Good morning, everyone. I would like to welcome all of you to Credicorp Ltd. Third Quarter 2018 Conference Call. We now have our speakers in conference. [Operator Instructions] With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy 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 Capital’s Chief Financial Officer, Mr. Cesar Rios. Sir, please go ahead.

Hi, good morning and welcome to Credicorp’s conference call on our earnings results for the third quarter of 2018. Before we review Credicorp’s performance in the third quarter of 2018, I would like to highlight some important matters that characterize the scenario in which we have operated in the last months, tailwind for our businesses. First, the private formal labor market remains robust. Different indicators like payrolls from the private sector showed healthy growth rates. Second. The second anchovy fishing season is expected to boost GDP growth in the fourth quarter. Third, we see a gradual recovery in private investment due to ongoing mining investment cycle and the expansion of Jorge Chavis International Airport. As headwinds for our businesses, first, the international environment has become more challenging; second, the slowdown in private investment during the third quarter of 2018. With regards to the political environment, Peru will hold a referendum on December 9 to address the following issues: reelection of members of the Congress; reforms regarding financing for political parties; a reform of the judiciary system; and the return to a bicameral parliamentary system. Finally, as we have shared with the markets in the last months, unfortunately, the political noise has posted ups and downs during the last months and it might continue in the following months. Let’s move to the next page please. Here, I would like to discuss the evolution of the local economy in the third quarter. In chapter #1, you can see that in the third quarter, our estimate of Peru’s GDP growth disaccelerated to 2.5% year-over-year due to the negative contribution of the primary sectors to real GDP growth, while non-primary GDP grew around 3.5% year-over-year according to our estimates. We foresee that the fourth quarter will be more dynamic. Therefore, all-in-all, real GDP growth…

Thank you, sir. [Operator Instructions] Our first question will come from Carlos Macedo with Goldman Sachs.

Thanks. Good morning, gentlemen. Thank you for taking questions. So I really only have one question, it’s about loan growth. I know you’re talking about how you are growing above the market. The market did show a slight deceleration this last quarter in terms of growth. With the GDP growth accelerate in the fourth quarter, probably an acceleration there, what do you think is the level that you can grow, say, with GDP, I suppose, stays in a normalized fashion?

Excuse me, sorry.

Yes?

Sorry for the interruption. We couldn’t hear very well at the beginning of the question. Could you please repeat?

Okay, sorry. Sure. I was just wanting to ask one question on loan growth. You talked about how you’re growing ahead of the market. The market is a little bit slower, it’s slowed a little bit in the third quarter likely because GDP growth was slower. If GDP’s growth stays around 3.5%, 4%, given the potential they have in the consumer market and the growth in the labor market, what do you think could be a sustainable level of loan growth for you going to, say, 2019 and 2020? Is it 10%? Is it 15%? How quick do you think loans can expand?

As we have mentioned before, we state over time that the loan growth of the existing can grow around 1.4 times nominal GDP. That is going to give us a range slightly before – below 10% with recurring GDP expectations.

But given the levels of penetration, isn’t that – obviously, in the past, if I remember, you guided something like 3 times real GDP, but the past is the past now. 10% with the levels of penetration in Peru particularly in the consumer side seems a little bit low. I know that informality is high and everything, but given the trends in the labor market, I would expect a little bit more?

Could be a little bit more growth specifically if we can, not only as BCP as a system to develop the capacity to lend to new segments. As a BCP, we’re working actively in doing that and we expect to have more significant visible results over time, not probably – not significant probably at the beginning of 2019, but as we can develop the capacity to distribute at a lower cost and with best risk measure tools, we can expand the market in the line that you mentioned previously, but it’s not going to be very visible at the beginning.

Okay, thank you.

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

Hi, good morning, Cesar and thank you for your presentation. My question is related to Mibanco. You mentioned an adjustment to the business volume, which included an increase in provision in this quarter and has slowed down in loan growth as you probably dedicated more resources to collections. After those adjustments, ROE declined to 22% versus the 30% that you have already achieved in this business. What can we expect going forward in terms of the potential profitability of Mibanco?

Probably recapping and regarding the adjustments, as you already mentioned, we have fine-tuning the balance between origination and collection. So we expect to start growing a more healthy rate down the road in the next quarter. And in terms of provisions probably we are going to see an improvement early next year. As a result, we will expect an improvement in profitability above the current levels, but probably not as high as the 30% that you mentioned before.

Okay, that’s clear. Thank you, Cesar.

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

Hello. Thanks for the opportunity to ask the question. I just wanted to see – I didn’t know we had heard from Credicorp management about the digital transformation and some metrics. I don’t know if there – if you wanted to point to one of the metrics that we were focused on that the long-term objective of digital sales was 70%. And you were showing figures I think as of June of around 7% at BCP. I just wonder if you can give us an update on some of those metrics that we can try to track those more closely, I didn’t see them? Thank you.

Jason, this is Gianfranco Ferrari. We don’t have as of today the exact figures for the quarter. As we mentioned before the target of 70% is an aspiration. However, why the aspiration, because what we are seeing is that whatever new product we put in place in the digital – into the digital channel quickly achieved a rate of over 50% of sales through digital sales. So that’s why our aspiration is to tackle – to reach 70% by 2021. We can come back to you with the exact figure as of September of this year.

Okay, great. Thank you very much.

Jason, just complementing this. This is Reynaldo. Remember that we started these in terms of numbers of sales of units, not in terms of the amounts disbursed. And what Cesar was commenting in terms of attracting new segments and tapping new markets probably require a very small loans for these for at least period of times. So it will be definitely an important growth in number of units sold, but not specifically in the amounts disbursed.

Okay. That color is helpful. It makes sense. Thank you.

Okay.

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

Thank you so much for taking my questions, gentlemen. I have 2 questions. The first one both with regards to cost of risk, the first one more specifically on asset quality, NPLs have been affected over the past few quarters with some specific cases that you mentioned occurring both in the wholesale and also in the SME portfolios. So, just wondering, how comfortable you are with those specific cases going forward? I understand that we didn’t have anything else on the Car Wash investigation, but just wondering, how comfortable you are overall with the wholesale and SME portfolios? And the second question, you are now adopting IFRS 9 as long as you understand and in the beginning of the presentation, it was clear to us how comfortable you are with the economy, so how much improvement could we see next year in terms of cost of risk versus this 1.43% of reserve year-to-date? Thank you.

Probably, I am going to give you an initial answer and Reynaldo is going to complement me. The construction case, it’s one of these occasional situations that are usual in the wholesale portfolio that from time to time occurs. That is not a trend or a recurring event. And in the case of Mibanco, as we have mentioned before, we have addressed the main issues and we expect improvement early next year. In the underlining portfolio of BCP, we are going to have a slight increase in the risk level, but because we want to expand the loan growth as we have mentioned previously. In the case of BCP, it’s going to be a purpose increase taking in new markets and improving the loan growth.

I agree with Cesar. I mean in the wholesale business I think we already have reached the peak in terms of provisions. So we don’t expect any further provisions in that portfolio, not in the construction industry or any other specific case, except specific cases that you always see in these markets. And in terms of the retail, we see very positive trend in both the SME and consumer markets. We have had a specific issue in Mibanco, but like what Cesar was mentioning, it has already been tackled and we expect very – good improvement in – starting in the first quarter of 2019.

Okay. And in terms of cost of risk, sorry in terms of cost of risk, should we already work for next year with an improvement versus these levels of 1.4 that you are running this year?

The guidance for this year, probably we are going to review that in the same vicinity, is a range between 1.3% or 1.5%.

We as of today, we maintain that guidance.

Thank you.

Thank you. [Operator Instructions] Our next question comes from [indiscernible] from Credit Suisse.

Good morning everyone. Thanks for taking my question. I do want to touch based on – sorry, can you hear me well?

Yes.

Perfect. So just wanted to touch base on the efficiency front, what we have – you haven’t discussed a lot of color on the initiatives taking place at BCP, I just want to touch base on other initiatives that are being undertaken in other subsidiaries such as Mibanco and Pacifico, I just want to see what has been done there, what can be done from here and what are your targets there, anything – any color you can provide on that sense will be helpful? Thank you.

Hi, this is Alvaro Correa. You will see different stages in the digital transformation on the other subsidiaries. For instance in Pacifico, we already have an effort on a separate lab that we have created about a year and a half ago. We are working very strongly on that and we are at the point in which we will probably start increasing that effort and embedding it in the actual operation of the company. So the advances have been great. We have started to see very, very good advances on transactions being done, both in sales and also in the after-sales or servicing of the customers. So we are working on that and very, very good advances. And on Prima AFP, we have just started. We are probably a year behind. And in Credicorp Capital, we are going to start with an effort next year, early next year. So basically different stages, but all are committed to that.

Perfect, in terms of Mibanco, anything going on specifically there?

Yes. This is Gianfranco Ferrari. In Mibanco, I would say it’s at a similar stage than Pacifico. They started a digital lab about a year and a half ago. Basically and conceptually, what they are doing is without changing their distribution model, which is a very high touch model is basically focusing in how to leverage in digital tools in order for their RMs to become much more productive. So basically, they are working on routing, on being more efficient on routing and also related to the RMs, basically digital iPhone or handheld device.

To facilitate the closing of operations have all the information already in the field. But everybody as Gianfranco mentioned, regarding to the RMs productivity.

Without – but what is very important, I would like to highlight this is without changing the distribution model.

Thank you. Thank you very much.

Thank you. Our next question comes from Miguel Tola with CAPIA.

Good morning to everyone. Thanks for taking my questions. I have two questions, the first one comes from the presence of real estate collateral loans that – what you mentioned on the earnings report, it says like – it’s like a significant portion, can you tell me a little bit more about these type of loans, do you receive any kind of interest on them and what’s your expectations on the next quarter for these type of loans?

If I understand, good question. We are talking about mortgages. We are talking about SME loans with collateral that at the end has less level of risk, but when you have some defaults, the defaults stay in books longer. But of course, they are normal loans with higher – and high quality collateral.

Okay. Thanks. And the other question comes from the – for BCP standalone, we can see there is a decrease on the number of branches and ATMs, what are your expectations for the next quarters on this type of number, they are going to start going – translate into the digital platform or what’s your expectation about that?

Yes. That’s exactly the idea. Our plans are migrating. I would say on the transaction side, as a matter of fact, less than 7% of the transactions are done at the branches today. We still have a challenge on the servicing and selling part of the business. Going forward, what we see is that in net, we are going to close branches, we will still be opening branches in places where we are the leaders of commercial potential, but in net, we are going to be closing branches going forward.

Thanks for your answer.

Thank you. [Operator Instructions] Our next question comes from Carlos Gomez with HSBC.

Yes. Good morning. In the past you have referred to competitive conditions in the corporate market, I think we can see common about that at this time, can you make an assessment about how competition stands now, both in corporate and in retail. Second, do you expect any consequences from the referendum and the changes in the introduction of framework in Peru for your business? Thanks.

I will answer your first question, competition is harsh in both corporate and the regional market. I would say the last three quarters. Especially in the corporate market the competition has been very, very harsh in terms of rates. We do see now that, that competition has been “more rational”. Margins are picking up slightly. And in the retail side, again it depends on the market or on the product, but from there, good competitors. Margins are slightly lower. However, we do focus on margins after risk or NIM after risk and that balance we believe we will achieve the balance where we are very comfortable. And again going forward, we see that we may gain market share. But most importantly, we want to keep that NIM after risk stable or with slight improvement. Regarding the referendum as a matter of fact, we don’t see any major impact in the way we do business in Peru.

And actually, the expectation probably has been incorporated in the economy, because in the previous quest, the results are already clear.

Okay. Going back to competition, so again neither the savings banks nor the commercial banks at this point in your opinion are acting irrationally in any particular product?

I will have to have a discussion with you on what irrational means, no, the answer is no.

Thank you very much.

Thank you. At this time, I am showing no further questions in the queue. I do apologize. We do have one question coming from [indiscernible] with Compass.

Hi, guys. Thank you for taking my questions. I just would like to know if you could give us some additional color on those specific measures for taking down the cost of risk at Mibanco. Just what are those specific measures, please?

Okay. Recapping the points that we have already mentioned, we have three main drivers. One is related to the balance between loan origination and collections. We have implemented a number of initiatives to improve the efficiency of the process and the productivity of the loan officers. At some point, probably the balance between loan origination and collections growth went too far in favor of the origination. We are in a high-touch business. This reduced focus on collections impacted the cost of risk. We have already tackled this issue and we are much better and much more productive than 1 year ago, but probably not at the peak that we reached probably 6 months ago, but we are in a much better position in relation to this point. The second was deterioration in certain specific products that at the end have cost of risk higher than we expected. We have made adjustments in the credit policy and in the monetary measures and we are originating now within the risk target levels. So, the new vintages are according to our expectations, but because we have we already in the books a couple of quarters of higher risk loans, we are going to see some higher provisions down the road in the next quarter and probably at the beginning of next year. And third, we have a more temporary effort impact that was caused by the last legs of the skips of the El Niño product that we have an impact in the last quarter. This is once at the end time that we don’t expect further impact from these factors. As a whole, we have addressed the main issues and we will expect low risk of levels in early next year.

Okay, great. Thank you.

Thank you. At this time, I am showing no further questions in the queue. I would now like to turn it back over to Mr. Walter Bayly, Chief Executive Officer of Credicorp for closing remarks.

Thank you very much all of you for joining us in this call. We clearly continue to live in a political environment, which is unstable though it is starting to settle down after a much more volatile first quarter. But hopefully, the political noise will continue to come down and the administration in the country can better focus on making the reforms and changes and taking the decisions that the country needs in order to better achieve its potential. Good news in the quarter for Credicorp was clearly the pickup in loan growth at BCP. As mentioned by Cesar, loan growth at Mibanco was relatively subdued, because we wanted to have a very good control on risk management. Overall, in Credicorp, we have had several isolated effects related to risk at BCP and at Mibanco, which in aggregate increased the cost of risk for Credicorp. We are not concerned. All issues have been identified, have been adequately addressed and dealt with and we are now seeing the new vintages well within our risk parameters. We have in this regard good expectations regarding what can happen at BCP regarding loan growth and risk management and at Mibanco regarding loan growth. And again as mentioned by Cesar, risk at Mibanco will continue to probably be a little bit higher than what has been in the past for the next quarter. The results in this quarter were favorably impacted by the good and improved results in all the non-banking subsidiaries which helped to offset the increased cost of risk. And just to finalize, we are very focused and moving forward very well on track on our medium-term plans and objectives and are extremely confident as to the sustainability of our businesses and the continuity of the results as we have been in the past and outlined in our guidance. With this again, I want to thank you all very much for joining us in this conference call and hope to be again at the end of the next quarter. Thank you very much and goodbye.

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