Credicorp - Q2 2024

Transcript

Operator (participant)

Good morning, everyone I would like to welcome all of you to the Credicorp Limited Second Quarter 2024 conference call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp's website. Today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you have connected to the call using an HD web phone on your computer, please use the keypad on your computer screen. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.

Now, it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Cigüeñas. You may begin.

Milagros Cigüeñas (Head of Investor Relations)

Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer, and Alejandro Pérez-Reyes, our Chief Financial Officer. Participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer, César Ríos, Chief Risk Officer, Diego Cavero, Head of Universal Banking, César Rivera, Head of Insurance and Pensions, and Carlos Sotelo, Mibanco's Chief Financial Officer. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties, and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances.

Gianfranco Ferrari will start the call with opening remarks about our improved macro environment and brief comments on our digital strategy execution, followed by Alejandro Pérez-Reyes, who will present in more detail the evolution of key macro figures, our financial performance, and revised outlook for 2024. Gianfranco, please go ahead.

Gianfranco Ferrari (CEO)

Thank you, Milagros. Good morning, everyone. Thank you for joining us today. During the quarter, we made significant progress in executing our strategic initiatives across most of our operations, resulting in a sound first half of the year. Our financial results were robust, ending the quarter with resumed loan growth, a resilient risk-adjusted NIM, and a solid balance sheet. Importantly, as the economy improves, we are well positioned to continue to leverage additional opportunities and advance on our mission to efficiently provide products and services that meet our clients' needs while promoting financial inclusion. Before I turn to discussing several specific areas of of our focus at Credicorp, I'd like to comment on the context in which we are operating, particularly in Peru. GDP growth projections from local economies have been revised upwards and now align with our expectations of GDP growth of 3% for 2024.Improved weather conditions have broadly benefited the economy, especially the fishing, agriculture, and textile industries. Despite the ongoing government fragility, inflation remains among the lowest in the Latin American region, with improved purchasing power paving the way for the central bank to further reduce its benchmark interest rate. With this, our team is expecting the consumer segment to improve in the second half of the year. These factors, combined with increased public investment and high copper and gold prices, underscore expectations for economic growth, highlighting Peru's resilience. Turning now to our second quarter results. We delivered a sound ROE of 16.2%, driven mainly by Universal Banking

Risk-adjusted NIM remained resilient, reflecting strengthened balance sheet dynamics, a disciplined interest rate management strategy, and our leading low-cost funding position, which together compensate for our controlled, although still high, level of provisions. Additionally, having declared our dividend last quarter, we maintain a strong solvency and balance sheet position, both of which are crucial to navigating the current credit cycle headwinds. We continue to see significant benefits from investing in innovation and enhancing our digital capabilities, which are fortifying our competitive modes, elevating our relationships with current clients, and expanding financial inclusion. Looking ahead, we maintain our GDP growth expectation of 3% for this year and expect a similar outlook for 2025. I'd like to take a few moments to address the performance of Mibanco Peru.

We believe we have the right hybrid business model strategy, which combines high-touch, in-person visits from relationship managers with digital tools, including centralized risk assessments and an expert team in place. However, we're currently working under extraordinary circumstances. Systemic issues are affecting the Peruvian microfinance industry, characterized by a highly complex credit cycle, where delinquencies and cost of risk are at the highest levels since 2008. Although we're seeing signs of a rebound in consumer behavior, the most vulnerable segments served by microfinance will be the last to recover. In this context, while Mibanco is performing better than its peers, ROE fell short of our expectations, and we still do not feel comfortable with respect to the risk assessment of our portfolio.

We're currently conducting a thorough review of our risk capabilities while keeping a strong focus on efficiency, and expect to have a much better assessment in the upcoming quarter. Since launching our microfinance business in 2009, we have navigated various market cycles, generating good returns for the period. I am confident that our profitability will recover, although gradually than anticipated. We remain the industry leader in supporting the significant and essential population segment that Mibanco serves in Peru. In Mibanco Colombia, we implemented a strategy last year to put our business back on course, which included management changes. While there is still much work to be done, this business is now performing better in relative terms and is in line with our expectations.

To sum up, we remain fully committed to the long-term potential of Mibanco, and believe that it offers a valuable contribution to Credicorp's portfolio of businesses. Turning to the next slide. We're proud to have a premier disruptive financial franchise in Latin America, underpinned by a well-defined strategy and clear goals. Our strategy is geared towards delivering the best experience in the most efficient way to remain competitive, while investing in long-term sustainable growth. Since 2022, we have ramped up our investments in innovative and disruptive initiatives to improve our digital and analytical capabilities, positioning us to become an omnichannel financial services company with a deep understanding of our customer needs. We are now seeing tangible results in both our core businesses, like BCP, and our disruptive ones, like Yape. These initiatives are delivering more digital customers.

Digital clients and digital monetary transactions have increased 9% points and 30% points, respectively, year-over-year, with digital clients growing more than 21% points in the last two years. We have greater customer engagement, increased primary banking relationships, and expanded deposits, which provide us access to highly competitive funding. At BCP, enhanced customer insights, increased client touchpoints, and strengthened digital analytical capabilities are delivering positive results. We can now offer our customers tailor-made products, leading to increased engagement and higher satisfaction, as reflected in the 11% points improvement in our consumer clients NPS in the last two years. Our development of digital distribution ecosystem has boosted income while reducing unit costs. As a result of these initiatives, BCP's efficiency ratio has fallen 190 basis points in the last five years.

Leveraging our digital capabilities, we are meeting banking needs anytime, anywhere, and creating a positive network effect, driving sustainable growth. Our aim is to develop world-class solutions and features that bring the unbanked into the financial system, attract, and retain customers. Additionally, we are committed to continuing our investment in technology and digital transformation, providing it continues to drive growth, develop efficiencies, and optimizes our businesses in the long run. This strategic approach to investing ensures that we not only lead today, but also secure our success for tomorrow. Finally, I'd like to give you a brief update on Yape. Alejandro will go into more detail shortly, and we'll take a deeper dive during our Credicorp strategic update event on September 26th.

With over 15.9 million customers and income per active user of PEN 44.1, up from PEN 3.7 in Q1, I am proud to announce that in Q2, Yape reached and surpassed breakeven, ahead of our expectations. Income growth accelerated and diversified with the continued addition of functionality in all three lines of business. Our investment in Yape is clearly paying off. According to Kantar Studio, Yape is now the top-of-mind brand in Peru across any industry. Now, let me welcome Alejandro to his first results call as our CFO. He will discuss in more detail the macro environment and the operational and financial performance of our business units. Alejandro, go ahead.

Alejandro Pérez-Reyes (CFO)

Thank you, Gianfranco, and good morning, everyone. I am pleased to join you on my first call as CFO. I look forward to building on the solid foundation that has been set and is reflected today in our strong solvency, sound balance sheet, and stable profitability. Moving on to quarterly results, as Gianfranco mentioned, we delivered solid overall operating and financial results. As I discuss the highlights of the quarter, I will focus on the year-over-year results, which are not impacted by seasonality. Loans began trending upward to stand at 2.9%, measured in quarter-end balances. Measured in our daily balances, loan growth stood at 0.2%, driven primarily by an uptick in mortgage volumes at BCP and BCP Bolivia. This quarter, low-cost deposits continued to grow and now represent 54.5% of total deposits.Despite the reduction in Peru's policy rate, we delivered higher NIM on the back of amortization of government program loans, repricing of our retail loan book in soles to reflect the higher cost of risk, and the repricing of our dollar book. NII grew 8.2%, boosted by the aforementioned dynamics. Other core income, which is the income and gains on FX operations, evolved strongly, boosted by BCP and to a lesser extent, by Credicorp Capital. Fees at BCP

The NPL ratio rose 33 basis points to 6%, as delinquencies increased, mainly through consumer, mortgage, and credit card loans at BCP. Consequently, NPL coverage stood at 95%. This quarter, we delivered an ROE of 16.2% on the back of solid expansion in margins, an uptick in transactional activity, and disciplined cost control. Next slide, please. The Peruvian economy continues to recover. Economic activity increased 5% year-over-year in May. Estimates indicate that GDP expanded 4% year-over-year in the second quarter, the highest quarterly growth rate in almost three years. The agricultural, fishing, and primary manufacturing sectors accounted for approximately half of GDP growth, bolstered by the results of the first fishing season, which was canceled in 2023. Non-primary sectors grew close to 3% year-over-year.

High commodity prices, particularly of copper and gold, which make up 50% of our exports, drove terms of trade to a historical high in May. Although this has not yet translated into overall growth, it should act as a tailwind for the coming quarters and years, especially if a new mining investment cycle materializes with the execution of large projects such as Tía María, Zafranal, Michiquillay, among others, which will require more than $6 billion in investment. Additionally, the inauguration of the Chancay Port, which is slated for November, could also help boost the economy in the medium term. Public investment has ramped up. In the first half of the year, it increased nearly 30% year-over-year in real terms, the highest print in 12 years, excluding the pandemic.

As for public-private investment projects, ProInversión awarded $5.1 billion in the first six months of 2024, the highest amount granted in 10 years, out of an $8 billion goal for the entire year. According to the Ministry of Economy and Finance, this amount is expected to double in 2025. The central bank expectations indicators have recovered, positioning in the optimistic range in four of the last five surveys, a trend not seen since before the pandemic. Given the current economic environment and despite political challenges, we reaffirm our forecast that Peru's GDP will grow around 3%. Next slide, please. Latin central banks are ahead of the United States in the easing cycle. Market participants expect Fed rate cuts in coming months, but doubts exist regarding the pace. As such, elevated rate in dollars continue to challenge emerging markets.

In Peru, headline inflation currently sits comfortably within the target range, while core inflation stands at the upper limit of the range. However, in July, core inflation showed less persistence compared to previous months. Consequently, yesterday, Peru's central bank cut its policy rate by 25 basis points to 5.5%, accumulating a total reduction of 225 basis points since September 2023. The rate is expected to stand around 5% by the end of the year. In Colombia, inflation remains among the highest of the region, at 6.9% year-over-year in July. Although the central bank has lowered its policy rate to 150 basis points since December, it remains high at 10.75%.

Finally, in Chile, the central bank has gradually reduced the pace of monetary easing and decided to pause in July, as the bulk of the cuts have already occurred and upward inflation risks persist. Next slide, please. BCP results remain strong, boosted by a rebound in economic activity and an uptick in liquidity across the financial system. Analyzing key quarter-over-quarter dynamics, what we see is that total loans measured in average daily balances grew 1.3%, driven mainly by a rebound in short-term wholesale loans. NII rose 1.9%, fueled by an uptick in interest income from loans via short-term financing in corporate banking, and a drop in interest expenses via increasing the share of low-cost deposits. Loan loss provisions rose 29.4%.

If we isolate the impact of the reversal of El Niño provisions that took place in the first quarter of 2024, provisions fell 3%. This decline was driven by a drop in provisions for consumer and mortgage loans, which was partially offset by an increase in wholesale provisions. Other income grew 11.2%, driven mainly by fee income, which was bolstered by growth in payments through Yape, an uptick in transactions and disbursement fees at BCP, and a rise in gains on FX transactions through growth in operations via digital channels. On a year-over-year basis, NII grew 10.4%, driven mainly by growth in interest income and loans. Growth in low-cost deposits triggered a decrease in interest expenses, which also contributed to the uptick in NII.

Loan loss provisions rose 29.1% due to the deterioration in all vintages, particularly among loans originated in the first half of 2023, and mainly in SME, Pyme, and credit cards. Other income rose 16.7%, impacted by growth in fee income via Yape and by an uptick in credit and debit card transactions. Operating expenses increased 11.3% year-to-date. This was driven mainly by an increase in the headcount of specialized digital talent and an uptick in cloud service use. In this context, BCP's contribution to ROE stood at 23.7%. BCP Bolivia's positive results in the second quarter of this year reflect the dynamism within its lower risk wholesale portfolios and growing transactional fees. Next slide, please. As anticipated, we are gradually increasing disclosure for Yape.

Today, I would like to announce that revenue generation at Yape continues to accelerate and reach the breakeven milestone in May. Ongoing growth in Yape's revenues, which rose 1.5x versus the previous in the second quarter of last year, reflects consistent advances in its three business lines. Yape's payment business line, which is the main generator of income, grew through bill payments, where transaction volume rose 4.66x, and via the total payment volume, which increased 111% compared to the second quarter of last year. Within the financial business line, in addition to the margin obtained from floating based on deposit balances, microloans became an income generator. In the second quarter of 2024, disbursements of single installment and multi-installment loans grew 3.2x year-over-year. Despite strong growth, the financial business line is in its early stages.

We are developing differentiated risk management capabilities based on transactional data from daily use, which should help us grow this line profitably. Finally, within the marketplace business, gross merchant volume doubled year-over-year. Next slide, please. Moving on to Mibanco. On a quarter-over-quarter basis, the microfinance industry continued to evolve in a complicated context. At Mibanco, total loans measured in average daily balances fell 3.2%, impacted by stricter origination policies and lower demand for loans in general. This drop reflects a contraction in higher ticket loans, which was partially offset by growth in small ticket, higher yield loans. Despite a drop in loans, NII increased 1.9%, mainly due to the drop in the cost of funding after the funding rate was repriced to take advantage of lower rates. In this context, NIM increased 19 basis points and stood at 13.6%.

If we isolate the impact of El Niño provision reversal of last quarter, provisions rose 19.8%. This evolution reflects a deterioration in the payment performance of all vintages, higher write-offs, and weakening in the payment capacity of vulnerable clients, who continue to be impacted by adverse events in 2023. From a year-over-year perspective, NII was up 2.6%. The uptick in interest income was boosted by income from the investment portfolio and by a drop in interest expenses after the funding base was repriced. Provisions increased 31.6% due to the same dynamics mentioned earlier. Operating expenses on a year-to-date basis remain under control and efficiency stood at 52.1%. Finally, ROE stood at 5.4%, negatively impacted by a contraction in loans and high provision levels.

This scenario was similar across the microfinance industry and reflects the challenges of a complex credit cycle. Mibanco Colombia has been impacted by deteriorating economic conditions, ongoing high inflation, very high funding rates, and a reduction in the interest rate ceiling. We have a profitable growth strategy, where we have slowed portfolio growth by emphasizing risk control and efficiency. This strategy is leading us to perform better in relative terms and in line with our expectations. Next slide, please. Profitability at Grupo Pacífico continued to be strong, with ROE standing at 26.4%. In quarter-over-quarter terms, net income dropped 10%, negatively impacted by higher income tax expenses, other non-recurrent expenses, and lower gains from investment in associates via the corporate health insurance joint venture, in particular.

Insurance underwriting results rose 19%, primarily due to a base effect in the P&C business, as reinsurance results normalized after a particularly unfavorable first quarter. The life business also contributed positively as claims dropped, particularly for credit, life, and disability and survivorship products. From a year-over-year perspective, Grupo Pacífico's net income dropped 6%. This decline was primarily driven by growth in expenses for income tax and higher interest expenses associated with life insurance contracts. An improvement in insurance underwriting results, mainly via the life business, partially offset these dynamics. Next slide, please. Profitability in the investment management and advisory business increased by 386 basis points quarter-over-quarter, with ROE standing at 18.6%. On a quarter-over-quarter basis, net income registered a robust 27% increase.

This positive dynamic was primarily attributable to an improvement in the performance of sales and trading in our capital markets business. The trading unit leveraged great volatility to capitalize on opportunities, while the sales unit saw a surge in transactional activity among our corporate clients in Colombia. In addition, we registered a significant contribution from our now-discontinued corporate finance business unit related to a past deal. These favorable business dynamics were partially offset by a rise in income tax and expense. On a year-over-year basis, net income rose 12%, bolstered by the robust performance of our capital market business.... Both our wealth and asset management businesses also contributed to the uptick, with AUMs climbing 15% and 20% in US dollars, respectively. These positive business dynamics were partially offset by a drop in treasury results and an uptick in income tax expenses. Next slide.

Now we will analyze Credicorp on a consolidated basis, starting with favorable balance sheet and pricing dynamics, which drove a strong NII. On a quarter-over-quarter basis, on the asset side, loan balances resumed growth, driven primarily by wholesale lending and, to a lesser extent, by retail loans. These dynamics, coupled with favorable pricing, helped us maintain resilient yields on interest-earning assets. On the liability side, our funding advantage in low-cost deposits was further boosted by inflows from pension fund withdrawals. In this context, the funding cost fell 12 basis points, outpacing the reduction in the yield on interest-earning assets, which fell 6 basis points. On a year-over-year basis, asset growth was driven by loan growth in the SME PYME, SME-Business, and middle market segments of BCP. The investment portfolio balance also rose, driven by our ongoing strategy to increase the duration of interest-earning assets.These dynamics led the yield on interest-earning assets to rise 25 basis points despite a drop in interest rates. On the funding side, the aforementioned increase in low-cost deposits and a downward re-rate of our time deposit balance led the funding cost to contract. This evolution was partially offset by an increase in wholesale funding costs, which was impacted by a BCP bond issuance earlier this year. These dynamics led the cost of funding to drop five basis points. Next slide, please. Our risk-adjusted NIM remained resilient, supported by growth in NII, which, alongside a rise in fee income and FX transactions, boosted core income. On a quarter-over-quarter basis, NIM increased three basis points to stand at 6.33%, while risk-adjusted NIM stood at 4.4%. If we isolate the effect of our reversal in El Niño

Core income increased 3.9%, bolstered by NII and strong growth in both fee level and FX transaction volumes, where the main drivers were BCP and Credicorp Capital. At BCP, growth in the fee level was fueled mainly by Yape and by core transactional services. Income from FX transactions grew 31.1%, bolstered by transactions through digital channels and wholesale banking. At Credicorp Capital, core businesses drove a solid fee income result. On a year-over-year basis, NIM rose 31 basis points, while risk-adjusted NIM fell in 31 basis points. Growth in other income was driven by BCP due to the same dynamics as in quarter-over-quarter. Next slide, please. Let's look at the dynamics for asset quality.

It is important to note that the diversity of BCP's loan portfolio provides a natural buffer in the context of a challenging credit cycle for the Peruvian financial system. Mibanco, on the other hand, is more exposed, given that it is concentrated in micro-business clients who are more vulnerable. Cost of risk at Credicorp stood at 3%. Underlying risk, which isolates the effects of reversals of El Niño provisions, was flat quarter-over-quarter. Let's go through underlying risk dynamics. Provisions grew 2.4 quarter-over-quarter, driven by Mibanco and partially offset by BCP. At Mibanco, growth in provisions was triggered by a deterioration in the payment performance of all vintages, which was concentrated in high-ticket loans, higher write-offs, and a weakening in the payment capacity of vulnerable clients.

Within BCP, the contraction in provisions was driven by consumer, which reported a drop in new refinancing and by mortgage, where an improvement in payment capacity was observed as clients' leverage decreased. This evolution was partially offset by growth in provisions, in wholesale due to a base effect, and in credit cards due to further deterioration of payment performance among vulnerable clients. On a year-over-year basis, provisions rose 35.9%, mainly through BCP and Mibanco. Within BCP, provisions grew primarily through SME PYME and reflected weakening in the payment capacity of over indebted clients and deterioration in the payment performance of all vintages. Additionally, provisions increased in credit cards via the same dynamics in quarter-over-quarter. At Mibanco, the uptick in provisions was driven by the same dynamics as those in quarter-over-quarter. Next slide, please. Moving on to non-performing loans.

On a quarter-over-quarter basis, growth in non-performing loans was led by Mibanco and partially offset by BCP. At Mibanco, NPL growth was driven by an uptick in delinquency in government program loans, which have high coverage levels, and by growth in delinquency in high-ticket loans among vulnerable clients affected by concurrent adverse events in 2023. Within BCP, the drop in NPLs reflects an improvement within SME PYME, where honoring processes for government loans are underway. This evolution was partially offset by an uptick in NPLs in credit cards and mortgages among vulnerable clients who are highly leveraged and lack stable employment. Deterioration in credit cards was concentrated in vintages originated in the first half of 2023. In this context, the NPL coverage ratio for total loans stood at 95%, or 98.2%, if we isolate the impact of government loans.

We have learned lessons from this cycle and have taken measures to recover asset quality faster. At Mibanco, a significant and growing numbers of clients have seen their income shrink, which has led to higher indebtedness and weakened payment capacities. In this context, we have stepped up restrictions at the origination level as we strengthen monitoring, collections, and reprogramming evaluation processes... while Mibanco is performing better than its peers, we are still adjusting our risk management capabilities. At BCP, deterioration is concentrated in the vulnerable segment within individual clients. Despite moves to restrict origination and offer temporary grade facilities, exposure and deterioration continues to persist in this segment. We are taking more aggressive action by selectively tightening origination guidelines in vulnerable individuals since May, and by offering medium-term rescheduling to both individuals and SME payment clients in the second half of 2024. Next slide, please.

We will review the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operating expenses grew 9.2%, driven primarily by core businesses at BCP and disruptive initiatives at the credit card level. Core businesses at BCP fueled growth in expenses through an uptick in IT expenses related to moves to attract talent to fill vacant positions and specialized digital talent, and increased use of the cloud as clients become more digital and transaction levels increase. Expenses for disruptive initiatives at the credit card level rose 29.2%. The most significant expenditures were in Yape, Tenpo, and Culqi, which together accounted for 66% of this semester's disruptive expenses.

Finally, an uptick in operating income and accelerating operating expenses led the efficiency ratio to drop 19 basis points to stand at 44.3% year to date in the first half of 2024. Next slide, please. This quarter, ROE stood at 16.2%, driven by strong results in our universal banking, insurance, and investment management and advisory businesses. Meanwhile, the ROE for the semester was 17.2%. These results are a testament to our resilience and ability to adapt to challenging circumstances. Now, I will move on to our updated guidance. Next slide, please. As previously stated, our GDP growth expectation remains unchanged at around 3%.

Regarding loan growth, despite the recent pickup in wholesale lending, our still cautious approach to origination in our retail banking and microfinance segment has led us to revise our guidance on total loan growth, measured in average daily balances, to the 1%-3% range. Our NIM is expected to stand by the end of the year towards the upper end of our guidance, which is between 6% and 6.4%. We expect cost of risk to situate around the upper end of our guidance, which is between 2% and 2.5%. The credit cycle has proven to be longer and tougher than expected. Although we are confident on the effectiveness of the credit measures taken, the stress is likely to linger in the individuals and microfinance segments for the better part of the year.

We achieved solid efficiency levels as we continue to invest in our disruptive initiatives. We are controlling growth in expenses at our core businesses to offset the aforementioned headwinds, and expect to close the year with an efficiency ratio near the lower end of our guidance, which is between 46% and 48%. Given the aforementioned dynamics and the better than anticipated evolution of both our fee income and insurance underwriting results, we reaffirm our ROE guidance for 2024 at around 17%. With these comments, we can move to the Q&A session.

Operator (participant)

We will now begin the question-and-answer session. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause for just a moment to allow everyone the opportunity for questions. We also ask that you please only ask one question at a time. After each question has been addressed 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. The first question comes from Ernesto Gabilondo with Bank of America. Please go ahead.

Ernesto Gabilondo (Director of Latam Financial Institutions)

Thank you. Hi, good morning, Gianfranco, Alejandro, Francesca, César, and good morning to the rest of the team, and thanks for the opportunity to ask questions. My first question will be on Mibanco and the microfinance industry in Peru and also, well, in Colombia. How do you see the credit appetite and the indebtedness in the sector? Are you detecting any positive signals on the evolution of the clients, given that there will be an expected better outlook for the economy? Or do you continue to see the same levels of deterioration, the asset quality? Any color on this would be very helpful.

Alejandro Pérez-Reyes (CFO)

Yeah. Good morning, Ernesto. As I mentioned in my opening remarks, we still don't feel comfortable where we stand in our portfolio in terms of risk in the portfolio we have as Mibanco. As a matter of fact, we've been tightening our credit policies over the last quarter, I would say, because we still don't see any improvement in that business. But having said that, if we take a longer vision, going back, Mibanco and the microfinance industry in Peru is a very relevant industry. Mibanco, Edifica at the beginning, and then Mibanco, when we merged the two institutions, it has provided very sound and nice results.

Going forward, we are still very positive on the-

... fundamentals of the business. But it's too, I would say it's too soon to tell that, that we're seeing any improvements, both in the market and within our risk capabilities. Colombia is a different story. Colombia is a much smaller play. Having said that, and taking into account that the Colombian environment overall for the banking system is much more complicated than the one in Peru, I would say that the Colombian Mibanco in Colombia has today a clearer path in terms of what has been being done over the last six months.

Ernesto Gabilondo (Director of Latam Financial Institutions)

Oh, perfect. Thank you very much. Just a second question, your 2024 guidance. I think in your second quarter press release, you were indicating to expect solid growth in other income and disciplined management of operating expenses. So, can you elaborate on your expectations for other income? Is this coming because of Yape? Is this showing in fees or in other income? I just wanted to understand a little bit more on that. And then in terms of expenses, I don't know if you would be willing to postpone some not urgent projects to maintain OpEx under control.

Gianfranco Ferrari (CEO)

Alejandro?

Alejandro Pérez-Reyes (CFO)

Sure. When it refers to the fees, we are expecting the strong fees that we're seeing to continue along the year. Part of the expenses we've done over the last few years, actually, to increase our transactionality capabilities, transactional capabilities, and this is paying out in these fees that we're seeing right now. We expect it to continue. We're expecting both at the Yape level, also at the core business at BCP to increase. And so we should see strong numbers along those lines going forward. As for expenses, we're controlling the cost to income. We are always looking into opportunities to be as efficient as possible, but we are not currently considering cutting any particular project that we are in at the time.

Gianfranco Ferrari (CEO)

So, yeah, as long as we control for the cost to income, we are okay currently with that. Still, as I said, we are always looking at expenses, and that's the reason why I said that our guidance is to be on the lower side of the cost to income guidance, and that is because we tend to choose some things, but they are smaller things, not necessarily the big projects that we're working on.

Ernesto Gabilondo (Director of Latam Financial Institutions)

Oh, excellent. Thank you very much, Alejandro and Gianfranco.

Gianfranco Ferrari (CEO)

Thank you.

Operator (participant)

The next question comes from Renato Meloni with Atomo Research. Please go ahead.

Renato Meloni (Analyst)

Hi, good morning, everyone. Thank you for the opportunity to ask questions. Just to start a follow-up here on Mibanco, during your initial remarks, you said that you're doing a better assessment of the situation in the upcoming quarters. So I wonder if you could offer some more color on what this assessment is, and maybe offer some order of magnitude in extra provisions that you might have to incur, and if that could materially impact the guidance? And then, the second question here is just on the, what do you think is the driver for the increase in low-cost deposits? And, if you expect that to increase during the rest of the year? Thank you.

Gianfranco Ferrari (CEO)

Yeah, I'll ask César to take the first question, and I'll take the second one.

César Ríos (Chief Risk Officer)

Okay. Thank you. I would like to remind something that Gianfranco has mentioned us. One is the general context of the market has been very challenging, particularly for the micro segment. Given, say, that we are doing a very thorough analysis for our internal capabilities and performance, and I would like to lead a little bit more light about what we mean for a thorough assessment. We are reviewing the entire process, checking, for example, our monitoring capabilities, how granular are they, what are we monitor? We are reviewing the performance and calibration of our models. How effectively are we combined our on-the-field capabilities with the modeling central system that compounds the hybrid model that we are convinced are the right one, but how finely tuned are these?

We are also reviewing cultural aspects that has been probably affected during a long period of a tough market, affecting the behavior of the clients and probably even our internal RNs. Summarizing everything, we are reviewing every conceivable aspect of the credit process to be sure that even under very tough market circumstances, we are performing at the best possible level, and we are finding opportunities to improve all along the lines that I already mentioned. The expectation is to have a clear picture in a quarter or so.

Gianfranco Ferrari (CEO)

I'll complement César's answer that goes beyond risk management at Mibanco, and we've talked about it in previous calls. I would say Mibanco and like most of the microfinance institutions in the traditional business has been 99% focused in lending. The whole microfinance industry has a strategic weakness, but at the same opportunity, in terms of gathering retail deposits, transactional deposits, and improving the fee income business. Those are two levers that obviously will take time, but strategically, is something that we're working at Mibanco. That won't help in the short term for sure.

In the short term, is what César just mentioned, but in the longer path, we do see that Mibanco has an opportunity to actually start basically, and improve those two sources of income. Going to your second question, the answer is quite direct and easy, is we've been investing in transactional capabilities for, I would say, I don't know, 15 years. And obviously, that doesn't pay off when interest rates are low, but it pays in environments like the ones we've been living for the last, I don't know, 24 months, 18 months, whatever. And we will continue to invest. So a few years ago, it was heavily investing in the distribution, the physical distribution capabilities. Today, is heavily investing in digital distribution capabilities.

A clear example, and the most successful one so far, it has been Yape. But I mean, if you recall, a few years ago, we started a strategy called War on Cash. That's exactly what's happening. We're not only improving in terms of market share, but the market, the non-cash market, has been growing steadily over the last few years.

Renato Meloni (Analyst)

Thank you. That's clear.

Operator (participant)

The next question comes from Brian Flores with Citi. Please go ahead.

Brian Flores (VP)

Hi, team. Thank you very much for the opportunity to ask questions. I have a question on Yape. As you mentioned, you achieved breakeven. I wanted to understand a bit, how do you envision this going forward? The 33% quarter-over-quarter expansion on revenues, do you think this is sustainable, something that you already have within your budget? And also wanted to ask and confirm, if now that the investments have been mostly done for on the technology side and the capability side, as you were mentioning on the transaction side, if going forward, this is purely, let's say, profit or only, let's say, largest part of it, that from the revenue side, will translate into profits directly, right? On this one. Thank you.

Gianfranco Ferrari (CEO)

Fra- Francesca?

Francesca Raffo (Chief Innovation Officer)

So in addition to today's primary revenue streams for Yape, as mentioned before, flows and payments, and also beginning to the lending business, what I think is very strong for Yape in the future is that the monthly active users continue to grow at a fast pace, and also the level of transactions that they have is continually increasing. If you look at a year-to-year, quarter-to-quarter comparison, active transactional level was 25 transactions per customer, now it's 40, with a growth in customers as well. So, the current pace of growth, I don't see it slowing down on the revenue streams that we know, bill payments and floating. But what we are going to see is a difference in percentage in the relative growth rate of new businesses.

We mentioned lending. We're growing fast on lending, in terms of not still creating a large balance, but really incrementing the pace at which we lend for all Yape customers. We believe that 50% of the Yape base should be able to have lending products available. Also, the new revenue streams in terms of foreign exchange remittances, which are highly a fee-based business, are also growing at a still small, but also growing. And finally, the newer business models, which are marketplace. We are currently having a lot of promotions, a lot of transactions around Yape, which gives us an optimistic view in terms of creating a new business line.

Gianfranco Ferrari (CEO)

Yeah. Maybe just to complement, Francesca's answer, bear in mind we've talked about it before. Bear in mind that what happens with this kind of comparable startups, actually, is that they have a J curve in terms of income, and therefore, profits. So that's what's happening, building on what Francesca mentioned. Just on your last comment, don't get me wrong, we're not gonna cut investments in technology. If we see an opportunity, we will continue investing in developing new features for our clients. And that's something that brings me to highlighting the meeting we're gonna have in September 26th, in which we are gonna be deep diving in Yape, another tech initiative or the disruptive initiative, which, by the way, I invite you all.

Brian Flores (VP)

Perfect. If I just make a quick follow-up on, on your comment on Francesca's. As you were mentioning, you see a big opportunity in terms of, lending via Yape?

... I also know, from your presentation that you're gonna be cautious, right? On the consumer segment. So how do we reconcile this, let's say, more timid appetite on consumer and credit cards with, perhaps a better optionality here with Yape to originate lending via the app, the apps? Thank you.

Alejandro Pérez-Reyes (CFO)

Yes, the key word, you mentioned the key word: optionality. The Peruvian market is the labor market actually is, I don't know, 75% informal market. So in the past, the whole financial system has two barriers for successfully lending to those segments. One is distribution costs, and the other one is data. Obviously, by disbursing through the app, the distribution cost is marginally zero.

And the models we are building, the risk models, I mean, we're building through the data we've gathered over the last few years in Yape has helped us in developing these new models, and so far, the performance of those, as Francesca mentioned, basically short-term loans, have been very good. So we'll go step by step, but we see a very large opportunity there.

Brian Flores (VP)

Super clear. Thank you.

Operator (participant)

The next question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Tito Labarta (Managing Director)

Hi. Hi, good morning. Thank you for the call, and taking my question. First question, just on the revision in the loan growth, right? A little bit lower, you know, despite still have, you know, 3% GDP growth. Is this primarily related to Mibanco? I mean, what do you need to see here for loan growth to really improve from here? Maybe starting there.

Alejandro Pérez-Reyes (CFO)

Sure. So the revision is a reflection not only of what we're expecting, but what has already happened during the year. The reason is on average daily balances, and the first half of the year, we've only grown 0.2% in the average daily balances. So that makes it harder to expect the 3%-5% growth that we had earlier, before. So we are expecting growth to pick up in the second half of the year. It's just that it's gonna be in specific areas, not necessarily as fast as we're expecting.

But as the economy continues to grow, we've seen, we've seen rates coming down, we see there's low inflation, there's investment on the private sector, and a lot of other leading indicators that show that the growth is becoming more widespread. Because at the beginning, it was very much on the primary sector, so you didn't feel it necessarily on the loan book. But now it's becoming more widespread, and we see a lot of different metrics that show that, including—we included in the presentation, the transactions with our credit and debit card. That is a leading indicator, it's moving stronger and in different industries. Also, energy consumption is growing at a more robust pace.

So we see a lot of different indicators that show us that the economy should continue to improve and be more widespread, and that will have an impact on the growth of the portfolio for the second half of the year. That moves us to the 1%-3% on average daily balances. But again, we, we are gonna be selective in specific risks, because the credit cycle is still not over.

Tito Labarta (Managing Director)

Okay. No, thanks for that. And I guess just on Mibanco again, you know, to see the growth pick up there, I mean, why, why is it so weak if the economy seems to be improving? Is this just because of the informality of those types of clients that's not necessarily captured in, like, the formal, macro figures? Just to understand, why the continued weakness there, like, what, what would it take for that to really begin to improve?

Alejandro Pérez-Reyes (CFO)

Yeah, Tito, maybe a more structural answer, and then a more short-term answer. The microfinance industry is a more volatile, or the highest within our portfolio, the business that has the highest volatility. And bear in mind that the microfinance sector has been hit since COVID, like, constantly, in Peru, I mean. So first COVID, then the terrible government we had, then the social unrest. And so it's been hit, like, for, I don't know, a period of three years or four years, something like that. And that's on one hand. On the other hand, this GDP growth, it takes time to trickle down to those segments.

Tito Labarta (Managing Director)

So it's a matter of time, but we do not have clarity as of today, and when is that time coming to benefit that portfolio?

Alejandro Pérez-Reyes (CFO)

Yeah, maybe just to complement, the growth in the first half of the year has been very tied to primary sectors, hasn't come necessarily with a big increase in hiring in companies. Now, the good news is that today, when you look at the central bank expectation survey, all of the indices are in the positive side, including the hiring expected for the next quarter. So we are seeing more positive news, but still it has to go from the primary sector to the full economy.

Tito Labarta (Managing Director)

... Yep. Okay, no, that, that makes sense. That's very helpful. And maybe, just to follow on the, I guess, on the cost of risk there, you-- I mean, you said at the higher end of the range, I mean, this quarter was a bit higher, first quarter was a bit lower, but you had some reversals there. Do you think this-- And, and you're sort of well above, like, historical levels. So just to put that into context, I mean, do you think that remains a bit elevated, maybe because of Mibanco, like, thinking into 2025 a little bit? Or, or can that, you know, improve going forward, sort of significantly, maybe back to historical levels eventually?

Alejandro Pérez-Reyes (CFO)

Yeah, well, well, the first thing I'll say is, we are expecting to be in range on the upper side of the range, so that certainly means that we are expecting some improvement during this year. Still not necessarily this year going back to pre all of these conditions that Gianfranco mentioned, you know, to levels pre-recession and COVID, et cetera. So this year, I think it's more of a transition year, where we'll see a decrease, but a slow decrease along the year. That will probably help us get into the range, but very much on the upper side, and hopefully 2025 is a year where it normalizes.

Gianfranco Ferrari (CEO)

Yeah, and maybe complementing that, the regarding cost of risk, there are, like, two forces going in opposite directions. One is that if we stand still with the current portfolio, cost of risk should be lower going forward. But on the other hand, the retail portfolio overall is growing at a faster pace than the wholesale portfolio, and that portfolio has a higher cost of risk. Actually, what we manage is risk-adjusted NIM. We expect, overall, the risk-adjusted NIM to improve going forward.

Tito Labarta (Managing Director)

Okay. That's helpful. Thanks, Gianfranco and Alejandro.

Operator (participant)

The next question comes from Eric Ito with Bradesco BBI. Please go ahead. Eric, your line is live. Our next question comes from Yuri Fernandes with J.P. Morgan. Please go ahead.

Yuri Fernandes (Executive Director)

Thank you, and good morning, everyone. I have a follow-up on Yape, on the breakeven and the long growth, right? Like, usually, Peru, you provision unexpected losses, and we see a good growth on disbursement here. If you can share maybe the balances, it would help us, but I guess you give the number, the number of Yape loans, right? Like 700,000 disbursement. My question here on the breakeven is the following: How are you provisioning for this? Are you building provisions ahead? Like, basically, this is penalizing your expenses. And even on expenses, is the total expenses line for Yape that you have in the table reflecting provisions?

So try to understand the breakeven, basically, if this is the breakeven, considering the credit and the cost of credit, like the potential expected losses, or not yet, like you are not including provisions in those lines. Thank you very much, guys.

Gianfranco Ferrari (CEO)

No, what you see. What you saw, sorry, in the presentation is overall cost of—as if Yape were a business unit by itself. So it has all of the costs, including provisioning. Yape loans, the bulk of the portfolio of Yape is very short-term loans. So we provision whatever is needed, but actually it's the NPLs that the ones that generate provisions. The delinquencies directly related to provisioning, because since the loans are very, very short tenure, the typical way of provisioning doesn't apply to the Yape portfolio.

Yuri Fernandes (Executive Director)

Okay. No, thank you, Gianfranco.

Gianfranco Ferrari (CEO)

Sorry, go ahead.

Alejandro Pérez-Reyes (CFO)

Yes, and the actual performance of the portfolio is much clearer and faster revealed in this kind of portfolio, because you have very short maturities. So in a very short period of time, you have a perfect profile of the payment expectation, and you can provision based on that.

Yuri Fernandes (Executive Director)

No, thank you, guys. And just to follow up on these loans, why are you more confident with Yape loans than Mibanco? I know it's different, the nature of the business, but given with all the questions, everything we're seeing on Mibanco, like, why are you confident that you can grow on Yape loans? What is different here?

Gianfranco Ferrari (CEO)

Yeah. A few reasons, Yuri, and we've discussed about this issue before, because you can... So, Mibanco goes to micro businesses, Yape goes to consumer lending. You cannot argue, and I may agree, that it, at those levels, at those segments, it's the same pocket, or the pocket gets mixed. But one reason is that one. The other reason is the model. Yape is completely built on risk models and digital capabilities. The acquisition cost is much, much lower than the acquisition cost at Mibanco. And maybe the last one, which is the most important one, is tenure. Mibanco's duration is around 13 months. The Mibanco portfolio is around 13 months.

Yape's portfolio is around one month. So, this is very, very different.

Yuri Fernandes (Executive Director)

Um-

Gianfranco Ferrari (CEO)

No, go ahead.

Alejandro Pérez-Reyes (CFO)

Sorry. To add, I think, to the previous question and to this one, one of the things we're trying in Yape is innovation around disbursement channel, collection channel, and product innovation. It's very different to give a working loan capital and a very small 20-day or 45-day loan. So this is. There's space for all of these products.

Gianfranco Ferrari (CEO)

Exactly.

Alejandro Pérez-Reyes (CFO)

What we need to find is the niches around that, no?

Gianfranco Ferrari (CEO)

No, super clear, everybody, and congrats on Yape. It is great. Like, when I see the chart of on your ARPAC and your cost to serve, you know, it's pretty nice. So just trying to check it, like, the potential, you know, questions here.

Yuri Fernandes (Executive Director)

Thank you very much.

Operator (participant)

The next question comes from Eric Ito with Bradesco BBI. Please go ahead.

Eric Ito (Analyst)

Hi, guys. Good morning. Can you hear me?

Gianfranco Ferrari (CEO)

Yes, perfectly.

Eric Ito (Analyst)

Okay, thanks for taking my question here. I have one question regarding loan growth. You mentioned that economy should continue to improve. We have rates coming down, low inflation next year. So just want to get a bit of color for 2025. If you can give us some numbers on loan growth expectations for next year, and maybe give us a breakdown for microfinance between the segments, retail, and wholesale. Thank you.

Gianfranco Ferrari (CEO)

Yeah, Eric, just to be clear, we don't provide guidance on 2025 until, I believe, it's February-

Alejandro Pérez-Reyes (CFO)

February.

Gianfranco Ferrari (CEO)

February 2025. If we go back to 2024, which is what we can discuss, basically, Peru's main driver for growth over the last, I don't know, two decades, has been private investment. Therefore, loan growth has been highly correlated to private investment, and even though we, as we mentioned before, we're, we expect to grow 3% this year, we still don't see in relevant private investment or private projects that for investment.

Having said that, and again, I want to stress out that we don't provide guidance for 2025. What we expect is that next year, maybe by the end of this year, some private investment should pick up because there's activity in the new brownfield and greenfield projects in the mining sector. Alejandro mentioned the port of Chancay, which has already been financed, but there's a huge

Alejandro Pérez-Reyes (CFO)

Yeah

Gianfranco Ferrari (CEO)

... collateral positive impact. The airport is going to be... the new airport is going to be inaugurated by year-end and so on. So we are positive on growth for, but the portfolio growth, I mean, but it's gonna be for next year, not maybe the last quarter of this year, but mostly next year.

Alejandro Pérez-Reyes (CFO)

Yeah. Maybe I'll just add that even though private is a driver, and it should be going forward, there's this project, there's also a big push from government for this private/public concessions, you know, and one important one is this Peripheral Beltway that has been assigned for $3.4 billion, which is also something that could generate some dynamics. So there, we are seeing more things going on. Still, the private investment is not necessarily online as of now.

Eric Ito (Analyst)

Okay, thank you. Just a follow-up, if I may. What's the level of sustainable ROE you guys think is the one for the bank?

Gianfranco Ferrari (CEO)

Yeah. What we've mentioned, what we've been mentioning for the last three or four years is 18%.

Eric Ito (Analyst)

Yeah. Thank you.

Operator (participant)

The next question comes from Andrés Soto with Santander. Please go ahead.Good morning, Fran, Gentlemen

Gianfranco Ferrari (CEO)

Yes.

Andres Soto (Analyst)

Laura-

Gianfranco Ferrari (CEO)

Yes.

Andres Soto (Analyst)

Uh, my sec-

Gianfranco Ferrari (CEO)

Yes, yes. No, go ahead. Go ahead.

Andres Soto (Analyst)

No, no, you're very good. You can, you wanna tell, all right, go ahead, but I want to change topics.

Gianfranco Ferrari (CEO)

No, no, well, you... We are considering it? Yes, we are considering it, yes. We haven't decided anything, but yes, we are considering it. Makes total sense.

Andres Soto (Analyst)

Perfect. Thank you. Now my second question is regarding actually to Yape loans. You know, the 700,000 disbursements caught my attention. I would like to understand, is this still only single installment loans, or are you already doing multi-installment loans? And if you can give us any color on what is the breakdown between both of them and any feedback that you have regarding the preliminary potential of this. You know, Francesca just mentioned 50% of Yape users should be eligible to get loans.

I would like to understand also, out of that, how many are already clients at BCP or any other credit card subsidiary, and which will be sort of incremental growth for the franchise?

Alejandro Pérez-Reyes (CFO)

Yes, Francesca?

Francesca Raffo (Chief Innovation Officer)

Yeah. So currently we disperse around a little over 300,000 loans, short-term loans per month in Yape. Around 90% of that is still a month, between 15 days and 29 days in terms of term. And we have for second time and third time customers, a longer term. Longer term meaning two months and three months. So it's still very early on, and what we are actually looking at is amounts and repayment types, so it's very early on for that. What we are seeing is that the customer base is very repetitive. So there is a lot of customers that are coming back for those short-term loans, and we want to still understand how we can penetrate the larger base of the 12 million customers for Yape.

So the 50%, that I mentioned is our goal, our North Star goal, saying that we—what we want to do is actually be able to lend to half of Yape's customer base. Because if you've seen, Peru's numbers, loan growth in terms of number of people, has been very stagnant in, you know, in the past, you know, 10 years. It hasn't been a real growth path.

Andres Soto (Analyst)

Congratulations again on the results.

Operator (participant)

The next question comes from Sergey Dubin with HL. Please go ahead.

Sergey Dubin (Analyst)

Yeah. So, I had a question regarding the direction of your net interest margin in the context of your asset yield and funding costs. I see that both asset yield and, you know, basically your asset yield expanded, your funding costs has also rose, but slower than asset yield, so your NIM has expanded as well. But could you put it in context also of the interest rate trajectory? Because it looks like, as you showed in the presentation, the Central Bank has been cutting rates since June of 2023. So how were you able to achieve expansion in the asset yield for so long after the rate cuts have begun? Number one, and number two, how sustainable is that NIM expansion, given that you expect BCRP to cut rates to 5% by the end of the year? That's the first question.

Alejandro Pérez-Reyes (CFO)

Sure. So far, we've been able to reprice loans due to the current risk situation, and at the same time, low-cost funding has been improving in an important way, and also we've had returns from investments. And all of that has contributed to our numbers and to the fact that we're expecting to be on the upper side of the range. I'm gonna make a general comment and then I'll comment specifically. If we were to do nothing, the sensitivity of our portfolio to changes in rates, with a lot of assumptions, basically a high basis point shift, both in dollars and in soles, would be around 14 basis points in a year and around 20 in a three-year period.

We measured it in a three-year period because of the movement of the whole portfolio and the and the durations. So that is in a case where you basically maintain the portfolio as it is during this change in rates. Of course, that's not the idea. We're moving more onto the retail side, and that should change the mix and allow us to maintain a resilient NIM in the foreseeable future.

Sergey Dubin (Analyst)

Okay. Just to clarify, because I wanna make sure I understand this very clearly. So are you saying that some portion of your loan book is not directly tied to reference rate and you price it more, you know, in a kind of, like, risk fashion? So it's not... I would suppose that would be more in SME, PYME, and more high-risk segments. Is that right? So these,

Alejandro Pérez-Reyes (CFO)

Yeah, that's, that's, that's what happened during the last year because of the change in risk conditions in the market. Okay, so, so all of our book is, of course, related to base rate movements, but given the credit cycle that we've been through, we've been able to reprice to the upside some of our loans because of higher risk in the cycle. When that risk comes down over time, that should also normalize more.

Sergey Dubin (Analyst)

Okay. So that's fine, that's clear. And then the second part of my question was, given the ongoing decline in reference rates, and then if you expect these risks to come down, so that obviously suggests that you're gonna reprice your loans down, which means that your asset yields will come down, well, probably somewhat substantially. So would you still be able to reprice your deposits overall funding down more so that you can keep your NIM at least flat, or do you think there is some downside to NIM and later, you know, part of this year, maybe even next year?

Alejandro Pérez-Reyes (CFO)

If we didn't change the composition of the portfolio over time, yes, there should be some pressure downwards on NIM, because we already have a very high market share in low-cost deposits. We have been repricing those. Even though there might still be some repricing to be done, when rates come down in time deposits, et cetera, the effects are not as big. Having said that, we'll do that, of course, over time, but on the other hand, we are shifting the mix of the portfolio and moving into more retail, where you have a higher margin. That mix is what makes us think that we'll be able to sustain these levels for longer.

Sergey Dubin (Analyst)

Okay. And could you repeat your-

Alejandro Pérez-Reyes (CFO)

Uh,

Sergey Dubin (Analyst)

Yeah, so your sensitivity to, let's say, I don't know what, it's like 25 basis points and rate moves is 14 basis in NIM. Is that correct?

Alejandro Pérez-Reyes (CFO)

Yeah.

Sergey Dubin (Analyst)

To 100, the calculation I gave is 100 basis points move, parallel move, both-

Alejandro Pérez-Reyes (CFO)

Uh-huh

... in soles and dollars. That has an impact in three years of around 20 basis points, in one year, around 14 basis points. That is with the portfolio without having any changes, you know? So that's basically taking the balance sheet-

Sergey Dubin (Analyst)

Right

Alejandro Pérez-Reyes (CFO)

... as it is, and going through the cycle of rates coming down.

Sergey Dubin (Analyst)

Okay.

Alejandro Pérez-Reyes (CFO)

When we move the portfolio and we go a little bit more into retail, that's when we compensate a part of that.

Sergey Dubin (Analyst)

Right. So that's a perfect segue into my next question. You've been saying this line for, like, a long time, that you guys are moving into retail, and it should bring higher NIM, which is true, but also it's very clear now it's bringing higher cost of risk as well. And it's actually what it looks like to me, a lot of people here focused on Mibanco, but really your SME PYME segment within Credicorp, which I think contributes most to your credit cost increase, just by sheer size of the portfolio. So my question there is: How are you first of all, like, what exactly changed between Q1 and Q2? Because I was under the impression that your credit costs were most vulnerable last year, and expectation was El Niño. Then El Niño happened, it wasn't as bad.

You reversed some provisions, so it looked like things were actually improving, but then now it's deteriorating again. So what, what has changed between Q1 and Q2 that you saw this deterioration?

Alejandro Pérez-Reyes (CFO)

Well, well, well, nothing has changed in the sense that the trend has been the same. What has been a bit of a surprise is that it was stronger than we expected beforehand. So the point is, we knew we were in a bad credit cycle. We were expecting it to start turning a little bit earlier in the year, and it's taken longer, but it's not necessarily a change in any way. Having said that, this is a cycle that is going on right now, and it will pass. And our strategy to move into retail is a more structural strategy that is not necessarily linked to the specific moment. So we're not gonna rush into something today when we're still expecting the risk to be better. But strategically, we are moving more into the retail segment.

Sergey Dubin (Analyst)

Okay. So that's the.

Alejandro Pérez-Reyes (CFO)

Yeah, so Jay-

Sergey Dubin (Analyst)

Yeah, go ahead.

Alejandro Pérez-Reyes (CFO)

There's a lot of people in the call. What we can arrange with our IR team is a specific conversation, and we can go in as much detail as you want, if you're okay.

Sergey Dubin (Analyst)

All right, that's fine. That's fine. Thanks.

Alejandro Pérez-Reyes (CFO)

Great. Thank you.

Operator (participant)

The next question comes from Carlos Gómez-López with HSBC. Please go ahead.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Hello, thank you. First, thank you for the disclosure on the NIM sensitivity. That's, that's very clear, and we appreciate that. I had two different questions. One is about your international operations. Given that, well, Peru is taking time to take off, how do you see your operations in Bolivia, in Colombia, and in Chile, and how much are you willing to invest in your fintech in Chile? And second, regarding the investor remuneration, you mentioned the possibility of a, well, of an extraordinary dividend. I've noticed that another company of associated with the group has been very active in buybacks. Is that something that Credicorp will consider at some point, or will you stay with your policy of always sticking to dividends? Thank you.

Alejandro Pérez-Reyes (CFO)

Good morning, Carlos. Let me start with the second one. As of today, we are not evaluating any buyback opportunities. But we mentioned before, the plan is to pay a, a, the relevant, the important dividend, the ordinary dividend will pay in May, June. This year, we raised that by 40%, I believe. And if there's the growth, portfolio growth is not there or whatever, we'll pay a, a, an extraordinary dividend, I would say, the last quarter of the year. Those are the plans. There's nothing formal yet. We're evaluating that. Regarding your first question, let me go by country first, then business by business. Bolivia, the bank is performing quite well.

Unfortunately, I always say we're, we have the right franchise in the wrong country.

... The country macro environment is very complicated. What we've been doing over the last, I would say 18 months, is de-risking our portfolio. And even though it's not a very dollarized portfolio, we've been de-dollarizing our portfolio too. The nice thing we've been doing in Bolivia, and we will talk about it more in September, is that we launched Yape in Bolivia, I would say about 1 year ago, or 18 months ago. Not because Bolivia is a large market or an interesting market by itself, but because we wanted to confirm or not our thesis that Yape was exportable and leveraging on a non-leading bank in the country. And so far, we've been successful with Yape in Bolivia.

As I mentioned, we'll be talking up more about it in September 26th. That's Bolivia. Obviously, we don't plan to invest more in Bolivia. Regarding Colombia, the country, the whole country is going through a lot of structural changes. The financial sector, I'm sure some of you are investors in some of the large banks in Colombia. The financial sector overall is struggling. The microfinance business, we've talked about it. Credicorp Capital in Colombia is performing quite well. We shared the overall results of Credicorp Capital. We feel quite comfortable with the ROE we have, the plan we deployed last year. We're actually beyond the KPIs we set as without target for 2025.

So we're quite happy. That's... I'm talking about Colombia and Chile at the same time, when I'm talking about Credicorp Capital. And lastly, regarding Chile and Tenpo, actually, I've been this week in Chile. Tenpo is right on track with the KPIs we set when we started. We've been assessing the development of Tenpo quarter by quarter. So the performing of the - the performance of the business is satisfactory today. We already asked for a full banking license. We expect that license to be awarded the first... Sorry, the first stage of that license to be awarded quite soon, so the plans are there. Therefore, we plan to keep investing in Tenpo until it reaches breakeven. We will also be talking about it in September 26th.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Presumably, you don't have a date for breakeven right now?

Gianfranco Ferrari (CEO)

We do have a date in our plan. I'm not sure we're gonna share it with you today.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Today. Okay, thank you so much.

Operator (participant)

It appears there are no further questions at this time. I will now turn the call back over to Mr. Gianfranco Ferrari, Chief Executive Officer, for closing remarks.

Gianfranco Ferrari (CEO)

Thank you. And thank you all for your questions. Our second quarter results showcase a solid ROE of 16.2%, driven by universal banking, insurance, and investment management and advisory, supported by improved loan growth and high transactional activity. Significant strides in strategic initiatives resulted in a robust first half of the year, positioning us to achieve our 2024 ROE guidance. Our financial performance was sound, with resumed loan growth, a resilient NIM, and a solid balance sheet. With these dynamics, more are saying they have still high provisions. As the economy strengthens, we are well positioned to capitalize on new opportunities and meet our clients' evolving needs.

In Peru, despite current systemic issues in the microfinance sector, we remain confident in our hybrid business models and are conducting a thorough review of risk capabilities to realign this business, and we still do not feel comfortable with risk assessment of this portfolio. While the quarter's ROE fell short, this business segment has created value for Credicorp over the longer term, and we anticipate a gradual recovery in profitability. Our focus remains on supporting the essential population segment we serve through Mibanco. The economic context in Peru is favorable, with a stable outlook for 2025, driven by strong underlying fundamentals, including controlled inflation levels, increased public investment, and robust commodity prices. In this context, we reaffirm our long-term target of 18% ROE.

This profitability level will be supported by a resilient NIM during a period of decreasing rates and a reduced cost of risk once the credit cycle is overcome. These dynamics will be further enhanced by strong non-interest income and optimized efficiency as disruptive initiatives mature. Our disruptive financial franchise is thriving, driven by a clear strategy and goals. Our commitment to digital advancement and customer-centric growth is evident in the tangible results across both core and disruptive businesses. Investments in innovation have led to increased digital customers, sales, and transactions, with reductions in unitary costs and notable improvements in customer engagement and satisfaction. Lastly, Yape has surpassed breakeven ahead of schedule, with significant income growth and diversification. We look forward to providing further details on this exciting business and our innovation portfolio at the Credicorp Strategic Update event on September 26th at 2:00 P.M. Eastern Time.

Thank you all for participating in today's call.