Credicorp - Earnings Call - Q2 2025

Transcript

Speaker 1

Morning, everyone. I would like to welcome you to the Credicorp Ltd. Second Quarter 2025 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investor section of Credicorp's website. Today's conference call is being recorded. As a reminder, all participants will be in 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 the HD web phone on your computer, please use the keypad on your computer screen. If you are using a speaker phone, 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 Chief Investor Relations Officer, Milagros Cigüeñas.

You may begin.

Speaker 2

Good morning. Thank you and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer, and Alejandro Perez-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; Diego Travezan, CFO of Insurance and Pensions; and Rogelio Benavides, New Bank CFO. Before we proceed, I would like to make the following statement very shortly. Today's call will contain forward-looking statements, which are based on management's strengths, expectations, and beliefs, and are subject to a number of risks and uncertainties. I refer you to the forward-looking statement 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 begin the call with remarks on the improved macroeconomic environment, a brief overview of our quarterly results, and an update on our strategy to build a more agile, balanced, and forward-looking platform, followed by Alejandro Perez-Reyes, who will provide a more detailed analysis of key macroeconomic indicators, our financial performance, and our outlook for 2025. Gianfranco, please go ahead.

Speaker 0

Thank you, Milagros. Good morning, everyone, and thank you for joining us. Let me begin with reflections on Peru's evolving macro environment and why Credicorp is uniquely positioned to benefit from what's ahead. Momentum is building. Terms of trade remain historically high, driven by strong gold, silver, and copper prices. Also, Peru maintains a solid trade surplus. Inflation is below 2%, real wages are recovering, and formal employment is expanding. GDP is expected to grow 3.2% this year, with domestic demand growing around 4.5%. These tailwinds are creating a more constructive backdrop. The data tells one story. The renewed activity on the ground is even more promising. While large infrastructure projects have yet to ramp up, small and mid-sized businesses are investing again, modernizing, adding capacity, and meeting stronger demand. Investments are increasingly spread across regions, laying a healthier foundation for sustained growth.

In this environment, Credicorp is ready not just to participate in the recovery, but to lead it. We build a resilient, diversified business anchored in digital infrastructure, deep client engagement, and scalable fee-generating platforms. This enables us to perform through difficult cycles, increasingly decoupling from the macro. With improving tailwinds, we're even better positioned to capture the upside efficiently and profitably. Our Q2 results reflect that momentum, stronger fundamentals, improving trade dynamics, and disciplined trade execution. We now expect ROE for the year to reach approximately 19%, including a 50 basis point boost from extraordinary income in the first half, with a longer-term outlook of around 19.5%. This underscores solid performance, crucial resilience, and the accelerating impact of disruptive platforms like Yape. While our efficiency ratio reflects upfront investments to scale these capabilities, we remain focused on unlocking operating leverage through disciplined execution in digital, data, and risks.

A healthier micro-level recovery further reinforces our long-term view and strengthens our confidence in delivering sustained shareholder value. Alejandro will detail the results and update its outlook. Before that, let me comment briefly on our situation with Sunat. As previously announced, Sunat has required us to pay approximately PEN 1.6 billion in alleged unpaid income tax and associated interest, which was done this week. This development does not alter our legal position or our confidence in a favorable resolution. We continue to believe that our case has strong legal and technical ground. We are prepared to defend our position through the appropriate channels, whether at the tax court, where proceedings may take one to three years, or if necessary, through the judiciary, which could extend the process by an additional five years.

We will continue to operate with discipline and transparency, defending our rights while building a stronger, more agile Credicorp. Let's now turn to our Q2 performance. We delivered another solid quarter with strong contributions across core businesses and continued execution on strategic priorities. These results translated into an ROE of 20.7%, supported by solid operating performance and disciplined risk management. Universal Banking and Insurance and Pensions posted very strong results, while Microfinance continued to recover. Key dates and transactional income also grew, reinforcing our diversified platform. Our innovation portfolio contributed 6.2% of risk-adjusted revenues, keeping us on track toward our 10% target for 2026. Trade dynamics improved, and FX neutral loan growth accelerated across all segments. Origination pipelines remain healthy, particularly in Retail Banking and Microfinance, and we expect sustained engagement in the second half of the year.

Risk-adjusted NIM hit a record 5.4%, aided by improved asset quality and our low-cost funding structure. On deposits, we increased our share of demand and saving accounts to 40.6%, reflecting our digital strategy and the trust we've built with clients. Asset quality trends remain favorable, thanks to tighter origination standards, refined risk pricing, and strengthened collections. Our efficiency ratio came in at 44.2%, within our expected range, highlighting the scalability of our digital investment and our disciplined approach to cost control. Capital levels remain solid across all businesses. Our performance this quarter reflects more than improved macro conditions. It's the result of a deliberate multi-year strategy to build a more agile, balanced, and forward-looking platform. In recent years, we've modernized systems, built end-to-end digital capabilities, and reimagined client engagement across each of our businesses. These investments continue to pay off in performance, resilience, and adaptability.

We're encouraged by a strong traction of our disruptive innovation portfolio, a key pillar of our long-term strategy. Credicorp is no longer just a trade growth story. We're structurally shifting to a more balanced model, where fee generation, client engagement, and scalable innovation are just as critical as lending. This transformation strengthens our resilience and positions us for more consistent, higher-quality growth. It's the foundation for the finance of the future: more inclusive, more digital, and more sustainable. Yape continues to scale in both reach and relevance, now serving nearly 15 million monthly active users, equivalent to 75% of Peru's economically active population. Its monetization strategy is advancing, making it one of the top five contributors to fee income in the Peruvian financial system. Transaction volumes and engagement remain high, and we're expanding services and deepening client interaction.

With platforms like Yape and promising ones like Tempo, our soon-to-be digital bank, we're scaling high-impact services that grow revenues and deepen relationships, transaction by transaction, not just loan by loan. As part of our long-term vision, we're building the next-generation capabilities to future-proof our businesses and redefine value creation for clients, employees, and shareholders. This includes advancing digital onboarding, behavioral scoring, embedded finance, and ecosystem-based activities. These are not just pilots; they're core building blocks for lasting differentiation. We're embedding AI and data management across our operations to generate value in tangible, scalable ways. Let me highlight three key areas. First, we're elevating the customer experience through hyper-personalization, advanced chatbots, and voice bots, making every interaction faster, smarter, and more intuitive. Second, we're enhancing operational efficiency by equipping our team with AI copilots and productivity tools.

These are already driving productivity gains of over 30% in code generation and simplifying daily workflows for commercial teams and allies. Third, we're strengthening strategic decision-making by harnessing data insights to identify new market opportunities, optimize our offerings, and increase earnings through solutions such as ALM optimization, smart customer prioritization, and strengthened risk management framework. By embedding AI deeply into how we operate, we're not just innovating, we're building a future where both our clients and our people benefit from smarter, faster, and more effective solutions. This commitment positions us at the forefront of our industry's transformation. Our goal is to shape the future of finance in our region, not only through technology, but through a model that is inclusive, efficient, and highly engaging. Looking ahead, we remain focused on execution, innovation, and long-term value creation.

I invite you to join us in New York on October 9th for our Investor Day, marking the 30th anniversary of our IPO. Together with our business leaders, I'll share how we're transforming finance to improve lives and positioning our platform to lead in a changing region. We'll outline our financial services model of the future, anchored in innovation, inclusion, and data-driven client engagement, while scaling distribution and unlocking synergies across our ecosystem. We'll also show how AI, advanced risk and data capabilities, and disciplined execution are future-proofing our business for sustainable growth. Having said that, let me pass the presentation to Alejandro.

Speaker 2

Thank you, Gianfranco, and good morning, everyone. This quarter's 20.7% ROE reflects sustained momentum in our core businesses and the increasing contribution of our innovation portfolio. These results include a positive 120 basis point impact related to a relevant gain in BCP's investment portfolio. Similar to what we communicated last quarter, we reevaluated Bolivia's balance sheet using a more market-reflective exchange rate, which generated an accounting contraction of 2.8% in Credicorp's total assets this quarter. As I discuss the quarter's highlights, I will focus on the year-over-year operating trends. Loans measured in quarter-end balances dropped 4.1%, impacted by the reevaluation of Bolivia's balance sheet and a depreciation in BCP's dollar portfolio, swallowing an appreciation of the Peruvian soles. Excluding these effects, underlying loan growth for the quarter was 2.6%. This increase was driven primarily by BCP, particularly through mortgages and consumer loans in retail banking and by Mibanco.

Asset quality has improved materially year over year. NPLs contracted across the board, and Credicorp's NPL ratios stood at 5% this quarter. The cost of risk fell to a low of 1.6% on the back of fortified risk management and supported by improvements in payment performance and in the Peruvian economy. Net interest income increased 4.2%, spurred by a contraction in interest expenses after interest rates fell and low-cost deposits expanded at 24.7%, which is 7.2% of the funding base. In this context, NIM remained resilient at 6.4%. Stimulated growth was registered for other core income. Fee income increased 8.2%, boosted by transactional activity at Yape and BCP. Gains on FX transactions rose 7.9% through higher volumes on BCP. Lastly, the insurance underwriting result grew 11.2%, reflecting a stronger insurance service result in the last quarter. On the efficiency front, our cost-to-income ratio stood within guidance at 44.9%.

Next slide, please. Peru's GDP growth is around 3% year over year in the second quarter, down from close to 4% in the first, due to a slowdown in primary sectors and a higher comparative base from the previous year. However, domestic demand remains strong, spending around 5% and outpacing overall GDP growth since mid-2024. This sustained momentum reflects the economy's current mid-cycle phase and ongoing support from elevated export prices. As a result, GDP expanded close to 4% over the last four quarters to the second quarter of this year, while domestic demand grew around 5%. High-frequency indicators continue to signal economic dynamism and are pinned by steady recovery in employment and real wages. More importantly, key profits for private investments such as heavy-duty vehicle sales, capital goods imports, and terms of trade are expanding at double-digit pace.

Notably, terms of trade have reached their highest level in 75 years, driven by elevated gold, silver, and copper prices, which together account for roughly half of Peru's exports. Supporting this trend, the Central Bank Business Expectation Survey showed that investment sentiment reached a historical high in the second quarter, suggesting that private investments should strengthen them. Furthermore, the favorable low-inflation environment continues to support recovery in private consumption. Hence, Peru's economy is expected to grow above 3% this year, with domestic demand rising around 4.5%, which would represent the higher growth rate in 12 years, excluding the post-pandemic rebound. On the external front, elevated loan uncertainty persists. Regarding President Trump's announcement of copper tariffs, the direct impact on Peru is expected to be very limited as copper input materials are not subject to the 50% tariffs. Next slide, please.

The Federal Reserve has kept the policy rate stable throughout the year, with toll rates seamlessly emerging from a minority of its members. Chairman Powell has continued to communicate a cautious approach toward lowering rates. Even the slowdown of the labor market has seen the Federal Reserve now pricing between two and three rate cuts this year. Present percentages surrounding President Trump's announcement continue to contribute to the unpredictability of the external environment. In Peru, unknown inflation has remained below 2% for seven consecutive months, which constitutes one of the lowest years for both advanced and emerging economies. The Central Bank has lowered the pace of rate cuts at its approaches to its usual level, making its last cut in May, when it dropped the rates 25 basis points to 4.5%.

In Colombia, inflation has lowered to 4.9% year over year in July, which remains above the upper bound of the target range of 4%. Inflation concerns and fiscal challenges have led the Central Bank to maintain a cautious stance. In Chile, the Central Bank cut its rates to 4.75% during its last meeting, after holding its policy rates stable throughout 2023. The move came as inflation reached 4.1% year over year in June, the lowest level since September of last year. A rate cut appears unlikely in the next meeting, given that inflation accelerated in July. Next slide, please. BTP registers a strong ROE of 30.9%, which reflects resilient margins, diversification of income, and a low level of cost of labor. This result includes a good percentage point impact of a significant gain realized on the investment portfolio.

On a quarter-over-quarter basis, total loans measured in quarter-end balances rose 1.4% or 2.5% in FX year comparisons. Growth was mainly driven by retail banking, which grew 2%, driven by mortgages and consumer loans. The wholesale banking portfolio, which is volatile due to the nature of its short-term loans, increased 0.8%. The growth recorded in middle-market banking was almost completely offset by the contraction rates in corporate banking. NIM slid at 6% due to an improvement in the asset mix and a drop in the funding cost. NPL volumes fell 2.2%, mainly driven by wholesale banking. In retail banking, NPL volumes remain relatively stable both in individual and SME. Provisions contract 4.8%, driven mainly by an improvement in payment performance in wholesale banking. In retail banking, provisions in individuals dropped slightly due to risk model calibration.

This evolution was partially offset by growth in provisions in SME PMEs, following a night in disbursement of lower tickets, higher yield loans. The cost of risk reached a low 1.2%, impacted by initiatives this year to shore up risk management and bolstered by favorable macro conditions in Peru. In this context, BTP's risk-adjusted NIM stood at 5.2%. Other core income rose 16.4%, fueled primarily by gains on FX transactions as volumes rose via advanced pricing strategies and market volatility. Moreover, fee income rose on the tail of 40 transactional levels. Other non-core income this quarter includes a relevant gain on securities of S/106 million, driven by a sovereign bond exchange that extended the duration of the investment portfolio. From a year-over-year perspective, I would like to highlight the following dynamics.

Loans in quarter-end balances remain relatively stable, given that 2.1% growth in retail banking was offset by a 2.4% contraction in wholesale banking, which reflects depreciation in the dollar-denominated portfolio. In FX retail terms, retail and wholesale banking drove average growth of 2.6% in BCP's portfolio. NPL contracts across all BCP segments, primarily in wholesale and SME PMEs. In the case of individual, NPLs fell due to less calculations on the back of higher liquidity and due to an improvement in loan origination and debt collection management. NIM remained resilient, bolstered by a downward trend in the funding cost. The cost of risk fell across retail banking segments as payment performance improved due to a greater share of lower risk betas within the loan portfolio, supported by a strengthening economic factor. The business erasure stood at 38% for the first half of the year.

Growth in operating expenses was spurred by an uptick in provisions for variable compensation, which rose alongside stronger business performance and initiatives to hire digital talent for strategic projects. The ratio of our core income to assets accelerated in upward trends, reflecting the positive impact of initiatives to diversify BCP's income streams. The strong fees and FX gains in core contributed to this acceleration. Next slide, please. Yape continues to lead Peru's digital financial services market, with nearly 15 million monthly active users at the end of the second quarter. This figure is equivalent to 75% of the economically active population. With consistent quarterly growth of over half a million users, Yape remains on track to meet its 2026 target of 16.5 million monthly active users. User engagement remains robust, with an average of 54.5 monthly transactions and 2.7 functionalities used per user, signaling deeper adoption of the app's ecosystem.

Monetization and operating leverage continue to strengthen, where revenue per monthly active user is S/6.5, while expenses per monthly active user stood at S/4.4, as an increasingly larger share of users contributed to revenue generation. Payments remain the primary revenue driver, fueled by growth in the average ticketed bill payment. However, lending has emerged as the fastest growing segment, now serving 3 million users and accounting for 18% of the app's total revenue. This growth reflects an uptick in loan disbursement, driven by hybrid effectiveness in lead conversion. The launch of SME loans in new markets has seen it move into higher-value long-term credit flows. By the end of the second quarter, the app's revenue had doubled year over year to represent 5.5% of Credicorp's risk-adjusted revenue. Yape remains focused on deepening user engagement, scaling monetization, and enhancing its value proposition as it advances financial inclusion.

Notably, nearly 30% of Yape loan recipients access the preferred loan in the form of financial assistance through their platform. Next slide, please. Involving economic recovery, it positively impacts the microfinance sector in Peru. In this context, the bank's profitability continues to rise and stood at 16.3% this quarter, supported by a rebound in loan disbursements in recent quarters, a strength in credit risk management, and effective interest rate strategies. I would like to highlight key quarter-over-quarter dynamics. Loans grew 2.1% in quarter-end balances, mainly driven by a drop in write-offs after more stringent origination guidelines were instituted one year ago. The NPL ratio fell for the fourth consecutive quarter to stand at 6.1%, in line with pre-pandemic levels. NIM rose to a peak of 14.4%, its highest level since before the pandemic, boosted by a shift in the mix towards more tickets, higher yield loans.

In parallel, the cost of risk rose 25 basis points to stand at 5.4%, while risk-adjusted NIM situated at 10.3%. From a year-over-year perspective, the decrease in the cost of funding, coupled with proactive loan pricing management, helps sustain the strong NIM. The cost of risk fell 217 basis points as lower risk betas continued to inflection and now account for 70% of total growth. Operating expenses remain under control, and efficiency stood at 62.4% for the first half of the year. In this context, the bank's first half contribution to ROE was 15.1%, transitioning towards our target for a sustainable ROE in the low 20s. The Bank of Colombia's result continues to pick up on the back of measures taken last year and also reflecting an improvement in the economic environment for the microfinance sector.

Growth is currently steady and risk is controlled, and the operations reported 11.1% profitability at the quarter end versus losses at the same point last year. Next slide, please. At the Grupo Pacífico Seguros, insurance and the underwriting results remain strong this quarter, supported by solid operational dynamics in both the PMC and life businesses, with ROE standing at 21.1%. On a quarterly basis, net income growth 23%. Insurance underwriting results rose 27% on the back of a decrease in insurance service expenses in the life business, which was driven by a drop in claims in credit life and disability and survivorship. The net loss on securities dropped in line with a lower impact of credit downgrades on a couple of assets in the investment portfolio this quarter. On a year-over-year basis, net income rose 16%, primarily due to the full consolidation of corporate health insurance and medical services operations.

Insurance underwriting results increase across both life and PMC businesses, particularly through lower claims in individual life and credit life in the former and car and car life in the latter. These impacts were partially offset by an increase in the net loss on securities, which was impacted by credit downgrades on a couple of assets in the investment portfolio. Next slide, please. Profitability or investment management and advisory business remained resilient this quarter, with ROE standing at 15.5%. On a quarter-over-quarter basis, core income-generating businesses delivered strong results this quarter, reflecting favorable treasury performance, improved capital market activity, particularly in the trading unit, and continued growth in wealth management with savings in U.S. dollars at 6%. However, deep credit leasing momentum was offset by a temporary increase in operating expenses due to a low rate in the first quarter, resulting in a 6% decline in net income.

On a year-over-year basis, net income decreased by 20%, mainly due to the absence of last year's one-off income from a now discontinued corporate finance business. Nevertheless, stronger treasury performance and lower tax expenses help partially offset the income. Next slide, please. Now I would like to review Credicorp's consolidated evolution. As we mentioned earlier, we reevaluated Bolivia's balance sheet once again this quarter, leading to a contraction in Credicorp's balance sheet. I will now focus on explaining the underlying quarter-over-quarter dynamics. The yield on interest-earning assets increased 21 basis points due to a shift in the interest-earning asset mix. On the liability side, a more expensive deposit mix led the funding costs to increase two basis points. On a year-over-year basis, interest-earning asset yield fell 27 basis points, driven by market interest rate dynamics and by a decrease in loans' share of the asset structure.

On the liability side, the drop in market interest rates and the lower cost funding structure drove a 42 basis point reduction in funding costs. In this context, NIM remained resilient and stood at 6.42%, increasing nine basis points. Going forward, loan growth, particularly in retail segments, should help us sustain resilient NIM despite lower interest rates. Next slide, please. Moving on to loan portfolio quality. Asset quality felt like further improvement this quarter as NPL volume continued to contract across segments, falling to levels below those reported two years ago prior to the 2017 recession. Amidst ongoing economic recovery, provisions have dropped over the past 12 months due to an improvement in payment performance and successful risk management measures at both BCP and Mibanco. The positive impact of this improvement exceeded expectations, which kept provisioning levels low once again this quarter.

In this context, the NPL coverage rate rose and stood at 109.5%. Going forward, we will continue to accelerate retail origination and manage risk comparables. We expect the cost of risk to rise but remaining within our appetite. Next slide, please. Moving on to core income, we recorded a 5.3% year-over-year increase. First, net interest income rose 4.2%, supported by lower interest expenses on an improved funding mix. Second, other core income grew 8.1%, fueled by fee income through Yape and core transactional activities and by gains on FX transactions. We continue to set new highs in our risk-adjusted NIM, reaching 5.44% this quarter, a 104 basis points increase year over year, fueled by resilient NIM and a lower cost of risk. The efficiency ratio for the first half of the year stood within guidance at 44.9%.

Operating expenses grew 11.4%, fueled primarily by core businesses at BCP and by investments in our innovation portfolio. Growth in core expense at BCP was driven mainly by provisioning for variable compensation and higher IT expenses. Expenses for our innovation portfolio rose 15%, led by Yape, Tempo, and CoolCube, which represented 83% of disruptive expenses in the first half of the year. Next slide, please. ROE for the quarter stood at 20.7%, driven by strong results across all our businesses. Meanwhile, ROE for the semester was 20.9%, supported by solid business performance and bolstered by an extraordinary gain from the Bananica transaction last year. If you adjust for each transaction, the recurring ROE is 20% for the semester. This quarter, the recurring net income reached a record high as we leveraged a differentiated funding structure and low cost of risk.

More importantly, we continue to strengthen revenue streams beyond lending while advancing our transitions towards a more diversified and resilient business model. As we communicated earlier this week, the full amount specified in the Sunat resolution against Grupo Crédito announced on June 30 has been canceled. This payment totals almost S/1.6 billion for alleged unpaid income tax and other security interest. This has not changed our stance in this case. We reaffirm our decision to exercise all legal rights available to current resolutions as we consider them unfounded. We are confident in a favorable outcome and continue to have the contingency as we most. Hence, no expense provisions have been deemed necessary. The payment does not affect the operations of our custodaries. However, it will impact cash flow at the Credicorp Ltd. level. Consequently, we do not anticipate issuing extraordinary revenues this year.

Now, I will move on to our guidance. Next slide, please. As previously stated, our GDP growth expectation remains unchanged at around 3%. We expect our loan book to grow around 6.5% year over year, measured in end-of-period balances. This is equivalent to around 3% measured in average daily balances. These figures do not consider the impact of the revaluation of BCP Bolivia's balance sheet, but they do consider the U.S. dollar devaluation against the Peruvian soles. Amidst a more dynamic economic backdrop and strengthening origination levels in the first half of this year, we expect balances growth to accelerate over the second half, driven mainly by retail banking at BCP and by Mibanco. The loan acceleration anticipated and the shift in the mix towards retail should support NIM while interest rates trend down.

Accordingly, we expect NIM to stand in the upper end of our guidance of between 6.2% to 6.5%. Although we expect a slight increase in the cost of risk in the second half of this year due to stronger retail originations, our guidance has been updated to 1.8% to 2.2% to reflect lower than anticipated provisioning levels in the first half of 2025, as the positive impact of our risk management measures and improvements in macroeconomic conditions exceed expectations. Accordingly, we are also adjusting our risk-adjusted NIM guidance upwards to between 5% and 5.2%. On the efficiency front, we maintain our guidance range for 2025. Fee income is expected to grow in the low double digits this year, supported by an acceleration in economic activity and ongoing diversification of our income sources. Additionally, insurance underwriting results are expected to remain solid and relatively stable compared to 2024.

We are increasing our four-year ROE guidance to around 19%. This new guidance already includes extraordinary gains from the Bananica transaction, which we estimate will have an impact of 50 basis points by year end. This revision reflects both solid core performance and sustained discipline on the risk side. While global uncertainties remain, we believe the fundamentals are in place to support this higher level of profitability. Finally, as Gianfranco Ferrari mentioned, we are revising our long-term sustainable ROE range upwards from 18% to around 19.5%. This adjustment is primarily driven by stronger expectations of loan growth dynamics, particularly through the penetration of higher yielding segments, which leads to a more favorable loan mix evolution and an improvement in risk-adjusted NIM. Moreover, we are seeing enhanced expectations for fee income and gains on foreign exchange operations, largely due to increased transactional activity across a diversified business line.

This factor contributes to a more optimistic efficiency outlook compared to our previous estimates. With these comments, I would like to open the Q&A.

Speaker 4

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 speaker phone, 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. Our first question comes from Brian Flores with Citibank. Please go ahead.

Hi, team. Good morning. Congratulations on the results and the new guidance. I wanted to ask you on cost of risk because I think it's a relevant improvement in your guidance. If you could elaborate a bit on what is driving this, and also you mentioned very recently that you're going to accelerate on retail, making the second half a bit in these terms a bit riskier. If you could elaborate on the long term, what is making you be a bit more constructive on a lower cost of risk? I think that would be very helpful. Thank you.

Speaker 0

Okay. Good morning, Brian. I'll ask first how to—this is a real school. I'll tell you if I finish.

Hi, Brian. Thank you for the question. Yeah, first one is good to explain a little bit the results of the first half of the year. Last year, we were in... We take several measures to assure that all our portfolios are under the risk appetite. In addition to improvement in capability, we restricted origination on certain segments. As a result of all of these effects, we have had during the first half of this year a very low cost of risk, absolutely low our initial expectations. With one minor exception, all our portfolios are under the risk appetite. Beginning more clearly in the second quarter of this year, we started to originate higher yielding, higher risk portfolios in a very successful way.

What we are anticipating in the second part of the year is to have the reflection of these improved origination and higher yielding risks that are going to change the mix. This form should continue in the following years.

Yeah. Maybe, Gianfranco, Brian, just to complement Gianfranco's answer, bear in mind that we do not manage our portfolio based on cost of risk, but on risk-adjusted NIM, which is very relevant.

Yes.

No, perfect. Super clear. A quick follow-up on the guidance. You reiterated the efficiency ratio, and I think you're very efficiently becoming efficient in digital use. If you could share what is your long-term vision on the branch networks, are you planning to monetize any of your prime real estate holdings? If you could elaborate this, you know, if you see branches evolving to a more, I would say, transactional hub. How are you thinking about this in the long term? Thank you.

Actually, Brian, this is a strategy we've started to deploy maybe four or five years ago. At the peak, at BCP, we reached up to close to 450 branches. Today, we have 300. There's been a reduction of about a third of the network. More importantly, I would say that the number of branches, the role of the branch has changed dramatically over the last few years, from more transactional vision to more educational and commercial vision. That path will follow. I would say that the bulk of the reduction has already been done. We do not plan to be as aggressive going forward. However, the world is changing so fast that we'll see.

No, perfect. Thank you.

Speaker 4

The next question is from Lindsey Marie Shema with Goldman Sachs. Please go ahead.

Hi. Thank you for taking my question and congrats on the increased guidance. Quick follow-up on cost of risk. When you think about cost of risk long term, where do you see the ratio trending and how long does it take to get there? Could it be structurally lower or should it continue to kind of accelerate to your long-term range? Thank you.

Thank you for the question. Once we reach, I would say, a more representative level at the end of this year, we expect for some years to increase the cost of risk based on the strategy that we are outlining. I am going to give a very simple example. Our cost of risk now is going to be around, let's say, 2%. This is a combination of wholesale, retail portfolios. If we are starting to reunite with higher risk portfolios, for example, only $1 billion portfolios that have a cost of risk of 8%, that brings a margin of 20% additionally, it is going to increase five basis points the overall cost of risk on the portfolio, but it is going to improve significantly, 2.5 times the profitability of the business. That is the strategy that we are going to follow.

Once we have a stabilization of the portfolio that already happened, we are starting to build the portfolio with new tools. For some years, we increase these higher risk, higher yielding portfolios. The overall cost of risk should increase, but with increased profitability.

Speaker 0

Yes. Again, Lindsey, the whole strategy and growth strategy actually is based on risk-adjusted NIM, as César mentioned, not only a cost of risk. As a matter of fact, we also include acquisition costs and so on. Regarding the risk-adjusted NIM, this is how we manage it.

Thank you. If I could elaborate on that a little bit, for loan growth this year, did you break down your expectations? I know you switched from average balances to period end, but is the kind of better expectation, is that mostly on retail and then just segment by segment? Thank you.

Alejandro?

Speaker 2

Yes. Hi, Lindsey. We made that change after a conversation with a lot of investors that preferred the end-of-year balance, but we still gave the equivalent. As we mentioned during the presentation, we were on the guidance, we were expecting growth end-to-end to be 6.5%, including the revaluation of the sol, which is stronger to the dollar than what we were expecting. It does come particularly from the more retail segment, both in Milagros and then at BCP, with mortgages and consumer credits. We're expecting most areas to grow, but those areas could be the ones picking up more. We've already seen that pick up in the last few months, and we expect that to continue and become even a little bit stronger in the next part of the year.

Speaker 4

The next question is from Fernando Meloni with Autonomous Research. Please go ahead.

Hi, everyone. Thanks for taking the questions. Renato here. Just quickly on loan growth for this year, I'm wondering, just thinking of the guidance from the beginning of the year and what has materialized, if you could explain a bit on what diverged the most here and the adjustments you've made. On the long-term guidance, and congrats again for raising the guidance for this year and for the sustainable ROE. I just wanted to, if you could, expand a little bit on the comments of the drivers for the higher guidance in the long term. Thank you.

Speaker 2

Sure. I mean, as for loan growth, as I was just mentioning, and tying that to the improvement in the economy that we've been mentioning, both Gianfranco and myself, really, we are seeing a very strong, very strong economy today and a much better situation for consumers. That ties to what César was mentioning about our risk capabilities and our origination capabilities, which is basically what we expect to translate into higher growth seen in lending, particularly, as I was saying, on the retail side, the consumer side, and microfinance side. By the way, it's already been happening so far. I mean, in mortgages, FX yield growth for the year, we've grown, just for a whole year, we've grown 6.5%. In consumer, almost 6%. We're seeing that actually pick up in the last couple of months. We expect that to continue.

With these capabilities and our distribution capabilities, and tying this to the longer-term ROE, we expect to continue to access more, let's say, risk, more of the consumer segment of retail, with a good risk-adjusted NIM. That is one of the main drivers for the sustainable array of the loan mix that translates with a good cost of risk that translates into a better risk-adjusted NIM. Also, on the fee income, we've been building a lot of different businesses and initiatives around that, and driven by Yape, but there are other things that we're also developing that are basically important sources of growth in the coming years. If you put those together, that's what brings us to our expected 19.5% sustainable ROE.

Speaker 0

Maybe, Fernando, just an additional comment on what Alejandro just mentioned is, if you remember, a few years ago, we stated a couple of guardrails regarding how much we were going to invest in our disruptive initiatives. One of those guardrails was up to 150 basis points of ROE. This year, as in 2025, that impact is going to be close to zero. Going forward, as we see it, that should be a positive. That bracket should be eliminated. Obviously, again, since the world is changing at the pace it is changing, we may have to invest or another Yape IDM account. Today, the vision we have is that the digital investments going forward, from 2025 onwards, will generate positive ROE rather than negative ROE.

As we've mentioned before, since we've been very conservative, especially in how to register the investments we've been doing in the digital transformation initiatives, it would be basically 100% or 90% of those investments, we've registered them as expenses. The equity part of those initiatives, the digital investments, is close to zero. It's not zero, but it's really irrelevant to the incomes they will generate going forward.

That's very clear. Thanks very much.

Speaker 4

The next question is from Carlos Gomez-Lopez with HSBC. Please go ahead.

Hello. Thank you. Congratulations on the results, and thank you for clarifying that the bond exchange was unsubordinated. Can I ask you briefly, is that after tax or before tax?

Speaker 2

Again, it's actually before tax, but government bonds don't have an income tax, so it ends up going all the way below the name.

Okay. That's very clear. Thank you. My real question is about Yape. We look at the numbers that you publish, and I estimate that right now you are showing a net income contribution of around $25 million. I could be wrong about that. How much do you think Yape contributes this year, next year, and in the future? What's the number that you are considering internally and your assessment to have?

Speaker 0

Francesca, can you answer that?

Speaker 3

Thank you, Cai. The number you mentioned is correct, but what we are expecting is as Yape begins to increase its loan portfolio, its contribution will be much larger. We are expecting, for the next three to five years, the goal would be for Yape to be the second largest line of business that Credicorp has, primarily due to its lending business in retail and SME segments, and also its increase in the newer segment, in the newer lines of business as marketplace and commerce.

That would be second to, I guess, second to BCP and therefore larger than Grupo Pacífico Seguros. Are we talking $150 million to $250 million?

Speaker 0

You have to do your math, Carlos. We don't show the specific figures. No, no, no. You have the figure of BCP. You have the figure of Pacífico. Do the math.

Yes, please do. Okay, I'll do that. Thank you.

Perfect. Thank you.

Speaker 4

The next question is from Alonso Acuna Aramburú with BTG. Please go ahead.

Yes. Hi. Good morning. Thank you for the call. I was following up on Yape. Can you comment on the asset quality trends at Yape? What's your cost of risk? What's your relevant TL? Also, some color on the lending. What kind of size of loans are you doing? The term of the loans, has that changed in the last few months? Do you have a target for how much lending should be as a percentage of revenues at Yape? Thank you.

Speaker 0

Yes. Maybe I'll start, and then Francesca, you can complement me. So, Alonso, today still, the Yape portfolio is very small, even though we're disbursing over $1 million loans per month. The bulk of that is mono-installment. The duration is actually less than 30 days. What we're doing is basically, even though that business is profitable, the real target is to learn to lend to the best performance of those initial clients. We're building up a multi-installment loan in the consumer finance business, which is growing rapidly. We just started to do some testing in the SME market also. Anything else? I don't know if Francesca, if you have the or who.

Speaker 2

I have no teams analyzed. The risk-adjusted NIM is very, very, very good, Alonso. We're quite positive on the impact of the lending business at Yape. We're not disclosing how much of the income or profits at Yape should be generated by lending, but obviously, it's going to be the major contributor, which, by the way, today it isn't.

Yes, thank you for that. Just to follow up generally on the cost of risk guidance, if it's correct, the expectation then for the second half of the year should be closer to 2% cost of risk for Credicorp?

The expectation for the whole year is in the range that we have stated, between 1.8 to 2.2. That implies, doing the math, that the second part of the year should be closer to 2 than closer to 1.6 for the reason that we have already stated.

Right. Fantastic. Thank you very much.

Speaker 4

The next question is from Yuri Rocha Fernandes with JP Morgan. Please go ahead.

Hi, everyone, and also congrats on the quarter. I had just a question on your deposit franchise, and we see the economy in Peru doing better. Your deposit is growing greatly above the loan, so don't get me wrong here. When I go to your low-cost deposits, they are down a little bit quarter over quarter, some 5%. Just asking if it is seasonal. On year over year, they are still growing. Given you have so many different verticals, I think a 4% or 5% general growing deposit, it could be a little bit higher, right? Just trying to understand on deposits why it was down, the low costs. I have a second question regarding dividends. You are generating a lot of capital, loan growth has been a little bit lackluster. The quarterly question on dividends, how should we think about your extraordinary dividends for this year? Thank you.

Speaker 0

Yeah. Yeah. Hi, Yuri. It's seasonal. What you see is seasonal regarding low-cost deposits. If you take a look at year over year, growth has been quite important. I would like, because of your question, to share information that was shared by the Central Bank this week. The usage of cash in transactions in Peru has gone from 95% of total transactions done in cash in Peru in 2013 to 64%. That's over a 30% reduction, no, 3,000 basis points reduction. The major driver for that decline has been the digital wallets. The major digital wallet in Peru is Yape. Therefore, we are quite confident that the low-cost deposits grow and market share will still be there because these are great news. If you see it, there's still two-thirds of the market doing transactions in cash. There's a lot of room for growth there. That's regarding deposits.

Regarding dividends, the policy is exactly the same. We haven't changed the policy. The issues that Alejandro Perez-Reyes mentioned are his fees. Since he had to pay S/1.6, S/1.7 billion to Sunat, we don't have, even though that doesn't affect our P&L, it does affect our cash position. Therefore, we won't be paying this year an extraordinary dividend in the second half of the year.

Speaker 2

Maybe I have to complement what Gianfranco. That is exactly right. The main impact that we're having of this Sunat situation is actually a cash impact. We use the money that we expected to pay out as an extraordinary dividend, it is the one that we're using to pay this claim by Sunat. What I just wanted to mention is that it doesn't change going forward our expectation for next year's ordinary dividends and, ideally, also extraordinary dividends. It is just an impact on this year because it's the money that we were expecting to pay out as an extraordinary dividend.

Oh, perfect. Thank you very much.

Speaker 4

Again, if you have a question, please press star then one. The next question is from Andres Soto with Santander. Please go ahead.

Good morning to all. Thank you for the presentation and the opportunity to ask questions. My first question is regarding your digital initiatives and your targets for the short term. You have mentioned the objective of these initiatives to represent 10% of revenue by 2026. I would like to understand if these targets refer to the whole year or a specific quarter. You were already at 6% in the second quarter of the year, so it would be interesting to hear your thoughts on the ramp-up to get to this target.

Speaker 0

Sure. Francesca?

Speaker 3

Yes. Thank you, Andres. Our goal was 2026, 10% for the whole year. We're very confident with what we're seeing with Yape's results. As you know, what we've shared before is that the idea around the innovation portfolio is how those initiatives graduate. The challenge for the innovation portfolio is to continue to generate a new set of initiatives around Tempo, around CoolCube, around Diggo. This is the way we're viewing it. We're very confident because we have a good venture around Yape, but the work is still there. It's on an annual basis.

Speaker 0

That's great. Thank you, Francesca. My second question is regarding the new medium-term ROE target of 19.5%. It was very helpful, your comment, Gianfranco, that this particularly reflects not considering the detraction that you are getting from digital initiatives, which are already breakeven. It looks like it's still a conservative one, considering that as they start to ramp up, they will actually contribute to profitability, and they will take your ROE to even higher levels. What prevents you from getting a more ambitious target for your sustainable ROE? That would be point number one. Point number two, you mentioned that part of what we are seeing here is better results of the NIM, higher contribution, leading to better efficiency. In the past, you used to have an efficiency target tied to this 18%, our medium-term ROE. What is your new efficiency target in this new objective?

Yeah. Maybe let me take the efficiency question, and then I'll pass it to Alejandro. You may comment the impact on, here, on the E, I was going to say that. First of all, good morning, Andres. The efficiency ratio with these new ventures growing at a much faster pace than the incumbents is tricky because yes, they start to become profitable, but their efficiency ratio is much higher than the efficiency ratio the incumbents have. The more Yape grows, the more inefficient we become. Obviously, at some point in time, Yape's efficiency ratio should be much lower than the, I don't know, the BCP's efficiency ratio. It's not the situation today. That happened with a lot of the, most of the new ventures we're deploying. That's the main reason for efficiency ratio. Obviously, we keep investing in branding the business and also in the transformation, as I mentioned.

Also, as I mentioned before, the bulk of what we've done in terms of investment in the digital transformation, mostly in the new venture, we've registered them as expenses. That's how it's like we've been front-loading expenses, and going forward. That's the trade-off, right? As we are successful, digital initiatives will grow but deteriorate the cost-to-income ratio. At the same time, since they become profitable, the ROE impact shouldn't be negative as I explained before. I don't know if I made it clear.

That was clear, Gianfranco. What I would like to get here is if the number that you're putting as the target is probably conservative considering this math that you described. To the point of the guardrails that you used to have, are they still valid? Are you still operating under the assumption that the disruptive initiatives are going to take away 300 basis points of efficiency and 150 basis points of ROE, or is this something that we said we are going to be at across the board?

Yeah. Again, 150 basis points, impact. As a matter of fact, this year is going to be, let's say, zero. That's not a negative. It won't be a drag this year. After, starting from 2023 forward, should be positive. That's the ROE's answer. The cost-to-income answer, the efficiency ratio, is another answer because, as I mentioned, it's completely Yape. Yape is profitable now, but the cost-to-income of Yape is not 40-something %. It's much more. The larger Yape becomes, the more that quote-unquote negative impact on ROE, on cost-to-income has. Going forward, as that may change and end up Yape being much more efficient than, let's say, BCP. In that case, the cost-to-income ratio will decrease also.

That is fundamentally a function of lending, I suppose.

Yes. Yes. The growth, the major source of income growth for Yape, the marginal income growth for Yape for the upcoming years, is what we expect the lending business is going to become.

Yes. Francesca probably mentioned this before, the three to five-year period for the ramp up. Is this still a valid timeframe, or when are you expecting to accelerate Yape lending, when those testing loans are going to start to become multi-instrument and larger loans?

They're already multi-instrument, but you know us very well. This

Speaker 1

This work is on purpose. We're not going to bet the house, going to grow dramatically that portfolio. We feel very comfortable with what we're doing, both regarding risk, cost of risk, and growth. The more comfortable we become, the faster we will deploy the whole study. We do not have a specific answer today on when we will achieve what we're looking for.

Speaker 2

If you focus on the nature of this planning, it's an exploratory business at the beginning. We deployed pilot. We monitor the pilot. When we discovered a specific segment that performed particularly well, we scaled up. In these cases, we can be scaling up certain parts of the portfolio rapidly, but starting to have discovered profitable segments. It's a discovery process. We have great expectations, but it's a discovery process.

Speaker 0

Thank you, César. What percentage of Yape borrowers are already in a multi-installment team?

Speaker 1

Do you have that figure? If you could tell.

Speaker 2

Today, they are 50/50.

Speaker 1

The balance.

Speaker 2

The balance is 50/50.

Speaker 1

Not the number. You're right. Not the number of clients, but the balance is up and down.

Speaker 2

Because, again, since the mono-installment loans are mono-installment, the maturity, the duration is less than one month. You have to work a lot to maintain the balance. That is going to shift dramatically in the upcoming years.

Speaker 0

Perfect. Thank you. Thank you, guys, and congratulations on the results.

Speaker 1

Thank you.

Speaker 2

Thank you.

If 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.

Speaker 1

Thank you, and thank you all for your questions. Q2 2025 was another quarter of solid expectations at Credicorp. Momentum in the economy, our business, and our innovation agenda give us the confidence for the rest of the year and beyond. The income is scaling. Digital engagement is deepening. Credit demand is returning. We're delivering value consistently, even amid regulatory uncertainty. As I noted earlier, we operate in a more supportive environment but are not dependent on it. Our platform performs through volatility and is now better positioned to capture upside more effectively. In this context, we've revised our long-term sustainable ROE upward from around 18% to approximately 19.5%, reflecting the benefits of a more diversified, inclusive business model as we expand into new segments and broaden our addressable market.

Our strategy will drive higher risk-adjusted means through a more retail-oriented loan portfolio, while increasing transactional and non-interest income from our disruptive initiatives. These drivers will accelerate income growth, enhance efficiency, and strengthen our ability to deliver sustainable returns. Looking ahead, I invite you to join us on October 9 in New York for our Investor Day, where we'll share how Credicorp is positioning to lead the next chapter of Latin American finance. We look forward to seeing many of you there. Thank you for your continued trust.

Speaker 2

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