Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd. Second Quarter 2019 Conference Call. We now have our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today’s presentation, we will open the floor for questions. At that time, instructions will be given as to the procedure to follow, if you would like to ask a question.

With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Gianfranco Ferrari , Deputy Chief Executive Officer, Mr. César Ríos, Chief Financial Officer and Mr. Reynaldo Llosa, Chief Risk Officer.

Now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. César Ríos. Mr. Ríos, you may begin.

[César Ríos, Chief Financial Officer]

Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the second quarter of 2019. Before we review Credicorp's performance I would like to highlight some important matters regarding recent events in the local and international economic environment.

First President Vizcarra has proposed a bill to institute a constitutional reform to call for general elections in 2020 rather than waiting to 2021. We know that the bill proposed includes a decision in which President Vizcarra would not be able to run in the announced elections.

This reform has still to be approved by Congress as such, this is still too soon to forecast outcomes. A number of the scenarios may play out and all of them are all set. In any scenario the decision process regarding this proposal will follow the guidelines established by the constitution, despite political noise the strong fundamentals of Peru remain.

This fundamentals include microeconomics policies, trade offence and a market free economic model. We now believe that our 2019 GDP growth will be in our range of 2.5% to 3%. Second, in Chart Number 1, the orange line shows that total loans in Peruvian banking sector expanded 7.2% year-over-year in June 2019.

Consumer loans grew 14.1% year-over-year in the same period, which represent a three year peak. However, data from the former job market has not improved at a similar pace. In light of these, we continue to monitor for any early signals that non performing loans will increase.

Finally, we know there is currently a global scenario of lower monetary policy rates and it risk of global growth. Central banks in both advance and emerging economic have started to use the monitory policy spend by lowering the referenced rate.

The Central Bank of Peru joined all the Central Bank on yesterday, lowered it monitory policy rate 25 basis points. It is important to consider that the local and external environment we are losing just described affect the financial system and our business performance.

Next page please. Regarding our quarterly and year-over-year performance there are important aspects of our lines of businesses that I would like to mentioned. In the case of Universal Banking, in the second quarter of 2019 average daily loan balances are discipline post 6.5% growth year-over-year. The retail banking portfolio grew by 11.6% while the newer market expanded by 8.7%.

The corporate banking segment were contracted by 1.5%, the long mix and the current mix favored the evolution of net interest margin both in a quarter-over-quarter and year-to-date terms. The cost to income ratio improved year-over-year and year-to-date mainly due to an increase in interest income on loans.

This help offset the increasing operating expenses which was driven mainly by growth in salaries and employee benefits. The cost of risk grew quarter-over-quarter and year-over-year due to an increase in expected loss reported by specific retail banking segments.

BCP Bolivia reported a good level of loan growth and a reduction in provisions, also efficiency ratio improved year-over-year and year-to-date in-line with increasing net interest income and fee.

With regard to microfinance, Mibanco posted a moderate level of loan growth in quarter-over-quarter and year-over-year turns. In terms of margin, the negative effect of downward pressure on interest income in highly competitive conflicts was offset by an improvement in the funding structure by which the share of retail funding increased. As such, net interest margin posted a recovery quarter-over-quarter.

The cost of Mibanco rose quarter-over-quarter as a result of the economic deceleration. We are already taking origination and collection measures to adjust risk performance. Mibanco began increasing its number of employees in the later part of 2018 primarily by expanding the salesforce to build capabilities and sustain business growth.

It is important to note that this is first time that Mibanco has increased its work force since its acquisition. Prior to this date, the bank was able to grow its long base without increasing the headcount. Mibanco is also building a new channel to leverage data analytics and digital solutions, which has increased administrative and general experiences.

With regard to Insurance and Pension Funds. The insurance and the writing result increased this quarter, this was primary due to the evolution of the property and casualty increase which posted an increase in the net earnings premium level primarily to its commercial lines for aviation and fire.

The underwriting process in the life insurance business however contracted due to a competition particularly in Rentaflex interest rates offered to clients. Corporate health insurance and medical services which we managed in association with UnitedHealth continue to improve.

The pension fund business also improved after posting a recovery in the profitability of its legal reserves. This business efficiency ratio improved due to a decrease in its operating expense and an increase in fee income.

In Investment Banking and Wealth Management, in the second quarter of 2018 the proprietary portfolio is continue to have a good run in a context of favorable market conditions. This was the case for fair value to profit and loss investment and fair value to other comprehensive income investments, which have no impact in the P&L.

Regarding the wealth management business assets under managed have grown by 5% year-to-date. Finally, corporate finance activity continues to post lower results as those seen in 2018.

Next Slide please. In this table you can see the most important views of Credicorp performance in the second quarter. Credicorp reported net income of S299 million which was 0.2% lower than the first quarter result and 12.3% higher than the fee reported in the same quarter of last year.

The result represented a return on average equity and average assets of 18% and 2.4% respectively. Overall, in terms of loan portfolio, most key figures posted improvement quarter-over-quarter and year-over-year. Net interest income and net interest margin follow the same trend.

Additionally the year-on-year analysis of operating efficiency indicates that the cost to income ratio remained relatively stable. The cost of risk however, increased quarter-over-quarter and year-over-year mainly in retail banking.

As we will develop later targeting these two segment has been part of our growth strategy. However, given the cost of risk deterioration in the financial system we have been taking pricing origination and collection adjustment while continue with a strategy.

Finally in terms of capital ratio, BCP is standalone BIS and Tier 1 ratios decreased quarter-over-quarter due to growth in risk weighted in line with loan expansion. Core equity Tier 1 however posted an increase both quarter-over-quarter and year-over-year.

Next page please. Regarding the year-to-date results. Net income increased 9.1% and translated in return on analogous equity analogous asset of 17.9% and 2.5% respectively. Net interest income increased 8.3% while net interest margin rose 15 basis points. Finally, the increasing provision led to a higher cost of risk while risk adjusted NIM remained stable.

Let’s review the main figures and indicator for the second quarter. Next page please. As you can see in chart number one, our loan portfolio accounts for 66% both our interest earnings assets as of June 2019, regarding the related - evolution of loans nature in average daily balance.

As you can see in chart number two, total loans grew by 6.7% from first half of 2018 to first half of 2019. This expansion improved the loan mix portfolio of both by business segment and by core. Loan expansion was mainly driven by retail banking at BCP stand-alone specifically in the mortgage loan book followed by the Credicorp and consumer segments.

In terms of currency mix, loan expansion was mainly driven by local currency for BCP, Retail Banking and Mibanco portfolios. As we will discuss later, this improvement in the loan portfolio mix has a positive impact in net interest income.

Next page please. First, in terms of funding you can see in chart number one, Credicorp’s total funding cost has slightly increased in the last quarter while remaining relatively stable during the last three years. Second, you can see in chart number two, that Credicorp’s funding structure shows an ongoing increase in total funding driven by higher level of due to banks and corresponding launch records with the Central Bank.

Third, in chart number three, in the quarter-over-quarter analysis you can see there is a decrease in the volume of the demand deposits, which offset the increasing time deposits. There is significant competition for local portfolio demand deposits as certain banks are pushing interest rates above Central Bank return rates. In the year-over-year analysis, the increase in total deposit was mainly attributable to saving deposits, which grew 9.7% driven by opening accounts in cash.

Next page please. Net interest income rose by 3.1% quarter-over-quarter and 9.4% year-over-year. Year-to-date net interest income grew by 8.3% this performance shows first, a positive volume on currency mix effect, while interest income during the pace of growth of average daily balances rose mainly in the retail segments and primarily in local currency. This was partially offset by the increasing interest expenses driven by a more expensive funding mix by source and course.

Next page please. As you can see in chart number one, risk adjusted NIM decreased four basis points quarter-over-quarter and nine basis points year-over-year, reaching a level of 4.39% in both the second quarter and the first half of 2019. Regarding year-to-date evolution risk adjusted NIM increased two basis points.

Year-to-date evolution is a result of net interest margin increase of 15 basis points partially offset by an increase in the cost of risk of 19 basis points. Net interest margin growth was driven by the loan portfolio mix improvement while the cost of risk increase was mainly attributable to specific retail segment in BCP stand-alone and to a lesser extent to Mibanco portfolio.

As we mentioned earlier, penetrating with a more profitable segments is part of our retail growth strategy which resulted in 11.6% BCP Retail Banking year-over-year growth in the first half of 2019 in average daily balance. However, given the consumer banking portfolio deterioration in the Peruvian financial system, our retail portfolio cost of risk slightly grew more than expected.

In this radar as part of our portfolio monitoring process, we have been taking pricing origination and collection adjustment measure to improve risk adjusted NIM. In particular in Credicorp and SNEP according to the duration of this specific portfolio full impact of this adjustment will rematerialize during next year. Regarding Microfinance. Mibanco portfolio has been effected by the economic declaration and we are making origination and collection adjustments to manage portfolio quality.

Next page please. Regarding non-financial income. If we focus on the accumulative evolution, as you can see in chart number one, non-financial income expanded 9.4% mainly due to the increase in the net gain and sales of security driven by higher gains at BCP stand-alone following records of Peruvian Government months and as Atlantic Security Bank and Credicorp capital by the positive evolution of their propitiatory portfolios.

To a lesser extent, growth was related on improvement in fee income and in the net gain of foreign change transaction in both core items of non-financial income. The evolution of these item is driven by transactional activity in the banking business main at BCP stand-alone.

Next page please. In the year-to-date analysis of operating efficiency, the cost to income ratio improved in-line with an acceleration in the pace of growth of operating income. In the follow chart, you can see the contribution of each subsidiary to the variation in the efficiency ratio.

First Pacifico posted a decrease in its efficiency ratio with - primarily attributable to growth in net earn in premiums. Mainly driven by the fact that Pacifico won two out of six tranches in the last tender process for disability, survivorship and burial expenses policies for the private pension fund system. However, it is important to mention that increasing net earnings premiums was offset by growth in net claims, which are not part of efficiency ratio, but impacted the net income.

In the case of BCP stand-alone the improvement in operating efficiency was attributable to an increase in interest come in-line with retail banking expansion, which offset the increase in salaries and employee benefits. An improvement in efficiency of Pacifico and BCP was partially offset by the deterioration in operating efficiency of Mibanco, which was finally driven but an increase in personal expenses in-line with a long-term strategy to train the new sales force to cover growth in the client base.

The relevant impact of our subsidiaries explained namely by a deterioration in efficiency ratio of core capital as it posted a decrease in its derivative resource. It is important note that the derivative result was offset by the net gains from securities, which is not part of efficiency ratio. To a lesser extent, the deterioration of the efficiency ratio is also related to an increase in salaries and employee benefits of Credicorp Capital related to increase in its headcount.

Next slide, please. On this page , you can see our current guidance for full-year 2019. And the relative figure for the full-year 2019. First, in terms of macroeconomic indicators given that economic activity remains below its potential and work less dynamics than expected at the beginning of the year, we have lowered our estimate for real GDP. Domestic demand on private investment growth.

In-line with this we expect the Peruvian Central Bank to ease its monetary policy such, have lowered our forecasts for the reference rate for year-end 2019. This change in the economic outlook period to the dynamic we are observing our businesses have led us to make some changes in our guidance for the full-year 2019 in-line with aforementioned that we are reducing our estimates for loan growth, net interest margin and risk adjusted NIM while we are increasing our estimated cost of risk.

Next slide please. Finally, I would like to talk about Credicorp's strategy. In 2017. We defined the three pillars that will guide the way we organize and plan for the next 20-years. The first pillar Credicorp is focused on identifying and documenting the best practice in each subsidiary to the closing across the organization. The objective is to leverage our scale and senior years without losing our GDP.

The second pillar concerns governance and focus on defining the operating model for the future. In this regard, we organize our subsidiaries into for business lines and implementing organizational changes to enhance these newest structural management.

The first pillar is growth. In recent years, we have built capital in each of our subsidiaries to very comfortable levels. This capital will sustain future growth. We are confident that all of our lines of businesses have considerable organic growth potential. To ensure that, we adequately identify and leverage opportunities, each line of business has developed strategic initiative to fuel sustainable growth.

This information is also key in our growth strategy. Each of our lines of businesses has its own agenda regarding digital matters, as we will review and the following slides. Outside of our established business lines Krealo acts as Credicorp's open innovation arm to create, invest and manage payments.

Finally, in terms of potential in organic growth, we have set up a specialized team to analyze and value investment opportunities. This team follows a strict guidance to determine which countries, sector and businesses are the best fit for Credicorp and its investment focus. We have set up a reserve fund for potential acquisitions of approximately $500 million.

Next slide, please. As we have shared before BCP transformation program is focused on offering our client an outstanding experience while gaining efficiency. Looking at our key digital results, our digital sales in consumer banking has improved from 5.1% in the first half of 2018 to 9.6% in the first half of 2019. In terms of digital clients in consumer banking, our number of user expense are 34% for our total client base, which represent a 13% point increase over the series posted at the end of 2016.

Finally, off branch transactions has increased representing 96% of total transactions, 58% weather security with digital channels and 38% self serve channels. This figure shows an important evolution in three years.

As is a typical digital success story, I will like to mentioned that our consumer loan digital monthly sales has doubled the product disbursement in the quarter while achieving a six fold cost reduction compared to the traditional brand channel. Moreover, the number of Yape users, our peer-to-peer payment has grown significantly to more than one million users as of today. We are accelerating its growth by being focused in increasing its use. The 44% of the Yape users space using Yape at least one time in the last 90 days with an average use of 3.8 times per user.

Regarding a scaling agile, we are implementing agile methodologies while improving a speed in for your experience and efficient. As of today, we have five Tribes and two centers of excellence in operation as well as eight Tribes and two centers of excellence on this site. We expect to finish implementing our Agile@Scale program by mid 2020.

Next slide please. Regarding Pacifico transformation program, we have focused on making Pacifico the number one reinsurance industry in three objectives, growth, experience and efficient. To this note, we have said nine inspirational key targets for 2021. We are working on six enables to advancing this - Consumer Experience to open our unique and analysis experience to our clients, Digital Marketing to promote digital communities and brand reputation focus on digital performance with positive business impacts.

Smart processes to focus on the intensive technology use to increase productivity, efficiency and our quality service. Agility to write the agile mindset adoption process in the company. Data Analytics towards trends decision making through Big Data and Analytical Models. Digital IT to deal digital architecture, to scale digital solution using the DevOps to provide continuous and efficient deliberate value and the strengthening cyber securities.

In the process of Going Agile, we have 11 squads on one center of excellence working with agile methodologies, we are developing new roles and capabilities in the organization, which will enable us to scale agile.

Regarding a specific stories, we are currently working on, first we have developed self service tool for our brokers ensuring that 59% of the information requirements happen automatic response. Second, we launched the digital life advisory model which is to improve customer experience while achieving efficiencies. As of June 2018, 62% of the application are register to this model. Finally, we are working on increasing Self-Manage Transactions by customers and Digital Sales.

Next slide please. In Mibanco we refined our transformation program as awarding our culture, changing our mindset, innovating in our customers centric business model, using new technologies and ways of working to achieve our inspirational purpose. We are focused in making Mibanco number one in growth and experience and becoming a benchmark in the microfinance business model. All of these are set to meet our purpose of transforming lives while writing together our progress story.

We are working in five enablers to advancing this Consumer-Centric to offer an extraordinary experience to our clients by understanding their needs. Digital Business Model, to develop digital capabilities to improve customers experience and evolve into cost efficient business model. Collaborative Organizational Culture ensure customers centric attitude, leadership and transformation commitment in our team. Data driven to support our core business and decision making proposes to advance analytics. IT and Digital Risk, to build digital architecture to support our transformation process and strengthen cyber security.

We are currently adopting agile methodologies. We have [55] (Ph) squad and one Tribe in our digital channels. Going to specific stories regarding digital innovation, we have developed URPI, an app that facilitate credit evolution while collection on the field. The sales force tool as an information and communication source which aims to prove customers experience and sales force productivity.

Moreover, we have built an strategic alliance with Uber and MO Technologies, this is a new digital model test focused in targeting on a specific Uber driver segment as potential clients and evaluating them using MO data mining SKUs. Positive results to opening opportunities to new alliances to access all our new segment. Lastly the use of Advance Analytics Model is boosting highly effective lead generation, which improve the productivity and efficiency.

Next slide please. Under our growth strategy, we setup Krealo in 2018 to build in based mange team, provide digital products and services beyond current initiatives underway at our other subsidiaries. Deal with both of our the value proposition that Credicorp can offer to current and future clients across its subsidiaries. Krealo is focused on a structured strategy of company building and partnership to the creation of new Fintech on investing on building on existing Fintech in Peru, Chili and Columbia.

In Peru, we have invested in CULQI in late 2018 to develop our broader solution in the payment eco system. CULQI online gateway has currently more than 5000 registered users which process sales for a monthly amount of over S27 million. CULQI is currently piloting its - solution for physical payment in several merchants and getting ready for a roll out in late 2018.

In Chile we have acquired Multicaja digital business in March 2018 including two operating businesses with over 800,000 online users. PayPal withdrawals and deposit services and top-up services. Beside the aforementioned this transaction includes a prepaid account company in process of obtaining regulatory approval to operate in the Chilean market.

In Colombia, we found Tyba, a digital investment application based on anonymous account with a advisor solution with the objective of providing access to low ticket investment to customers. Tyba is currently finishing its MDP and is in the process of obtaining regulatory approvals to launch the product in the Columbian market.

Continuum of regulatory approval, Krealo is based to have all three MVP live in the respective markets the year-end. Moreover, we expanded our Open Innovation Initiative through Krealo and we will reach $30 million in total disbursements for 2019.

Next slide, please. Finally, I wanted to give you some information about the recent acquisitions we have made in Colombia and the rationale for each of them. In February, we acquired Ultraserfinco to complete our existing Credicorp Capital business to become in dispute of leader in equities and fixed income trading in Columbia. Ultraserfinco has an attractive wealth management business with over $500 million in assets under management, more than 50-years of experience in the industry.

Additionally, this acquisition complements geographically our client progress. Ultraserfinco will have a significant presence in Medellin. Second, we acquired Bancompartir in June. With the objective expanding Credicorp's microfinance business in the region. Columbia has attractive macroeconomic fundamentals a significant potential for this model, and a fragmented microfinance market, which provides consolidation opportunities.

With Bancompartir and Encumbra, Credicorp is well positioned to become market leader. Bancompartir is Columbia's number four private microfinance bank with a nationwide footprint comprises of 104 branches and covering 27 out of 33 departments Finally, Bancompartir will leverage on the Mibanco’s capabilities to improve on commercial productivity, risk management and financial performance.

It is important to highlight that for both of these acquisitions altogether, we will pay approximately $120 million.

With these comments. I would like to open the Q&A please.

[Operator]

Thank you, sir. [Operator Instructions] Thank you. We will take our first question from Ernesto Gabilondo of Bank of America.

[ErnestoGabilondo]

Hi, good morning, Walter, Cesar, Franco thanks for the opportunity. My first question is on your expectations for loan growth per segment. We have seen the economy has been impacted by the temporary suspension of Las Bambas. The every four year weak investments seasonality in regional and local governments. We have seen the strike in Arequipa. And in addition the political turmoil or celebrating presidential elections next year and the escalation of the global trade work.

We believe somewhere or in some cases are temporary impact while the yesterday’s interest rate cut could help a little bit to improve the economic activity. However, we think there could be likely some delays in some construction and large infrastructure projects and some impacts related to the uncertainty of the global trade work. So, we have seen your downgrade radiation for loan growth, but how do you see loan growth per segment, should we expect wholesale loans to be modestly growing. And retail loans been able to maintain its double-digit base growth. Thank you.

[CésarRíos]

Yes, this is César. I think we will see that the trends are going to continue, due to the mentioned that you have pointed out probably is going to be challenging to grow in the corporate segment, but the retail segments continue with a very good dynamics.

And the adjustment that we foresee are as I mentioned during the presentation, adjustment in pricing in risk and probably the market is going to conduct something similar. So in terms of retail banking we foresee a good trend in the following months, but some challenges in the corporate segment.

[GianfrancoFerrari]

This is Gianfranco, just to complement was what César just mentioned. Specifically in the retail segment, we have to bear in mind that actually the fourth quarter, the last part of the third quarter and the fourth quarter are very strong in the SME business, business formality we have seen over the last few years basically because of the year-end comparing. So, we are positive there.

And on the consumer lending business, we are leveraging on digital tools and new channels in order to tackle new segments of the evolution. So, yes, we are positive in the SME and consumer landing and on the corporate we will see that the portfolio is going to be flat or really small growth due to what you mentioned in terms investment.

[ErnestoGabilondo]

Thank you, César and Gianfranco. And my second question is on your transformational plan, we know these expenses were under control during the quarter below the 8% year-over-year you guidance. And we notice that despite you are revise in downward the GDP growth, loan growth means and expecting a higher cost of risk, you are maintaining unchanged your expectations for the efficiency ratio.

So, I just want to know if you are delaying some of the transformational projects or should we expect OpEx to trend up in the next quarters. And can you share with us some of your advances in the digital transformation for example what are you doing in terms of QRs and biometrics and Fintech, I don’t know if CULQI, Bancompartir and Tyba will be the key businesses to follow? Thank you.

[GianfrancoFerrari]

Yes. I’m going to talk about the digital transformation again and then I will talk about BCP transformation, we haven’t changed our plans, as I mentioned in the previous conference call, this is our long-term strategy and we are seeing that there is a lot of value, we are bringing a lot of value because of the transformation.

We don’t foresee any deterioration in the cost to income ratio and the main reason is that despite that fact that we won’t stop any of our investment we are getting benefits of this information so far. We are already closing - we have already closed some branches due to the escalating Agile or [indiscernible], we are getting efficiencies there to.

In terms of QR, actually this is our such a strategy on payment, the Yape which Gianfranco just mentioned start as a P2P application. Today it’s also a P2M application as of today, we may have anything between 8000 to 10,000 profitably QR already deployed. [indiscernible] VisaNet is also deployed its QR and our ambition is to have 150,000 QR codes by the end of the year.

We are doing thorough analysis on Yape and the collateral benefits we are getting in terms of deposits, usage of debit cards are very positive, so we will continue investing specifically in Yape. Regarding Fintech, I would say it is a twofold strategy one is one that César mentioned that if Krealo either building or buying and in addition to that we BCP also have a strategy in terms of either both buying, partnering and/or testing new distribution models, risk models and things like that with...

[ErnestoGabilondo]

Thank you very much.

[Operator]

Thank you. We will take our next question from Jason Mollin of Scotiabank.

[JasonMollin]

Hello everyone. César thank you for the detailed presentation. I want to ask about BAP’s guidance for return on average equity this year and return on average equity on sustainable basis. To keep the ROE outlook of 17.5% to 18.5% for 2019 what is going to offset the changes in guidance, the lower loan growth, NIM and higher cost of risk. And today you also reiterate your sustainable ROE of 19% - reported 18% in the quarter BCP was an impressive 21.5, Mibanco at 20%, Pacifico 13.6%, Prima 33% that accounts for almost all the earnings.

Can you talk about your confidence or BAPs confidence in this sustainable ROE outlook in particular with Peru’s 10-year local bond yield, now I think the five-year low, we reached I July a 4.3%. Maybe in the context to talk a little bit about how BAP management looks at the Group’s cost of equity today versus the past and in that comments on the strategic decision to use excess capital to invest in opportunities outside of Peru. So maybe putting that all together, I think the most important thing is understanding the views on the long-term ROE.

[CésarRíos]

Okay. I’m trying to address, because there are several questions. If you see our result, we already have a significant results that are not contemplated in the mean nor in the efficiency ratios that are related to gains on sense of securities.

We have booked at significant amounts in a P&L, but I will also like to mention that from the close to 2018 to June, we have increased our non-realized gains in around $800 million. So, we have had an impact in the balance sheet, we have increased the equity for this factor that temporarily has lowered our return on equity. Down the road, probably, these gains are not going to be as substantial.

The other important factor that compels how to reaffirm our sustainable ROE is that these reserve fund that is starting to be deployed, have an impact of more than 100 basis points in the profitability so far. So, take into consideration these factors, I think we have confidence that the short-term ROE is achievable. And the sustainable ROE also when we deployed and start to get in a profitability with the excess funds.

[JasonMollin]

Maybe talk about the cost of equity. Do you think that BAP’s cost of equity is lower today than it was? Do you think long-term rates will be low and therefore I mean, the premium that BAP is generating over what I would consider what I estimate the cost of equity is substantial. And I think over the long run, just a general comment would be perhaps returns need to come down if rates stay low for longer, maybe some comments there.

[CésarRíos]

I think the cost of equity, we clearly see two different forces, the reference rates are lowering and these will tend to our low the cost of equity that probably due to the situation environment, the risk premium will increase somehow. As a result, we probably think that the cost of equity is going to remain relatively stable due to do different forces.

And regarding a the impact of lower interest rates, we have conducted several analysis. Of course, our book are sensible. But while we transition for a more retail portfolio, the portfolio is less sensitive to the reference rates, the wholesale portfolios are very sensitive and translate interest rate very rapidly, the retail portfolios tend to be much more resilient.

[WalterBayly]

Jason, hi this is Walter, the points you mentioned are very valid. And the question is what the cost of equity of Credicorp going forward? Don't take long- term decisions based on short-term cost of equity improvement. So the question which is a very valid one, which you are putting on the table is what we expect to be the long-term cost for Credicorp.

Clearly, there is no clear answer for that. But I think it is premature based on movements in the markets in the past, month or even less than that, to take long-term decisions. I don't think the world has changed dramatically from one day to the other, because there are short-term movements in rates and it is not clear the scenarios going forward.

So we will be cautious. We have not changed our long-term view, our long-term strategy, we continue to work on long-term decision based on the cost of equity that we have always determined around 11%, and until we see more permanent changes in the micro scenario both domestic and international, which at stage again I’m not sure we have enough perspective to get certain that they are long-term changes.

We will not change. We do not have at this stage any indication that are sustainable return on equities both on the short or long-term are not reachable or obtainable and we continue to work on those fronts. I don’t know if we answered your question.

[JasonMollin]

Yes. That is very helpful. Thank you.

[WalterBayly]

You are welcome.

[Operator]

Thank you. We will take our next question from Andres Soto of Santander.

[AndresSoto]

Good morning. And thank you for the presentation my question is related to capital deployment, you mentioned before that you are setting aside $500 million for future acquisitions. In the past you mentioned that microfinance in Columbia was our key target, we have seen the acquisition of Bancompartir and this is from that perspective this is small acquisition and so not clear to me going forward what is going to be the focus in terms of M&A, is it going to continue consolidating the microfinance industry in Columbia entering through a microfinance space in our countries or additional investments in the Fintech space?

[WalterBayly]

Sure. Again this is Walter Bayly. I will start with your question. I think we have been extremely consistent in explaining to the market that one, inorganic growth is a complement to organic growth not the driver of the growth Credicorp.

Number one, that it is the best practices in the world to have a continued presence in exercising the M&A matter of an organic growth to do series of complementary acquisitions. We have had a set up - a rigorous process through which we analyze and determine where we want to be, we have made some very important decisions, where we want to play and what we want to play, that is point number one.

Point number two, the fund that was self funded that we have determined which currently is around $500 million is not exclusively for the use of M&A, it is a reserve fund which is therefore rainy day and potentially for inorganic acquisitions. It is not exclusively dedicated. So, if we decided not to pursue any inorganic growth that fund would not be zero.

Third, yes we think that microfinance in Columbia is a good alternative for us for several reasons, one, we believe that we have a domestic model which can be exported. Second, as César mentioned in its presentation, we think that the macro conditions and regulatory conditions are both for the development of microfinance in Columbia and furthermore we see a fragmented market.

We have been there for almost three years with an operation that we started from zero called Encumbra where we dedicated our time understand the market and how do we need to adjust our current model to the Colombian market, after three years of being there, we felt it was right for us to take the next step which we did and we acquired a more relevant position.

It will take us a year or year half or two before we can take another step because we need to incorporate, but we have done merge with our existing operation over there and do the work that we need to do generally. So this is not a 100 meter race, this is more about firm. So we do not expect to do anything further in microfinance, Colombia for the time, I already mentioned.

Again we are going to very disciplined in where we go, what we do. Number two, the $500 million are not exclusively dedicated to an organic growth. And number three, we will take some time to digests and incorporate what we have just acquire. I don’t know if I answered your questions.

[AndresSoto]

That is very clear Walter and following up on the Bancompartir acquisition, the microfinance space in Colombia is basically dominated by - so those are not focused on profitability, Bancompartir itself delivered 7% ROE. Not sure what are you target there, how much you can believe you can improve this ROE and more specific question on the funding structure, I see that 25% of Bancompartir deposits are from [indiscernible] so the shareholders is when are you going to remain there, if not what is going to be the founding for this company.

[WalterBayly]

The current status of the microfinance industry in Columbia is not similar to what we found in Peru several years back, where the market was basically and it has NGO which even though they do not have a for profit driven they are there are generate and be self-sustained. So there is a bit of a lack of understanding of what non-profit profit drive them.

We have been in the market and we think that it is compatible to be a for profit organization, but very focused on driving and improving the quality and the - of growth of those customers. So we see zero conflict in us having a return on equity driven objective with competing with NGO. The longer-term equity we expect obliviously about the cost of equity for Credicorp for which we had a couple of conversation before that, but there are periods of time in which we need to adjust model et cetera. We think that this transaction will be accretive for shareholder.

And about the funding, it is relatively small operation. They are self funded and we are there of course if more support is required, but if anything the capital strength and the perception of market, strength of Bancompartir has dramatically increased when you have a relevant shareholders likely recorded behind it. So we foresee those difficulties in achieving and obtaining the required funding going forward, not the similar situation to what we found when we acquired as we carry through.

[AndresSoto]

Great, thank you for you -.

[WalterBayly]

You are welcome.

[Operator]

Thank you. We will take our next question from Alonso Garcia of Credit Suisse.

[AlonsoGarcia]

Thank you. Good morning, everyone. I just wanted to ask to Mibanco the ROE in fiscal clearly down versus last year. I mean, understanding you have had some asset qualifications last year that might be affecting this year and if you are growing your base of employees. My question is when these pressures on profitability should subside, and what would be able to know sustainable ROE from Mibanco once this is left behind? I mean, also on Mibanco, if you could elaborate on the competitive environment in microfinance in Peru, and the level of investment in asset client in that payment it would be appreciated. Thank you.

[GianfrancoFerrai]

Yes. This is Gianfranco. Regarding your first question, there are three forces in a microfinance, and microfinance industry and within Mibanco today. On the macro side, this competition has been harsher today than it was the year before. Basically, because of the whole business is not growing as fast as before. That has led to squeeze in margins for that is one part.

The other part is that specifically for Mibanco is that as I mentioned before, we have hired close to 1000 people over the last 12 months. The idea here is that we already achieved productivity, we do foresee of the right productivity in terms of balancing our commercial productivity and collections productivity for each HRM. You have to bear mind that at Mibanco our RMs have this dual role of commercial part and the collection part also.

So with the current model, we believe that we have already rich the relativity, the balance productivity that can be achieved. And obviously we are working in Mibanco in how to deploy new digital tools or digital mechanisms in order to further improve that productivity.

And third, having said that, even though the cost to income as we ramp up has deteriorated this semester. If you compare the level of cost to income that Mibanco has compared to the main competitors in a microfinance industry, we are playing anything between 500 to 1000 basis points lower.

So we do believe that we have a competitive advantage there. And the new areas we have hired over the last year normally our new RM gets the or achieve the right level after nine months. So, the new vintages of maybe this is not the correct word, but the new vintages of RM will start getting the benefits. I would say by the first quarter of next year. Sorry, and that will lead, should lead us to similar ROE that there have had for a couple of years ago at Mibanco.

[CésarRíos]

Just only adding to that is increasing it has been significantly in the last, this year has been 1,200. And we are paying the salaries of these people and the productivity is going to be full flow next year.

[AlonsoGarcia]

Understood. Thank you. And just one final question, you already mentioned I know you discussed the amendment from however despite this some activity that we have over the past month. You completed accumulate capital at a nice pace. You have now each one of 89.8%. So my question is based on this level capital an extraordinary dividend is or could be potentially on the discussion that comes to you and to maintain capital at optimal levels.

[WalterBayly]

As you will, Walter, as you mentioned yes it is potentially something we might do, we have not made a decision in August we have to be dated to the appropriate approval levels.

[AlonsoGarcia]

Thank you very much.

[Operator]

Thank you. We will take our next question from Gabriel Nobrega of Citibank.

[GabrielNobrega]

Hi everyone and thank you for the opportunity to ask the questions. I actually have a question on credit quality, looking at your provisions we know that the increase segment more than 40% year-over-year. However you are resource were relatively flat on a quarterly basis. While I understand that part of this could be done to the increase right off a lot. Could you just share with us what you are seeing in terms of risk in your portfolio and this is, their end segment that is where you more and if also this is one of the main reasons why you were increasing your cost of guidance. Thank you.

[ReynaldoLlosa]

Yes. It is Reynaldo quite a bit in the Asia Pacific quarter as compared to the first quarter of this year. Having said that, we don’t see any dramatic changes in the quality of our portfolio we have seen a specific deterioration in some of the specific portfolio specifically credit card and some part of the SME segments. And such this reflected in the probation estimate.

Having said that and that our probation level is within our capital limit so I mean what we are doing is basically taking the adequate measures in terms of underwriting portfolio management and collections to change that potential in the quality of our portfolio. In terms of wholesale, it is quite stable we haven’t seen any big cases in this specific quarter.

[GabrielNobrega]

Alright. That is very clear. Thank you.

[Operator]

Thank you. We will take our next question from Carlos Gomez of HSBC. Hello Carlos, your line is live.

[CarlosGomezLopez]

Apologize that was mute. I have two brief questions the first one is what is your expectations for the loan growth Peru over the medium term of the next three to five years. And second since you are looking at M&A possibilities since your fund. Did you look at the transaction in Paraguay? Thank you.

[WalterBayly]

This is Walter, Carlos. The answer to Paraguay is loan growth I think we have some guidance.

[CésarRíos]

Yes. We usually said that in the medium term the expected growth is 1.5 times nominal GDP. So, if we have medium term real GDP between 3% and 4% I think is achievable and 2% inflation we are going to have around 89% growth and this is sustainable growth with the market. Probably we can do something little bit better increasing the penetration in low segment within new digital capabilities.

[CarlosGomezLopez]

Okay and follow-up to Paraguay that would not be a market for you or that would not be a type of institution you would like to look at.

[WalterBayly]

Carlos this is Walter again. We have never been very close to Paraguay. Our people in Bolivia who believe that there is a potential to do some trade transaction and that is far we will go at this stage, we do not know the country, we do not have customers. So we believe that that is not an intelligent way to go in a country which is just going by something.

So if anything we want to know the country and we would do that for four Bolivian operation where they do have a certain amount of great relation and maybe several underlying - many year on the road to do something, but at this stage it is clearly not on the table.

[CarlosGomezLopez]

Thank you very much.

[WalterBayly]

You are welcome.

[Operator]

Thank you. We will take our next question from Yuri Fernandes of JPMorgan.

[YuriFernandes]

Tank you gentlemen. I have a question on fees, it was a bit light this quarter especially like the banking fees was growing around 3% year-over-year and you mentioned in the report that the negative it comes mostly on the season credit cards, accounts maintenance those kind of things. So my question is what is happening there like why are you seeing a decrease in conceptual durables products. Are you seeing a retail clients moving to another bank is setting like this or is there a explanation for the decrease on the seasonable product. Thank you.

[GianfrancoFerrari]

Two issues, one is the micro environment doesn’t help it, there is a very high coloration in terms of - you have a reminder we have a lot of - we are very professional bank. A good bunch of our fees comes from the transaction of business that is one issues and the other issue is that clients are migrating to digital channel interacting more digitally.

Normally those channels or recharge much less on those charges are not charge at all those channels and that is the reason why you are seeing a reduction in it. Obviously the cost to interact with those challenges much lower when they interact though these channel. So those are two main reasons why the fee income business has not grown that much.

[YuriFernandes]

Okay. So just a follow-up there is no decrease in the number of clients and can you provide a number for the year, I know you have the guidance of the - they were remaining flat for the year, but any call on how much banking fees can grow this year.

[GianfrancoFerrari]

Not really but just to the first part of the question as a matter of fact, due to both the digital and the sales channels. Channels we have deployed over the last couple of years, we are seeing on the contrary on what we are gaining number of clients. Last year, the number of new we got into the band, was something that we have never seen before over a million clients.

[YuriFernandes]

Thank you very much.

[Operator]

Thank you. We will take our next question from [indiscernible].

[UnidentifiedAnalyst]

Yes. Just one question on your NIM trajectory. I understand what you said about DCRP cutting rates by 125 basis points for the same time you have always hit about how your retail NIM - as you weigh your portfolio towards more of a retail loans as opposed to corporate, your NIM should expand. So I'm kind of wondering how I should quantify the various impacts, what is the impact from the decline of DCRP reference rate versus the shift to higher NIM loans and, how do you see NIM trajectory over not just this year, but over 2020s and possibly 2021? Thanks.

[WalterBayly]

Okay. Probably two different questions. If we make on our various static sensitivity analysis, each 10 basis points of a reduction in interest rates impact the NIM in around Sol 20 million, this is assuming an instantaneous impact.

But the most important forces that are already in place are the change in currency and the needs of the portfolio. So we think that we can counterbalance the negative effects of lower interest rates, with the change in portfolio and the change in currency composition.

[UnidentifiedAnalyst]

Okay, can you elaborate on that a little bit, what does it mean changing currency and changing portfolio. Are you referring to change in portfolio are you referring to segments like retail versus corporate.

[CésarRíos]

Probably going to see by yourself. In solace, we usually have higher margins as in dollars, and the long term trend of our portfolio has been a change from U.S. dollars to solace. And it has been driven for the second half as I'm going to mention that this is the change in the composition of the loan portfolio from a more corporate portfolio or more retail portfolio.

The retail portfolio usually have not only a higher structural, a higher interest rates but are more resilient are less sensitive to short term movements in interest rates. When you have an adjustment on 25 basis points in the corporate portfolio, the next disbursement is going to have a reference that is 25 basis points lower.

For a Credicorp is much more stable as more driven expansion of the risk of the client the segment the value offering. So in this movement from wholesale to retail I think we can improve the risk adjusted NIM overtime.

[UnidentifiedAnalyst]

Well exactly. So here is my question, I guess when as your loan book, especially on the corporate side reprises downward from tomorrow, whatever basically, as a bigger floating rate loans. So your base is going to reset for the end of the year, most of your corporate loans and not all of them will be a reprise and then retail will probably take some times to reprise depending on you know the floating effects or whatever. But starting from January 1, 2020, because as I understand and you have been talking about us before that you are continuing to shift your focused towards retail funding, because corporate spreads are very low. So that is exactly my question in how you see assuming BCRP doesn’t do anything on the rate and rates were flat how do you see a revolution for 2020?

[GianfrancoFerrari]

This is Gianfranco. I think what we have already provided guidance on both NIM and risk adjusted NIM and as you may see those are slightly below our previous guidance.

[UnidentifiedAnalyst]

Right. But I’m asking for the next year, I’m understand the dynamics this year, I’m trying to understand [Multiple Speakers] I’m just trying to understand the dynamic the trajectory?

[GianfrancoFerrari]

The dynamics are as what César mentioned. Since we are shifting our portfolio towards more retail portfolio and we have seen retail, the portfolio is more solid that the NIM should be higher. However, the cost of risk is going to be higher too, therefore what we state is that somehow a similar risk adjusted NIM as we are expecting for the rest of this year.

[UnidentifiedAnalyst]

Okay. Thank you.

[Operator]

Thank you. At this time there are no additional questions in the queue. I would now like to turn the conference over to Mr. Walter Bayly, Chief Executive Officer for closing remarks.

[Walter Bayly, Chief Executive Officer]

Thank you very much for joining us in this conference call. Negative headwinds regarding domestic GDP growth expectations is definitely the most important factor affecting our current and short-term forward looking results.

The obvious impact will be on one hand the lower than expected loan growth and on the other hand some deterioration of credit quality. We believe neither of the above answer the fundamental growth potential for Credicorp, but are likely to impact short-term results. Domestic political volatility have been around for quite a while and we believe it’s only impact is related to the already mentioned impact on lower GDP growth.

With this overall context Credicorp quarterly results have been solid and our indication of what we see going forward. And on the fundamentals of Credicorp, namely strong franchises, strong capital essential, solid risk management and continued cost control and good fundamentals in the most of the countries in which we operate to continue to offer growth potential.

Our agenda is full, we continue to be focused in improving the product and services we offer our customer in adapting our business model and corporate shifts and customer preference and technological advantage.

In short, we have gone through short-term domestic and international volatility before, we believe we are prepared to weather the international and the domestic headwinds and we continue to focus and pursuing our medium objective to maintaining customer preference while generating value to our shareholders. Thank you very much for joining us in this conference call and we look forward to seeing you in three months time. Thank you and good bye.

[Operator]

Thank you, ladies and gentleman this concludes today's teleconference. You may now disconnect.