Credicorp Ltd (BAP) 2019 Q2 法說會逐字稿

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.

(Operator Instructions)

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. Cesar Rios, 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. Cesar Rios.

Mr. Rios, you may begin.

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 [precision] in which President Vizcarra will 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 scenarios may play out, and all of them are uncertain.

In any scenario, the decision process regarding this proposal will follow the guidelines established by the constitution.

Despite political noise, the strong fundamentals of the rule remain.

These fundamentals includes prudent macroeconomic policies, trade openness and a market-friendly economic model.

We now believe that our 2019 GDP growth will be in a range of 2.5% to 3%.

Second, in Chart #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 represents a 3-year peak.

However, data from the formal job market has not improved at a similar pace.

In light of this, we continue to monitor for any early signals that nonperforming loans will increase.

Finally, we know that there is currently a global scenario of lower monetary policy rates amidst risk of global growth.

Central banks in both advanced and emerging economies has started to ease the monetary policy stance by lowering the reference rates.

The Central Bank of Peru joined other central banks and yesterday lowered its monetary policy rate 25 basis points.

It is important to consider that the local and external environment evolution just described affects 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 mention.

In the case of Universal Banking, in the second quarter of 2019 average daily loan balances at BCP post 6.5% growth year-over-year.

The Retail Banking portfolio grew by 11.6% while the middle market expanded by 8.7%.

The Corporate Banking segment however contracted by 1.5%.

The loan mix and the currency mix favor 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 the expected loss reported by specific Retail Banking segments.

BCP Bolivia reported a good level of loan growth and a reduction in provisions.

Also the efficiency ratio improved year-over-year and year-to-date, in line with increasing net interest income and fee income.

With regard to Microfinance, Mibanco posted a moderate level of loan growth in quarter-over-quarter and year-over-year terms.

In terms of margins, the negative effect of downward pressure on interest income in highly competitive context 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 risk of Mibanco rose quarterly-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, primary by expanding the sales-force to build capabilities and sustain business growth.

It is important to note that this is the first time that Mibanco has increased its workforce since its acquisition.

Prior to this date, the bank was able to grow its loan-base without increasing the headcount.

Mibanco is also building new channels to leverage data analytics and digital solutions, which has increased administrative and general expense.

With regard to insurance and pension funds, the insurance underwriting results increased this quarter.

This was primarily due to the evolution of the property and casualty business, which posted an increase in the net earning premiums level primarily to its commercial lines for aviation and fire.

The underwriting results in the Life Insurance business however contracted due to a competition, particularly in Renta Flex interest rates offered to clients.

Corporate health insurance and medical services which we manage in association with United Health continued to improve.

The pension fund business also improved after posting a recovery in the profitability of its legal research.

This business efficiency ratio improved due to a decrease in its operating expenses and an increase in its fee income.

In Investment Banking and Wealth Management, in the second quarter of 2019 the proprietary portfolios continued to have a good run in a context of favorable market conditions.

This was the case for fair value through profit and loss investment and fair value to [other] comprehensive income investment, 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 result than those seen in 2018.

Next slide please.

In this table you can see the most important figures of credit cards performance in the second quarter.

Credit card reported net income of PEN 2,099 million, which was 0.2% lower than the first quarter result and 12.3% higher than the figure posted in the same quarter 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 remains 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 risk 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 adjustments while continue with the strategy.

Finally, in terms of capital ratios BCP Stand-alone BIS achieved 1 ratios decrease quarter-over-quarter due to growth in risk-weighted assets, 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 a return on average equity and average assets of 17.9% and 2.5% respectively.

Net interest income increased 8.3% while net interest margin rose 15 basis points.

Finally, the increase in provisions led to a higher cost of risk, while risk-adjusted NIM remain stable.

Let's review the main figures and indicators for the second quarter.

Next page please.

As you can see in Chart #1, our loan portfolio accounts for 66% of our interest-earning assets as of June 2019, regarding the accumulated evolution of loans measured in average daily balance.

As you can see in Chart #2, total loans grew by 6.7% from first half 2018 to first half 2019.

This expansion improved the loan mix portfolio both by business segment Mibanco.

Loan expansion was mainly driven by Retail Banking and BCP Stand-alone, specifically in the mortgage loan book followed by the credit card 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 #1 credit cards total funding cost has a slight increase in the last quarter while remaining relative stable during the last 3 years.

Second, you can see in Chart #2 that credit cards funding structure shows an ongoing increase in total funding driven by a higher level of due to bank and corresponding, and loans repos with the Central Bank.

Third, in Chart #3, in the quarter-over-quarter analysis, you can see there is a decrease in the volume of demand deposit which offset the increase in time deposits.

There is significant competition for local corporate demand deposit as certain banks are pushing interest rates above Central Bank reference rates.

In the year-over-year analysis, the increase in total deposits was mainly attributable to saving deposits, which grew 9.7% driven by opening accounts in (inaudible).

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 and currency mix effect on interest income given that 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 currency.

Next page please.

As you can see in Chart #1, risk-adjusted NIM decreased 4 basis points quarter-over-quarter and 9 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 2 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's portfolio.

As we mentioned early, penetrating risk in a more profitable segment is part of our retail growth strategy, which resulted in an 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 regard, as part of our portfolio monitoring process, we have been taking pricing, origination and collection adjustment measures to improve risk-adjusted NIM, in particular in credit cards and SME-Pyme.

According to the duration of these specific portfolios, the full impact of this adjustment will materialize during next year.

Regarding Microfinance, Mibanco portfolio has been affected by the economy deceleration and we are making origination and collection adjustments to manage portfolio quality.

Next page please.

Regarding nonfinancial income, if we focus on the accumulative evolution, as you can see in Chart #1, non-financial income expanded 9.4%, mainly due to the increase in the net gain in sales of securities driven by higher gains at BCP Stand-alone, following repurchases of Peruvian government bonds and Atlantic Security Bank and Credicorp Capital by the positive evolution of their proprietary portfolios.

To a lesser extent, growth was related to an improvement in fee income and in the net gain of foreign exchange transaction, both core items of non-financial income.

The evolution of these items is driven by transactional activity in the banking business mainly at BCP Stand-alone.

Next page please.

In the year-to-date analysis for operating efficiency, the cost-to-income ratio improved in line with an acceleration in the face of growth of operating income.

In the following 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 which was primary attributable to growth in net earning premiums, mainly driven by the fact that Pacifico won 2 out of 6 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 earning premiums was offset by growth in net claims, which are not part of the 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 income in line with Retail Banking expansion, which offset increasing salaries and employee benefits.

An improvement in efficiency of Pacifico and BCP was partially offset by the deterioration in operating efficiency at Mibanco, which was primarily driven by an increase in personnel 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 all subsidiaries explained mainly by a deterioration in the efficiency ratio of the core capital has posted a decrease in its derivative result.

It is important to note that the derivative result was offset by the net gains on securities, which is not part of the 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 increasing its headcount.

Next slide please.

On this page, you can see our current guidance for full year 2019 and the releases figures for the full year 2019.

First, in terms of macroeconomic indicators, given that economic activity remains below its potential and was less dynamic than expected at the beginning of the year, we have lowered our estimates for PL GDP, domestic demand and private investment growth.

In line with these, we expect the Peruvian central bank to ease its monetary policy and as such have lowered our forecast for the reference rate for year-end 2019.

This change in the economic outlook period to the dynamics we are observing our businesses have led us to make some changes in our guidance for the full year 2019.

In line with the aforementioned, we are reducing our estimates for loan growth, net interest margin and risk-adjusted NIM, while we are increasing our estimate of cost of risk.

Next slide please.

Finally, I would like to talk about Credicorp's strategy.

In 2017, we defined the 3 pillars that will guide the way we organize and plan for the next 20 years.

The first pillar [Credicorp Way] is focused on identifying and documenting the best practice in each subsidiary to deploy then across the organization.

The objective is to leverage our scale and synergies without losing agility.

The second pillar concerns governance and focus on defining the operating model for the future.

In this regard, we organize our subsidiaries into 4 business lines and implementing organizational changes to enhance these new structural management.

The first pillar is growth.

In recent years, we have built capital in each of our subsidiaries to very comfortable level.

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 have developed a strategic initiative to fuel sustainable growth.

Digital transformation is also key in our growth strategy.

Each of our lines of businesses has its own agenda regarding digital matters, as we will review in the following slides.

Outside of our established business lines, Krealo act as Credicorp's open innovation arm to create, invest and manage fintechs.

Finally, in terms of potential inorganic growth we have set up a specialized team to analyze some value investment opportunities.

This team follows strict guidelines to determine which countries, sectors 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's transformation program is focused on offering our clients an outstanding experience while gaining efficiency.

Looking at our key digital results, our digital sales in Consumer Banking have 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 users stand at 34% for our total client-base, which represent a 13% point increase over the figure posted at the end of 2016.

Finally, off-branch transactions has increased representing 96% of total transaction, 58% were executed through digital channels and 38% through self-service channel.

This figure shows an important evolution in 3 years.

As specific digital success stories, I would like to mention that our consumer loan digital monthly sales has doubled the product disbursements in the quarter while achieving a sixfold cost reduction compared to the traditional branch channel.

However, the number of Yape users, our peer-to-peer payment channel, has grown significantly to more than 1 million users as of today.

We are accelerating this growth by being focused in increasing its use.

The 44% of Yape users paid using Yape at least one time in the last 90 days with an average use of 3.8 times per user.

Regarding scaling [agile], we are implementing agile methodologies while improving speed, employee experience and efficiency.

As of today, we have 5 tribes and 2 centers of excellence in operation as well as 8 tribes and 2 centers of excellence on design.

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 of the insurance industry in 3 objectives; growth, experience and efficiency.

Toward this note, we have set 9 aspirational key targets for 2021.

We are working on 6 enables to advance in this journey; consumer experience to open our unique and extraordinary experience to our clients; digital marketing to promote digital communities and brand reputation; focus on digital performance with positive impacts; smart processes to focus on intensive technology use to increase productivity efficiency and quality service; agility to guide the agile mindset adoption process in the company; data analytics to strength decision-making through big data and analytical models; digital IT to build digital architecture to scale digital solutions using DevOps to provide continuous and efficiency -- efficient deliberative value and strengthening cybersecurity.

In the process of going agile, we have 11 [squads] and 1 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 specific stories, we are currently working on first, we have developed self-service tool for our brokers, ensuring the 59% of the information requirements have an automatic response.

Second, we launched the digital life advisory model, which seeks to improve customer experience while achieving efficiencies.

As of June 2018 62% of the applications are registered to this model.

Finally, we are working on increasing self-managed transactions by customers and digital sales.

Next slide please.

In Mibanco, we defined our transformation program as evolving our culture, changing our mindsets, innovating in our customer-centric business model, using new technologies and ways of working to achieve our aspirational purpose.

We are focusing making Mibanco #1 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 5 enablers to advance in this join consumer-centric to offer an extraordinary experience to our clients by understanding their needs.

Digital business model; to develop digital capabilities to improve customer experience and evolve into a cost-efficient business model.

Collaborative organizational culture to ensure customer-centric attitude, leadership and transformation commitment in our teams.

Data driven to support our core business and decision-making processes to advance analytics.

IT and digital risk to build digital architecture to support our transformation process and strengthen cybersecurity.

We are currently adopting agile methodologies.

We have 16 squads and 1 tribe in our digital channel.

Going into specific stories regarding digital innovation, we have developed [Urpi], an app that facilitates credit evaluation and collection on the field, this sales-force tool as an information and communication source which aims to improve customer experience and sales-force productivity.

Moreover, we have built a strategic alliance with Uber and MO Technologies.

This is a new digital model test focused in targeting specific Uber driver segment as potential clients and evaluating them using MO data mining skills.

Positive results will open opportunities to new alliances to access other new segments.

Lastly, we -- the use of advanced analytics models is boosting highly effective leads generation which improve the productivity and efficiency.

Next slide please.

Under our growth strategy we set up Krealo in 2018 to build a best and managed team that can provide digital products and services beyond the current initiatives underway at our other subsidiaries.

This will bolster the value proposition that Credicorp can offer to current and future clients across its subsidiaries.

Krealo is focused on structuring the strategies of company building and partnership through the creation of new fintechs or investing and building on efficiencies in Peru, Chile and Colombia.

In Peru, we have invested in Culqi in late 2018 to develop a broader solution in the payment ecosystem.

Culqi online gateway has currently more than 5,000 registered users which process sales for a monthly amount of over PEN 27 million.

Culqi is currently piloting its [empower] solution for physical payments in several merchants and getting ready for a rollout in late 2019.

In Chile, we have acquired Multicaja digital business in March 2018, including 2 operating businesses with over 800,000 online users, PayPal withdrawals and deposit services and top-up services.

Besides the aforementioned, the transaction include a prepaid account company in process of obtaining regulatory approval to operate in the Chilean market.

In Colombia, we founded Tyba, a digital investment application based on anonymous account with a (inaudible) buy/sell solution with the objective of providing access to low ticket investment to customers.

Tyba is currently finishing its [MBP] and is in the process of obtaining regulatory approval to launch the product in the Colombian market.

Continuing of regulatory approval, Krealo expects to have all 3 MBPs live in the respective markets by 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.

First, in February we acquired Ultraserfinco to complete our existing Credicorp Capital business to become undisputed leader in equities and fixed income trading in Colombia.

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 coverage since Ultraserfinco has significant presence in Medellin.

Second, we acquired Bancompartir in June with the objective of expanding Credicorp's Microfinance business in the region.

Colombia 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 Colombia's #4 private microfinance bank with a nationwide footprint, comprised of 104 branches and covering 27 out of 33 departments.

Finally, Bancompartir will leverage from Mibanco's capabilities to improve commercial productivity, risk management and financial performance.

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

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

(Operator Instructions) We'll take our first question from Ernesto Gabilondo of Bank of America.

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 4-year weak investments seasonality in regional and local governments.

We have seen the strikes in Arequipa.

And in addition, the political turmoil, celebrating presidential elections next year and the escalation of the global trade war.

We believe somewhere or in some cases are temporary impacts.

Well, 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 war.

So we have seen your downward revision for loan growth.

But how do you see loan growth per segment?

Should we expect wholesale loans to be modestly growing and retail loans being able to maintain its double-digit paced growth?

Yes.

This is Cesar.

I think we will expect that the trends are going to continue.

Due to the mention that you have pointing out probably it's going to be challenging to grow in the corporate segment, but the retail segments continue with a very good dynamic and the adjustments that we foresee are, as I mentioned during the presentation, adjustments in pricing and 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.

This is Gianfranco.

Just to complement what Cesar just mentioned, specifically in the retail segment you have to bear in mind that actually the third -- the fourth quarter, the last part of the third quarter and the fourth quarter are very strong in the SME business.

This is the seasonality we've seen over the last few years, basically because of the year-end campaign.

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 population.

So yes, we are positive in the SME and consumer lending and on the corporate, we will see that the portfolio is going to be flat or really a small growth due to what you mentioned in terms of investment.

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 guided.

And we noticed that despite your revising downward your GDP growth, loan growth, NIMs and expecting a higher cost of risk, you're maintaining a change, 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 fintechs?

And I don't know if Culqi, Tenpo and Tyba will be the key businesses to follow?

Yes, I'm going to talk about -- Gianfranco talking.

I'm going to talk about BCP's transformation.

We haven't changed our plans.

This is -- as I mentioned in the previous conference call, this is our long-term strategy and we're seeing that there's a lot of value.

We are bringing a lot of value because of the transformation.

What we don't foresee any deterioration in the cost-to-income ratio.

And the main reason is that despite the fact that we won't stop any of our investments, we are getting benefits of the transformation so far.

We are already closing -- we've already closed some branches due to the -- to escalating agile or scaling agile (inaudible), we are gaining efficiency there too.

In terms of QRs, QRs -- and actually this is a whole more structure -- strategy on payments.

Yes, which Cesar just mentioned, started as a P2P application.

Today it's also a P2M application.

We are -- as of today, we may have anything between 8,000 to 10,000 QR -- proprietary QR already deployed.

VISANET is also deploying its QR and our ambition is to have 150,000 QR codes by the end of the year.

We are doing further analysis on Q -- on Yape, sorry.

And the collateral benefits we're getting in terms of deposits, usage of debit cards and so on are very positive.

So we will continue investing specifically in Yape.

Regarding fintechs, I would say it's a twofold strategy.

One is the one Cesar mentioned that is parallel in building or buying companies.

And in addition to that, we at BCP also have a study in terms of either or both buying, partnering and/or testing new distribution models, risk models and things like that with fintechs.

Perfect.

We'll take our next question from Jason Mollin of Scotiabank.

I want to ask about BAP's guidance for return on average equity this year and return on average equity on a sustainable basis.

To keep the ROE outlook of 17.5% to 18.5% for 2019, what's 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%.

[BH] reported 18% in the quarter.

BCP was an impressive 21.5%, Mibanco at 20%, Pacifico at 13.6%, Prima at 33%, that accounts for almost all your earnings.

Can you talk about your confidence or BAP's confidence in this sustainable ROE outlook in particular with Peru's 10-year local bond yield?

Now I think it's a 5-year low we reached in July of 4.3%.

Maybe in that 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 comment on the strategic decision to use the excess capital to invest in opportunities outside of Peru, so maybe putting that all together, I think the most important to me is understanding the views on the long-term ROE?

Okay.

I am trying to address because there are several very relevant questions.

If you see our result we already have significant results that are not contemplated in the NIM nor in the efficiency ratio that are related to gain some sales of securities.

We have booked significant amounts in the 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 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 this reserve fund that is starting to be deployed has an impact of more than 100 basis points in the profitability so far.

So taking 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 profitability with these excess funds.

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 premiums 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 comment there?

I think the cost of equity, we clearly see 2 different forces.

The reference rates are lowering and this will tend to lowering the cost of equity that probably due to the situation, the 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 2 different forces.

And regarding 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 sensitive -- is less sensitive to the reference rates.

The wholesale portfolios are very sensitive and translating interest rate very rapidly.

The retail portfolios tend to be much more resilient.

Jason, hi, this is Walter.

The points you mentioned are very valid.

And the question is what is the cost of equity of Credicorp going forward?

You don't take short-term and long-term decisions based on short-term cost of equity movements.

So the question, which is a very valid one, which you're putting on the table is what do we expect to be the long-term cost of equity for Credicorp?

Clearly there's 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 were short-term movements and 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 decisions based on the cost of equity that we have always determined around 11%-10% -- it's around 11%.

And until we see more permanent changes in the macro scenario both domestic and international, which at this stage again I'm not sure we have enough perspective to determine that they are long-term changes, we will not change.

We do not have at this stage any indication that our sustainable return on equities, both of the short or long term, are not reachable or obtainable.

And we continue to work on those premises.

I don't know if we answered your questions.

Yes, that's very helpful.

We'll take our next question from Andres Soto of Santander.

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 Colombia was a key target.

We've 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, if it's going to continue consolidating the microfinance industry in Colombia, entering into a microfinance space in all countries or additional investments in the FinTech space?

Sure.

Again -- sorry, this is Walter Bayly.

I'll tackle 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 growth of Credicorp.

Number two, that it is the best practices in the world to have a continued presence in exercising the M&A muscle of inorganic 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's point number one.

Point number two, the fund, that reserve fund that we have determined, which currently is around $500 million, is not exclusively for the use of M&A.

It is a reserved fund which is there for a 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 0. Third, yes, we think that microfinance in Colombia is a good alternative for us for several reasons.

One, we believe that we have a domestic model which can be exported.

Second, as Cesar mentioned in his presentation, we think that the macro conditions and regulatory conditions are good for the development of microfinance in Colombia.

And furthermore, we see a fragmented market.

We have been there for almost 3 years with an operation that we started from 0 called Encumbra, where we dedicated our time to understand the market and how do we need to adjust our current model to the Colombian market.

After 3 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, 1.5 years or 2 before we can take another step because we need to incorporate what we have done, merge with our existing operation over there and do the work that we need to do internally.

So this is not a 100-meter race, this is more a marathon.

So we do not expect to do anything further microfinance in Colombia for the time frame that I already mentioned.

Again, we are going to be very disciplined in where we go, what we do.

Number 2, the $500 million are not exclusively dedicated to inorganic growth.

And number three, we will take some time to digest and incorporate -- we have not even paid for it, so incorporate what we have just acquired.

I don't know if I answered your questions.

That's very clear, Walter.

Following up on the Bancompartir acquisition, the microfinance space in Colombia is basically dominated by NGOs, so they are not very focused on profitability.

Bancompartir itself delivered 17% ROE.

Not sure what is your 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 -- has a compensation, so they're selling shareholders.

Is this money going to remain there?

If not, what is going to be the funding for this company?

Okay.

The current status of the microfinance industry in Colombia is not dissimilar to what we found in Peru several years back where the market was basically in the hands of NGOs which to -- even though they do not have a for profit driven, they are to generate and be self-sustained.

So there is a bit of a lack of understanding of what non-for-profit drives 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 spiral of growth of those customers.

So we see 0 conflict in us having a return on equity driven objective with -- competing with NGOs.

The one return on equity we expect obviously above the cost of equity for Credicorp for which we had a couple of conversations before that, but there are periods of timing which we need to adjust the model et cetera.

We think that this transaction, though small will be accretive for Credicorp shareholders.

And about the funding, it is a 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 shareholder likely to go behind it.

So we foresee no difficulties in achieving and obtaining the required funding going forward, not dissimilar situation to what we found when we acquired as we carry through.

We'll take our next question from Alonso Garcia of Credit Suisse.

I just wanted to ask on Mibanco as the ROE year-to-date is considerably down versus last year.

I mean I understand you've had some of the quality issues last year that might be affecting this year and that you are growing your base of employees.

My question is when this operation on profitability should subside and what would be a reasonable sustainable ROE for 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 investments of clients investing, it will be appreciated.

Yes, this is Gianfranco.

Regarding your first question, there are like 3 forces in the microfinance and in the microfinance industry and within Mibanco today.

On the macro side that competition is -- has been harsher today than it was the year before basically because the whole business is not growing as fast as before.

That has led to a squeeze in margins, so that's one force.

The other force is that the -- specific for Mibanco is that, as Cesar mentioned before, we have hired close to 1,000 people over the last 12 months.

The idea here is that we really achieve the productivity that we do foresee is the right productivity in terms of balancing commercial productivity and collections productivity for each [RM].

You have to bear in 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've already reached the productivity -- the balance productivity that can be achieved and obviously we're 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 at Mibanco has deteriorated this semester, if you compare the level of cost-to-income that Mibanco has compared to the main competitors in the microfinance industry, we are playing anything between 500 to 1,000 basis points lower.

So we do believe that we have a competitive advantage there.

The new RMs we've hired over the last year, normally a new RM gets or achieves the right productivity level after 9 months.

So the new vintages of -- maybe it's not the correct word, but the new vintages of RMs will start getting the benefit I would say by the first quarter of next year.

I'm sorry, and that will led -- should led us -- lead us to similar ROEs that there was we had before a couple of years ago at Mibanco.

Yes, only adding to that the increasing has been significantly in the last -- this year has been 1,200 people.

And we are paying the salaries of these people and the productivity is going to be full flow next year.

And just one final question.

Your running capital you mentioned I mean you have this because the M&A from.

However, despite this semi-activity that you have the robust months, you continued to accumulate capital at a nice pace.

You have now a CET1 of 18.8%.

So my question is if based on this level capital an extraordinary dividend is or could be potentially on a discussion from Q2 year-end to maintain capital at optimal levels?

As you -- hi, this is Walter.

As you mentioned, yes, it is potentially starting with (inaudible).

We have not made a decision and obviously has to be taken to the appropriate approval levels.

We'll take our next question from Gabriel Nobrega of Citibank.

I actually have a question on credit quality.

Looking at your provisions, we note that you increased them significantly more than 40% over a year.

However, your NPL ratios were relatively flat on a quarterly basis.

However, I understand that part of this could be due to the fact that you increased your write-off a lot.

Could you just share with us what you are seeing in terms of risk in your portfolio?

And is there are any segments that is worrying you more and if also this is one the main reasons why you were increasing your cost of risk guidance?

Yes.

This is Reynaldo.

Yes, as you were mentioning, provisions have grown quite a bit in this specific 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 specific integrations in some specific portfolios, specifically credit cards and some part of the SME segment.

And as such this reflects -- this is reflected in the provision -- in our provision estimates.

Having said that, our provision level to date is within our -- at that limits.

So I mean what we are doing is basically taking the adequate measures in terms of underwriting portfolio monitoring and collections to change that potential shift 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.

We'll take our next question from Carlos Gomez of HSBC.

I have 2 brief questions.

The first one is what is your expectation for loan growth in Peru over the medium term over the next 3 to 5 years?

And second, since you're looking at the M&A possibility since you have a fund, did you look at the transaction in Paraguay?

This is Walter, Carlos.

The answer to Paraguay is now loan growth.

I think we have some guidance.

(inaudible).

Yes.

We usually state that in the medium term the expected grow is 1.5x nominal GDP.

So if we have a medium-term real GDP of between 3% and 4% that is I think is achievable and 2% inflation we are going to have around a 9% growth.

And this is the sustainable growth with the market.

Probably we can do something a little bit better increasing the penetration in low segments with new digital capabilities.

Okay.

And if I may follow up on Paraguay, that would not be a market for you or that would not be a type of institution you would like to look at?

We have -- Carlos, this is Walter again.

We have never been very close to Paraguay.

Our people in Bolivia do believe that there is a potential to do some trade transaction and that is as 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 will do that through our Bolivian operation where they do have a certain amount of trade relations and maybe several -- underline several, many years on the road, we might do something, but at this stage it is clearly not on the table.

We'll take our next question from Yuri Fernandes of JPMorgan.

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 reports that the negative, it comes mostly on the retail fees on credit cards account maintenance, those kind of things.

So my question is what is happening there like why are you seeing decrease in concepts of those products?

Are you seeing a retail clients moving to another bank?

Is something like this, or is there any other explanation for the decrease on the seasonables product?

Yes.

Two issues, one is that macro environment doesn't help this.

There's a very high correlation in terms of -- you have to remember we have a lot of -- we are a very transactional bank, so a good bunch of our fees come from the transactional business.

That's one issue.

And the other issue is that clients -- and Cesar mentioned it, clients are migrating to digital channels, interacting more digitally.

And normally those channels -- or we charge much less on those charges or not charge at all on those channels and that's the reason why you're seeing a reduction in fees.

Obviously, the cost to interact with those clients is much lower when they interact through digital channel.

So these are the 2 main reasons why the fee income business hasn't grown that much.

Okay.

So just a follow up.

No decrease in the number of clients, and can you provide a number for the year?

I know you have the guidance of efficiency, they were remaining flat for the year, but any color on how much banking fees can grow this year?

We don't really...

Not really, but just to -- on your first part of the question, as a matter of fact, due to the -- both the digital and the self-served channels we've deployed over the last couple of years, we are seeing on the contrary on what you just ask, we are gaining a number of clients.

Last year the number of new clients we got into the bank was something that we've never seen before, over 1 million clients.

Yes.

We'll take our next question from Sergey Dubin of Harding Loevner.

Just one question on your NIM trajectory.

I understand what you said about BCRP cutting rates by 25 basis points, but at the same time you have always talked 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 these various impacts, what's the impact from the decline in BCRP reference rate versus the shift to higher NIM loans?

And do you see -- how do you see NIM trajectory over not just this year, but over 2020 and possibly even 2021?

Okay.

Probably 2 different questions.

If we make on a various static sensitivity analysis, each 10 basis points of reduction interest rate impacts the NIM in around PEN 20 million.

This is assuming an instantaneous input, but the most important forces that are already in place are the changing currency and the mix of the portfolio.

So we think that we can counterbalance the negative effects of lower interest rate with the change in portfolio and the change in currency composition.

Okay.

Can you elaborate on that a little bit?

What does it mean change in currency and change in portfolio?

Are you referring to a change in portfolio, you're referring to segments like…

Yes.

Retail versus corporate and (inaudible)?

Probably going step by step.

In sol 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 sol.

And this has been driven for the second factor that I am going to mention, that is in the change in the composition of the loan portfolio from a more corporate portfolio to a more retail portfolio.

The retail portfolio usually have not only higher structural, higher interest rates, but are more resilient, are less sensitive to short-term movements in the interest rates.

When you have an adjustment of 25 basis points in the corporate portfolio, the next disbursement is going to have a reference that is 25 basis points lower.

For a credit card is much more stable as it's more driven in function of the risk of the client, the segment, the value offering.

So doing this movement from wholesale to retail I think we can improve the risk-adjusted NIM over time.

Well, exactly.

So here is my question I guess.

When -- as your loan book, especially on the corporate side the price is downward from tomorrow, whatever, basically as -- because it's floating rate loans, so your base is going to reset, so the end of the year most of your corporate loans, if not all of them, will be re-priced and then retail will probably take some time to re-price depending on the floating effect or whatever, but starting from January 1 of 2020 because as I understand it and you've been talking about it before that you're continuing to shift your focus towards retail funding because the corporate spread is very low.

So that's what -- that's exactly my question, how do you see assuming BCRP doesn't do anything on the rates and the rates stay flat, how do you see NIM evolution for 2020?

I think...

Well, we -- Gianfranco.

We already provided guidance on both NIM and risk-adjusted NIM.

If I...

And as you may see, those are slightly lower than our previous guidance.

Right, but I'm asking for next year.

I'm not -- I understand the dynamics this year.

I'm trying to understand what are --

So -- yes.

These -- yes, you don't have to give me like exact guidance in terms of...

We are -- as of today, we...

Yes, I'm just trying to understand the dynamic, the trajectory.

Yes, the dynamics are what Cesar mentioned.

Since we are shifting our portfolio towards more retail portfolio and within retail, the portfolio is more skewed on solid, the NIM -- the NIM should be higher.

However, the cost of risk is going to be higher too, therefore what we expect is that somehow a similar risk-adjusted NIM as we are expecting for the rest of this year.

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.

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 alter the fundamental growth potential for Credicorp, but are likely to impact short-term results.

Domestic political volatility has been around for quite a while and we believe its only impact is related to the already mentioned impact on lower GDP growth.

With this overall context, Credicorp's quarter results have been very solid and are an indication of what we see going forward and of the fundamentals of Credicorp, namely, strong franchises, strong capitalization, solid risk management and continued cost control and good fundamentals in most of the countries in which we operate that continue to offer growth potential.

Our agenda is full.

We continue to be focused in improving the products and services we offer our customers, in adapting our business models to incorporate shifts in customer preferences and technological advances.

In short, we have gone through short-term domestic and international volatility before.

We believe we are prepared to weather the international and domestic headwinds and we continue focus in pursuing our medium-term objectives to maintaining customer preference while generating value for shareholders.

Thank you very much for joining us in this conference call, and we look forward to seeing you in 3 months time.

Thank you and goodbye.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.