Credicorp Ltd Q2 FY2025 Earnings Call

Good morning, everyone. I would like to welcome you to the Credicorp Limited Second 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. Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Cigüeñas. You may begin.

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; Cesar Rios, Chief Risk Officer; Diego Cavero, Head of Universal Banking; Cesar Rivera, CFO of Insurance and Pensions; and Rocio Benavides, Mibanco Chief Financial Officer. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward-looking statements, which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties. And I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Gianfranco Ferrari will begin the call with remarks on the improved macro 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.

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 midsized 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've built 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 credit dynamics and disciplined credit 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, structural 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 risk. A healthier macro level recovery further reinforces our long-term view and strengthens our confidence in delivering sustained shareholder value. Alejandro will detail the results and updated outlook. But 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 and paid 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 grounds. We are prepared to defend our position through the appropriate channels, whether at the tax court where proceedings may take 1 to 3 years or if necessary, through the judiciary, which could extend the process by an additional 5 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 & Pensions posted very strong results, while Microfinance continued to recover. Fee-based 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. Credit 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 investments 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 multiyear 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 the strong traction of our disruptive innovation portfolio, a key pillar of our long-term strategy. Credicorp is no longer just a credit 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 5 contributors to fee income in the Peruvian financial system. Transaction volumes and engagement remain high, and we're expanding services and deepening client interactions. With platforms like Yape and promising ones like Tenpo, 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 distribution. These are not just pilots. They are 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 3 key areas. First, we're elevating the customer experience through hyper personalization and advanced chatbots and voicebots making every interaction faster, smarter and more intuitive. Second, we're enhancing operational efficiency by equipping our teams with AI copilots and productivity tools. These are already driving productivity gains of over 30% in co-generation and simplifying daily workflows for commercial teams and analysts. 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 frameworks. 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 9 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 life 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.

Thank you, Gianfranco, and good morning, everyone. This quarter's 20.7% return on equity reflects sustained momentum in our core businesses and the increasing contribution of our innovation portfolio. These results include a positive impact of 120 basis points from a significant gain in BCP's investment portfolio. As previously mentioned, we revalued Bolivia's balance sheet using a more market-reflective exchange rate, resulting in a 2.8% accounting contraction in Credicorp's total assets this quarter. I will focus on year-over-year operating trends while discussing the quarter's highlights. Loans measured in quarter-end balances decreased by 4.1%, affected by the revaluation of Bolivia's balance sheet and a depreciation in BCP's dollar portfolio due to an appreciation of the Peruvian sol. Excluding these factors, underlying loan growth was 2.6%, primarily driven by BCP, especially in mortgages and consumer loans in Retail Banking, as well as by Mibanco. Asset quality has shown significant improvement year-over-year, with non-performing loans contracting across the board, and Credicorp's NPL ratio standing at 5% this quarter. The cost of risk fell to a low of 1.6%, supported by enhanced risk management and improvements in payment performance and the Peruvian economy. Net interest income rose 4.2%, driven by a decrease in interest expenses following lower interest rates and growth in low-cost deposits, which now account for 57.2% of the funding base. In this context, the net interest margin remained stable at 6.4%. Other core income reported high single-digit growth, with fee income up 8.2% due to increased transactional activity at Yape and BCP. Gains from foreign exchange transactions increased by 7.9% due to higher volumes at BCP. Lastly, insurance underwriting results grew by 11.2%, reflecting stronger performance in the Life business. Our cost-to-income ratio was within guidance at 44.9%. Peru's GDP growth has slowed to about 3% year-over-year in the second quarter, down from nearly 4% in the first quarter, largely due to a slowdown in primary sectors and a higher comparative base from last year. Nevertheless, domestic demand remains strong, expanding by around 5% and outpacing overall GDP growth since mid-2024. This sustained momentum indicates that the economy is in a current mid-cycle phase, bolstered by high export prices. Consequently, GDP grew close to 4% in the last four quarters leading up to the second quarter of this year, while domestic demand increased by approximately 5%. High-frequency indicators continue to demonstrate economic dynamism, backed by a steady recovery in employment and real wages. Notably, critical proxies for private investments, such as heavy-duty vehicle sales, capital goods imports, and terms of trade, are expanding at a double-digit pace. The terms of trade have reached their highest level in 75 years due to elevated prices for gold, silver, and copper, which together represent about half of Peru's exports. Supporting this trend, the Central Bank's business expectation survey indicated that investment sentiment hit a historic high in the second quarter, suggesting that private investment is expected to strengthen. Moreover, the low inflation environment remains supportive of recovery in private consumption. Thus, Peru's economy is anticipated to grow above 3% this year, with domestic demand increasing approximately 4.5%, marking the highest growth rate in 12 years, excluding the post-pandemic rebound. On the external front, global uncertainty persists. The impact of President Trump's copper tariffs on Peru is expected to be minimal, as copper input materials are not subject to the 50% tariffs. The Federal Reserve has kept the policy rate stable this year with dovish signals from a minority of its members. Chairman Powell has communicated a cautious approach to lowering rates. Given the slowdown in the labor market, Fed futures now anticipate between 2 and 3 rate cuts this year. Persistent uncertainty surrounding President Trump's tariff announcement contributes to the unpredictability of the external environment. In Peru, annual inflation has stayed below 2% for seven consecutive months, representing one of the lowest trends among both advanced and emerging economies. The Central Bank has reduced the pace of rate cuts as it approaches its neutral level, having made its last cut in May by 25 basis points to 4.5%. In Colombia, inflation has slowed to 4.9% year-over-year in July, remaining above the target range's upper bound of 4%. Inflation concerns and fiscal challenges have led the Central Bank to adopt a cautious stance. In Chile, the Central Bank reduced rates to 4.75% in its last meeting after maintaining the policy rate stable throughout 2025, as inflation eased to 4.1% year-over-year in June, its lowest since September of last year. A rate cut seems unlikely in the next meeting, given inflation accelerated in July. BCP reported a robust return on equity of 30.9%, reflecting resilient margins, income diversification, and a low cost of risk. This result includes a 2 percentage point impact from a significant gain realized on the investment portfolio. Quarter-over-quarter, total loans measured in quarter-end balances increased by 1.4%, or 2.5% in FX-neutral terms, mainly driven by Retail Banking, which grew by 2% due to mortgages and consumer loans. The Wholesale Banking portfolio, which is subject to volatility from short-term loans, rose by 0.8%. Growth in middle market banking was nearly offset by a contraction in corporate banking. The net interest margin was 6%, supported by a better asset mix and reduced funding costs. Non-performing loan volumes decreased by 2.2%, driven mainly by Wholesale Banking. In Retail Banking, NPL volumes remained stable for both individuals and SMEs. Provisions decreased by 4.8%, mainly due to improved payment performance in Wholesale Banking. In Retail Banking, provisions for individuals dropped slightly due to adjustments in risk models, partially countered by increased provisions for SME-Pyme as lower ticket, higher-yield loans were disbursed. The cost of risk was low at 1.2%, aided by initiatives to enhance risk management and favorable macro conditions in Peru. BCP's risk-adjusted NIM stood at 5.2%. Other core income rose by 16.4%, primarily driven by gains on foreign exchange transactions due to rising volumes through debt pricing strategies and market volatility. Additionally, fee income increased due to strong transactional levels. Other non-core income this quarter included a notable gain on securities of PEN 106 million, resulting from an exchange of sovereign bonds that extended the duration of the investment portfolio. From a year-over-year perspective, loans remained relatively stable, as a 2.1% growth in Retail Banking was offset by a 2.4% contraction in Wholesale Banking, a reflection of depreciation in the dollar-denominated portfolio. In FX-neutral terms, both Retail and Wholesale Banking contributed to an average growth of 2.6% in BCP's portfolio. NPLs contracted across all segments, particularly in Wholesale and SME-Pyme. In the case of individuals, NPLs fell due to debt cancellations linked to higher liquidity and improvements in loan origination and debt collections management. NIM remained robust, supported by a downward trend in funding costs. The cost of risk declined across Retail Banking segments as payment performance improved, benefiting from a larger share of lower risk vintages within the loan portfolio, aided by a strengthened economic backdrop. The efficiency ratio was 38% for the first half of the year. Operating expenses increased due to higher provisions for variable compensation in accordance with better business performance and efforts to recruit digital talent for strategic projects. The ratio of other core income to assets continued its upward trend, reflecting the positive effects of initiatives to diversify BCP's income streams, with strong contributions from fees and foreign exchange gains. Yape continues to lead the digital financial services landscape in Peru, boasting nearly 15 million monthly active users by the end of the second quarter, corresponding to 75% of the economically active population. With consistent quarterly growth of over 0.5 million users, Yape is on track to reach its goal of 16.5 million monthly active users by 2026. User engagement is strong, averaging 54.5 transactions per month and 2.7 features utilized per user, indicating deeper integration of the app's ecosystem. Revenue per active user reached PEN 6.5, against expenses of PEN 4.4 per user, thanks to a growing number of users generating revenue. Payments remain the primary source of income, spurred by growth in average ticket sizes for bill payments. Meanwhile, lending has become the quickest-growing segment, serving 3 million users and accounting for 18% of Yape's overall revenue, reflecting increased loan disbursements driven by improved lead conversion effectiveness. The introduction of SME loans in June marks a strategic expansion into higher-value long-term credit products. By the end of the second quarter, Yape's revenue had doubled year-over-year, now representing 5.5% of Credicorp's risk-adjusted revenue. Yape remains committed to enhancing user engagement, boosting monetization, and enriching its value proposition as it promotes financial inclusion, with nearly 30% of loan recipients accessing their first formal financial system loan through the platform. The ongoing economic recovery is positively influencing the microfinance sector in Peru. Mibanco's profitability reached 16.3% this quarter, supported by an increase in loan disbursements in recent quarters, enhanced credit risk management, and effective interest rate strategies. Key quarter-over-quarter dynamics include a 2.1% growth in loans measured at quarter-end balances, primarily driven by a reduction in write-offs following stricter origination guidelines implemented a year ago. The NPL ratio fell for the fourth consecutive quarter to 6.1%, aligning with pre-pandemic levels. The net interest margin peaked at 14.4%, the highest since before the pandemic, driven by a shift towards smaller ticket, higher-yield loans. The cost of risk rose by 25 basis points to 5.4%, whereas risk-adjusted NIM settled at 10.3%. Year-over-year, decreasing funding costs and active loan pricing management sustained the strong net interest margin. The cost of risk decreased by 217 basis points as lower-risk vintages gained ground and now represent 70% of total loans. Operating expenses were controlled, resulting in an efficiency ratio of 52.4% for the first half of the year. Mibanco's contribution to ROE for the first half was 15.1%, moving toward a sustainable ROE target in the low 20s. Mibanco Colombia's results improved due to measures implemented last year and a more favorable economic environment for the microfinance sector, reporting 11.1% profitability at the quarter end compared to losses last year. At Grupo Pacifico, insurance underwriting results remained strong this quarter, driven by solid operational performance in both the P&C and Life businesses, resulting in a return on equity of 21.1%. Net income rose 23% quarterly. Insurance underwriting results increased 27% due to decreased service expenses in the Life business as claims in credit life and disability and survivorship saw reductions. The net loss on securities declined alongside a lower impact from credit downgrades on some assets in this quarter's investment portfolio. On a year-over-year basis, net income increased by 16%, primarily due to the full consolidation of corporate health insurance and medical services operations. Underwriting results improved across both the Life and P&C segments, especially through lower claims in individual life and credit life, and decreased claims in cars and personal life for the latter. These gains were somewhat offset by rising losses on securities due to credit downgrades affecting some investment portfolio assets. Profitability in our investment management and advisory business remained robust this quarter, with a return on equity of 15.5%. Quarter-over-quarter, core income-generating businesses produced solid results, benefiting from favorable treasury performance, improved capital market activities, and continued growth in Wealth Management, resulting in a 6% rise in assets under management in U.S. dollars. However, this positive momentum was countered by a temporary rise in operating expenses, leading to a 6% decline in net income. Year-over-year, net income dropped by 20%, primarily due to the absence of one-off income from our now-discontinued corporate finance business last year. Nevertheless, stronger treasury performance and lower tax expenses helped somewhat mitigate the overall decrease. Now, I would like to discuss Credicorp's consolidated evolution. As mentioned, we revalued Bolivia's balance sheet again this quarter, leading to a contraction in Credicorp's balance sheet. I will detail the underlying quarter-over-quarter dynamics. The yield on interest-earning assets rose by 21 basis points due to a shift in the asset mix. On the liability side, a more costly deposit mix resulted in a 2 basis point increase in funding costs. Annually, the yield on interest-earning assets fell by 27 basis points, influenced by market interest rate trends and a reduced share of loans in the asset structure. Conversely, the drop in market interest rates and a declining funding cost framework contributed to a 42 basis point reduction in funding costs. Nonetheless, the net interest margin remained resilient at 6.42%, increasing by 9 basis points. Moving forward, loan growth, particularly in retail segments, is expected to sustain a strong net interest margin despite decreasing interest rates. Regarding loan portfolio quality, asset quality showed slight further improvement as non-performing loan volumes continue to decline across segments, falling below levels reported two years ago prior to the 2023 recession. Amid the ongoing economic recovery, provisions have dropped over the past year due to better payment performance and effective risk management at both BCP and Mibanco. The positive impact of these developments exceeded expectations, maintaining low provisioning levels again this quarter. Accordingly, the NPL coverage ratio has increased to 109.5%. Looking ahead, we will continue promoting retail origination while managing risk in parallel. We expect the cost of risk to rise but remain within our accepted limits. Moving on to core income, we reported a 5.3% year-over-year increase. First, net interest income rose by 4.2%, aided by reduced interest expenses due to a better funding mix. Second, other core income grew by 8.1%, propelled by fee income from Yape and core transactional activities, as well as gains from foreign exchange transactions. We achieved a new high in our risk-adjusted net interest margin at 5.44% this quarter, reflecting a 104 basis point year-over-year increase thanks to a stable net interest margin and lower cost of risk. The efficiency ratio for the first half of the year was in line with guidance at 44.9%. Operating expenses increased by 11.4%, primarily due to core business growth at BCP and investments in our innovation portfolio. Core expenses at BCP were driven mainly by variable compensation provisions and increased IT costs. Costs for our innovation initiatives rose by 15%, led by Yape, Tenpo, and Culqi, which accounted for 83% of disruptive expenses in the year's first half. For the quarter, return on equity was 20.7%, reflecting strong results across our businesses. Meanwhile, return on equity for the semester was 20.9%, supported by solid business performance and bolstered by an extraordinary gain from the Banmedica transaction last quarter. Adjusting for this transaction, the recurring return on equity for the semester stands at 20%. This quarter, recurring net income reached a record high as we leveraged a differentiated funding structure and maintained a low cost of risk. More importantly, we are reinforcing revenue streams beyond lending while advancing towards a more diversified and resilient business model. As previously communicated, the full amount detailed in the SUNAT resolutions against Grupo Credito from June 30 has been canceled. This payment totaled almost PEN 1.6 billion for alleged and paid income tax and interests. Our stance on this matter has not changed, as we reaffirm our decision to utilize all legal avenues available to contest the resolutions, which we find unfounded. We are optimistic about a favorable resolution and will continue to evaluate the contingency as we manage the situation. Therefore, no expense provisions have been deemed necessary, and while this payment does not affect our subsidiaries' operations, it will impact cash flow at the Credicorp level. We do not foresee issuing extraordinary dividends this year. Now, onto our guidance. Our GDP growth expectation remains at around 3%. We estimate our loan book will grow by around 6.5% year-over-year based on end-of-period balances, translating to about 3% based on average daily balances. These estimates do not account for the revaluation of BCP Bolivia's balance sheet but do consider the depreciation of the U.S. dollar against the Peruvian sol. Given a more dynamic economic environment and strengthening origination in the year’s first half, we expect growth to accelerate in the second half, primarily driven by Retail Banking at BCP and Mibanco. The anticipated acceleration in loans and the shift towards retail should support the net interest margin as interest rates decrease. Consequently, we expect the net interest margin to fall within the upper end of our guidance range of 6.2% to 6.5%. While we foresee a slight increase in the cost of risk in the second half due to stronger retail origination, we are updating our guidance to 1.8% to 2.2% to reflect lower-than-expected provisioning levels in the first half of 2025, as the positive results of our risk management efforts and improvements in macroeconomic conditions have exceeded our expectations. Similarly, we are raising our risk-adjusted net interest margin guidance to a range of 5% to 5.2%. On the efficiency front, we are maintaining our guidance for 2025. We anticipate fee income to grow in the low double digits this year, driven by increased economic activity and ongoing diversification of our income sources. Furthermore, we expect insurance underwriting results to remain solid and relatively stable compared to 2024. We are raising our full-year return on equity guidance to around 19%, which includes extraordinary gains from the Banmedica transaction, expected to impact 50 basis points by year-end. This revision reflects both strong core performance and disciplined risk management. Despite ongoing global uncertainties, we believe the fundamentals are in place to support this elevated level of profitability. Finally, as Gianfranco mentioned, we are adjusting our long-term sustainable return on equity target upwards from 18% to around 19.5%. This change is mainly driven by improved expectations for loan growth dynamics, particularly through the introduction of new, higher-yielding segments, leading to a more favorable evolution of the loan mix, alongside an expected enhancement in risk-adjusted net interest margins and optimistic projections for fee income and gains from foreign exchange operations, largely influenced by increased transactional activity across our diverse business lines. With these remarks, I am now ready to open the floor for questions.

Our first question comes from Brian Flores with Citibank.

Congratulations on the results and the new guidance. I wanted to ask you about the cost of risk because I think it's an important improvement in your guidance. Could you explain what is driving this? You also mentioned recently that you're going to accelerate on retail, which makes the second half a bit riskier. Can you elaborate on the long term and what is leading you to be more optimistic about a lower cost of risk? I think that would be very helpful.

Brian, I'll ask Cesar Rios to answer your questions.

Thank you for the question, Brian. To start, let me give you a brief overview of our performance in the first half of the year. Last year, we implemented several measures to keep our portfolios within risk limits. Along with enhancing our capabilities, we also limited new origination in certain areas. Consequently, we experienced a very low cost of risk during the first part of this year, which was actually better than we initially expected. With one minor exception, all our portfolios remain within the risk appetite. Beginning in the second quarter, we began originating higher yielding, higher risk portfolios successfully. We expect this improved origination to lead to higher-yielding risks that will change our mix in the second half of the year, and we anticipate this trend will continue in the coming years.

And maybe Brian, just to complement Cesar's answer, keep in mind that we do not manage our portfolio based on cost of risk, but on risk-adjusted net interest margin, which is very relevant, yes.

No, perfect. Super clear. And then a quick follow-up on the guidance, too. You reiterated the efficiency ratio. And I think you're very efficiently becoming increasingly digital. Just if you could share what is your long-term vision on the physical branch network? Are you planning to monetize any of your prime real estate holdings? If you could elaborate if you see branches evolving to a more, I would say, transactional hub. Just how are you thinking about this in the long term?

Actually, Brian, this is a strategy we've started to deploy maybe 4, 5 years ago. At the peak at BCP, we reached up to close to 450 branches. Today, we have 300. So there's been a reduction of about 1/3 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.

The next question is from Lindsey Shema with Goldman Sachs.

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 should 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 for the question. Once we reach, I will say, a more representative level at the end of the 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 and Retail portfolios. But if we are starting to originate in higher-risk portfolios, for example, only PEN 1 billion portfolio that has a cost of risk of 8%, but brings a margin of 20% additionally, is going to increase 5 basis points the overall cost of risk of the portfolio, but it's going to improve significantly, 2.5x that the profitability of the business. And that's the strategy that we are going to follow once we have stabilized the portfolio that's already happening, and we are starting to build the portfolio with new tools. So for some years, we increase the higher risk, high yielding portfolios, the overall cost of risk should increase, but with increased profitability.

Again, Lindsey, our entire strategy and growth plan is based on risk-adjusted net interest margin, as Cesar mentioned, not solely on cost of risk. In fact, we also factor in acquisition costs and other elements. Managing it through risk-adjusted net interest margin is our approach.

If I could elaborate on that a little bit, for loan growth this year, could you break down your expectations? And then 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?

Alejandro?

Yes, we made a change after discussions with many investors who prefer the end-of-year balance. However, we still provided the equivalent. As mentioned during the presentation, we expect overall growth to be 6.5%, which includes the revaluation of the sol, and it is stronger against the dollar than we anticipated. This growth particularly comes from the retail segment, both at Mibanco and BCP with mortgages and consumer credit. We expect most areas to grow, but those segments should see the most significant increases. We have already observed this growth in the last few months and anticipate it will continue to strengthen in the latter part of the year.

The next question is from Renato Meloni with Autonomous Research.

It's Renato here. I have a quick question about loan growth for this year. Considering the guidance from the start of the year and what has actually happened, could you elaborate on what diverged the most and the adjustments you've made? Additionally, congratulations on raising this year's guidance and for achieving sustainable ROE. Could you also provide more details on the factors driving the higher long-term guidance?

Certainly. Regarding loan growth, as I mentioned earlier, we are observing a very strong economy now, which has significantly improved the situation for consumers. This aligns with what Cesar has shared about our risk and origination capabilities. We anticipate that these factors will lead to increased lending growth, especially in retail, consumer, and microfinance sectors. This trend has already been evident; for instance, in mortgages, we've seen a 6.5% growth year-to-date, while consumer lending has grown nearly 6%. We expect this momentum to continue. With our capabilities and distribution strengths, we aim to engage more with the consumer sector of retail while maintaining a good risk-adjusted net interest margin. This approach is a key factor in achieving a sustainable return on equity, supported by a favorable loan mix and cost of risk. Additionally, we've been expanding various business lines, particularly with Yape, which will serve as vital growth sources in the coming years. When considering all these elements, we project a sustainable return on equity of 19.5%.

Renato, I'd like to add a point to what Alejandro just said. A few years ago, we established certain guidelines regarding our investment in disruptive initiatives, one of which was a limit of up to 150 basis points of ROE. This year, in 2025, we expect the impact to be nearly 0. Moving forward, we view this as a positive development, as this drag should be eliminated. Of course, given the rapid changes in the world, we might need to invest or come up with new ideas. However, our current outlook is that the digital investments beyond 2025 will yield positive ROE instead of negative ROE. As we've noted previously, we've been quite conservative in how we account for the investments in our digital transformation initiatives, recording around 90% or 100% of these as expenses. Consequently, the equity portion of these digital investments is almost 0—not entirely, but essentially insignificant compared to the income they will generate in the future.

The next question is from Carlos Gomez with HSBC.

Congratulations on the results. And thank you for clarifying that the bond exchange was an extraordinary gain. Can I ask you briefly, is that after tax or before tax gain?

The gain, it's actually before tax, but government bonds don't have income tax. So it ends up going all the way below the line.

Okay. That's very clear. And so I'm keeping here. My real question is about Yape. And we look at the numbers that you published, 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 can contribute this year, next year and in the future? What's the number that you are considering internally and you are talking to investors about?

Francesca, can you answer that?

The number you mentioned is correct. What we are expecting is as Yape begins to increase its loan portfolio, its contribution will be much larger. And we are expecting for the next 3 to 5 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 inclusion in the newer segments of marketplace and commerce.

So that will be second to BCP and therefore, larger than Pacifico. Are we talking $150 million, $200 million, $250 million?

You have to do your math, Carlos. We don't disclose specific figures. You have the figure of BCP, you have the figure of Pacifico, do the math.

The next question is from Alonso Aramburú with BTG.

Just following up on Yape. Can you comment on your asset quality trends at Yape? What's your cost of risk? What's your level of NPLs? And also some color on the lending, what kind of size of loans you're doing, the turn of the loans? Has that changed in the last few months? And do you have a target for how much lending should be as a percentage of revenues at Yape?

Yes, I'll begin and then Francesca can add to that. Currently, the Yape portfolio is quite small, although we are disbursing over PEN 1 million in loans each month. Most of these loans are single installment, with a duration of less than 30 days. While this business is profitable, our main goal is to learn how to lend effectively to our top-performing initial clients. We are also developing multi-installment loans in the consumer finance sector, which is experiencing rapid growth. Additionally, we've just begun testing in the SME market. I'm not sure if Francesca has the details on non-performing loans.

Low teens annualized.

So again, the risk-adjusted NIM is very, very, very good, Alonso. But we are quite positive on the impact of the lending business at Yape. And again, 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. And just to follow up generally on the cost of risk guidance. So is it correct that the expectation then for the second half of the year should be closer to 2% cost of risk for credit cost?

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.

The next question is from Yuri Fernandes with JPMorgan.

Congrats on the quarter. I have just a question on your deposit franchise, and we see the economy in Peru doing better. And your deposits are growing way above the loans, so don't get me wrong here. But when I go to your low-cost deposits, they are down a little bit quarter-over-quarter, some 5%. So just checking if it is seasonal. On year-over-year, they are still growing. But given you have so many different verticals, I think a 4%, 5% annual growth on deposits, it could be a little bit higher, right? So just trying to understand on deposits, why it was down the low cost. And then I have a second question regarding dividends. You are generating a lot of capital. Loan growth has been a little bit like clusters. So the quarterly question on dividends, how should we think about your extraordinary dividends for this year?

Yes, Yuri, what you're observing is seasonal in terms of low-cost deposits. When we look at year-over-year growth, it's been quite significant. In response to your question, I'd like to share some recent information from the Central Bank. The use of cash for transactions in Peru has decreased from 95% of total transactions in 2013 to 64% now, which is a reduction of over 30%. The main reason for this decline is the rise of digital wallets, with Yape being the leading one in Peru. We remain confident that the growth in low-cost deposits and our market share will continue, as this is encouraging news. However, it's important to note that two-thirds of the market is still conducting transactions in cash, indicating ample opportunity for growth. As for dividends, our policy remains unchanged. However, as Alejandro mentioned, we had to pay between PEN 1.6 billion and PEN 1.7 billion to SUNAT, which, while it doesn’t impact our profit and loss statement, does affect our cash position. Therefore, we will not be distributing an extraordinary dividend in the second half of this year.

To add to what Gianfranco said, that's correct. The primary effect of the SUNAT situation is a cash impact. The funds we had intended to distribute as an extraordinary dividend are now being used to settle the claim from SUNAT. I want to emphasize that this does not alter our projections for next year's ordinary and potentially extraordinary dividends. This is solely a one-time impact for this year due to the funds we planned to allocate for the extraordinary dividend.

The next question is from Andres Soto with Santander. The main impact from the SUNAT situation is a cash impact. The funds we planned to distribute as an extraordinary dividend are being redirected to cover this claim from SUNAT. I want to clarify that this does not alter our expectations for next year's ordinary dividend or, ideally, the extraordinary dividend. This is solely an impact for this year since it concerns the funds we intended to use for the extraordinary dividend.

My first question is regarding your digital initiatives and your targets for the short term. You have mentioned this objective of these initiatives to represent 10% of revenue by 2026. I would like to understand if this target refers to the whole year, a specific quarter. You were already at 6% in the second quarter of the year. So it will be interesting to hear your thoughts on the ramp-up to get to these targets.

Sure. Francesca?

Thank you, Andres. Our goal is to achieve 10% for the entire year by 2026. We are very confident in Yape's results. As we've mentioned before, the purpose of the innovation portfolio is to ensure that initiatives graduate successfully. The challenge lies in continually developing a new set of initiatives, particularly around Tenpo, Culqi, and other projects we are working on. This is how we are approaching it. Our confidence stems from our strong venture with Yape, but we still have work to do on an annual basis.

That's clear. My second question is about the new medium-term return on equity target of 19.5%. It was very helpful, Gianfranco, to hear your comment that this partly reflects the progress you are making with digital initiatives, which have already reached a break-even point. However, it seems like this target might be conservative since, as these initiatives begin to grow, they will contribute to profitability and could elevate your return on equity even further. What is stopping you from setting a more ambitious target for your sustainable return on equity? Regarding your second point, you mentioned that part of what we are seeing is an improvement in risk-adjusted net interest margin and higher fee contributions leading to better efficiency. In the past, you had an efficiency target linked to the 18% medium-term return on equity. What is your new efficiency target in light of this new objective?

Let me address the efficiency question before passing it to Alejandro, who can comment on the overall strategy. The growing efficiency ratio of these new ventures presents a challenge because they are becoming profitable but have a higher efficiency ratio compared to the incumbents. As Yape grows, our inefficiency increases. Eventually, Yape's efficiency ratio should be significantly lower than BCP's, but that isn't the case right now. This trend is common among most of the new ventures we're launching. This is primarily why our efficiency ratio looks the way it does. We continue to invest in both business operations and transformation, as I mentioned earlier. Additionally, a significant portion of our investment in digital transformation, particularly in new ventures, has been recorded as expenses. Essentially, we've been front-loading these expenses. Moving forward, there will be a trade-off; while our successful digital initiatives may lead to growth, they could also negatively impact the cost-to-income ratio. However, since these initiatives are becoming profitable, they shouldn't adversely affect the return on equity, as I explained earlier. I hope that clarifies things.

That's clear, Gianfranco. What I would like to know is whether the mid-term target you mentioned is potentially conservative based on the calculations you've provided. Are the guidelines you previously established still applicable? Are you still assuming that the disruptive initiatives will reduce efficiency by 300 basis points and ROE by 150 basis points? Or will this be updated as you achieve more progress?

Yes. The impact of 150 basis points this year will effectively be neutral, so it won’t be a concern. Starting in 2026, it should become positive. Regarding ROE, for the cost-to-income side, the efficiency ratio is important. Currently, Yape is profitable, but its cost-to-income ratio exceeds 40 percent. As Yape grows, it will have a larger negative effect on the cost-to-income ratio. However, this could change in the future, making Yape potentially much more efficient than BCP, which would reduce the cost-to-income ratio as well.

And that is fundamentally a function of lending, I suppose.

Yes. The primary source of income growth for Yape in the coming years is expected to be the lending business.

And Francesca probably mentioned this before, the 3- to 5-year period for the ramp-up. Is this still a valid time frame? Or when are you expecting to accelerate Yape lending when those testing loans are going to start to become multi-installment and larger loans?

They're already multi-installment, but we are conservative. So we're not going to take excessive risks; we plan to grow the portfolio significantly. We feel very comfortable with what we're doing in terms of risk and growth. The more comfortable we become, the faster we will implement the overall strategy. We do not have a specific answer today on when we will reach our goals.

And if you focus on the nature of this client, it's an exploratory business at the beginning. We deploy pilots. We monitor the pilots. When we discover a specific segment that performed particularly well, we scale that. In these cases, we can be scaling up certain parts of the portfolio rapidly, but subject to have discovered profitable segments. So it's a discovery process, and we have great expectation, but it's a discovery process.

What percentage of Yape borrowers are already in a multi-installment scheme?

Do you have that figure?

Today, they are evenly split. It's not about the number of clients, but the balance is...

Because the mono-installment loans are for a single installment, the duration is less than one month. Therefore, a lot of effort is required to maintain the balance, and this will change significantly in the coming years.

Congratulations on the results.

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, and thank you all for your questions. Q2 2025 was another quarter of solid execution at Credicorp. Momentum in the economy, our business and our innovation agenda give us the confidence for the rest of the year and beyond. Fee income is scaling. Digital engagement is deepening. Great demand is returning. And 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 NIM through a more retail-oriented loan portfolio while increasing transactional and noninterest 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.

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