Good morning everyone, I would like to welcome all of you to the Credicorp Ltd. Fourth 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 to questions. With us today is, Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Reynaldo Llosa, Chief Risk Officer; Francesca Raffo , Transformation Officer, and Mr. Cesar Rios, Chief Financial 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 fourth quarter of 2019. Before we review Credicorp's performance, I would like to highlight some important matters regarding the local environment. First, following the dissolution of Congress by President Vizcarra on September 30, 2018. Congressional elections took place on January 26, 2020. Voting results point towards the fragmented Congress with nine political parties. A simple majority requires 66 votes, while an absolute majority requires 87 votes, which mean, that parties will have to form a consensus to pass legislation. Members of Congress will assume their roles on March 2020 and their turn will end in July 2021. Second, the Executive branch has taken to measures to bolster public investment. Amount emergency decrease to 100 down to stimulate public investment, the following are not working. The reactivation of paralyzed projects. Measures to increase execution of prioritized infrastructure project. A prioritize public investment of regime and loosening the fiscal deficit rule to achieve a 1% deficit of GDP by 2024 instead of 2021. These measures are expected to have an effect on economic activity towards the second half of 2020. Next slide please. The economic activity decelerated during the last quarter of 2019. As you can see in Chart 1, our estimates suggest GDP expanded around 1.6% year-over-year in the last quarter of the year. With these result GDP expanded 2% in 2019 while non-primary GDP grew around 3%. The lackluster result for 2019 is primarily attributable to a decline in the result reported by the primary sector particularly fishing and mining. For 2020, GDP expect to accelerate an advance 3%. However, this recovery will mostly be attributable to our rebound in the primary sectors and to public investment. As you can see in Chart 2,…

Thank you sir. [Operator Instructions] We also ask that you please only ask one question at a time. After each question address by our speakers you will then be allowed to ask as many follow-ups as needed. But again, please only ask one question at a time. Thank you. Our first question will come from Jorg Friedemann, Citibank.

Thank you for the opportunity. One point on the guidance please and one point that is implicit in the guidance, but I know, you did not comment. So, on the asset quality, we have seen that cost of risk as guided for 2020 is on the range of 1.6 to 1.8. So, the flow would be the level posted in 2019. And you mentioned that this is due to the origination in riskier segments. However, over the past two years, you have already been focusing a strongly in riskier segments, but I know, in 2018 for instance, your cost of risk declined. So, my question is, what is different now, because the activity seems to be picking up and your NPLs are already coming down. So, why to keep higher guidance of cost of risk. Are you willing to build up coverage, which is below historical average, this is the first point. And the second point, just for me to understand, what I know, drove the income compression or is low down in 2019. You grew 3.5%, which is below even the level of credit growth, and that was at 6.6%. And what do you have for 2020 in terms of expectations for fee income? Thank you very much.

Hi. I will give you initial comments and probably Reynaldo complimenting. In the case of asset quality, we have came down for the last four years from around 2% to 1.6%. While we have been improving several variables in our risk management models. Going for what we have to a factors to consider, when the inclusion of higher risk segments and the momentary effect of the deterioration of the premium portfolio at BCP. During 2020, we are going to fine tune the results of this premium portfolio. And at the same time we are going to purposely take more risk in new segments as we have been mentioned previously. In relation to fee income. We have state this previously also that the expected is that the fee income is going is going to grow less rapidly than the margins, because as we incur new margins, we are going to go, for example, in consumer loans, digital loans that it's going to have healthier margins, but usually no fee income related. And there is a strong competition in the payment systems also. So a structurally we are going to expect a lower fee income grow down the road.

Regarding the coverage of our NPL, I would like to add that it is around 113%, it's been stable around that number. It has even picked up a little bit during this year. And I would say that that happens because, I mean, that level of knowledge basically as loan stuck up by real estate collateral. So I mean, that doesn't reflect the fact that there is a important recovery value in these specific loans.. So with that level of courage, I would say we're pretty healthy.

Okay, thank you.

Thank you. Our next question will come from at Jason Mollin, Scotiabank.

Yes. Hello. Hi everyone. Good morning. Credicorp showed a quarter-on-quarter and year-on-year increase in non-interest expenses. And in your release you stated that an important part of the increase is due to consulting and market expenses. Can you help us quantify that and understand that these will be ongoing expenses or not? And in relation to that, looking at your return on equity outlook and the sustainable return on equity outlook, you mentioned that the sustainable ROE of 19% will be once you've optimized, I guess, the capital and the transformation program. If you can talk about particularly on the capital side. Is this more on earnings improvement, perhaps from efficiency on sustainable ROE? Is it -- or is it more about optimizing capital? Thank you.

Okay. Probably first, relating to expenses, particularly at BCP Stand-alone level we have a strong seasonality in the fourth quarter. I wouldn't say that is any particular effect in advisory fees for this year. What's happen is that in many cases, you register the final invoices in the last two months of the year and this is a seasonal effect. I think is mainly the reason. When you have extraordinary gains that coincide with this period, you offset, but in this case, we have only will say, the trend. In the case on return on equity, what we are having now I will say, are three main effects. First, we have the impact of the reserve fund that in general terms cost us north of 100 basis points. If we put these funds to work or make another decision, I will say automatically increase 100 basis points of return on equity. We're talking about around 600 million at this point. The other factor is the transformation. Now, we are in the phase of investment, investing a lot is spending a lot in the transformation and we expect to start gradually gaining more ongoing a tangible not only operational, but financial rewards for this investments, and this will paid off down the road. And third and not a less important, the effect of withholding tax. We have increased significantly withholding dividends from 2018 to 2019 and we expect to continue paying increasing dividends over time. So, for example, from 2018 to 2019, almost 2% of the earnings -- the decreasing earnings growth was attributed to marginal, more withholding taxes. The money that we ship upwards from Peru to Bermuda to pay dividends, pay withholding tax of 5%. We pay more dividends, we pay more withholding taxes. And the rate of the withholding taxes can increase also. When we start to operate in a more sustainable levels of dividends, the marginal factor of this increase is going to diminish. A change from 13 to 28 seconds down the road, it shouldn't be as dramatical as these on a continuous basis.

Thank you very much.

The good factors to there, we have regional expectation of higher ROEs.

Thank you, Cesar.

Our next question will come from Ernesto Gabilondo, Bank of America Merrill.

Hi, good morning, Cesar. Good morning, guys. Thanks for the opportunity. So GDP growth is expected to improve this year by public investment and rebound in primary economic sectors. However, we continue to see tough competition, especially in wholesale loans from international players and in the Microfinance sector. So, how do you see the challenges for your loan growth of 8% to 10%, especially in a year with a divided Congress and almost one year ahead of the presidential elections? And then I will make that my next question.

Okay. I would say that we are going to face probably two different realities, the retail -- the BCP retail portfolio and Mibanco portfolio growing on a faster pace, not only competing, we're trying to capture the same specific markets that we have been dealing, but probably addressing with new products, different markets. So, we are not only competing in the specific field, but expanding the potential markets going downward or creating different products. So we are positive about that. The counterpart is, as you rightly mentioned in the wholesale segment that we expect tougher competition, both in terms of volume and margins, the combined effect produce has an expectation of between 8% or 10% as we have provided in the guidance.

Perfect. Thank you. So -- and then my second question is how you see the net income growth these year. Are you expecting double-digit growth? Or it should be more in the high single-digit growth? And then what will be your assumptions for the dividend payout ratio to achieve this 16%, 18% ROE guidance? And then my last question is on your M&A activity, do you continue to see opportunities in the region, any sector or country where you are more interested? Thank you.

Okay. I think there are probably three questions. If I can address one by one. I think in terms of NIM, our implied growth on NIM, I'm going to give you the answer, combining the loan growth with the expected NIM, give you the answer. I'm probably going to be in the vicinity that you're ready mentioned.

Sorry, you're ignoring the net income growth.

In the net income, if you combined of these figures probably we are going to be in the single-digits.

In the single-digits and your payout ratio, do you think it could be the same as in 2019, because I believe you consider special dividend in 2019?

In the case of the payout, we are, I will say, it’s a split answer. In the sense that we expect to continue paying a higher dividend, but in additional, we are now analyzing. We have not reached a conclusion at this point. How to -- what to do with the reserve funds. That was set assign mainly for M&A purposes. Based on decisions, a potential additional special dividend will be declared.

Perfect. And then in my last question of the M&A activity, as you were mentioned, you can use these reserve funds. So any sector or country where you are seeing more interest?

Hi. This is Walter. Regarding M&A, we continue to regularly review opportunities both domestically and in the countries that we have targeted, which we have well commented with all our shareholders. And frankly, we're finding a lot of potential assets that are interesting for us. So probably in the first half of this year, we will have to review and take a decision as to the size of continuity of such mutual fund. This is all work in progress. So I do not want to create expectations, but we are managing this aggressively vis-à-vis opportunities in the market and value creating for shareholders.

Perfect. Thank you very much, Cesar and Walter.

Thank you.

Thank you. Our next question will come from Alonso Garcia, Credit Suisse.

Good morning everyone, and thank you for taking my question. My first question is on the CET1 level that is embedded in your…

Excuse me, I couldn't hear you very clearly.

Okay. Sorry, I will start again. So, my question is on capital, I mean, you are targeting a sustainable ROE of 19%. So, my question is, what kind of CET1 ratio is embedded in that 90% target? And my second question is, I can ask my second question afterwards.

Okay. I will say that, in line with these expected ROE can be -- and payout ratio north of 50%. If you assume that a business grow let's say a 10% and you have an ROE around 18%, 19%, a very simple mathematics gives you that payout is going to be a little bit north of 50%.

Okay. But just to clarify. This 19% implies capital structure with the CET1 close to your target or your internal minimum of 11%. Is that correct?

Yes. The basic foundation is to have each company appropriately capitalized. That is the foundation. That's the basic assumptions. After that, requirement is fulfilled, we have extra fund to pay dividends. And at this point, with the analysis that we conducted in the case of BCP, the core equity Tier 1 in the minimum point is 11%.

Okay. Understood. Thank you. And my second question is on OpEx [ph] I mean, based on your guidance is it fair to correct to assume that you are anticipating an acceleration in expensive growth from 6.7% growth in 2019 to a high single-digit this year. And what is a timeframe for your investment plan and is it like a two, three years of intensive investment or four years? And when should we expect OpEx growth to normalized. After this [Indiscernible]?

Well, we are targeting in average is maintaining the efficiency ratio with an internal transformation of some variables. What we expect this as a product of the transformation, we became much more efficient down the road, but spends more on technology in new digital capabilities and less on the traditional expenses, actually embedded in our numbers and a significant shift is spending more in IT, in new capabilities and less in traditional expenses. In the short term, the effect is going to be neutralized and down the road, what we expect is a better efficiency. But continuous being investing aggressively in new capabilities is not going to be a three-year plan. That is going to end. What we expect that this is a trying framework to reap the benefits but we are continue to transform the capabilities to be a more digit and more data driven institution.

Thank you very much.

Thank you. Next question will come from Andres Soto, Santander.

Good morning. Thank you for the presentation. My question is related to Bolivia. This operation represents almost 7% of the loan book. And you highlighted some macro and political uncertainty in this country. And when I look at your coverage, I see that only 3% of your loan book in Bolivia is currently covered. So my question in relation to your cost of risk guidance is what level of coverage you assuming in these guidance? And to what extent you see some downside risk in your guidance based on your Bolivia exposure? Thank you.

Probably Reynaldo is going to compliment me. But as a general rule, all our past due loans are properly covered. In the case of Bolivia, its no exception. What you have in Bolivia is a structurally lower past due loans that implies and in relative.

And just to add to what Cesar mentioned, when that crisis is start Bolivia we were quite concerned of that potentially, it could have in your portfolio. We have been positively surprise on the evolution of the portfolio. We haven't seen any significant impact in other quality in Bolivia. And we have to take a closer look at what happens in that country in following months in term of the elections. But as of today, we don't have any major concern in terms of that potential impact. We have increasing our guidance of provisions to other risk.

Andres, this is Walter. Yes, we are concerned with Bolivia. even further, more than the political volatility is need in the country to do some financial adjustments that will undoubtedly have an impact on the macroeconomic stability of a country. We are hoping that those adjustments are gradual and start soon, otherwise, a more volatile situation could come down the road. It is not material in the portfolio of Credicorp. And portfolio and back in Bolivia is more than adequately capitalized. And we feel that we have taken the appropriate measures to prepare ourselves in such hopefully unlikely scenario of more disruptive macroeconomic conditions appear during this year.

Perfect. Thank you guys for the insights.

Thank you very much. [Operator Instructions] Our next question will come from Carlos Gomez, UBS.

Hi.

Carlos go ahead.

Hi. This is Carlos Gomez from HSBC. Two questions, one on the corporate change you want to increase the size of the board. Could you comment a little bit as to why specifically from [Indiscernible], what is the rational and couldn't have in mind for the position? Second, a technical question on the page four of your press release, you show the profitability by company. There is a growing item which is others, which is now minus 175 million solid, largest prima. Could explain exactly what it is in that particular line? Thank you.

Hello, Carlos. This is Alvaro Correa. With regard to the size of the board, that's the outcome of an assessment that has been performed and has to do with the diversity and more balanced distribution of board members in the committee. And on top of that, the need to increase the number of independent directors. So, the conclusion was basically to have one board member and that will help a lot in this governance improvement process.

Okay. The second question.

Yes, probably the last question is in relation to the already mentioned withholding taxes. The company builder unit, [Indiscernible] and some corporate expenses, but the main factor is withholding taxes. As I mentioned before, when you increase dividends, you need to reserve more money for withholding taxes, the dividend from one year to another was increased in fold.

So, follow-up there. Is there anything that you can do about the withholding taxes. I mean, re-domiciling [ph] the company save you some money in any way?

Carlos, this is Walter. Yes, we are continuously evaluating and obviously because of the increase of the amount of this withholding tax. We are bringing the issue back to the table. It is extremely complicated because it involves selling assets and moving assets from one country to the other, which have huge consequences from a tax perspective. So yes, we're looking at it. But so far, we have not been able to find an alternative which seems to be a better structure than what we are today because of the cost of moving from one place to the other, I didn't know if I explained myself.

No, you explained yourself. And obviously there is no simple answer to this. So if we need to get us to technically a higher tax rate going forward?

That is unfortunately true.

All right. Thank you very much.

Thank you. Our next question will come from Yuri Fernandes, JP Morgan.

Thank you gentlemen. I had a question regarding your guidance, and to your risk adjusted NIM. It points to a zero to 30% increase. Then similar to your margins, but your cost should be from zero to any bit higher. So my point is like what's a confidence level that the risk adjusted will increase, because about this mix shift towards consumer and local currency loans, this trend is not totally new, like we saw this in the last one, two years. So my point is like, how -- like how should we think about the risk adjusted NIM for 2020 demanding the low end of the expansion? Are you confident that we can see a surprise here?

We have -- let's say we have different ranges, and in the ranges are the expected outcomes. Something that we need to consider is that the basic of calculation was nor identical. Cost of risk is based on the loan book, and the NIM is in the entire portfolio, including investments. So it's not absolutely linear.

Got it. Thank you.

But I would like to add, I mean, that the underwriting process in the new segments of the market is taking us every year a larger share of our total portfolio. So we expect to have the cost of risk increase a little bit, but a net interest margin adjusted to risk increase more than what is the impact, the negative impact on the cost of risk.

No, I mean, just like if you have your like NIM, increasing like [Indiscernible] and your cost of risk move in the same direction. In the end like the risk adjusted NIM can be flattish, right? So that was my concern when you try to put together NIM with the cost of risk?

Okay. I think we are usually very conservative on our projections and then we see -- we are very optimistic on the level of growth on these new segments. So that's why we projected a higher growth of risk for the year.

No. Got you guys. Thank you very much.

Thank you. Our next question will come from [Indiscernible] TRG management.

Hi. Thank you for taking my question. I had a question on costs, it seems you're guiding for your cost income ratio, et cetera to be flat in 2020 versus 2019. But I know you've had an aspiration at BCP to dramatically improve your efficiency ratio. So is that going to be harder to do now? And, you've spoken about the cost for the technology transformation program. So I was wondering what those costs were? And then finally had a question on loan growth. You got into a big pickup and loan growth. Have you actually started to see this early 2020? Or is this more of a hope and aspiration that once the political environment improves spending starts coming to you eventually see it? Or has this been something you've already started seeing in 2020? Is there evidence of this?

Okay. Our guidance is related to efficiency not cost. So, I think like the numerator and a denominator, both growing. In terms of the impact of the transformation, as I already mentioned is a medium term effort and we are starting to see the benefits and in the particular case of BCP that explains almost 70% of the results of the group. During 2018 despite a growing investment in the transformation that almost doubled during the year, we have improved a cost to income ratio 100 basis points.

How much are the investment you're making in the transformation roughly?

Excuse me'

How much is the quantity and investment in the transformation?

At BCP level, we have -- directly as an expensive, though is an investment. In terms of expenses we are in the vicinity of 200 million solace. But the investment is significantly higher than that figure. And we are going to see an amortization day and the benefit also.

Okay. And then on loan growth, I was just wondering, have you actually started to see an improvement in loan growth in 2020? Or is this something that you're hoping will come through as the year progresses? And so I just had one more thing I was curious about, you said something about 600 million in reserve funds that you could get more interest on. And you talked about that is something you could deploy these funds to improve your sustainable ROE in the long term, but as a bit confused about what you meant by that?

Okay. In the case in the case of loans, our expectation is I mentioned, between 8% to 10%. This is a little bit higher than the 6.6% average daily balances that we grew during this year. We expect some pickup in specific segments, but especially, we have a significant expectations to grow market share in a special niches, through new products, new channels, as we have stated before, so it's a combination of both.

Regarding the reserve fund the intent for that fund was mainly to be able to have the liquidity available to capture opportunities that we think could be found in the markets and in the businesses in which we have strategically focused Credicorp. In order to have that liquidity, obviously it is in very low yielding, very liquid assets. Does the return obtain for that excess capital has obviously been very low. If we were to assume that that fund totally disappears, which is not something that is quite on the table right now, this would mean a distribution of funds that would increase the return on equity by about 100 basis points. Those are the comments that were made in the prior question. Going forward, as I mentioned in the prior question as well, we are starting to believe that there are no significant opportunities that seem to be available. And during the first half of this year we will reassess the size and whether or not we want to keep that fund. At this stage we have not made the decision. My only comment is that, we will reassess this during the first half of the year and take the decision that obviously generates more value to our shareholders. If we are going to keep a cash fund for that size, it doesn't make any sense. If we can redeploy it to improve the profitability, and by the generation for our shareholders, it does make sense. Those were the comments I don't know if I explained myself.

Perfect. Thank you.

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

Thank you very much. A quick comment on each of our four business lines regarding the last year's performance. At BCP, we have seen strong results, growth on loans driven mainly by the retail banking. Thanks to improvement in the value proposition, and the bank targeting broader segments of the population, while implementing new risk, data and analytics models. Very intense competition on the wholesale side. Fortunately, the margins are not on that side of the business. In Microfinance, was a challenging year for Mibanco due to a combination of increased competition and portfolio, the duration which led to pressure margins. As a result, Mibanco has strengthening its risk model and is in process of developing a hybrid business model, leveraging data and analytics to be able to originate better and distribute more efficiently our loans. This is an ongoing process, and I will talk a little bit more about it. On Pacifico, we have in booth profitability at the group a three-month. Pacifico won the tender for two tranches of the contract to cover the cost of disability survival and burial for the ASP. And Prima had a very strong performance driven by cost control and portfolio gains. Credicorp capital, a boost in profitability of the investment banking and asset management business due to favorable financial market conditions, which allow the group to achieve gains and proprietary portfolio. Going forward, BCP will continue its strategy focusing customer experience and efficiency in all segments. Investments in digital transformation are already helping to increase bank penetration. We are starting to see the results. They're still not absolutely meaningful within the size, but we think that this is the way to go and we will pursue this path going forward. In Microfinance, as I mentioned, we are -- the efforts are focused…

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