth rates in the agricultural, fishing, and manufacturing sectors into negative terrain. Growth in the mining sector, attributable to increased copper production at Quellabeco and the recovery of production at Las Bambas after temporary shoot-loss last year, partially offset this decline. This dynamic, coupled with the impact of the first quarter marked by social unrest and climate events, could lead to a 0.5 decline -over-year in economic activity in the first semester of 2023. This represents the most significant reported decline in 22 years, excluding the pandemic period. Domestic demand fell 2% -over-year in the first half of 2023, driven by a sharp 10% decline in private investments and a sluggish .6% growth in private consumption. Price pressures are finally easing, and inflation expectations have dropped materially in La Tama. Central banks in Chile and Brazil have already started their red-cutting cycles, and Peru's central bank is expected to follow suit in the last quarter of this year. Regarding our outlook, Peru's GDP is expected to grow around 1% this year. GDP growth in Colombia is expected to slow to 1.6%, while Chile's GDP growth is expected to be flat. As you know, we are closely monitoring the evolution of El Niño Costero, weather phenomenon, and its impact in our businesses. In its last official statement on July 21 and 10, it assigned a 40% probability that El Niño Costero will be weak during the summer of 2024. 36% it will moderate, and 11% that it will be strong. In its last speech of July 28, President Buluarte communicated the importance of private investment as a tool for economic growth and development, moving apart from the previous government stance. She announced, for instance, that $1.8 billion worth of infrastructure projects will be awarded in the second semester through Proinversión, the investment promotion agency. Peru's macroeconomic fundamentals remain robust, with low public debt and net international reserves equivalent to 33% of GDP and 29% respectively. This government's ability to unlock and mobilize private and public investments will be key moving forward. Next slide, please. BCP results were favorable despite this context. Regarding the key quarter dynamics, NII increased .9% despite a slight 1% drop in loan volumes. This drop reflects a downturn in economic activity, primarily in wholesale banking and more conservative origination guidelines in retail. Our NII reflects a disciplined approach to pass rules and our ability to leverage a transactional funding base to mitigate raising funding costs. BCP fee income rose on the back of higher transactional levels, particularly through digital channels and POS. Provisions in consumer loans and credit cards remained at high levels as a recessive high inflation environment in the first half of the year affected the payment capacity of vulnerable subsegments, which are more leveraged and have unstable jumps. Additionally, SMEP segments drove the uptick in provisions. On a -over-year basis, growth in net income was spewed by a .6% increase in NII. This evolution was driven by raising interest rates and .2% increase in structural loans, which was driven primarily by a .9% uptick in retail banking loans through SMEP credit card and mortgages. Loan loss provisions increased .8% over a low base. Additionally, growth was driven by an increase in provisions of consumer loans, credit cards and SMEPs, which were affected by macroeconomic conditions. Operating expenses grew 8.3%, driven mainly by IT and marketing expenses and investment in disruptive initiatives. This increase was partially offset by a non-recurrent tax expense reversal. Consequently, BCP's efficiency ratio dropped 420 basis points and stood at 37%, while ROE reached 24.2%. At BCP Bolivia, our risk appetite remains low. Since the beginning of this year, US dollar reserves in Bolivia's central bank has dropped materially, and banks have daily limits in US withdrawals. Regardless, BCP Bolivia net income remains stable. Next slide, please. YAPE continues to progress towards monetization by pursuing its medium-term targets. One, to be the main payment network in Peru. Second, be present in the daily life of YAPEros, and finally, meet the financial needs of YAPEros. Features launched in the last 18 months have allowed YAPE to continuously grow its active use base, engagement and income generation. Monthly active users reached the 9 million mark. The average month of transaction level for this group has risen from 14.9 to 23.5 in just one year. Currently, 5.2 million users generate income. Our main monetization drivers continue to be fruit. In the past six months, monthly mobile top-up transactions grew 20% to total 11 million transactions at the end of June. In just three months, utilities payments have grown 4.8 times and stand at the end of June and 2.2 million transactions. Through YAPEpromos, the gross merchant volume grew 4.8 times to a stand at 25 million soles at the end of June. In the last six months, monthly disbursements of microloans rose 18%. In the aforementioned context, unit economics are moving towards break even. The revenue per active user per month is growing and stands at 2.5 soles, while the cash cost per active user per month stood at 4.4 soles at the end of June. Next slide, please. MiBanko's profitability began to recover this quarter after a challenging start early this year. On a -over-quarter basis, 19.5 rose .6% after a structurally long disbursement recovered from a difficult first quarter. Disciplined loan pricing bolstered PII and offset the impact of an uptick in the funding cost. Consequently, NIM increased 80 basis points and stood at 13.5%. The next slide, please. The NIM was a The revenue per active user per month rose .5% after the bank insurance fee level rose alongside growth in disbursements. MiBanko's provision expense dropped slightly after risk models were fine-tuned to better reflect the client-payment behavior but remained high due to a deterioration in payment capacity. From -over-year perspective, NII rose 1% through an uptick in the structural loans and interest rate pastrude, which mitigated the impact of raising funding costs. Non-interest income rose .6% due to the same factors as those outlined in the -over-quarter analysis. MiBanko's provision rose fueled by a downturn in payment performance and a more challenging macroeconomic outlook. Operating expenses rose .9% and the efficiency ratio stands at 52.4%. Finally, ROE rebounded to .5% in the quarter. MiBanko Colombia is facing high inflation, high funding costs, lower interest rate ceilings, and a deterioration in economic expectations. We have adopted our strategy accordingly and we believe that untapped potential exists in the Colombian microfinance market. Next slide, please. ROE, a group of Pacifico, was high this quarter and stood at .1% driven by the live business. Regarding -over-quarter dynamics, net income deteriorated on the back of a lower net gain from associates. This evolution reflected a downturn in results for corporate health insurance over a particularly high base last quarter. -over-year profitability was up, driven primarily by the live business and secondarily by property and cash flow. In the live business, the insurance and the writing results improved due to an upswing in income from insurance service through pensions, life, group, and credit life, which benefited from better prices and more favorable volume dynamics. Reduced expenses for claims also contributed to this improvement. In the property and cash flow business, the insurance and the writing results rose .1% through an improvement in medical assistance results, which was partially offset by a downturn in the results for cars. Next slide, please. As you know, our strategy is to focus on recurring businesses to improve ROE in the medium term. Nonetheless, the uptick in profitability in recent quarters has mainly been driven by non-recurring income. On a -over-quarter basis, income was boosted primarily by the Treasury Department, which managed ASB cash surplus via structural portfolios and short-term investments. In terms of recurring businesses, assets under management, wealth management, grew .2% and dropped income growth, while the assets under management level in the asset management business remained stable. Year over year, income increased 32%, driven mainly by the capital market business, which reported gains on the proprietary fixed income portfolio in Colombia and by the Treasury Department, which generated earnings via the same dynamics seen quarter over quarter. Regarding recurring businesses, wealth management, assets under management, grew 9% and dropped income growth, while assets under management, almost contracted 17% driven by outflows in third-party funds. And income decreases slightly as these outflows generate lower fees. Next slide, please. Now, we will look at credit course consolidated dynamics. On a -over-quarter basis, our structural loans measuring average daily balances fell .6% or increased .2% with FX neutral. Growth in BCB retail banking on MiBanco was offset by a contraction in wholesale banking at BCB. Our deposit base constructed .5% or .8% with FX neutral. This evolution was driven by a drop in low-cost deposit, which was partially offset by growth in time deposits. On a structural year basis, structural loans increased .5% measured in average daily balances, fueled primarily by retail banking at BCB and MiBanco. Deposit balances dropped .7% or .2% with FX neutral. Low-cost deposits have fallen system-wide, but our market share has risen to .6% and currently represents .1% of our total deposits. Next slide, please. Now, let me explain core income dynamics. Core income rose .3% -over-quarter and 15% -over-year on the back of NI. NI grew .3% -over-quarter and .5% -over-year. This result was attributable to volume dynamics, the skills early and to discipline and past rules. In this context, the net interest margin rose 18 basis points -over-quarter and 110 basis points -over-year. At 6.02%, risk adjusted NIN increased marginally to 4.56%. We analyzed the results for fee income FX transactions. It is important to note that both lines have been affected by our strategy at BCB Olivia in which we have adjusted our fee framework for foreign transfers to offset the impact of FX transactions due to restrictions on foreign currency availability. If we exclude this impact, fee income increased .1% -over-quarter and announced chicken transactions while the result of FX transactions remained flat. On a -over-year basis, excluding Bolivia, fee income contracted .3% driven by lower fees in the pension business and the elimination of intercity fees. Next slide, please. Let's look at the dynamics of structurally non-performing loans. As indicated earlier, adverse effects events in the first quarter of the year coupled with a contraction in internal demand, high inflation and high interest rates have notably impacted client payment performance and consequently portfolio quality this quarter. In this scenario, on a -over-quarter basis, growth in structurally non-performing loans was driven by MiValvo. After loans reprogrammed in the first quarter fell delinquent by SMAP where low ticket riskier subsegments reported poorer payment performance and credit cards and consumer loans where the debt service capacity of vulnerable segments fell due to over-indepthness and unstable employment. The aforementioned was partially offset by a sale of a delinquent portfolio in the energy sector in hotel banking which had been previously probation. On a -over-year basis, structurally non-performing loans volumes increased due to an uptick in refinance collateralized loans in the retail and tourist sectors served by hotel banking. The evolution of non-performing loans in retail banking and MiValvo was driven by the same factors as those seen in the quarter analysis and was partially offset by the sale of a delinquent retail banking portfolio during the first quarter of the year. In this context, the structural coverage ratio stood at 108%. To analyze our structural coverage ratio, it's important to review the NPL portfolio mix in terms of unsecured and collateralized products. Please refer to Appendix 2 for more details. Next slide, please. Moving on to the provisions and the cost of risk, we have consistently indicated that our cost of risk will increase as we shift our loan portfolio mix towards more retail. Additionally, cost of risk has further increased as client payment capacity has been impacted by macroeconomic conditions. Provisions in consumer loans and credit cards at BCP and MiValvo remain at high levels as a recessive high inflation environment in the first half of the year which have affected the payment capacity of clients. At BCP, vulnerable subsegments, which are more leveraged and have unstable jobs, were the most impacted. While at MiValvo, clients were severely hit by the first quarter events. Additionally, SMEP mix segments at BCP drove their ticking provisions quarter over quarter. In this context, the structural cost of risk stood at 2.3%. We are closely monitoring our asset quality metrics, have refined our client segmentation by risk profile, and have gradually implemented a stricter origination guidance for individuals, SMEP, MiValvo. Nonetheless, the impact of recent measures on asset quality metrics will take some time to fully materialize. We will review in this page the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operating expenses grew .2% in the first half of the year, driven primarily by core businesses at BCP and disruptive initiatives at credit card level. At BCP, core businesses fueled growth in expenses through an antiquated IT expenses related to an increasing usage of cloud and client become more digital, more usage of IT applications, licenses, and other software to enhance capacities and improve security, and moves to attract more specialized digital talent. Marketing expenses mainly driven by advertisement to boost deposit and digital sales and growth in loyalty program expenses. The aforementioned dynamics were partially offset by a non-recurring tax expense reversal. Expenses by disruptive initiatives at credit card level increased 70% to ensure market leadership in the long term. Operating leverage remained strong at BCP standalone. At MiValvo, operating expenses remained under control, but income grew at a slightly lower pace. Our efficiency ratio stood at .4% in the first half, down 310 basis points compared to last year and driven by high income at BCP and Pacifico. Next slide, please. Similar to the previous quarter, record quarter profitability was driven by strong results in our universal banking and insurance businesses. ROE this quarter expanded by 130 basis points year over year and stand at 18.6%. Meanwhile, ROE for the semester was 18.9%. Note that we have benefited from relatively low effective tax rates this semester due to the strong performance of our insurance business and due to the fact that tax exempt interest income accounted for a larger share of the revenue mix at BCP. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. Now I will move to our updated guidelines. Next slide, please. Our updated macro scenario for 2023 is now a GDP growth of around 1%, which incorporates the scenario of a week to moderate El Niño Costero at year end. Regarding loan growth, the social and climate events of the first part of the year, coupled with a sluggish internal demand, are taking a toll on our client borrowing capacity, particularly in our consumer loans, credit card and SME segments at BCP. Accordingly, we adopted a stringent origination guidelines in those segments. In addition, demand for loans in wholesale banking has weakened, which reflects a downturn in business activity. These dynamics led to lower expected structural loan growth, which now stands at between 1 and 4% measured in average daily balances. Our NIEM guidance remains unchanged between 5.8 and 6.2%, as we higher than initially expected cost of funds will offset the positive impact of a higher yield from the loan portfolio, which was triggered by a reduction in wholesale loan share in the total mix. We expect the cost of risk to stand between 2.1 and 2.5%, largely driven by the impact of the macro conditions of BCP performance. Note that BCP and MiBanco are likely to have divergent dynamics on this front during the second semester as MiBanco started its cycle of loan deterioration and credit restrictions before BCP. We achieved solid efficiency levels in a context marked by an acceleration in investment to develop future businesses. Our ongoing efforts to bend the expense curve are expected to partially offset the aforementioned income headwinds and results in an efficiency ratio between 45 and 47%. Finally, we remain maintain our ROE guidance of around 17.5%, but now acknowledge downside risks associated with asset quality deterioration and El Niño Costello. With these comments, I would like to start the Q&A session.

We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you use a speakerphone, please pick up your hands up before pressing the keys. To describe your question, please press star then 2. At this time, we will pause momentarily to assemble a roster. Our first question will come from Ernesto Gabilondo with Bank of America. You may now go ahead.

Thank you. Hi, good morning, Gianfranco, Francesca, and Cesar, and good morning, everyone. Congrats in your second quarter results. My first question is on your ROE guidance for the year. As you mentioned, it was maintained at 17.5%, although anticipating softer loan growth and a higher cost to risk. Can you elaborate on which would be the other lines that can help to compensate the softer loan growth and higher cost to risk? What are the trends that you are expecting for loan growth and cost to risk next year? Thank you.

Good morning, Ernesto. This is Gianfranco. I'll ask Cesar to go into the details for the answer.

Okay. Thank you, Ernesto. First, effectively, we are maintaining our guidance of around 17.5%. At the beginning of the year, we had probably a conservative approach mentioned at 17.5%. Now I have already mentioned that we have some downside risk due to potential credit deterioration. This is a general framework. It's important to note that we already have gone through half of the year with very positive results with an ROE north of 18%, around 18.6%. Down the road, what we are expecting is effectively a softer loan growth with a composition that is going to be tilted to retail, but with lower yields than previously expected because we are being more conservative in our origination approach. This is going to be accompanied by higher cost of risk and the usual acceleration of non-income sources, effects and transactional activity that is usually higher during the second part of the year. And finally, by the seasonal increase in expenses that has two main components, the normal seasonality of the last part of the year that I previously mentioned and the trend in the acceleration of IT and disruptive initiatives. All in all, we think that with these elements, we can be around the .5% previously mentioned.

Maybe just to add on what Cesar mentioned, Ernesto, also when we provided the original guidance, the expected results at Pacifico were not the results we're getting. So as we mentioned in the previous call and at the end of the day, due to some specific events, Pacifico is having an outstanding year this year, and that is going to offset in part what Cesar just mentioned.

Perfect. Thank you. Just to follow up in terms of the cost of risk, you were guiding between 2.1 and 2.5. So looking into next year, would that be the same trend that we should expect or do you think most of the worst parts will happen in 2023 and probably should be normalizing when thinking about next year?

Reynaldo? Yes, Ernesto. This is Reynaldo Ollosa. As you know, we don't provide guidance for next year, and we will do it during the first quarter of 2024. Having said that, there is a lot of uncertainty in terms of the impact of El Niño, so we need to confirm that information in terms to have a better projection of the number. But also, we expect next year to have much better results due to all the things we are doing in terms of managing the risk in the consumer and SME portfolios, both in BTP and in the Banco. So there are headwinds and tailwinds, and we will have more information on that regard by the first month of 2024.

Perfect. Thank you very much. And just a second question related to the ROE of your subsidiaries. You have a nice chart in your report showing all the ROEs per subsidiary, and we can see that BCP, Standalone, Grupo Pacifico, Prima, ASB Bank, all of them continue to deliver ROEs above 20%. But on the other side, when looking to BCP Bolivia, Banco, Credit Core Capital, we continue to see ROEs at most at 10%. So what are the strategies you are implementing to improve the ROEs across the subsidiaries? And I don't know if you have a medium target in each of them.

Yes. Thank you for your question, Ernesto. So let me go one by one. Actually, how we manage Credit Core Capital and ASB is we manage them as a business unit. Correct me if I'm wrong, Cesar, but that business is with an ROE of 17%. So it is close to what the ROEs were expecting for that business. Having said that, this first half, we have had some non-recurrent positive impact that helps, obviously, the ROE. But going forward, we have established a transformation plan for that business aiming to have an ROE of between 16% to 17% by 2025. Regarding Mi Banco, both Mi Banco Peru and Mi Banco Colombia, the microfinance business is a much more volatile business. And we are definitely in the downturn of the business. But we're working both in the short run and the long run. The short run basically focuses on risk. And the long run, we need to revisit the whole business model so as to go back to the ROEs of over 20% we have had in the past in that business. And finally, Bolivia. Bolivia is Bolivia. That's my answer. We're doing whatever the best we can do in Bolivia. If you compare our ROEs to the banking system in Bolivia, they're quite good. There's not much more to do in that business.

Excellent. Now, thank you very much.

Our next question will come from Juan Recalde, Scotiabank. You may now go ahead.

Hi, good morning. Congratulations on the strong results and thank you for the opportunity. My questions are related to JAPE. So first, the fee income generating monthly active users have been increasing as a percentage of total users. So I was wondering if you can provide some colors on what are the drivers here and how you are increasing monetization. And the second question is related to the strong growth in payment volumes that we saw in JAPE and also related to the growth in the services payments. So my question there is how much of the TPB growth has been driven by the service payments? What are the other drivers of TPB growth?

Francesca, are you there?

Yes. Hi. Thank you for the question. JAPE, as mentioned in the investor data, has plans on many, many monetization lines for business. So the growth in terms of TPB is growth basically around P2P transactions, QR transactions in databases and in merchants, and also online transactions. So that's the main volume in terms of frequency, productivity, and engagement. On the monetization side, growth is mainly around SOPA, QR usage, where we see at NDRC, utility payments that is beginning to grow. This is one of the newest transactions that we have, and also the online payment around income. Having said that, we are slightly exploring lending, which is growing. We see an increase in the number of transactions and also on average amount of lending per customer. The promotion that Reynaldo mentioned as an engagement tool, there's also a take rate that is also growing. And we are actually exploring ticket sales, gaining, and different venues for growth that are coherent with JAPE's super app, built in terms of whatever we can gain on activity and engagement.

Thank you, Francesca. That's helpful. And then I had another question related to fee income, which was quite strong this quarter held by the Bolivian operations. So how much of the fees in Bolivia are one-off and how sustainable are these levels?

I wouldn't consider that one-off. I would consider more than temporarily. And the distortion is an accounting thing. Let's say what you are doing is charging a fee and recognizing in the other part of the equation higher effects exchange. For that reason, I would say we have a positive margin, but it's reflected in an abnormally high fee and an abnormally low in effects. So it's a structural business that in this moment has more volume and wider spread in these two variables. But it's part of the business in Bolivia.

But maybe on top of that one, what we're seeing in the fee income business is that what we've been investing for I would say decades now, we are basically BCP, Peru, one transactional hub in Peru. That's obviously paying off. And what we're also seeing, and maybe Jape is part of it, is the amount transacted in non-cash alternatives is constantly increasing. Beyond Jape, I mean, David's credit and things like that. And obviously that is also an important driver for fee income generation.

Thank you for the comments.

Our next question will come from Yuri Fernandez with JP Morgan. You may now go ahead.

Hi, guys. Thank you. Good morning. I have a question regarding your cost of risk. I understand you have expected losses. So now you're calling for a challenging outlook, lower GDP. My call is regarding 2024. I guess the scenario is still a little uncertain here. But in this 2.1 to 2.5 cost of risk, the level we should expect for 2024 or basically you are going to build those anticipatory provisions for the tough environment now. And maybe for the next year we should see cost of risk running at a more normalized level. So just trying to understand if this is somewhat a new normal for the short term or maybe no. Maybe you're just doing this now because you're seeing challenging environment and given you do expected losses, things will improve at some point. That's the first one. And I would like to check the box on the portfolio sale. I guess you put out that some of the wholesale NPL improvement was regarding a portfolio sale. How big was that just to understand how that affected your new NPL formation? Thank you.

In terms of the guidance for next year, what I can mention as of today, Yuri, is that our estimations, our levels of provisions today include the impact of El Niño with a probability between weak and moderate. That is reflected on our provision level today and that's included in the guidance for a year between 2.1 and 2.5. Regarding next year, as I mentioned before, it's too soon to tell. And we will be able to provide you more information in the following months, in the next two quarters probably. And in terms of the sale of that specific case in the wholesale banking, it's around $30 million.

That's the sovereign bond exchange we made. We're

talking about the sale of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of

10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10% of 10 You had some amount of provisions. Yes, you know just try to understand the moving parts on the economic future

Yes, we we I mean Compared to the provision level we had we had a profit so we Estimated a higher loss than than than what we finally obtained by the sale So it had a positive impact on on our levels of provisions In the world

Okay here, thank you

Our next question will come from Jeffrey Elliott with autonomous you may not go ahead

Hello, thanks very much for taking the question So the cost of risk has been two point one percent in The first half and you're guiding to two point one to two point five For the full year so that seems to capture particularly at the two point five end of the range quite a big step up in provisions in the second half, I'm just trying to understand What sort of scenario it would take to get that big step up and get you To the high end of the range and how cautious you feel like you're you're being now with that two point one to two point five

Yes What I can mention is remember that that we haven't Finished that just in all the impact that we've had in the in the first semester in our current level of provision So that's incorporating the projection of the second semester all those loans that are at default but not fully provisioned as by the end of all the first semester and it included what I just mentioned in the the forecast of of the Impact that Nino would have under under current information in terms of the portfolio looking forward So that's why we are Increase the the guidance in in the cost of risk expected for for a year for the year as a whole

Okay, so if I'll need new ends up being more severe then there's there's some further risk that that it could go even higher Is that is that fair?

Yes, that's a first statement. Yes Thank you

You Our next question will come from Tito Lobarta with Goldman Sachs you may not go ahead

Hi, good morning. Thanks for the question Thanks for the call and taking my question Two questions. What is on your insurance results, you know continue to deliver, you know, good results there just to understand How do you think about the sustainability of that going forward to that? Yeah, we saw a bit of a decline this quarter. Should that Normalize or can it remain you know above historical levels for some time? Any color you can go in that would be helpful and my second question Just if you can remind us that the sensitivity of your margin To a lower rate environment, you know, your margin has been doing well so far But do you think how much pressure could there be as rates go down? And you also show there that the risk-adjusted margin which has been relatively stable Do you think that can continue to be stable as we've seen recently? Thank you

Hi, Tito. I'm also a beginner to answer the first question

Thank you. Well, maybe it's important to explain or to comment something about the important results in the interest business or for these first two quarters maybe one of the Is the higher investment results we obtain in? our Because the reinvestment rates we obtain a in our investment portfolio and Because the performance of our investment portfolio in general the second reason of this higher results is the higher profits we have obtained in the Inability and survivorship insurance this is the insurance that That is related of the affiliates to the AFP the aggregate. Sorry Because in the last bidding contest We obtained an important a portion for for these contracts and with an interest increase in in the in the rates, so we have obtained a Interest increase in premiums without the calling claims that respected some part of calling calling claims for coming claim for these years, so a this has generated a high profit for this business and the third explanation is related with the High profits that we have obtained in the group life and medical life business due to the repricing We made in the previous years Considering the bad results we have obtained in theory the the the covering pandemic so considering that considering that The following the market trends and the competitive Situation in the market with some Reductions in in in in their collective Group life business in the in the next in the next month and We will obtain good result for for this year, but we expect to have a sustainable ROI Around the low 20s for the for the next and the following years

Yes And Cesar, could you answer the second question?

With an instant adjustment, I think our sensibility is around 25 Basis points the first year of the adjustment a little bit higher than we mentioned Probably a couple years ago when the interest rates start to rise because the portfolio has shortened and our expectation is that we can we can maintain an Margin an in similar to the actual one with a combination of reduced rates and a change in the profile of the portfolio That moves towards a more retail Product of the increase in retail banking in BCP and a more accelerated growth in Nibalo

Okay, so so the stable ish Nim but you meant 25 bits that's for about a hundred bits cut in rates Is that the right sensitivity and and also you can comment on the risk adjusted nim also particularly as you go in retail

Yes, and I will emphasize you each because it's around we are not talking about fine decimals

sure Okay, and on the on the risk adjusted nim and any comments particularly as you go in retail

Yes, the risk adjusted nim a Should improve the the short term level when we adjust accordingly The cost of rate down the road, but this is not a precise guide and this is a trend what I am mentioned at this point

Okay, yes, that's the quality normalizes you can see some improvements, but a bit more medium term it sounds

Yes

Okay, great, thank you

Our next question will come from Carlos Gomez with HSBC you may now go ahead yeah

Hello good morning First of all, thanks again for your improved disclosure on capital and on the digital initiatives You started last quarter, but I mean it continues to improve and we really appreciate that Just a better insight about how things are going to question one One is different from what you want to hear You emphasize your detachment from the macro But we would like to to know what you think that growth can be in Peru in the long term and your credit growth can be In Peru in the long term and the second one is on the digital initiatives if you can tell us more about Tempo and EO at this point.

Thank you Sure hi Carlos yeah as of today and again correct me if I'm wrong our Chief economist expects Peru to grow 2.5 percent 2024 is that correct?

At this point, I think it's more around 2.1 because we are considering a basic scenario With a combination of weak and moderate El Niño at the beginning of the year The number of me but a convention is more representative without the impact of So

anything between 2 to 2.5? Percent growth Carlos just a quick comment on that But who needs to grow much faster that this comment goes beyond Beyond the impact on our business if Level of poverty in Peru Was reduced dramatically over the last 20 years until covered Went back we went back like in a couple of years like 10 years in terms of that ratio and we To go back we need to grow as a country at least 4% So that's a challenge we have we have again this goes beyond our our business Regarding tempo an EO. Let me start with EO EO is in a actually in a friends and family Proof of concept with very good results and we're going to launch it. I believe in a couple of weeks So we could talk much more about Initial results in next goal, but the initial results are quite good in terms of user experience That that's the only indicator we have today Regarding temple It's performing quite well again in operating indicators We recently got a temple recently got the approval from the Chilean Superintendency to issue credit cards. We're in that process So that's the next relevant stage in the temple original business case so as soon as we Start to get more relevant information we plan to And the temple business becomes more relevant for for very hard We plan to do something similar to what we're doing with Yappi regarding information disclosure

Thank you, and if I can go back to the beginning you mentioned yes This is what Peru needs to do one could agree to ask my question is in the medium term What is your realistic expectation? We're in the business about what Peru can do over the next three to five years and also How does that translate into credit growth for you? Thank you.

Yes, so Long term in Peru is much less than three to five years. We have had six presidents in six years So it's quite difficult I Don't think this is a personal opinion. I don't think with the current scenario Political social and economic a micro economic scenario I don't think that it is achievable for Peru to grow four percent four percent over the next few years We need to do a lot of structural reforms That we don't see them being done in the near future Regarding growth Portfolio growth it I want I want Rather don't provide an answer in that because there's a lot of variables regarding the the multiple of portfolio growth Related to GDP growth. That's the main reason why Or one of the main reasons why we we started to try to decouple from GDP growth So as to keep growing At a much faster Multiple

Thank you so much

Our next question will be a follow-up from Yuri Fernandez with JP Morgan

Hey, hey, I'm me again Hello, it's me again. I have a follow-up regarding costs here. Let's put the worst-case scenario, right? This is not a moderate ania. This is a stronger Nia. You need to revise your cost of risk You need to decelerate your low growth and this impacts your profitability Can you cut your expenses on the investment plan like the famous? 150 bits on our we headwind I'm just trying to understand what you can do like if there is a worst-case scenario What can you do on all your digital initiatives or if the bank will prefer to say no? Hey, Yuri, we prefer to have our ways below 16 below 15 whatever But keep investing on technology and keep expenses high just trying to understand if expenses could be you know evolved for for the company in the case there is a you know ice cream event That's one and regarding also a neo I remember in 2017 you had a extraordinary provisions for the event and later I guess reverted like it was not as bad as It was as we expected So in the case things get you know clear that this is a moderate to a stronger neo if the company could do you know? Voluntary and participatory you know provisions as you did against thousand and seventeen. Thank you

Yeah Regarding your first question Yuri, maybe a quick previous comment at which we shared on the vessel they also Most of the investments were doing in the digital ventures and the digital transformations we are Registered them as expenses rather than as investments The main reason there is that if obviously there's a high risk in this investments. We rather Be conservative and if something goes out we don't want to Surprise the market so going to your question your specific question. There's some room We were not planning to do that whatsoever. We are Because of the results we're having in the digital ventures and the discipline Pursuing in the person were making we don't plan to cut as of today obviously we don't plan to cut any Investments in that sense obviously there is if there's a major Dramatic scenario which we don't see today There's some room to cut expenses. I Don't think having said that I don't think that there that the expenses we can cut Will offset all the negative impact we may have in a dramatic scenario, but again I Highlighted the word dramatic scenario Yeah, I'll ask Reynaldo to answer the second question

in terms of our level of provisions if we have information by by the last quarter that I mean that we have a Level that that's what we have already considered in our projections of course we would start increasing our level of level of provisions Having said that comparing to what we had in 2017 We have a totally different situations companies are more prepared in in the in the whole sec wholesale segments more more exposed to the ninja phenomenon and We have learned a lot in during the last crisis the the coffee Situations and the social unrest and the political situation we had to provide Assistance and help to those clients in the in the retail banking that are exposed to these kinds of events so in terms of the level of deteriorations in those portfolios we expect to have a relatively lesser impact that that what he had in 2017 where the situation was totally different so So that's in general our strategy, but we will have more information in the following months

I made it to compliment you I would say that as a country were better prepared that we were in 2017 and on top of that and this is a spoiler to my to my closing remarks work Almost all of the superior subsistence at credit Corp were closely working with our clients both at the corporate level and at the retail level in Educating them and helping them to be much better prepared if an El Nino Major effect will come

Thank you, Gianfranco, and I don't want to sound super bearish here and just no check in the box What would it be? You know like if this happens? What would be your message and thank you for for being candid and animation that you know? Don't want to cut expenses, but if there is a need you may you may do so so thank you for for the clarification

Our next question will come from Sergey Dubin with Harding Lovener

Yes, good morning gentlemen, thanks for the call three questions actually So the first one there was some news about some ongoing Or resurfacing political unrest again in Peru in July has that died down? Is it continuing and how do you see the the trend there? Maybe that's the first question

Sure, I'll take that one. Hi, Jay. Good to hear from you I Don't want to downplay the the the social noise that there was in July as we mentioned in the in the investor day what we we what we see is like we have a Fragile stability today in Peru about pressure political stability but the The noise the political social noise we had in July it was very little There's nothing going on obey basically basically nothing going on today And obviously nothing to compare to what we saw Last year by year end and in January and February of this year. So today we're again Going through a fragile Stability and we hope that that stability improves as we move forward

Okay great and then my second question regarding cost of risk From the little confused about this It looks like from the presentation You know, it's going to be a summer 2024 event if I'm the student correctly, but you also Talked about how your cost of risk for 2023 is already incorporating that so can you help me with the timing of Expecting anything in 2023 or that entirely 24 event that's first part of this question and the second part is you mentioned that you expect cost of risk grants to diverge in the second half with me Banco kind of going down and perhaps Bcp going up. Can you help explain why that is? Is that related to the steps that you've taken in terms of her being a risk of appetite? But any color around that would be helpful

Okay,

hello, yes in terms of 2023 Closing June numbers. We included everything that we expect for for the year incorporating some outlook of the level of growth is that that is impacted for for 2024 That that that in general it includes all the events that are under under our control and that we foresee for for the remaining of the year and in terms of of me Banco and Bcp as I mentioned me Banco is started with some specific measures before Btp so that the Remaining provisions left for both institutions vary. I mean that the need for for me Banco provisions for the rest of the year are relatively Lower than that we will see in Btp that's what that's what says are specifically mentioned

Okay, and this Steps that you're talking about that relates to what I mean, are you are you curbing? I mean like curtailing risk or curtailing loans to more risky segments Could you could you explain what it is that me Banco's already did and Bcp hasn't done yet?

That you are totally right. I mean I That things we have done in both banks have limited the growth of the portfolios And as you have you seen it hasn't been a very good years in terms of long growth in terms of the first six months Of the year and that are reflections of our restringent more stringent grade policies in in both banks so that that that's what what we've seen and and that's what we expect to have a Better outlook in terms of that of the new loans But we still have in our portfolio some loans that were impacted by the by the macro Trends and the specific events that happened in Peru in the first quarter Okay,

and the third question is regarding new trajectory, so I believe you mentioned in the beginning of the call that You know a bunch of Latin American central banks already cut interest rate, and you expect To win some for bank to cut the rates in q4 of this year, so could you remind me what? What is again? What is the sensitivity of? me into I Don't know what they 25 bits of rate cuts and then how would you expect me to sort of shape up? If you see successive rate cuts in 2024

Yes As I mentioned previously the sensitivity of our Instantaneous 100 basis points production in portfolio is around 25 basis points the first following year That's the sensitivity Our guidance is to remain in the same level that we previously mentioned, but a combination of factors We are going to grow the retail portfolio less than was previously expected But at the same time the wholesale portfolio has already reduced in some degree so the combination of these factors Lead us to maintain our guidance in terms of NIM the expected result of our decrease a Inference rate is a gradual compression of the NIM that is going to be offset for the relative Faster growth of the retail segments and me bank was already Mentioned previously at this point. We are not providing guidance for 24

Okay Make sure I have to be clearly 100 basis point cut in interest rate leads to 25 Basis point compression with a 12 month lag like our next year essentially right is that correct

a Based on stannis effect they'll change in the composition of the portfolio If you have the entire portfolio and you reduce at once 100 basis points The impact through the year is 25 basis points with a combination of maturities Sensitivity and so forth and so on

Okay, I understand okay, that's fine. Thank you

Again if you have a question, please press star than one Our next question will come from Andres Soto with Santander. You may now go ahead

Good morning, John Franklin team. Thank you so much for the presentation Most of my questions have already been answered by that I would like to take the opportunity to ask for an update regarding the strategic plan for investment banking and world management in the past you you commented that you wanted to implement the plan to increase Scale specifically in the world management business that may potentially include the money activity I would like to get a sense of how that should be nap and when when can we expect news about that?

We should Share in detail the best of they are The the basically the plan is to focus in wealth and asset management We're in that process we already we're pulling off the most of the investment banking business part of it is We're closing basically the M&A businesses in Colombia and Chile obviously it has to it's not a one-time. It's like you have to pull off as we As we finish our the mandates we have and we already transferred The lending business that that we had in Peru to to BCP so today I Would say that by year end we will have positive results in terms of We'll have finished all all all the cost reductions we expected Be very in shape to start growing Both organically and if there are opportunities in organically in that in that business going forward

Understood thank you. Thanks again and congratulations on the strong result despite the challenging environment.

Thank you

This

concludes your question and answer session I would like to turn the cost back over to John Franco Ferrari for any closing remarks

Thank you for all for your for your questions a system noted our GDP growth Expectations considers of weak to moderate El Nino costero as well as announced government reactivation plans Additionally what the macro scenario would likely improve in the second half We still expect to see a lag effect Which is reflected in our great risk management approach and expectations of for full year structure and long growth and cost of risk Importantly we've been managing efficiently better than initially expected Despite accelerating investments to strengthen our future businesses All in all we maintain our ROE guidance at around .5% While noting potential downside risk mainly associated to asset quality deterioration and El Nino cost Looking ahead we remain confident in delivering a longer ROE of approximately 18% This is underpinned by Peru's strong fundamentals and our emphasis on broadening non-interest income via disruptive investments to decouple from the macro complemented by our potential to leverage our bad brand strength Expand our client network and see structural growth opportunities as they be emerged These efforts are fortified by our strategic advantage in acquiring low-cost deposits and realizing efficiency improvements through transformational investments Now I'd like to give you a better understanding of how we are currently helping our clients and investing in a more prosperous future for Peru We're working across our organization and leveraging synergies to develop and deliver educational content and support in the face of climatic threats through both both mass distribution channels and targeted individual actions Examples include Pacifico Seguros comunidad segura program aimed at promoting a culture of risk prevention through workshops and conferences for families microentrepreneurs and community leaders Additionally Pacifico and DCP are sharing recommendations on how to come to manage climatic events through their financial education podcasts and popular webcasts while MiBanco is distributing educational content on privation across multiple channels We are implementing a strategic approach driven by the need to safeguard our portfolio and more importantly minimize the adverse effects on the lives and businesses of individuals in Peru We firmly believe that these are the crucial investments that will yield long-term benefits and unlock the vast opportunities in Peru Thank you all for your continued support. Have a great week

The conference is now concluded thanks for attending today's presentation you may now have this connection you