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Edited Transcript of BAP earnings conference call or presentation 8-Nov-19 2:30pm GMT

Q3 2019 Credicorp Ltd Earnings Call

HAMILTON Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Credicorp Ltd earnings conference call or presentation Friday, November 8, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alvaro Correa Malachowski

Credicorp Ltd. - Deputy CEO & Head of Insurance and Pension Funds

* César Ríos Briceño

Credicorp Ltd. - CFO

* Gianfranco Piero Dario Ferrari de Las Casas

Credicorp Ltd. - Deputy CEO & Head of Universal Banking

* Reynaldo Llosa Benavides

Credicorp Ltd. - Chief Risk Officer

* Walter Bayly Llona

Credicorp Ltd. - CEO

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Conference Call Participants

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* Ernesto María Gabilondo Márquez

BofA Merrill Lynch, Research Division - Associate

* Gabriel da Nóbrega

Citigroup Inc, Research Division - Research Analyst

* Jason Barrett Mollin

Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services

* Jorg Friedemann

Citigroup Inc, Research Division - Director

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Presentation

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Operator [1]

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Good morning, everyone. I would like to welcome all of you to the Credicorp Ltd. Third Quarter 2019 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. Reynaldo Llosa, Chief Risk Officer; Mr. César Ríos, Chief Financial Officer; and Mr. Guillermo Garrido Lecca, CEO and Health Insurance -- of Health Insurance and Business.

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

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César Ríos Briceño, Credicorp Ltd. - CFO [2]

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Thank you. Good morning, and welcome to Credicorp's conference call on our earnings results for the third quarter of 2019. Before we review Credicorp's performance, I would like to highlight some important matters regarding recent events in the local environment. As you are aware, President Vizcarra dissolved the Congress on September 30 and called for parliamentary elections, which will be held on January 26, 2020. It is important to note that the Constitutional Court of Peru will rule on the constitutionality of the dissolution of Congress. Thus far, the financial indicators have registered little reaction to this event, PEN actually appreciated and the yield on Peru's sovereign bonds decreased. Despite these events, we believe that Peru will continue to report a strong macroeconomic fundamentals. These fundamentals are: prudent macroeconomic policies, trade openness; an integration in the global market and a [market preamble] legal framework.

Moreover, although economic activity has decelerated in 2019, Peru will remain one of the fastest-growing economies in the region, and inflation is expected to be low. We expect Peru's GDP to grow 2.5% in 2019 and 3% in 2020.

Second, economic activity accelerated in the third quarter of 2019. As you can see in Chart #2, after a 1.7% year-over-year expansion during the first half of the year, our estimates suggest GDP expanded around 3.3% year-over-year in the third quarter of 2019. Nonprimary sectors actually accelerated and grew 3.3% year-over-year and underpinned Peru's expansion as one of the most dynamic in the region.

Finally, the Central Bank reduced its monetary policy 25 basis points in November 7 to 2.25%.

Slide 3, please. In recent weeks, the government has announced several measures through legal decrees. First, the government has established a special regime to reinitiate work on public investment works that have been paralyzed by arbitration disputes. Moreover, it has put together packages to bolster public spending in the last quarter of 2019.

Regarding taxation, income tax acceleration for operations on the local stock exchange will continue to 2022. Furthermore, the government approved a Mergers and Acquisitions Law, which reduced the transaction amount that triggers a review process by regulators.

Lastly, the Prime Minister has announced an increase in the minimum wage in the first quarter of 2020. The minimum wage currently stands at PEN 930 and was last increased in 2018.

Next, I would like to review recent events in the economies in the region, none of which has -- is expected to have a material impact on Credicorp's results.

In Bolivia, according to the national electoral tribunal, Evo Morales won the presidential election in the first round. The Organization of American States will carry out an audit of the elections due to procedural controversies, and authorities in Bolivia have stated they will respect the decision. Protests continue in this country due to the alleged electoral fraud.

In Chile, social unrest was started by an increase in public transportation fares. Despite announcement from President Piñera, protest continue.

In this context, which is marked by both external and internal risks, the Central Bank of Chile has reduced its reference rate to 1.75%. The rate has fallen 125 basis points since March 2019. This event, although relevant in economic, political and social terms for Bolivia and Chile, are unlikely to significantly impact Credicorp, whose main business are located in Peru.

Slide 4, please. Regarding our quarterly year-end year-over-year performance, there are important aspects that were recorded I would like to mention. First of all, this quarter, Credicorp declared a special dividend of PEN 8 per share to be paid in dollars on November 22, 2019. This dividend represents a payout of 16%, which together with the ordinary dividend paid in May, represents a payout of 56% of 2018 earnings.

In the case of Universal Banking. In the third quarter of 2019, average daily loan balances at BCP posted 7.5% growth year-over-year. The Retail Banking portfolio grew 12.3%, while the Wholesale Banking portfolio expanded 3.3%. The loan mix and the currency mix favored the evolution of NIM, both in a quarter-over-quarter and year-to-date terms.

In September, BCP rolled out a liability management operation, which is corporate bonds to optimize its maturity profile while reducing the funding cost curve, both in local and foreign security as we will review later on. The cost of risk grew quarter-over-quarter and year-over-year mainly due to an increase in the expected loss reported by SME and Consumer segments. BCP Bolivia reported a good level of loan growth and a reduction in provisions.

With regard to microfinance, the focus on retail deposits resulting in an improvement in the funding cost. Our focus on fine-tuning risk management has temporarily impacted loan growth. Regardless, we expect to see a recovery next quarter. Additionally, net interest margin was impacted after we stop originating loans in some riskier segments. Finally, it is important to note that the newly hired sales force is still on a learning curve and such, we expect productivity to rise next year.

With regard to insurance and pension funds, the insurance underwriting result increased this quarter. This was primary due to the evolution of the life insurance business, which posted an increase in its net earning premium level. The property and casualty business, however, experienced an increase in its net claims. Corporate health insurance and medical services, which we manage in association with UnitedHealth, continue to improve.

The pension fund business registered an improvement in its results after posting a recovery in operating income and efficiency. On the other hand, quarter-over-quarter, the profitability of the business legal reserve decreased.

In investment banking and wealth management, on November 1, after receiving the approval from the regulator in Colombia too, we completed the acquisition of 100% of the capital stock of Ultraserfinco. In the third quarter of 2019, corporate finance activity recovered after registering lower results in previous quarters. This uptick occurred after important loan transactions and M&A deal, involve both Peru and Colombia, were closed.

The sales and trading business grew at a slower pace than in previous quarters in a context marked by an increasing volatility at the capital market level. The asset management business continue to focus on growing its international platform of funds for institutional investors in Latin America and other regions.

Finally, in wealth management business, we have expanded the portfolio of products available to clients in Chile and Colombia, where assets under management have grown by 22% year-to-date.

Slide 5, please. Now I will comment on Credicorp's performance highlights in the third quarter. First, regarding profitability measures, Credicorp reported net income of PEN 1,093 million, which was 0.5% lower than the second quarter results. This figure led Credicorp to report net income of PEN 3,292 million year-to-date, 8.8% higher than the figure posted last year. Results year-to-date represented a return on average equity and average assets of 16.6% -- sorry, 17.6% and 2.4%, respectively.

The loan folio accelerated this quarter, registering year-to-date growth of 6.8%. The cost of risk increased in this quarter mainly at BCP Stand-alone through Retail Banking. In this context, the cost of risk situated up 1.59% year-to-date, 16 basis points higher than the figure posted for the same period last year. The pace of price adjustments are somewhat out of step, which led risk-adjusted NIM to fall to 4.3% year-to-date, 5 basis points lower than the figure posted for the same period last year.

In terms of operating efficiency, the cost-to-income ratio fell 40 basis points. This was due in large part to the fact that Pacifico won a tender for Disability and Survivorship policies for pension funds. Nonetheless, after loss of reserves, the impact of the tender in net income is moderate.

Finally, core equity tier 1 ratio of BCP Stand-alone increased quarter-on-quarter and year-over-year and stands at 11.95%.

Slide 6, please. As of September 2019, our loan portfolio accounted for 66% of our interest earned assets. Regarding the year-to-date evolution of loans measured in average daily balances, you can see in Chart #1, total loans grew by 7% year-over-year. Loan growth was mainly driven by Retail Banking and BCP Stand-alone as you can see in Chart #2.

The mortgage loan book led expansion in the retail folio, accounting for 40% of total growth. The majority of the remainder of growth was attributable to the Credit Card, Consumer and SME segments. It is noteworthy that the Credit Card loan book continues to grow at a faster pace and registered an expansion of 21% year-over-year growth.

In terms of currency mix, loan expansion was mainly driven by local currency. This context, loan growth was led by higher margin savings.

Slide 7, please. In terms of funding, as you can see in Chart #1, Credicorp's funding structure grew 9.1% year-over-year driven mainly by deposits on bonds and notes issued. As shown in Chart 2, our deposit base shows quarter-over-quarter growth was led by demand deposits and driven mainly by wholesale clients, both through interest-bearing and noninterest-bearing deposits.

Year-over-year, growth was led by both demand and saving deposits, which grew 11.3% and 10.8%, respectively. It is important to note that growth in saving deposits is concentrated in individual accounts.

Bonds and notes issued, reflect the impact of BCP's liability management strategy to improve its maturity profile, while reducing the funding cost curve in both local and foreign currency. In fact, the dollar-denominated 5-year bond issuance was priced at the lowest interest rate ever achieved by a Peruvian issuer. Due to a strong demand and attractive interest rate, new money was issued in both currencies, and as such, bonds and notes issued registered growth of approximately PEN 2.1 billion quarter-over-quarter.

It is important to note that there is a one-off charge in derivative and exchange difference related to the liability management transaction which affect total nonfinancial income this quarter. Nonetheless, new money will replace more expensive debt, and as such, will favor our funding costs in coming quarters.

Slide 8, please. As you can see in Chart #1, (inaudible) has improved 8 basis points a year-to-date due to the sale of loan portfolio under legal collection. Year-to-date, the portfolio sold total approximately PEN 170 million was generating an impact of 14 basis points in the NPL ratio.

In Chart #2, you can see the year-to-date evolution of the cost of risk which increased 16 basis points. This was primarily due to: first, the increasing provisions in BCP's Retail segment. As we mentioned last quarter, our SME team and medium-term loan deteriorated more than expected. We have already taken pricing, origination and collection measures, but the full impact of portfolio adjustments will be evident next year. Moreover, we are penetrating risky consumer segments through digital channels, where the increase in the cost of risk is compensated by higher margins.

Second, the deterioration in the debt service capacity of a specific client in wholesale banking in the first half of the year. It is important to mention that this loan is already provisioned, and as such, we require no new provisions in coming quarters.

Third, the change in Peru's growth prospects led to adjustments in the parameters of our risk orders. Additionally, Mibanco's cost of risk increased quarter-over-quarter as we continue to adjust origination and collections processes. The full impact of this measure will materialize in coming quarters.

Slide 9, please. Net interest income grew by 0.9% quarter-over-quarter and 6.5% year-over-year. Year-to-date, net interest income grew by 7.7%. This performance is a result of: first, the positive evolution of interest income, which was mainly driven by growth in loan volumes and more profitable mix of business segments and currencies as mentioned earlier. This was partially offset by a decrease in interest rate and higher competition, particularly in wholesale banking and microfinance.

Second, growth in interest expenses, which was driven primarily by an expansion in the deposit volume via time deposits. NIM deteriorated by 8 basis points quarter-over-quarter and 13 basis points year-over-year to situate at a level of 5.4% in the third quarter. Nevertheless, year-to-date, NIM rose 6.6 basis points, reaching a level of 5.37%.

Finally, risk-adjusted NIM decreased 18 basis points quarter-over-quarter and year-over-year in a context marked by higher-than-expected cost of risk after the market behaved somewhat differently than anticipated in our pricing model. Adjustments are underway. In the year-to-date evolution, risk-adjusted NIM decreased 5 basis points, situated at 4.3%. Measures taken, which will improve risk-adjusted NIM in the following quarters, are: fine-tuning of our pricing strategy to compensate for higher risk in the Consumer segment; adjustments in origination and portfolio management guidance for SME-Pyme segment; and adjustment to origination and collection guidance at Mibanco.

Slide 10, please. Regarding nonfinancial income. In Chart #1, you can see the year-to-date evolution of nonfinancial income, which expanded 11.5%. This was driven mainly by 2 factors: first, by an increase in the net gain on securities in the trading portfolio at BCP Stand-alone following the sale of Peruvian government bonds; second, albeit to a lesser extent, an increase in fee income, a core item in nonfinancial income.

In Chart 2, we can see that the year-to-date evolution of fee income registered an expansion of 4.2% mainly at BCP Stand-alone. This was mainly attributable to an increase in the gain of trust and transfers and payments and collections.

Slide 11, please. In the year-to-date analysis of operating efficiency, the cost-to-income ratio decreased 40 basis points, excluding the fact of increase in net earning premiums due to disability, survivorship and burial expenses policies for the private pension fund system, operating efficiency ratio at Credicorp increased 20 basis points.

In the following chart, you can see the contribution of each subsidiary to the variation in the efficiency ratio. First, Grupo Pacifico post an improvement in its efficiency ratio. This was primarily attributable to growth in net earning premiums, which was 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. This represented an improvement of 60 basis points in the efficiency ratio. However, it is important to mention that an increase in net earning premiums was offset by net claims associated with -- which are not part of the efficiency ratio but impacted net income.

In the case of BCP Stand-alone, improvement in operating efficiency was attributable to an increase in interest income in line with growth in retail banking loans, which offset the increase in salaries and employee benefits. At Mibanco, the efficiency ratio deteriorated. This was driven by an increase in personnel expenses in the first semester of the year. As we mentioned earlier, our newly hired sales force is still on a learning curve, and as such, productivity should increase next year.

The impact of other subsidiaries was attributable to a deterioration in the efficiency ratio at Credicorp capital. We registered a drop in its derivative results. It is important to note that the derivative result was offset by the net gain on securities, which is not included in the efficiency ratio.

Slide 12, please. Regarding profitability, our return on average equity of 17.6% year-to-date is impacted by reserve fund and unrealized gains. Credicorp had a reserve fund of approximately PEN 1.9 billion at the end of September 2019. This balance impact our return of average equity by 124 basis points. As we have communicated, we will pay a special dividend of PEN 8 per share in November 2019, which will translate in a payout ratio of 16% and will increase our total 2018 payout to 56%.

Additionally, we acquired Ultraserfinco, and we expected to close the acquisition of Bancompartir this year. The total amount of both transactions will be around $120 million. While these payments will reduce the volume of our reserve funds, future dividend payments of subsidiaries will partially offset this movement by increasing the fund balance.

Another factor that impacts our return on average equity are unrealized gains. Thus far, in 2019, the unrealized gains of our fair value to other comprehensive income investments has posted an increase of 160% in a context of lower interest rates. As the unrealized gains are part of Credicorp's equity, this increase has impacted our return on average equity. This effect is more relevant for Pacifico's figures because this subsidiary has a long duration investment portfolio to hedge its long-term liabilities, mainly related to the life insurance business, where assets [and] liabilities are mark-to-market according to current accounting principles.

As you can see below, excluding increasing unrealized gains on equity, Credicorp return of average equity year-to-date increases by 40 basis points. It is important to mention that the application of IFRS 17 in 2021 will reduce this effect, but measuring liabilities at fair value.

Slide 13, please. On this page, you can see our current guidance for full year 2019. First, in terms of macroeconomic indicators, given the economic activity remains below its potential and was less dynamic than expected at the beginning of the year, our estimate for real GDP for 2019 is 2.5%, which marks the lower end of the range for GDP indicated in our previous guidance.

The last traditional guidance that we post has contemplated a series of potential uncertainty relative to the political and macroeconomic outlook for 2019. As such, we will not modify our guidance for 2019 at this time.

Slide 14, please. As mentioned in the past, our aspiration is to be the #1 bank for customer satisfaction in Peru and the most efficient in the region. To achieve this, we have been investing in customer experience differentiation in our physical, self-service and digital channels. In this process, we have optimized the most important customer journeys and developed a digital offering that provides agility, simplicity and service anytime, anywhere.

We currently lead the market for customer satisfaction in all segments. In the Consumer segment, we have jumped in the satisfaction ranking from fourth to first place in just 15 months. In the period from December 2018 to September 2017 (sic) [2019] we increased our digital client base by 42% to reach 3 million clients. This represents 38% of our total universe of clients as observed in Chart #2.

It is important to note that digital clients are those that meet any of the following criteria: they conduct 50% of the monetary transaction through digital channels; conduct at least 50% of nonmonetary transactions through digital channels; or purchase at least any product digitally in the last 12 months. Growth in the digital client base is a result of migration, both transaction and sales, from traditional to digital channel. This strategy has already optimized because of structuring our distribution network.

As you can see in Chart #3, digital transaction increased to 57% in September 2019 from 41% in 2016. In Chart #4, year-to-date digital sales increased to 12% as of September 2019 from 6% as of September 2018.

Referring to the monthly figure, digital sales represent 15% of total units sold in September 2019, versus 8% in September last year. At a solid level, the most important product sold digitally is the advance on wages product. Digital sales for this product have accelerated and currently account for 43% of year-to-date sales versus 23% in the same period last year, measuring units. Our effort to differentiate our customer experience and digital product offerings represent the first step in our strategy to capture new client segments, increase cross-selling and subsequently boost growth.

Slide 15, please. Credicorp's platform, Yape, has grown its number of users significantly. In 2019 alone, Yape has more than tripled its users to reach 1.5 million clients at the end of September. We expect to reach 2 million users at the end of the year, and our aspiration is to reach 10 million users in 2021. Yape allows users to make payments in a simplified, faster and secure way solidly by identifying the name of their recipient from a list of contacts or by reading the user's QR code.

With this feature, Yape attracts 130,000 users monthly, of which 40,000 represent new clients for BCP. A new Yape user is twice as likely to acquire more BCP products and to receive self-leads than a known Yape user. We have our road map to add new features so that Yape can become the most used application in Peru, excluding social networks. Peruvians currently conduct 85% of their transactions in cash. Our goal is to capture a significant share of these transactions by building the largest platform for small payments in the country. To achieve this, we are leveraging Credicorp's distribution network which includes branches and agents and encompasses more than 7,500 points of service to fuel our goal to have 10 million Yape users by the end of 2021.

We are targeting 4 million to 5 million unbanked customers to the digital payments card that we will embed in Yape in the first quarter of 2020. This will be the first digital card in the market and will contribute significantly to financial inclusion in the country allowing newly bank clients to receive disbursements and make balance inquiries, transfer service payments, et cetera. We will incorporate value-added services to attract middle market companies with Yape for business. And in just over a year, we will be able to make nano loans through these platforms.

Yape brings a differential experience to a small claiming users and represents a new alternative in the transactional offering at Credicorp. We are about to launch Yape for Mibanco clients, Culqi and online and in physical payment solution providers to facilitate peer-to-peer, micro business Yape payments.

Finally, these transactional alternatives complement credit and debit card payment methods. Our goal is to create an integrating ecosystem of complementary payment methods to offer customers the best solution for their needs anytime, anywhere.

Slide 16, please. Regarding Credicorp's governance, I would like to discuss our recent organizational changes. Alvaro Correa, who shares the role of Deputy CEO of Credicorp with Gianfranco Ferrari, will no longer be the CEO of Pacifico. Cesar Rivera will assume this role. With this change, Alvaro will be able to directly manage the consolidation of the insurance and pension fund businesses, where we are seeking to integrate joint operational and commercial capabilities and develop new ones, in line with our transformation program. Additionally, in the investment banking and wealth management line of business, Alvaro will focus capturing growth opportunities in wealth and asset management in the region and on integrating each of the 4 businesses at the regional level.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from Jorg Friedemann, Citibank.

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Jorg Friedemann, Citigroup Inc, Research Division - Director [2]

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So my question comes into the broad pictures that you are expecting for the coming year. I know that you still do not provide guidance, but just wondering, in terms of the macro lines, how you see the different forces affecting the banking system in Peru driving your results next year. You have a convoluted political scenario. I'm not sure if you saw this affecting or not business and if you see room for acceleration in loan growth.

You mentioned the actions that you are taking to fix asset quality issues for this year. Cost of risk is already close to the upper limit of the guidance. So just wondering if you see room for this to stabilize next year.

And in terms of margins, you have started an important monetary easing in Peru, 50 basis points already, if you see pressures coming from net interest margins next year on top of that.

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Gianfranco Piero Dario Ferrari de Las Casas, Credicorp Ltd. - Deputy CEO & Head of Universal Banking [3]

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This is Gianfranco Ferrari. Maybe -- actually, you made 3 questions in 1, so I'll answer the first one. Actually political noise, I would say that as of today, there's much less political noise than what we had, maybe, on the last conference call. As you may know, the Congress has already been shut down. There's already a date, which is January 26, I believe, for elections of a new Congress. The parties have already prepared their list, so everything is underway.

What we see now is that actually, the government is focusing on trying to speed up public spending. And work on a lot of public investment that was sold because of judiciary or arbitration problems with basically -- mostly with the Brazilian construction companies in Peru. We see that as positive, and we -- what we expect is that the remaining couple of months of this year, and most importantly, the first semester of next year, public spending should speed up. Having said that, as of today, we haven't seen any important pickup in corporate -- private corporate investments.

On the retail side, we are quite comfortable with the level of growth we're having for the year. And maybe -- and I will ask Reynaldo here on cost of risk, but we have been mentioning over the last couple of quarters that we actually didn't see the cost of risk at the levels that we reached, basically because we're targeting new segments of the population. And the cost of risk should be higher at those segments.

What is important, though, is that the risk-adjusted NIM, which is the way we manage, has lowered. And I would say that measures are being taken in order to solve that issue. Basically, raising price where prices were appropriate and/or managing risk adequately. I don't know, Reynaldo, if you want to add something else?

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Reynaldo Llosa Benavides, Credicorp Ltd. - Chief Risk Officer [4]

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I mean if you see the performance of our portfolio, except the SME market, I would say it's quite stable. But what Gianfranco was mentioning is correct. I mean we are underwriting clients with a higher risk profile than we used to underwrite before, and that has an impact -- a direct impact in our provision level because the provisions are recognized the day of disbursement. On the other hand, the margin that this client would provide comes over time. So that has an impact in the short term.

Also, don't forget about the anticipating nature of IFRS 9. I mean as long as we get that, what are the -- in our consumer portfolio, that will also have an impact in the overall provision level.

And finally, as long as we see, I mean, an expected GDP growth level decline, that will also have an impact in the provisions level. So yes, as you were mentioning, we are on the higher side of the range. We expect to have a final -- I mean, levels of this year around that number.

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Operator [5]

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Our next question will come from Jason Mollin, Scotiabank.

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Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [6]

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My question is related to the overview of Credicorp's business lines that you show on Slide 4 of your presentation. I think it's very helpful to understand the drivers for your main businesses. You show, of course, year-to-date BCP Stand-alone increasing its return on equity from 20% in 2018, to 21.5%. Mibanco, on the other hand, showed a material decline in the return on equity, and you gave a good job of trying to give a snapshot on what's driving that. And Pacifico, we had a decline in the ROE as that accounts for the majority of your earnings for the group.

If we look forward, I mean, what are the dynamics here for -- especially, I think, with the decline in profitability of Mibanco, and you talked about the impact of the new sales force and perhaps getting out of some of the riskier segments. How should we think about the big picture profitability for these 3 main subsidiaries of Credicorp going forward? Can we see the bank continue to increase or at least maintain the trend in the last year to increase? And can we see Mibanco turn it to ramp -- Mibanco and Pacifico turn the profitability levels around?

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César Ríos Briceño, Credicorp Ltd. - CFO [7]

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Okay. Probably in terms of Universal Banking and mainly BCP, the main drivers are going to be the significant -- the increase in the Retail Banking segment due to the trends, but also the inclusion of new segments as we have already mentioned. We are positive that this is going to result in healthy net adjusted NIMs. And we are managing -- we are going to manage the efficiency ratio, balancing the efficiency in the current business and investment for the transformation that we are embarked on. As I know, we are, in general terms, positive in the trends.

In the case of microfinance, as we have been discussing previously, 2019 was a year of adjustment that was mainly originated, but credit issues in which we (inaudible) assessments with the appropriate accuracy in our (inaudible) policy. And as a result of that, we could [portray] the growth of the portfolio, and at the same time, increase our sales force. The net result during this year is that you have lower margins, higher provisions and higher cost.

Going forward, we expect that we are going to be able to manage better the net interest margin to reduce the risk profile and starting to gain efficiency where with the significant amount of new people that we have incorporated is starting to produce a full capacity. Give and say that, this is a competitive market, and we are positive, but probably the final margins are not going to be as high as were 2 years before.

In the case of insurance -- in the case of the insurance business, probably you can expand.

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Alvaro Correa Malachowski, Credicorp Ltd. - Deputy CEO & Head of Insurance and Pension Funds [8]

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Basically, I think that we're working on different things in Pacifico through the -- for the insurance business as a whole. First of all, I think, something that has been more evident as quarter-by-quarter goes by is the increased profitability of the providers. As you know, we bought a large number of providers some years ago, and we've been working diligently to make them more profitable. And I believe that today, most of them are at profitable levels.

We do have some land banking there that kind of curtails profitability. But over the next few years, we will build on this land, and we will make it produce, so that, that will also contribute to the profitability.

Additionally, we are, as Pacifico insurance group as a whole -- of all the companies, we are working very aggressively on the efficiency ratios. Currently, we've been reducing that significantly, going down from levels of about 18% to 16%. And we'll continue to do that with a target of being below 14%. So right there, we would generate additional efficiency that will also contribute to profitability and obviously to the ROE -- ROAE.

We are also working -- one of the things that we've been working diligently also over the past years is in reducing our commissions in ourselves. And through that, we are aggressively targeting e-channels or e-commerce. We are working that with the new platform. This year, we've launched insurance or -- for -- or e-commerce for auto, [so what], home insurance. And next year, we will be rolling out also for health insurance, and that not only brings new sales to us, but it also reduces the cost of the sales, less commissions and also more efficient sales.

We're also working very close with the other companies of Credicorp to increase our sales in different products. A very good example of this is that we have worked closely with Mibanco, for example, to sell an [indemnisatory] oncological product, which last year, we had none in the market. And year-to-date or -- we've reached the sale of about 36,000 products, and we are working to increase that.

And I think that the other thing is also we're working on increased sales and also better underwriting to reduce our loss ratios, which I think has been evident in the auto and in the health insurance business.

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Operator [9]

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(Operator Instructions) Our next question will come from Ernesto Gabilondo, Bank of America.

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Ernesto María Gabilondo Márquez, BofA Merrill Lynch, Research Division - Associate [10]

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My first question is also to know your point of view on the recent political noise. I want to know if this is affecting credit demand. Do you think that the delay on infrastructure projects has been -- is limiting wholesale loans road? And do you think this could have an impact in consumer loans at some point?

As you mentioned, the new Congress is going to be placed during -- or next year. What is the chance to think about presidential elections during the middle of next year? Or do you think this is already discarded?

Do you think the new Congress in place could implement potential changes, reforms that are needed in the country? Or do you think this is likely to happen after there is a new government in place, that it could happen next year or in the next couple of years?

And then my second question is a follow-up on the provision charges. So as you mentioned maybe the cost of risk for last quarter should be around 1.8%. But thinking about next year, do you think we should think about this 1.8% as the new recurring level? Or what will be the elements to think that you can return to the year's guidance for this year of around 1.4%, 1.6%.

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Walter Bayly Llona, Credicorp Ltd. - CEO [11]

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This is Walter Bayly. Let me tackle the kind of political environment, and then I'll pass it back to César on the specific numbers you mentioned. The scenario that we see going forward with this election for Congress in January is that we will have a Congress, which will not have a majority from 1 party, but rather, will be a Congress in which several political forces will balance themselves out. So in reality, we expect a lot less belligerent or aggressive Congress, where there will be no majority. So from that standpoint, we think it will be a quiet period, where really, the political focus will be more on presidential elections than what happens in Congress. We are not concerned because what I just mentioned that the incoming Congress will be able to articulate any dramatic changes to legislation or constitution or anything that relates -- that has serious impact on the model, which the country operates.

Presidential elections, very early to tell. We have a estimate of what are the different potential candidates. And it is very early to tell, but there's nothing in the horizon that really makes us worry tremendously at this stage. And again, it is very early to be very clear about what the future will bring regarding presidential elections. We're still almost 2 years ahead. Back to you, César, on the specific questions or Reynaldo.

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Reynaldo Llosa Benavides, Credicorp Ltd. - Chief Risk Officer [12]

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Yes. In terms of our expectations for provisions for next year, it will depend on the portfolio mix. I mean if we see our corporate loans growing again, it will probably help us reduce the cost of risk that we have today. But within the retail or the retail portfolio, definitely, the fact that we are underwriting, as I mentioned, in people with a higher risk profile, that will have that impact in the retail portfolio. And if we are successful in underwriting those clients, the -- all our cost of risk in the retail portfolio will increase marginally. But that should be more than compensated by the differences in pricing and also by the fact that we underwrite those clients through digital channels, and thus, a lot more efficient than traditional channels. So in terms of a number, we don't have a guidance today, but it would probably be around what we have today, around 1.6%.

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César Ríos Briceño, Credicorp Ltd. - CFO [13]

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Yes. Currently -- sorry.

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Gianfranco Piero Dario Ferrari de Las Casas, Credicorp Ltd. - Deputy CEO & Head of Universal Banking [14]

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I would like to add on -- this is Gianfranco, what Reynaldo just mentioned, two matters. One is that we don't manage the credit decisions, like cost of risk, solely. We manage by risk-adjusted NIM. So the cost of risk may go up, but if the risk-adjusted NIM goes up, it's a good decision. So it's not cost of risk by itself. That's one issue I would like to clarify.

And the other one is that what Reynaldo just mentioned. If you go line-by-line on the P&L statement, what we're seeing is that the further we're able to distribute through digital channels, the cost of distribution reduces dramatically. So again, we may end up with a higher cost of risk, but a better bottom line because of this matter -- of this lever, too.

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Operator [15]

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Our next question will come from Gabriel Nóbrega, Citibank.

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Gabriel da Nóbrega, Citigroup Inc, Research Division - Research Analyst [16]

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We've seen that interest rate has been decreased from around 2.75% to 2.25%. So here, I am just trying to understand what is your sensitivity to this decrease. Maybe if you can give a sensitivity of around 100 bps decrease.

And also, as we go into 2020, you have been saying that you were seeing an increased loan demand for retail. Do you believe that the improvement in your loan mix could offset the pressures from the coming down of the reference interest rate?

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César Ríos Briceño, Credicorp Ltd. - CFO [17]

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Yes. Probably, we will address this question with 2 different approaches. First is the underlying assumption that we have is that we are going to change our mix in the portfolio from more wholesale to more retail and among retail, to higher-margin, higher-risk segments. And the other change is from more dollars to more soles as a result of the previous change. This will result as an average and an increase in margins.

As a counterforce, you have the general trends of the interest rates in the system in soles and in dollars. As a general rule, you can see that the combination of the duration of the portfolio and the pass-through effect means that more or less, 1/3 of the top line increase or decrease in interest rate I translated in the bottom line to the period. What is the result of a combination of almost immediately pass-through in the wholesale short-term operations very mildly translate in the higher segment's revolving credit lines. I don't know if this answer helps to understand the process. The combination of everything is that we think with the -- is going to be a net positive.

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Operator [18]

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

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Walter Bayly Llona, Credicorp Ltd. - CEO [19]

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Thank you. We continue to navigate in a macro environment, both local and international, with negative headwinds and increased uncertainty. Our 8.8% increase in accumulated net income is a very good result, with the backdrop of this environment and the tremendous investments we are doing to better serve our customers, incorporating technological innovation to ensure our long-term profitability. Our year-over-year improvement in efficiency, added to the increase already mentioned in profitability, is a very good indicator that we continue to successfully balance our short-term and long-term priorities. It is unavoidable that the slowdown in the Peruvian economy will impact short-term results, but this should not distract us from our medium-term focus and view. There continues to be very interesting growth opportunity in the Peruvian market, but it is also true that competition and technology will pressure margins and profitability. And it is with this view that we have to continue investing and preparing our different subsidiaries to be very well positioned to capture the growth in this challenging competitive environment.

I would like to address the specific microfinance unit in which there were a couple of questions. Yes, profitability is down. We had returns of equity of almost 56% last year that is clearly not sustainable in the long run. This year, the results are closer to 20%, but we think there continues to be upside as the return on equity we can obtain in the microfinance business should be at least equal to that, that we obtained in the Universal Banking. So yes, we are continuously investing in microfinance and continues to see potential for growth and increased profitability.

We thank you for your continued support and interest and are confident that the positive results will continue to be delivered by us over time.

With this, I conclude the presentation, and thank you very much again. Good morning. Good day.

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Operator [20]

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