Credicorp Ltd Q1 FY2025 Earnings Call

Good morning, everyone. I would like to welcome you to Credicorp's Limited First Quarter 2025 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 listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. Now, it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Ciguenas. You may begin.

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; Cesar Rios, Chief Risk Officer; Cesar Rivera, Head of Insurance and Pension; 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 sections 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 macro environment, a brief overview of our quarterly results and on how Peru is positioned amid global uncertainties, 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.

Thank you, Milagros. Good morning, everyone, and thank you for being here today. I want to start by expressing my confidence in Peru's macroeconomic fundamentals and Credicorp's potential to lead and create value within this context. The economy is recovering more quickly than anticipated, showing growth across various sectors such as construction, retail, agriculture, and services. This recovery is resulting in increased expectations for private investment and a rebound in formal employment. The first quarter's 3.9% GDP growth in Peru confirms this positive trend, fueled by private spending, reduced inflation, and record levels of trade terms. Falling interest rates and the recovery of the business cycle are driving credit demand and fostering private sector growth. Despite ongoing political uncertainties, Peru's macroeconomic policies remain largely responsible. Even a slight political stabilization could bring significant advantages, and at Credicorp, we are strategically positioned to take advantage of this. We are keeping a close eye on global developments, including President Trump's announcement of a 10% tariff on US imports from all trading partners. While this tariff is not expected to significantly impact Peru's GDP, there is a broader concern about potential effects on global growth and commodity prices, given our small and open economy, where external factors account for up to 60% of GDP volatility. This is particularly important due to China and the US being Peru's main trading partners, with China being a major destination for Peru's copper exports. Given the fast-changing environment, it is too early to fully gauge the potential effects. Nonetheless, we are monitoring developments closely and stand ready to act as necessary. Against this backdrop, Credicorp had a strong performance in the first quarter. We experienced renewed loan growth, particularly in wholesale banking and individual lending, while adhering to a careful risk approach. Our risk-adjusted net interest margin improved year-over-year due to lower provisioning. Profitability remained robust, supported by operational trends and our ability to capitalize on Peru's cyclical recovery. These results stem from not only favorable macro conditions, but also deliberate strategic investments. We've updated our core systems, enhanced our digital capabilities, and redesigned key customer experiences across Universal Banking, microfinance, insurance, and wealth management. Now, regarding the first quarter results, we achieved an impressive return on equity of 20.3%, bolstered by strong operating results and exceptional gains from closing the acquisition of the remaining 50% interest in the joint venture with Empresas Banmedica. If we exclude this non-recurring gain, the return on equity still stands at 18.4%, surpassing expectations and showcasing solid fundamentals across our core operations. Operational performance was strong in Universal Banking and insurance and retirement services. Microfinance performance improved alongside continued growth in non-interest income, particularly in fee-based and transactional revenues. We reached 5.4% of risk-adjusted revenues from new businesses this quarter, moving towards our 10% target by 2026. We are witnessing a revival of credit demand across our primary lending categories. In the first quarter, loan growth was notably strong in wholesale banking short-term loans, and to a lesser extent in individual lending and Mibanco. We anticipate that retail segments and microfinance will pick up speed in the upcoming quarters. Our risk-adjusted net interest margin increased sequentially, supported by better asset quality and a resilient underlying margin, despite declining interest rates, thanks to our expanding low-cost funding base. On the funding side, deposit growth remained robust due to liquidity in the system and heightened client trust. Our continuous investments in service and digital platforms have strengthened client relationships, leading to a market share increase in low-cost deposits to 41.3%. The improved asset quality reflects proactive measures taken since 2023, including tightening lending standards, repricing risk, reinforcing low-risk scheduling, and enhancing analytics capabilities, in conjunction with a favorable macro environment. We are also advancing our risk management capabilities as our risk transformation project progresses and is expected to yield significant impacts starting in 2026. Furthermore, our strong solvency has allowed us to increase our dividend while supporting our plans for sustainable long-term growth. Our efficiency ratio stands at 45.7%, remaining within our guidance as strategic investments in innovation and digital capabilities continue to foster diversified income streams and scalable growth through deeper market penetration. We are committed to integrating sustainability into our strategy, as we believe it is directly linked to our business performance. Our initiatives, ranging from inclusive finance and financial education to green loans and environmental risk management, are aligned with long-term value creation. We recently shared our updated sustainability framework for 2025 to 2030 on our website, providing a more targeted, action-oriented plan that reflects our dedication to inclusive sustainable growth. We encourage investors to review the full strategy and provide feedback as we enhance our sustainability efforts. Additionally, this quarter saw a one-time gain of approximately PEN236 million related to the revaluation of our previously held 50% stake in Pacifico's health business, under IFRS accounting. There was also a non-cash equity adjustment of about PEN257 million from the revaluation of Bolivian assets, following the adoption of a more market-reflective exchange rate. Bolivia remains an important part of our regional footprint, and we maintain a disciplined approach to managing our exposure there. These results highlight the strength of our core operations and our long-term commitment to creating a more agile, client-focused, and resilient financial platform. Looking ahead, we project that Peru's economy will grow around 3% in 2025, contingent on global recession risks being managed. The momentum from the first quarter is expected to carry into the second quarter, bolstered by high trade terms, recovery in real wages, and resilient private consumption. Additional positive factors include significant profit distributions to employees, the delayed effects of monetary easing, and strong investment expectations. While global uncertainty and the upcoming elections in 2026 may impact sentiment later this year, the outlook remains positive. Allow me to step back and discuss the implications of the changing global environment for Peru and the potential challenges and opportunities that lie ahead. There is no doubt that Peru is in a solid economic position, marked by positive macroeconomic indicators, strong domestic demand, and robust performance in the first quarter. However, we are functioning in a global environment fraught with uncertainty, characterized by evolving trade tensions, risks of global recession, and geopolitical factors. Although the immediate impact of current tariff actions on Peru is limited, there are broader concerns about how slower global growth might influence external demand, commodity prices, and overall market confidence. Recent advancements in trade negotiations between the US and its partners are a positive development that could help alleviate potential risks to global growth. Nevertheless, we remain watchful as uncertainty continues to impact our outlook. Beyond Peru, the effects of trade tensions are evident throughout the region. In Chile, while the direct effects appear limited, the indirect consequences, such as the slowdown of essential trading partners, declining copper prices, and weakening business confidence pose additional risks. Given that copper constitutes nearly half of Chile's export revenues, diminishing external demand expectations are putting downward pressure on growth forecasts. In Colombia, a sustained decline in oil prices could adversely affect fiscal revenues and investment. The economies of Peru, Colombia, and Chile may eventually benefit from a realignment in global trade flows due to shifts in global sourcing patterns. For Credicorp, these dynamics reinforce our ability to adapt across various economic cycles. Therefore, we are concentrating on not only managing short-term volatility but also positioning Credicorp to capitalize on long-term shifts in regional trade and production patterns. Our solid capital foundation, digital infrastructure, and client-centric approach equip us to achieve both objectives. Now, I would like to hand the call over to Alejandro for a more detailed analysis of our operating and financial results.

Thank you, Gianfranco, and good morning, everyone. As Gianfranco mentioned, our 20.3% ROE this quarter includes extraordinary income related to the acquisition of the remaining 50% stake in the joint venture with Empresas Banmedica. Isolating this effect, operating ROE was a robust 18.4%, positioning us for a strong 2025. A non-recurring adjustment affected our balance sheet this quarter. In March, we revalued Bolivia's balance sheet using a more market reflective exchange rate. We generated an accounting contraction of 2% in Credicorp's total assets. As I discuss the quarter's highlights, I will focus on the year-over-year operating trends and isolate one-off effects. Loans expanded 1.5% measured in average daily balances, driven primarily by short-term loans in wholesale banking. Asset quality has improved materially year-over-year. NPLs contracted in retail banking at BCP and at Mibanco and Credicorp's NPL ratio stood at 5.1% this quarter. Cost of risk fell to a low of 1.6%, driven by a more dynamic portfolio management and supported by improvements in payment performance and in the Peruvian economic backdrop. Net interest income increased 4.3%, spurred by a contraction in interest expenses after interest rates fell and low-cost deposits expanded and registered a 59% share of the funding base. In this context, NIM remained resilient at 6.2% despite a year-over-year contraction in asset yields. Diversified sources of income reported double-digit growth year-over-year. Fee income increased 16%, boosted by transactional activity at Yape and BCP. Gains on FX transactions increased 12.6% through higher volumes at BCP. Lastly, the insurance underwriting result rose 17.9%, reflecting a stronger reinsurance result in the P&C business. We delivered robust operating results through strengthened asset quality and diversified income sources, showcasing the success of the company's strategy and of our investment in digital capabilities. Finally, we recently announced a dividend payout of PEN40 per share as we move capital levels closer to target across our subsidiaries.

Next slide, please. Peru's GDP grew 3.9% year-over-year in the first quarter of 2025, marking the third consecutive quarter of growth at this pace. This positive momentum which reflects the transition to the mid-cycle phase of the business cycle is expected to continue supporting growth in the second quarter. High-frequency economic indicators such as car sales and imports are growing rapidly, while employment and real wages continue to recover. According to the Central Bank survey, business investment expectations hit a historical peak, reaffirming that private investment is poised to improve. Inflation remained within the Central Bank's target range of 1.7% year-over-year in April. This figure is among the lowest reported in both advanced and emerging economies, further supporting the recovery in private consumption. Moreover, the quota for the first anchovy fishing season announced in April was 20% higher than last year's and marked a seven-year high and will benefit the fishing and primary manufacturer sectors in the second quarter of this year. Record high terms of trade are also bolstering economic growth. In 2024, gold constituted nearly 20% of our exports and its price has surged to historical highs. Gold shipments this year could be twice that of 2023 and approach the level of copper, our main export product, which represents 31% of total exports. If the global recession is kept at bay, the probability that Peru will grow above 3% this year remains high given the favorable domestic environment. Even though the heightened uncertainty imposes downsized risks to growth, markets are more optimistic after the recent trade deals between the US and UK and the US and China. Hence, the impact of tariffs is expected to be mild.

Next slide, please. The Federal Reserve has been in a holding pattern this year, and Chairman Powell has said that it is in no hurry to adjust its policy stance as they wait for more economic data. Market expectations for rate cuts are divided, influenced by varying perspectives on the impact of tariffs and uncertainty regarding growth and inflation. Fed Futures have shifted and now they are pricing two rate cuts by year-end. The unpredictability of President Trump's announcement continues to drive market volatility and this tendency is likely to persist. In Peru, the Central Bank lowered its policy rate 25 basis points to 4.5% in May's meeting. The Central Bank will remain cautious and prudent until the global outlook can be determined with greater certainty, especially as its rate stands close to neutral levels. In Colombia, inflation has decelerated to 5.2% year-over-year in April, although it remains above the upper bound of the target range of 4%. Consequently, the Central Bank decided to cut its policy rate by 25 basis points to 9.25%, maintaining a cautious approach due to the fiscal challenges and uncertainties on the external front. Finally, in Chile, the Central Bank also opted to keep the rate stable throughout 2025 as inflation has remained pressured upwards and stood at 4.5% year-over-year in April. The latest monetary policy report suggests that only one rate cut will be made over the year. Next slide, please. BCP posted strong performance, mainly on the back of improvements in asset quality and diversified sources of revenues, which continued to represent a key strength. On a quarterly basis, ROE stood at 27.1%, driven by the following dynamics. Total loans measured in average daily balances rose 1%, mainly fueled by wholesale banking and secondarily by consumer loans both at BCP and Yape. NIM remained resilient at 5.8% despite decreasing interest rates, cushioned by a lower cost funding structure. NPL volumes fell 4.7%, mainly driven by wholesale banking and SME-Pyme. The cost of risk stood at 1.3%. Recent improvement in cost of risk is due to the cumulative impact of enhancements in underwriting and risk management, a relatively strong Peruvian economy and a few one-time events, including consumer and credit card risk model recalibration, pension fund withdrawals in the second half of last year, and increased customized loan restructuring to clients in hardship. On a quarter-over-quarter basis, provisions contracted, driven by the one-time events previously mentioned and by an improvement in payment performance. Additionally, in wholesale, provisions dropped due to higher reversals after repayments by corporate clients. In this context, BCP's risk-adjusted NIM stood at 5%. From a year-over-year perspective, I would like to highlight the following dynamics. Loans grew 2.9% in average daily balances, driven primarily by wholesale loans and secondarily by retail loans and mortgages in particular. NIM remained resilient, impacted by the same dynamics seen quarter-over-quarter. Other core income rose 17.8%, driven mainly by fee income that increased on the back of rising transactional levels. Gains on FX transactions were fueled by higher volumes amid market volatility. The cost of risk fell across mutual banking segments as payment performance improved in a strengthening economic backdrop. The efficiency ratio stood at 37.7% this quarter. Growth in operating expenses was spurred by an uptick in provisions for variable compensation, which rose on the back of stronger business performance and by investments in innovation initiatives. It is noteworthy that the ratio for other core income to assets has been rising since the second half of last year, which attests to the positive impact of initiatives to diversify BCP's income streams. Next slide, please. Yape continues to demonstrate strong user growth, adding over 0.5 million new active users per quarter to surpass the 14 million mark in the first quarter of this year. Yape's popularity is reflected in solid engagement results, where Yape Yaperos conduct more than 52 transactions a month on average and use 2.6 functionalities. Regarding monetization, Yape's revenue generation remains strong and represented 4.8% of Credicorp's risk-adjusted revenues. Notably, the gap between revenues and expenses per MAU is gradually increasing every quarter. Our payments business continues to be the key driver of revenue growth, representing 56% of Yape's revenues. This uptick was mainly driven by bill, QR code and checkout payments. Moreover, the financial business expanded due to improvements in the effectiveness of leads. Multi-instalment loans, which have a better asset quality profile than single standalone loans have accelerated and now represent 50% of loan balances compared to 25% at the beginning of 2024. By the end of the first quarter of this year, lending revenue represented 13% of Yape's revenues, and we are halfway to achieving our aspiration of having 5 million Yaperos with at least one loan disbursement. Finally, we are improving the value proposition of current features while maintaining the highest standard of security and stability to provide the best possible for Peruvians. Next slide, please. This quarter, Mibanco Peru sustained profitability in the mid-teens as asset quality metrics strengthened and loan growth resumed. I would like to highlight key quarter-over-quarter dynamics. Mibanco's loans measured in average daily balances grew 0.7% following an uptick in disbursements that was particularly strong in March, which reflects the improvements incorporated in our models to better assess risk profiles and subsequently expand loan offerings. This growth was mainly concentrated in small-ticket higher yield loans. The NPL ratio fell for a third consecutive quarter to stand at 6.4%, in line with pre-pandemic levels. This reflects the positive impact of ongoing adjustments to origination guidelines, debt relief facilities and improvements in debt collection processes. NIM contracted due to a less favorable asset mix and stood at a strong 13.9%. The cost of risk rose to 5.1% due to a base effect given that write-offs were low last quarter. In this context, risk-adjusted NIM stood at 10.1%. From a year-over-year perspective, I would like to highlight the resilience of Mibanco's NIM. Our active loan pricing management, coupled with a decrease in the cost of funding helped sustain NIM. The cost of risk rose 53 basis points, which reflects one-time reversals made in the first quarter of last year. If we exclude this effect, the cost of risk decreased 104 basis points, reflecting an improvement in underlying risk and lower risk vintages gained traction in the portfolio. Operating expenses remained under control and efficiency stood at 52.9%. In this context, Mibanco's first quarter contribution to ROE was 14.7%. Mibanco Colombia's results improved significantly despite a challenging business environment, thanks to its focus on efficiency as well as disciplined risk processes and controls. Next slide, please. At Grupo Pacifico, insurance underwriting results remained strong this quarter, supported by solid commercial dynamics in both the P&C and Life businesses. Nonetheless, profitability was impacted by credit downgrades in the investment portfolio and stood at 19.3%. This quarter figures also reflect the full consolidation of Empresas Banmedica operations effective since March, with no material impact on the results in this period. On a quarterly basis, net income rose 8%, primarily driven by a drop in operating expenses due to seasonality. This was partially offset by lower insurance underwriting results in the Life business, mainly related to the disability and survivorship product, given that Pacifico was not awarded a tranche of SISCO VIII for this year as opposed to having won a tranche under SISCO VII last year, and low results from our corporate health business due to higher claims. On a year-over-year basis, net income dropped 16%, primarily impacted by an increase in the net loss on securities, which continued to be impacted by a credit downgrade in the investment portfolio last quarter. The impact of this variation was nonetheless, partially offset by higher insurance underwriting results in both the P&C and Life businesses. Next slide, please. Operating dynamics were strong this quarter for the Investment Management and Advisory business, which reaffirms that our strategic approach is on target and puts us in good stead for 2025. ROE for the line of business according to internal managerial figures came in above expectations and stood at 18.4%, which is impacted by a one-off charge for equity related to last year's results. If we exclude this effect, ROE stood at 16.9%, driven by the following operating trends. On a quarter-over-quarter basis, net income rose 47%, fueled primarily by a seasonal drop in operating expenses and growth in income from our Asset Management business, where AUMs in US dollars were up 12%. The impact of these variations was partially offset by lower income from our Wealth Management business and less favorable treasury results. On a year-over-year basis, net income increased 10%, fueled primarily by lower operating expenses and higher income from our Asset Management business, where AUMs in US dollars were up 20% and our Capital Markets business, which registered an uptick in transactional activity among corporate clients. The impact of these variations was partially offset by lower income from wealth management due to a decrease in net interest income from time deposits and current accounts in the context of declining interest rates. Next slide, please. Now I would like to review Credicorp's consolidated evolution. As we mentioned earlier, we revalued Bolivia's balance sheet by increasing the exchange rate which led Credicorp's balance sheet to contract. I will now focus on explaining underlying quarter-over-quarter dynamics. The 23 basis point drop in the yield on interest-earning assets was fueled by the interest-earning asset mix, which reported a shift to our assets with lower rates by a decline in market rates. On the liability side, lower market interest rates and ongoing growth in low-cost deposit share of total funding led the cost of funding to drop 14 basis points. On a year-over-year basis, similar balance sheet dynamics drove a contraction of around 50 basis points, both in yield on assets and funding costs. Going forward, improving macroeconomic conditions and growth in retail loans should help us sustain resilient NIM despite lower interest rates. Next slide, please. Moving on to loan portfolio quality. Asset quality has clearly turned the corner and NPL volumes continue to contract across segments, falling to levels below those reported two years ago prior to the 2022 inflation. Provisions dropped over the past nine months due to an improvement in payment performance, successful risk management measures at both BCP and Mibanco, and the one-time event mentioned previously. Consequently, the cost of risk dropped to 1.6%. In this context, the NPL coverage ratio rose and stood at 107.4%. Going forward, we expect some of the impacts of one-time events to gradually dissipate. We will resume more balanced origination, and as a result, cost of risk is expected to increase and remain under control at the lower end of our guidance. Next slide, please. Let's move on to an analysis of our year-over-year income and the evolution of expenses. Core income rose 7%, driven by other core income which increased 15% on the back of our recovery strategy. We expect our diverse sources of fee generation and fortified FX digital capabilities to sustain growth down the line. Regarding margins, we set new heights for our risk-adjusted NIM, which has risen 39 basis points to 5.24% on the back of resilient NIM and a significant decrease in the cost of risk. The efficiency ratio stood within guidance of 45.7%. Operating expenses grew 15.6%, driven primarily by the core business at BCP and by investments in our innovation portfolio. At the core business at BCP, expenses growth was mainly related to increased provisioning for variable compensation and IT expenses. Next slide, please. ROE for the quarter stood at 20.3% after we benefited from extraordinary gains related to the finalization of our acquisition of the remaining 50% stake from the joint venture we had with Empresas Banmedica. If we exclude this non-recurring gain, ROE stood at 18.4%, fueled by strong operating results at our Universal Banking and Insurance businesses. It is important to highlight that recurring consolidated net income this quarter represented a record high for the company as we leverage the decrease in the cost of risk and harness the power of diversified sources of income. Now, I will move on to our guidance. Next slide, please. As previously mentioned, assuming there is no global recession, we maintain our expectation for Peru's GDP to grow around 3% in 2025. We expect loan book year-over-year growth of around 3.5% measured in average daily balances or around 6% measured in quarter end balances. In both cases, excluding the impact of Bolivia's balance sheet revaluation. Amid a more dynamic economic backdrop, we expect growth to accelerate over the remainder of the year, 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 downward. Accordingly, we expect NIM to stand between 6.2% to 6.5%. This quarter's cost of risk was below expectations as we anticipate the effects of one-time events to gradually fade and retail origination to increase, the cost of risk is expected to approach the lower end of our guidance range. Given the current global economic uncertainty, we are maintaining our guidance for both cost of risk and risk-adjusted NIM. On the efficiency front, we maintain our guidance range for 2025. Fee income is expected to grow in the low double-digit 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. While the robust ROE in the first quarter of 2025 places us in a favorable position with potential upside, global uncertainties have led us to maintain our guidance for ROE at around 17.5% for this year. With these comments, I would like to start the Q&A session.

We will now begin the question-and-answer session. (Operator Instructions) Thank you. Our first question today comes from Brian Flores with Citibank. Please go ahead.

Hi, team. Thank you for the chance to ask questions. Congratulations on the results. I wanted to inquire about the guidance. As you've mentioned, the environment is improving, correct? The first quarter's ROE, whether factoring in one-offs or not, appears to be above the midpoint of the guidance. So, I'm curious why you haven't updated this guidance yet. Is it due to the elections or concerns about falling commodity prices? If the trends continue into the second quarter, could you consider revising the guidance then? Also, in relation to your earlier comment about Credicorp's sustainable ROE being around 18%, is it reasonable to start aiming for higher sustainable ROE levels now that you're already achieving it? Thank you.

Alejandro, can you take it?

Sure, thanks for the question. Yes, I believe you are correct in thinking that based on our current insights, we likely expect to exceed the existing guidance of approximately 17.5%. However, considering the global situation, I wouldn’t attribute it directly to the circumstances in Peru. We anticipate that Peru will have a robust year, and any political developments will more likely be felt in early 2025 and 2026. The primary concern involves tariffs and the trade war, rather than any direct impact. The expected direct effects in Peru are quite minimal. The real issue arises if there is a recession, with reduced growth in China and the US, as we are a small, open economy, which would definitely have an effect. Copper prices also play a role. In such a scenario, we could see numbers closer to the guidance we provided. However, this is not our primary scenario, especially with the potential agreements we have seen over the last couple of weeks. As soon as we gain more clarity, we will aim to provide updated guidance, provided that conditions remain stable. Therefore, you can anticipate some revisions. Regarding long-term return on equity, we are currently reviewing that. We have had discussions, and the context and all that Credicorp is working on make us optimistic about increasing that figure, but we need to conduct a comprehensive review. We aim to establish a stable number going forward, and we will get back to you on this in a few months.

Pardon me, this is the conference operator. We seem to have a connection issue with the speakers. Give me one moment.

I believe we are in a good position now.

You're back on the line. Thank you.

Sure. Yes. So I was going to say that for the longer-term, yes, we are doing a review, but it's going to take a little bit longer because we want to be really sure about the numbers we give the market and we'll come back in the future with that revision.

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

Hi, everyone. Thanks here for the opportunity for asking questions. So we saw a pretty subdued cost of risk this quarter, you mentioned a revision in the models similar to what happened in 4Q, but within different segments. So I wonder here, what are the drivers if it's only helping here on the model revision and improvement in cost of and if you expect this to continue going forward, so you still can revise models for different segments, and if the conditions improve we can actually have cost of risk much lower than the guidance this year? Thank you.

Cesar?

Okay. Yes. Thank you, Renato, for the question. I would like to emphasize that there are several factors behind this reduction in the cost of risk. Of course, the macroeconomic environment is more positive. We have had some particular events that have impacted the current situation, but also the cumulative effect of several measures taken in the origination process since the second part of 2023 through 2024 that have aligned our credit policy, streamlined the process. Part of this process is adjusting the models and now our models are recognizing lower expected losses in specific segments. But given that, down the road, we expect to originate higher volumes in riskier, more profitable segments. So we are going to trend up the cost of risk, but coupled with significantly improved margins in this specific sector. So the net effect in risk-adjusted NIM should be net positive.

Perfect. That's understood. Congratulations on the results. Thank you.

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

Hi, good morning. Thank you for taking my question. I would like to follow up on the potential upside risk to guidance, as it seems to mainly stem from cost of risk and positive trends in asset quality. However, net interest margin has slightly declined, and loan growth remains quite modest. I understand it is expected to increase, but it is hardly growing considering the strength of the economy. If the cost of risk had been closer to the guidance of 2%, I believe return on equity in America would have approached 17%. Can you clarify whether the upside risk is primarily linked to a lower cost of risk? Additionally, what will it take for loan growth to pick up, given that both the economy and asset quality are performing well? I would like to understand the potential sources of this upside. Thank you.

Sure. Thank you, Tito. I'm sorry, go ahead Gianfranco.

No, go ahead, Alejandro, and I'll complement you.

Yes, I was going to mention the loan growth aspect of the question. Typically, during cycles like the one we experienced in 2023 and 2024, there is a delay in the recovery of loans. Additionally, we've observed high liquidity which has resulted in increased repayments or prepayments from clients. Recently, we have seen a rise in loan sales, particularly over the last couple of months with very strong numbers. However, it does take time to build up the portfolio. Nevertheless, we are confident that we will achieve our guidance of 3.5% in our daily balances and over 6% in year-over-year figures. I would also note that this is just the ramp-up period following a challenging cycle.

Yes, to add to what Alejandro said, we need to ensure we are comfortable with the risk processes and models before accelerating loan growth. This quarter, the primary impact was due to a significant cost of risk. However, as previously mentioned, we are confident that loan growth will be present moving forward.

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

Thank you guys and congrats on another good set of results, 18% ROE even the one-off is pretty good. I had a question regarding loan growth and I understood Bolivia revaluation took a hit. I see you are keeping your average loan growth guidance of 3.5% unchanged. So just trying to understand how quickly loan growth will rebound? And if you are still comfortable with this because given this is an average accrual, right, this is your average book, not your end of period book, it gets tougher, right, after I would say a more soft growth in the first Q. So if you can explain a little bit the loan growth dynamics, I would appreciate. Thank you.

Sure. Thank you, Yuri. Yeah, I get the point still. As I was mentioning, we've already seen a couple of months that are very strong. Actually, the numbers from the last month are very high in historical terms in the sense of loan sales. So we are expecting this second quarter to pick up and then actually accelerate more in the third quarter as all of our risk capabilities, we are going to be more comfortable with them. So I would say these next six months we should see an important acceleration in loans. Another important thing to mention is that in March specifically we had some prepayments in the wholesale side that also decreased the number and showed a lower number than we've had before. So again, we are confident that it's going to pick up, and it's what we're seeing actually right now. Again, we are seeing more activity on the lending side right now.

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

Hello, good morning and congratulations on the very good results. I have a question regarding your sensitivity to interest rates. Your margins have been impressive, partly due to relatively high rates in the US. Could you remind us of your sensitivity to a 100 basis points decline in rates, both domestically and internationally? Additionally, I understand we are limited to one question, but I must say I’m surprised by how positive you sound about the political situation. Given that you just lost the Prime Minister and have elections coming up next year, you seem more confident than in past situations. Am I interpreting that correctly? Thank you.

Alejandro, let me address your second question first. The short answer is yes, but it's an unfortunate situation. We have experienced a fairly mediocre government for the past four years. The changes we've noticed in recent days lead us to expect continuity, and despite all the political noise and instability, the macroeconomic figures remain very solid. Therefore, we believe that the performance of not only Credicorp but also Peru in the upcoming quarter will be quite strong.

I'll address the other question. We've just updated our analysis. For 2025, if there were to be a parallel shift of 100 basis points, we would see an effect of 17 basis points on the NIM, with approximately 92% of that, or nearly 16 basis points, coming from our dollar portfolio. We believe that the solid portfolio carries minimal risk, and the Central Bank is likely near neutral, so we do not anticipate more than 25 basis points in rate cuts. Therefore, we do not expect significant movement from that front. On the dollar side specifically, it would be around 16 basis points if there were this parallel shift of 100 basis points, though this is a highly theoretical scenario.

The next question is from Andres Soto with Santander. Please go ahead.

Good morning, Gianfranco, Alejandro. Thank you for the presentation. My question is on Yape. We have seen positive results this quarter. Congratulations on Yape already contributing to profits. My question is specifically on lending. I would like to hear again what you mentioned regarding multi-instalment loans and how much that already represents from the disbursements made through Yape and based on that, what are your expectations for the ramp-up of lending and which areas of lending? Are you seeing opportunities for lending? Are you seeing there it’s going to be individual lending or are you also considering SME lending to be a driver in the short-term?

Yes. Francesca, can you answer that?

Thank you, Andres. In response to the last part of your question, our primary focus at the moment is on individual lending. We still have work to do in designing our product offerings and refining the sales and collection processes. However, we aim to move into SME lending as well, since a significant portion of our customers operate in that sector. We believe we have ample data to create suitable solutions for small businesses, but for now, our efforts are centered on individual lending. Currently, multi-quarter loans account for the largest share of disbursements, but we are seeing multi-quarter loans start to become more relevant as they typically remain outstanding for longer than a month. Our goal is to transition more towards multi-quarter lending gradually, and we expect that by the end of the year, most of our outstanding balances will be in the multi-quarter category.

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.

Thank you. The first quarter of 2025 marked a strong start for the year and reaffirmed the strength and adaptability of Credicorp's businesses, with an ROE of 20.3% and 18.4% excluding extraordinary gain from America, we exceeded expectations while remaining focused on quality, sustainability and execution. These results reflect more than favorable macro conditions. They are the product of consistent strategic decisions, deepening client relationships, strengthening risk management and investing in the capabilities that will define financial services in the years ahead. Despite an evolving rate environment, margins remained resilient. Our deposit base grew and efficiency was in-line with our expectations as we accelerated investment in disruptive growth. We're particularly encouraged by the progress of disruptive initiative strategies, which reached 5.4% of risk-adjusted revenues this quarter, evidence that our innovation is scaling with impact. As these new models mature, we are confident in our ability to meet our structural ROE ambition of 18% by 2026, while expanding access and generating shareholder value. At the same time, we're embedding sustainability deeper into our business. Our updated 2025, 2030 sustainability framework reflects this commitment, linking long-term value creation with financial inclusion, access to quality healthcare and health insurance, sustainability, finance, resilience and trust. With over 6 million Peruvians newly integrated into the financial system since 2020, this is more than a strategy. It is our purpose in action. We're also monitoring the external environment carefully. The recent US tariff announcements are expected to have limited direct impact on Peru. However, we are mindful of second order effects on global freight and commodity flows, particularly given China's importance to Peru's export base. The recent 90-day tariff reprieve between the US and China along with progress on the UK-US trade deal are positive developments. That said, we remain attentive to evolving dynamics in the external environment. As always, we're prepared to respond with agility and discipline. Looking ahead, we see a supportive backdrop. Peru's recovery is gaining momentum, private investment is strengthening and confidence is returning. Credicorp is exceptionally well-positioned to capture this cycle and lead through it with our diversified portfolio, strong capital base and a clear sense of strategic decision. Thank you all for your questions. We look forward to speaking with you again next quarter and to welcoming many of you in person at our upcoming Investor Day in New York City on October 9, 2025, as we celebrate Credicorp's 30-year IPO anniversary. We'll share updated strategic priorities and progress on our innovation agenda. More details will be shared in due course. Thank you very much.

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