Credicorp (BAP) Risk Factors

Economic conditions in other countries and developments in international financial markets can affect Peru's economic growth. The country's exports are highly concentrated in the mining industry; with tax revenues from the sector peaking at 14% in 2007 and represented 5% of total tax revenues in 2018. In addition, gold and copper exports represented 47% of all shipments in 2018 (49% of all shipments in 2017). Therefore, Peruvian trade responds significantly to fluctuations in metal prices, especially gold and copper, which fell 36.6% and 41.7%, respectively, between December 2012 and December 2015. This turned a US$6.4 billion trade surplus in 2012 into a US$2.9 billion trade deficit in 2015. In contrast, 2018 registered a US$7.0 billion trade surplus (2017: US$ 6.6 billion), the highest since 2011, due to a US$6.8 billion increase in copper exports and US$1.6 billion increase in gold exports since 2015 (the exported volume of copper increased 50.4% and the average export prices of gold increased 9.4% in the same period). In 2018 the average price of copper stood at US$2.96 per pound, its highest price in the last four years. Meanwhile, terms of trade remained stable in 2018 (in 2017 they increased 7.1%, the first increase in the last 6 years). In addition to changes in prices, Peru is also vulnerable to fluctuations in foreign demand, especially from China and the United States. A pronounced economic slowdown in China over the next few years poses a risk to Peruvian growth as it may impact exports and foreign direct investment. A reduction of growth in Latin America can also impact the Peruvian economy and our business, especially with regard to Chile, Colombia, Bolivia and Panama, where we have operations, as well as Brazil and Mexico, which have a broad impact throughout the region because of their size. Moreover, regarding the Trans-Pacific Partnership (TPP), a free trade agreement (FTA), after a long period of negotiations between the Trade ministers of the 12 Asia-Pacific countries, a final agreement was signed on February 4, 2016. However, on November 22, 2016 the President elect of the United States announced the United States withdrawal from TPP while the other 11 countries reached an arrangement to continue with the agreement without the United Staates. On March 8, 2018, these 11 countries signed a modified FTA called the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTTP or TPP11). Since then, United States officials, including President Donald Trump have suggested that the United States mayrejoin the TPP. Throughout 2018, there were some trade tensions between United States and China. Early in 2018, the President of the United States issued a memorandum directing his administration to take several actions, including to: file a World Trade Organization case against China for discriminatory licensing practices, restrict investment in key technology sectors, and impose tariffs on Chinese products (such as aerospace, information communication technology and machinery). On July 6, 2018, the United States put in place the first China-specific tariffs (25% on 818 imported Chinese products valued at US$34 billion, referred to as List 1). China took retaliatory measures by imposing a 25% tariff on 545 goods imported from the US, worth US$34 billion. On August 7, 2018, the US released a revised version of the 25% tariffs on a List 2 of goods imported from China worth US$16 billion; China announced on the same day a reciprocal 25% additional tariff on US imported goods valued at US$16 billion. Both of these second-round tariffs were implemented on August 23, 2018. On September 24, 2018, the US implemented a third round of tariffs to Chinese imported goods worth US$200 billion with an initial carry rate of 10% (set to increase up to 25% by January 1, 2019); China reacted with tariffs on US imported goods worth US$60 billion with a rate varying between 5% - 10%. After resuming negotiations in late November 2018 and during the G20 Summit in Buenos Aires in December 2018, US and China agreed to a temporary truce in which both countries would refrain from increasing tariffs or imposing new tariffs for 90 days (until March 1, 2019) as they work towards a large and complete trade deal. To date, no comprehensive trade deal has been struck. The development of the trade tensions between the US and China is relevant to Peru's economy and businesses because the US and China are Peru's main trading partners and are relevant drivers of global demand. Furthermore, financial conditions in global markets also affect the Peruvian economy, affecting interest rates for local corporate bonds and influencing the exchange rate. Monetary policy tightening in developed economies, particularly on the Federal Reserve System in the United States, could affect economic activity in Peru since it strengthens the US dollar and increases interest rates, thereby reducing access to funding for some local businesses. Also, since the Peruvian economy still has some level of loans denominated in U.S. Dollars (28.2% of loans and 37.3% of deposits as of December 2018), which we sometimes refer to as dollarization, potential statement of financial position effects should be taken into account since a higher exchange rate could increase debt burdens for individuals and businesses that have taken loans in dollars but earn their income in local currency. However, the BCRP has taken steps to foster de-dollarization and thus reduce this vulnerability by implementing in January 2015 the so-called "De-dollarization Program" that implies additional U.S. dollar reserve requirements on financial institutions if: - The balance of total loans in dollars (excluding loans for foreign trade operations and loans with a term greater than 3 years and over US$ 10 million since January 1, 2015) as of December 2015 was 90% above the balance recorded in September 2013. In December 2016, the target was updated to 80% of the balance recorded as of September 2013. This target continued to apply for December 2017. For December 2018 the target considered total loans in dollars and required additional U.S. dollar reserve requirements on financial institutions if the balance is either: (i) above 80% of the balance of September 2013, (ii) above the balance of loans in dollars of December 2017 plus 40% of the additional flows in domestic currency compared to Decemeber 2017 (the flows in domestic currency are converted to U.S. dollars using the pubished exchange rate by the SBS, and exclude mortgage, consumer and foreign trade loans) or (iii) above 1.04 times the balance of loans in dollars of December 2017. As of February 2019, the BCRP has made no further rulings on this topic. - The balance of car loans and mortgage loans in dollars at December 2015 were above 85% of the balance in February 2013. The target for December 2018 was updated to 60% of the balance recorded in February 2013; and thereafter the target would be lowered by 10 percentage points each year. As of March 2019, the target for December 2019 is 50% of the balance recorded in February 2013. - In the case of U.S. dollar total loans, the reduction target is calculated based on period-end balances as of September 2013. The reduction target for the joint portfolio of mortgage and car loans was calculated with period-end balances as of February 2013. However, compliance levels for both targets are calculated using average daily balances. In the context of the aforementioned "De-dollarization Program", Credicorp's main subsidiary BCP Stand-alone has reduced significantly the level of foreign exchange risk on credit risk, which in turn reduces the impact discussed in this risk factor. For further details, see "Item 4. Information on the company – 4.B Business Overview – (9) Supervision and Regulation – 9.2 BCP Stand-alone and Mibanco – 9.2.7 The BCRP's monetary and macro prudential policy". These targets were complemented by the addition of two new types of Currency Report Operations (known as Repo). The instruments complemented the de-dollarization process by: - Providing liquidity in local currency to financial institutions for an amount up to 20% of such institution's Total Liabilities Subject to Reserve Requirements (TOSE by its Spanish Initials) in U.S. dollars through a Repo - Expansion. However, under no circumstance, can the median reserve requirements decrease below 25%;- Providing local currency to financial institutions at spot foreign exchange (FX) prices in order to finance the re-denomination of their loans in U.S. dollars through a Repo – Substitution.

Because we are subject to regulation and supervision in Peru, Bolivia, Colombia, Chile, the Cayman Islands, the United States of America, and Panama, changes to the regulatory framework in any of these countries or changes in tax laws could adversely affect our business. Banking We are, most directly, subject to extensive supervision and regulation through the SBS's Banking and Insurance System Law (Ley General del Sistema Financiero y del Sistema de Seguros y Organica de la Superintendencia de Banca y Seguros) and the Regulation of the Consolidated Supervision of Financial and Mixed Conglomerates (Reglamento para la Supervision Consolidada de los Conglomerados Financieros y Mixtos). The SBS and the BCRP supervise and regulate BCP Stand-alone and Mibanco's operations. Peru's constitution and the SBS's statutory charter grant the SBS the authority to oversee and control banks and other financial institutions, including pension funds and insurance companies. The SBS and the BCRP have general administrative responsibilities over BCP Stand-alone and Mibanco, including defining capital and reserve requirements. In past years, the BCRP has, on numerous occasions, changed the deposit reserve requirements applicable to Peruvian commercial banks as well as the rate of interest paid on deposit reserves and the amount of deposit reserves on which no interest is payable by the BCRP. Such changes in the supervision and regulation of BCP Stand-alone and Mibanco may adversely affect our results of operations and financial condition. See "Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation – 9.2 BCP Stand-alone and Mibanco". Furthermore, changes in regulation related to consumer protection made by these agencies may also affect our business. The Superintendency of the Securities Market (Superintendencia del Mercado de Valores or SMV by its Spanish initials) also supervises certain of our subsidiaries such as BCP, Credicorp Capital Sociedad Agente de Bolsa (Credicorp Capital Bolsa), Credicorp Capital Sociedad Administradora de Fondos (Credicorp Capital Fondos), Credicorp Capital Peru S.A.A. and Credicorp Capital Titulizadora. In Colombia, we are subject to supervision and regulation through the Superintendency of Securities and Insurance (SFC - Superintendencia Financiera de Colombia) and the Colombian Stock Market Self-Regulator (AMV - Autorregulador del Mercado de Valores de Colombia). In Chile, we are subject to supervision and regulation through the Chilean Financial Market Commission (CMF - Comision para el Mercado Financiero). See "Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation – 9.6 Credicorp Capital". Changes in U.S. laws or regulations applicable to our business, or the adoption of new regulations, such as under the Foreign Account Tax Compliance Act (FATCA) or the Dodd-Frank Wall Street Reform and Consumer Protection Act, may have an adverse effect on our financial performance and operations. On January 1, 2019, the OECD´s Common Reporting Standard (CRS) will take effect in Peru, which will increase current client due diligence efforts for BCP Stand-alone and other Credicorp financial subsidiaries in Peru. We are also regulated by the United States Federal Reserve System, which shares its regulatory responsibility with the State of Florida Department of Banking and Finance - Office of Financial Regulation, with respect to BCP's Miami agency, and by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority, Inc. (FINRA), with respect to Credicorp Capital Securities (CCSI), which is a U.S. broker dealer. Similarly, we are regulated by other governmental entities in other jurisdictions. In the Cayman Islands, we are subject to the supervision and regulation of the Cayman Islands Monetary Authority (CIMA). In Bolivia, we are subject to the supervision of the Financial System Supervisory Authority (ASFI by its Spanish initials) that has assumed all regulatory functions held previously by the Superintendency of Banks and Financial Entities and the Superintendency of Pensions, Securities and Insurance. Nonetheless, in 2010 the Insurance and Pensions sectors have come out of this regulation and have their own Supervision Authority: Pensions and Insurance Inspection and Control Authority (Autoridad de Fiscalizacion y Control de Pensiones y Seguros – APS). Finally, in Panama, we are subject to the supervision of the Superintendency of Banks of Panama and the regulatory framework set forth in the Decree Law 9 of February 25, 1998. Changes in the supervision and regulation of our subsidiaries in other countries may adversely affect our results of operations and financial condition. Taxation For a discussion of Peruvian Regulationtax regulation see "Item 10. Additional Information – 10.E Taxation". The Chilean Statutory Income Tax rate to resident legal entities is 25% under the attribution regime and 27% under the semi-integrated regime (25.5% for semi-integrated regime only for 2017). On the other hand, foreign resident individuals or legal entities are subject to a 35% dividend withholding tax. This tax applies at the moment of the effective remittance of the dividend and the corporate income tax can be used as a credit. In case of non-treaty country resident shareholders, the corporate tax credit is limited to 65% of the corporate income tax associated to such dividend. Therefore, in this case, the total tax burden for foreign taxpayers, subject to a 35% tax rate, will be 44.45%. Nonetheless, the "65% limit" does not apply to those investors domiciled or resident in a country with which Chile has a Double Taxation Treaty in force. Additionally, a transitory rule provides that this benefit will also be applicable to those investors who are residents of countries with which Chile has a Double Taxation Treaty subscribed and pending ratification, to the extent that the treaty was signed prior to December 31, 2018. This transitory rule would be in effect until December 31, 2021. If the Chilean entity has chosen the attributed regime, the corporate tax will be fully creditable, regardless of the country of residence of the shareholder. The Group chose the "Income Tax semi-integrated system". The additional tax rate has not been changed. The Colombian statutory income tax rate was 33% for fiscal year 2018 and a temporary income surtax of 4% was introduced (34% and a surtax of 6% for 2017). This surtax applied only from a tax base equal to or greater than 800,000,000 Colombian pesos, approximately US$268,096. For 2019, Colombian corporate income tax rate is, in general, 33% and will decrease to 32% in 2020, 31% in 2021 and 30% as from 2022. However, a temporary surtax will be applied only to financial institutions whose taxable income equals to or exceeds US$ 1.3 million approximately. (CC Fiduciaria, our Colombia trustee company, is eligible for this surtax). In 2019 the surtax rate is 4%, in 2020, 3%; and 3% in 2021. Without prejudice of the provisions established in tax treaties, distribution of dividends to non-residents is subject to a 7.5% withholding tax, as from 2019. When the corresponding profits were not taxed at the level of the distributing company, the corporate income tax rate would be applied over the dividends (the percentage will depend on the year of distribution), and after that, the 7.5% tax. Foreign portfolio investment is also subject to the 7.5% withholding tax. However, in case of previously untaxed corporate profits, instead of applying the general income tax rate, a withholding tax of 25% will be assessed. Corporate profits earned up to December 31, 2016, are not subject to the 7.5% withholding tax on dividends, even though the distribution occurs from and after January 1, 2017. Finally, as from 2019, profits distributed to Colombian companies are also subject to the 7.5% tax, under similar conditions of non-resident investors, even though some exceptions apply. In any case, the tax paid by the Colombian company over the dividends can be transferred to its foreign investors. Therefore, they are entitled to use it as a tax credit against its own tax when they receive dividends. For details on Income tax review by the Tax Authorities on the jurisdictions in which we operate, please refer to note 18 (d) of the consolidated financial statements. Insurance Our Property and Casualty (P&C) and Life insurance business is carried out by Pacifico Seguros y Reaseguros S.A. (Pacifico Seguros), which is part of Grupo Pacifico. The insurance business is subject to regulation by the SBS. New legislation or regulations may adversely affect Grupo Pacifico's ability to underwrite and price risks accurately, which in turn would affect underwriting results and business profitability. Grupo Pacifico is unable to predict whether and to what extent new laws and regulations that may affect its business will be adopted in the future. Grupo Pacifico is also unable to predict the timing of the adoption of any new laws and the effects any such new laws or regulations may have on its operations, profitability and financial condition in future years. However, we still expect Peru to adopt new legislation in the coming years, similar to the measure enacted by the European Union through Solvency II, which sought to further reduce the insolvency risk faced by insurance companies by improving the regulation regarding the amount of capital that insurance companies in the European Union must hold. Our operating performance and financial condition depend on Grupo Pacifico's ability to underwrite and set premium rates accurately across a full spectrum of risks. In order to be profitable, Grupo Pacifico must generate sufficient premiums to offset losses, loss adjustment expenses and underwriting expenses. To price premium rates accurately, Grupo Pacifico must: - collect and analyze a substantial volume of data;- provide sufficient resources to its technical units;- develop, test and apply appropriate rating formulae;- closely monitor changes in trends in a timely fashion; and - predict both severity and frequency with reasonable accuracy. If Grupo Pacifico fails to assess the risks that it assumes accurately or does not accurately estimate its retention, it may fail to establish adequate premium rates. Failure to establish adequate premium rates could reduce income and have a material adverse effect on our operating results or financial condition. Moreover, there is inherent uncertainty in the process of establishing life insurance reserves and property and casualty (P&C) loss reserves. Reserves are estimates based on actuarial and statistical projections at a given point in time of what Grupo Pacifico ultimately expects to pay out on claims and the related costs of adjusting those claims, based on the facts and circumstances then known. Factors affecting these projections include, among others: (i) in the case of life insurance reserves, changes in mortality/longevity rates, interest rates, persistency rates and regulation; and (ii) in the case of P&C loss reserves, changes in medical costs, repair costs and regulation. Any negative effect on Grupo Pacifico could have a material adverse effect on our results of operations and financial condition. Pension fund In 2012, the Peruvian Government passed a law to reform the Private Pension System (SPP by its Spanish initials), which attempted to expand coverage for affiliates, encourage market competition, and decrease administration fees in the SPP. In 2016, the Congress approved a reform that allows pensioners to withdraw up to 95.5% of their pension funds. This initiative may motivate affiliates that haven't reached the age of retirement to apply to an early retirement regime by altering their employment situation. See "Item 4. Information on the Company – 4.B Business Overview – (9) Supervision and Regulation – 9.5 Prima AFP".

Credicorp assumes reinsurance risk in the normal course of business for our insurance contracts when applicable. Premiums and claims on assumed reinsurance are recognized as revenue or expenses in the same manner as they would be if the reinsurance were considered direct business, taking into account the product classification of the reinsured business. While Credicorp's internal requirements in regard to reinsurer counterparty credit risk are higher than local regulatory requirements, as set by Grupo Pacifico's risk management unit and approved by the Risk Management Committee, a failure by one or more of our counter-party reinsurance companies to honor their contractual obligations could have a material adverse effect on our financial condition and results of operations.