Good morning, everyone. I would like to welcome all of you to Credicorp's second quarter 2018 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; and Mr. Reynaldo Llosa, Chief Risk Officer. It is now my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin.

Good morning. And welcome to Credicorp's conference call on our earnings result for the second quarter of 2018. Before we review Credicorp's performance in the second quarter of 2018, I would like to highlight some important matters that characterize the scenario in which we have operated in the last few months as tailwinds for our businesses. First, Anglo American approved Quellaveco, a major mining project in the south of Peru for a total investment between $5 billion and $5.3 billion. Moreover, according to the Ministry of Finance, Quellaveco will have a positive impact of 40 basis points in real GDP growth in 2019. Two other important projects that have been announced are, Mina Justa, a greenfield, and Toromocho, a brownfield, each of them for a total investment of $1.3 billion. This announcement indicates that business sentiment is positive and reflects a recovery in private investment in the country. Second, economic growth was stronger than expected. As a headwind, copper price decreased. With regard to the political environment, in the last few weeks, there has been noise related to allegations of corruption among high-level members of the judiciary system, after a series of audios were leaked. This will be an opportunity to improve the judiciary system. Furthermore, in the presidential address on July 28, 2018, President Vizcarra mentioned the possibility of calling for a referendum to address the following issues. Re-election of members of Congress, reforms regarding financing for political parties, a reform of the judiciary system and a return to a bicameral parliamentary system. Additionally, he stated that S/ 4.0 billion will be invested in El Nino reconstruction program in 2018. Overall, business confidence has improved in the last three months after a period of declines when threats of presidential impeachment loomed. Please let's move to the second page of…

[Operator Instructions]. Our first question comes from Ernesto Gabilondo from Bank of America Merrill Lynch.

Hi. Good morning. And thanks for the opportunity. Three questions from my side. The first is on loan growth. So, your new guidance is between 7% and 9%. With a 9% growth and better economic activity that we're seeing in the country, do you think this new guidance seems conservative at some point or are you concerned that the recent political noise in the country is making you to be less optimistic? And my second question is on NIM and the NII growth. So, we see a slight NIM expansion on a quarterly basis. We're seeing an improvement in the cost of funding, a higher exposure to Mibanco and the retail business and we're seeing more stable margins in the wholesale banking. So, I think in terms of NIM expansion, it's behaving well. However, when we look to the NII growth, it's still below loan growth. So, how do you see the correlation of NII and loan growth in the next quarters? And finally, in terms of the cost of risk, it's at historical lows. And I think that made you to improve your guidance to 1.3%, 1.5% for the year, but what could be the expectation to reach the 1.5%? Again, it will be more by increasing the loan portfolio growth or do you think there's something related to the political outlook that it's concerning you to be reaching the 1.5%. Thank you.

Relating to loan growth, beside the factors that you already mentioned, we have also a comparison effect because we grew more at the last quarter of last year. So, we have a comparison issue when we compare year-over-year. In the second point related to the NIM and the stability of the NIM, I think we are balancing the acceleration in the growth of the high-yielding business with a smaller portfolio – a smaller investment portfolio and a very competitive environment for corporate loans. Related to the cost of risk, what we expect is to have a continued improvement slightly probably in the underlying quality of the portfolio, an acceleration in the growth – in the relative share of the growth in the high-yielding segments like credit card, consumer and SMEs. But the new methodology implies that when you increase the loans in this portfolio, you, from the beginning, start to book provisions based on the expected loss. So, you don't wait for the incurred loss. So, when you originate these kind of loans, you, from the beginning, from the origination, you start building provisions based on the risk quality of these portfolios.

Okay, perfect. Thank you very much.

Thank you. Our next question comes from Jorg Friedemann with Citibank.

Hi, Walter, Alvaro and Cesar. This is Jorg. I appreciate the opportunity. I have two questions. The first with regards to asset quality, I understand what you mentioned with regards to the cost of risk and the expected loss methodology under IFRS 9. But I was just wondering, on the case of Mibanco, when those better vintages will reflect better NPLs because the NPL ratio has been deteriorating sequentially since the end of 2016. So, when does it stabilize following what you're seeing in terms of better vintages? And on the wholesale and SME, which were negatively impacted in this quarter by specific cases, so do you have additional concerns or do you think that, going forward, these portfolios would behave well? And my second question would be related to net interest margins. I understand that you're facing a tougher environment in terms of competition on wholesale and you are also seeing lower reference rates that could, to some extent, pressure margins. However, it has behaved very well with what you highlighted in terms of funding costs. How sustainable those margins are? And this better funding mix and credit mix could compensate these headwinds that you are seeing both in terms of competition and also in terms of lower rates in the country. And also, if you could just give us an additional – if I may, an additional overview about the transformational projects and how these affect OpEx in the midterm. So, how long would you envision OpEx above inflation? I really appreciate. Thank you.

Okay. Thank you, Jorg. First, regarding to Mibanco, Mibanco has been growing above the level of its peers. And as I mentioned during the presentation, they have had a slight deterioration in specific portfolio and a decrease in the effectiveness of the collection. That has been addressed. But because we already have some vintages with these high-profile risks on the book, we expect to have provisions above the levels of the first two quarters for the remaining part of the year. In relation to the NIM and the environment, if you allow me to split a little bit the answer between income and expenses, as you mentioned, we expect a strong competition in the wholesale segment. We expect probably a stable rate in our retail portfolios, but a bigger share due to the relative growth of these portfolios. Now, we have an investment portfolio that is below the levels at the end of the first quarter. So we are going to have less income for this part of the book. And in relation to cost of funds, because we consider that the cost of funds in sols is going to be relatively stable that the cost of funds in dollars are going to increase, probably the average cost of funds is going to increase. The whole combination lets us to think that we're going to have the NIM in the ranges that we have already stated. You already mentioned a question related to transformation process. The transformation process is working well, but it's in an acceleration process. So, we should expect during the remaining of the year and the next year an acceleration in the expenses related to these initiatives. For the nature of the projects, we are going to obtain the best financial results over time. At the same time, we are improving operating results, acquisition capabilities to the process.

That's perfect. Very well explained. Just a quick follow-up on the first question with regards to Mibanco. I understood the pace of provisions, but in terms of the NP: ratios, given the better vintages that you are observing, when we should see the NPL ratios stabilizing because they continue to go up?

Yes. Let's remember that NPL ratio is considering part of the effect of the El Nino phenomenon, which are we are starting to see this time of the year. And basically, what we are working today will see our results by the last quarter of this year. That way, we will probably see more stable NPL ratios.

That's perfect. Thank you very much, gentlemen.

Thank you. Our next question comes from Marcelo Telles with Credit Suisse.

Hi there. Good morning, everybody. Thanks a lot for your time. I have two questions. The first one is a more top-down one. In your guidance, you reiterated your relatively stable ROE at 19%. But in this quarter, you were a little over 18% ROE in an economy that is definitely accelerated, as you mentioned, almost 6% growth in the second quarter versus the same period of last year. So, what do you think will take for you to be able to maybe improve or not deliver, let's say, an ROE above 19% down the road, especially considering your historical profitability level has been well above that. I understand competition. It's probably fierce nowadays than back then, so why not expecting a higher a sustainable return on equity in the medium to long term? And my second question is a more specific question regarding the – the fact that your NII lagged – your NII growth actually lagged behind the growth in all portfolios. I think you mentioned – in your press release, you talk about the negative impact of some – the unwind of some swap positions. I was wondering if they were, indeed, meaningful and if you could quantify that, so that we have a better view what the outlook is going to be in the coming quarters. Thank you.

Okay. Globally, regarding to the ROE during the first half the year, and probably I'm going to review some quarter that I already stated previously, is that we have a balance sheet issue in the sense that, during the first quarter we have approximately S/ 2.1 billion of income generation, but we have several charges against that reduced the total shareholders' equity. We have the dividends. We have the impact of the acquisition of Mibanco because when we already have booked the goodwill, the additional acquisitions, the difference between price paid and book value should be charged against earnings, we have the impact of the valuation of the investments during the second quarter. And additionally, we have an initial adjustment at the beginning of the year for the adjustment of IFRS 9. So, the combined effects were a lower shareholders' equity during the first part of the year. So, when we talk about a sustainable ROE of 19%, we are talking about an acceleration over the time because given the levels of average equity, now the average equity, the return on equity should be around 18%. The 19% is an acceleration that considers over the time an improvement in efficiency that counterbalanced the pressure of target that we envision in our growing markets over the years.

Just as a follow-up, do you see that – sorry to interrupt. Do you see any chance that actually, in the long run, your ROE could actually be higher than the 19%? Regardless of all these issues that you mentioned, you think there is the possibility that we could at least get more – maybe a little bit closer to the ROEs you had some years ago which was above 20%?

Of course. It may be. We are giving our best estimate now. But you should remember that our level of equity is significantly now than the level of equity four years ago. The bank – four years ago, BCP as standalone, that is significant for Credicorp's overall performance, operated with average equity, core equity Tier 1 level of above 7% and 8%. Now, we're operating with average core equity Tier 1s more in the vicinity of 11% and with a peak of 12% during the years prior to the declaration of dividends, which are significant improvements in the level of equity. Now, additionally, we have a war chest considering future acquisitions that around S/ 1,100 million – S/ 1,500 million. Sorry. That has an impact on ROE also.

Thank you. And regarding the NII question?

Yes. If you remember, we presented in page number 10 the risk-adjusted NIM. So, we manage the business more focused on the risk-adjusted NIM than the NIM for the cost of risk [ph] alone by itself. Of course, we manage daily each line, but the overall result is that we are already pursuing. And when we decrease interest rates, the counterbalance is less risk in the specific parts of the portfolio. And you can see in the page number 10 of the presentation that between the first quarter of 2017 to now, we have an increase in the risk-adjusted NIM. And that's the period that we've tried to manage.

Okay. That was helpful. Thank you so much.

Thank you. Our next question comes from Thiago Batista with Itau BBA.

Hi, guys. Thanks for the opportunity. I have just one question about the medium-term loan growth. A little bit soft improvement in loan growth in Peru, Peru, which, let's say, [indiscernible] of the political situation in the country, but looking at the medium term, how – looking at the medium term, how do [indiscernible] level of loan growth for Peru or for Credicorp? And which segment do you believe will lead the expansion? My question is, to trying to estimate if it's possible to see in a couple of years loan growth, let's say, at 15% or around 10% is the new normal for Peru?

Okay. Now we have differing estimates. The International Monetary Fund, central bank, internal estimates that situates the loan growth probably in the vicinity of high single-digits. And for the next year, probably something that's slightly below that. There is a possibility to have around 10%, but I think it will be the high-range scenario. Saying that, the growth probably is not going to be uniform among segments. For the last quarters, the micro segment has been growing faster and has been throwing challenges in the corporate segment, for example.

Okay, perfect.

Thank you. Our next question comes from Andres Soto with Santander.

Hi. Thank you for the opportunity to ask questions. My question related to your insurance business. We have seen a significant increase in the acquisition cost this year, which has not only affected the insurance business, but also putting pressure on your consolidated efficiency ratios. In your press release, you mentioned some accounting affect there. And I would like to understand if we can expect any reversion in these negative trends over the next few quarters? And more generally speaking, if you can, guys, please comment on your current views on the insurance business in general and over the medium-term and how does it fit within the overall Credicorp portfolio. Thank you.

Hi, Andres. This is Alvaro Correa. Yes, I can explain. There are a couple of reasons why the acquisition cost went up. One is related to more activity, higher sales on premiums on some high commission business, like, for instance, annuities or the Renta Flex, which is a special product, a new product that we are selling starting a couple of years ago, and also credit life related business. So, that increases commissions on one side. So, it's a matter of mix really. And the other one is related to an item that we used to charge for each policy in the past. And the regulator basically forbade it at the end of last year to continue charging that concept. Therefore, what happened is that we added up to the premiums, but the impact on the accounting is that we no longer charge a one-off fee at the time of the sale, but we basically charge it on the premium and we basically accrue it over the period of 12 months. So, what is going to happen at the end is that, after 12 months, this will be compensated, but in the first half of the year you see the impact of this change. With regards to the medium-term perspective for the insurance business, there are, as Cesar mentioned at the beginning, the motor insurance business is under some pressure today. We're making some changes on how we – it's not an underwriting issue really. We have pretty good levels of cost of claims. But it is a matter basically of expenses that the company will have to be more efficient. So, we are applying very stringent efficiency programs in the different companies under the insurance umbrella. So, that has to change over time. We are very optimistic about what's happening in the life insurance business. It's growing very well. The health business is improving dramatically, both in the health insurance as well in the health services. Both are doing really well. And property and casualty, in general, and as you know, a bad year last year because of the El Nino effect. This year, we have some casualties that affected short-term results, but starting to improve. That's our perspective. It's going to improve over time. So, basically, we are expecting better returns in the months and the years to come.

Thank you for your response, Alvaro. And what is your ambition in terms of what this business should be delivering in terms of ROE? It is currently at 11%. Clearly underperforming the rest of the Credicorp units. It is reasonable to think that it can get closer to the consolidated levels of Credicorp?

What I would answer is that something that we expect to achieve in the short run is to go above the level of 15%, and I would expect a sustainable ROE of around 17%. Yeah. Well, you have to take into account the impact of the unrealized gains on the equity of the company. So, that sometimes distorts the results on return on equity. So, you take that aside, we're expecting around 17% for the whole business.

That's very clear. Thank you very much.

Thank you. Our next question comes from Jason Mollin with Scotiabank.

Yes, hi. I have two somewhat related questions. I wanted to get more details on your distribution strategy. We saw that the – I guess, it's at the BCP level – Agentes is up over 400 year-on-year, 265 increase in the quarter. If you can talk a little bit about the strategy for distribution. And then, in that context, related to that, you mentioned that the transformation strategy is underway. You gave us some data in the press release about the use of digital channels, et cetera. Maybe you can expand a little on that and give us an idea on how that's working. Thank you.

I think this is at the very core of the transformation effort. In terms of BCP, at the beginning, at the very core of the transformation efforts are the development of capabilities to distribute digitally different products. We are working actively in that. We have several products already working and some of the labs. The results should be an increase in the percentage, in numbers of units and dollar amounts of the products served through digital channels. Probably, sustainability of alternative channels such as call centers, ATMs, agents, and probably a decrease in the number of traditional branches, but we are examining that very carefully with an holistic distribution capacity approach –holistic distribution capacity model, in which we consider different segments, different ways to reach clients, combining all the different channels – digital, alternatives, traditional branches.

When you show that chart of the digital usage, how far can that go? Or what are the expectations? When I look at the chart, it's showing, obviously, dramatic increase over the last years, but how should we think about the usage of digital channels as a percentage? I guess I'm looking here at this chart, I guess it's close to 50%. Is that – if I'm reading the color right in this chart.

We expect that this percentage increase over time. Coming back to the last question, we expect a significant increase in the capacity to sell products not only in a transactional dimension that is stated in the chart that you are referring to.

Okay. That sounds good.

Thank you.

Thank you. Our next question comes from Carlos Macedo with Goldman Sachs.

Thanks. Good morning, gentlemen. A couple of questions. First question, you mentioned IFRS 9 and how now you're provisioning according to expected loss. What does that say about your NPL ratio? Is it something that we should expect a decline? The cost of risk is now down about as low as it's been. And I understand the issues around writing off loans in the SME book, but what does it say about your forward NPL ratio? Second thing, bringing Marcelo and Thiago's question together, 19% sustainable ROE, if you payout around 30% means you can grow your loans around 12%. Is that reasonable in the medium term in a sustainable way? Or if this loan growth is going to be closer to 10%, should you maybe be paying out more? Maybe like 40% or 50%? Should we expect the payout to increase? How should we think about those questions, given the guidance that you give for sustainable ROE and the medium-term growth prospects, long-term growth prospects that you have?

Okay. I'm going to make initial remarks regarding to NPL. Probably Reynaldo can add something additionally. You have two different effects here. You have the P&L effect in the cost of risk. And as we mentioned previously, in the NPL, you have balance sheet effect that related, for example, to loans that are already provisioned that we cannot discharge from the books because it has a judiciary process, a legal process underway. And the procedures usually take five years, so we intend to sell periodically part of the portfolio. So, when we accelerate the growth in segments which has real estate collateral, we should expect an increase in this ratio over time. If we are not able to sell parts of this portfolio, it doesn't imply an increase in the risk profile. Actually, this portfolio has less cost of risk than other parts of the portfolio, but this has this lagging effect that lasts for many years in your books.

In terms of our forward acquisitions when these NPL ratios should stabilize, we probably will see more stable numbers by sometime in the end of the year. Or as Walter was explaining, it's true that the reason why this NIM ratio has been growing regardless the positive effect of the cost of risk, but we will only see more stable numbers on the NPL ratio. Besides we're also – in an effort to try to show some strength of this portfolio, this collateralized portfolio, so probably we'll see their numbers in terms of the NPL ratio by the end of this year.

Regarding to the long-term ROE, probably [indiscernible] some data, we expect the growth for the portfolio for this year in the range of between 7% and 9%. Probably within the last year, in the high single digits. The margins are going to be pressured. I think we should, everybody, expect that. The cost of risk is stable. And we have an aggressive efficiency program underway that should balance out everything and help us achieve sustainable ROE of around 19%.

Great. Given that growth may be high single digits, maybe low double digits, could this imply that maybe to keep that – because otherwise your ROE will go down from just having a lot more capital than you need. Does that mean that eventually you might raise the dividend payout to something like 40%, 50%?

Yes, it can imply that because, if you have a sustainable ROE of 19% and you are growing your risk assets [indiscernible] 8%, 9%, something in this vicinity, you conceptually have the remaining part to other corporate purposes – can be dividends, can be acquisitions. We already mentioned that we have an inorganic growth strategy over place and we are working in that actively.

Okay, perfect. Thank you.

Thank you. Our next question comes from Yuri Fernandes with JP Morgan.

Thank you, gentlemen. I have a question on deposits. And I guess it's clear that margins would be under pressure. I just would like to know more details if deposits or cost of funding may be part of this pressure because, if I look in here, like your deposits, they are growing slightly below the total loan book. But, more particularly, like they keep them in the books, they are growing much less than that. So, my question here, how is the competition for the liability side? Like, if you also see cost of funding maybe increasing, so deposits can accelerate. And my second question is regarding the securities portfolio. I guess, you already addressed this in the presentation and in one of the questions, but can you provide more details on what happened with this mark-to-market and if you expect any future impact on the coming quarters similar to what we saw in the second Q? Thank you.

Yes, okay. Regarding to the deposits, for many years, in Peru, when the loans had been growing slowly due to the acceleration [indiscernible] acceleration in the GDP, the deposit has been growing less than the loan portfolio. This has been happening in the country, and so structurally the loan-to-deposit ratio has increased slightly over time. So, we should expect probably the same over time. Not a dramatical change. That is more increasing loan-to-deposit ratio in the entire system. Of course, there are a lot of competition for the deposits. But I would like to distinguish two different kinds of deposits. The core deposits are not interest-bearing, demand deposits, saving deposits that we maintain and even increased slightly our market share participation – that is our very strong base. And in these deposits, you compete not in terms of pricing, but in terms of distribution capabilities, products, the servicing capabilities of the bank. And in terms of the other parts of the deposit, that's going to be driven by market conditions. Basically, the reference rate in sols and in dollars. What we expect in the short term, an increase in foreign currency interest rate is stable for the remaining of the year in local currency. And the next year, we expect an increase in the reference rate in local currency. So, this is in relation to deposit. I cannot – and the second question was related to the investment portfolio. While we had – during the first quarter, we have an above-average result selling – realizing gains, selling securities. And in the second quarter, we have below average results, probably with two different types of results. In terms of BCP, we have already realized losses selling securities for the trading portfolio. In case of the other subsidiaries, we are more mark-to-market and probably we're going to see reversal during the remaining quarters. In the measure that the interest rates comes down for the bonds that we have on books that are mainly Peruvian and Latin American securities. Medium-term securities.

Very clear. Thank you.

Thank you. Our next question comes from Isaac Nontol with Prima AFP.

Good morning. And thank you for the opportunity. I have only one question from my side and it's related to the insurance business. Has Pacifico already adopted or is about to adopt the new mortality table published in March 2018 to receive some adjustments during the next quarters?

No, not really. We already implemented the new tables. And as a matter of fact, we have been using very conservative forward-looking tables in the past. So the adjustments were not that high. And what you see now is probably what you will be seeing in the next quarters.

Okay, thank you.

Thank you.

Thank you very much.

Thank you. At this time, I would like to turn the conference over to Mr. Walter Bayly, Chief Executive Officer, for closing remarks.

Thank you very much. And as usual, thank you all for joining us in this call. I've got relatively little to add to what has been presented and discussed in the Q&A session. But this first half of the year, we have been positively surprised by the resilience of our economy, notwithstanding the political changes, the impeachment process and the continued political instability. Nevertheless, it is important to realize that this very positive GDP growth in the economy has somewhat relevant effect to the extent that we are comparing it with previous that was affected by El Nino. In reality, the economy does not feel like a 6% GDP growth which is the number that has been statistically presented because of the factors that I mentioned about. The year-to-date results which can be summarized in a return on equity of 18.5% and growth in net income of 14.4% for the first six months demonstrate another solid period of results for Credicorp. The strategies of all our businesses are advancing in an orderly fashion. We continue to invest in several fronts in all our businesses and prepare our people, our infrastructure, our systems for the future. We are very confident that our financials will continue to show very positive results notwithstanding short-term volatilities or short-term effects on any particular quarter. The fundamentals of all our businesses are solid and we are positioning all of our businesses for growth in the future. And we are very confident in our ability to continue to deliver very solid long-term results for our shareholders. Again, as I mentioned, very little to add. It's been a quarter without any substantial one-off effects. But everything in all the parts of our organization is working in an orderly fashion. And again, just to summarize, we are confident to be able to continue delivering the results that we have had for the past 10, 15 years in the years to come going forward. With this, I finish our presentation. And again, thanking you all for joining us in this conference call. Thank you and goodbye.

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