Credicorp Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 12 speakers on the call.

Operator

Good morning, everyone. I would like to welcome all of you to the Credicorp Limited Third Quarter 2023 3 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp's website. 20. Today's conference call is being recorded.

Operator

As a reminder, all participants will be in a listen only mode. There will be an opportunity for you to ask questions at the end of today's presentation. 20 keypad on your computer screen. Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Saguenas. You may begin.

Speaker 1

Thank you and good morning everyone. For today's call, our Chief Financial Officer, Cesar Rios, will be providing the introductory comments In addition to his usual discussion of the macro environment and financial performance, our CEO, Gianfranco Ferrari could not be with us today. In addition, speaking on today's call will be Raymundo Morales, CEO of Yape, who will give us an update on Yape's progress. Finally, participating in the Q and A session will also be Francesca Raffo, Chief Innovation Officer Reynaldo Llosa, Chief Risk Officer Cesar Rivera, Head of Insurance and Pensions and Carlos Otelio, CFO at Mibanco. Before we proceed, I would like to make the following Safe Harbor statement.

Speaker 1

20. 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.

Speaker 2

While the macro environment has been more challenging than expected, Credicorp has continued to demonstrate its distinctive resilience in Peru, Thanks primarily to our diversified and prudently managed loan portfolio and funding advantage. A strong NII is complemented With an increasing share of the core non interest income streams, including those from insurance and Yape, which which is a key part of our strategy of decoupling from the macro. Our strong track record demonstrate our ability to We are registering healthy margins even after high provisions supported by long mix shift, a stricter origination in vulnerable segments, dynamic pass throughs and our funding advantage. Our solid capital base represents a strength, particularly within a challenging credit cycle where the impact of soft macro conditions on payment performance in specific segments is evident. We have already stated, we believe strongly in the importance of continuing to invest in both The technological transformation of our core businesses and in disruptive initiatives to maintain and enhance our strong competitive modes and future sustainability.

Speaker 2

Please, next slide. By embracing our agile and self destructive mindset, we are building a diverse business capturing synergies, maximizing our main profit pools, targeting new client segments and developing our own disruptors As we seek to retain a healthy and sustainable ROE, our focus on gaining a deep understanding of both present and upcoming market trends Trimundo will now provide an update on the sustained progress at Yape, which in just over 7 years has become the main payment network in Peru and is the most mature example of our disciplined approach to disruption and innovation as we advance towards our goal Thanks, Cesar, and good morning, everyone. Yape is an example of our rigorous approach to innovation and our commitment to meeting current and future market needs. Hitting the $10,000,000 mark For Yaperos over a year ago was a turning point for us. We initiated our monetization plan by rapidly launching new business lines and functionalities, 20 9 transactions per month, up over 160% year on year.

Speaker 2

Making interoperability a reality, Yape continues growing at an exponential rate, a clear sign of the benefits of this service offers to both clients and the ecosystem in general. JAPA is not only the primary payment network in Peru, it is also the digital brand that boasts the highest awareness level in the country. Please turn to the next slide. As the number of active yaperos continues to grow with each new feature added, The use of individual features also increases, driving gains in market share, attracting even more Yaperos and partners, while operating more and more efficiently, reinforces our flywheel effect. Top ups are a clear example of how Yape is helping us decouple our growth from the macro.

Speaker 2

BCP's top up market share used to be around 10%. But after launching this functionality through Yape, our market share rose to 46%, which represents 5x growth in just 18 months. Last January, we enabled bill payments through Yape and have seen an upward trend for monthly growth with over 20% of the Aperos now using the service. We are currently at just 5% of our expected TAM for bill payment, So still have an immense opportunity for continued growth. Similarly, the use of our features in each business line, including POS, Rapid adoption of these products is allowing our revenue generating TPV to grow at a 3x the pace of our total TPV, which has grown from non existent in early 2022 to around 5% at the end of Q3.

Speaker 2

Our long term aspiration is above 20%. Please turn to the next slide. Unitary economics continue to move towards an expected breakeven in 2024. With multiple product launches. In marketplace, Via Bettenda will initially focus on electronics, which typically represents 50% of e commerce sales.

Speaker 2

We are also launching other high engagement products such as ticketing through our acquisition Join Us, gaming and gift cards. In financial, we are introducing small multi installment loans with longer tenures through 100,000 pre approved leads. In payments, we are completing our portfolio of solutions with FX transactions and remittances among others. We are also providing collection services for CPG companies. On the functionalities front, we're enhancing our UX to include the critical capabilities of Asupra.

Speaker 2

So as you can see, we're going to remain very busy. Yape continues to progress towards monetization by pursuing its medium term target of being the payment the main payments network in Peru being an integral part of Yapero's daily life and addressing their financial requirements. We look forward to updating you again in the future on our continuous progress. I'll turn the call back over to Cesar. Thank you, Raymundo.

Speaker 2

I will share now the key financial highlights of the quarter, by retail banking at BCP. Meanwhile, low cost deposits grew 1.2% and accounted for 50.9% of our funding base at quarterend. Similarly, most of our income streams registered relevant sequential increases. NII grew 1.6% driven by asset mix dynamics, which were partially offset by a higher cost of funding for bank deposits. Fees also grew 1.6% off the back Of positive dynamics in revenues from debit card collection services and bill payments.

Speaker 2

Insurance underwriting results rose 11.6% as earnings in the Life business continue to trend upwards. We navigated asset quality headwinds as Peru credit cycle continued to deteriorate. That weak economic performance took a hold on payment performance in specific segments. All in all, we delivered resilient results despite negative GDP growth and have maintained solid capital levels at our subsidiaries. Having said that, a note of caution is in order Next slide, please.

Speaker 2

In the Q3, the Peruvian economy is expected to have registered its 3rd consecutive quarter decline year over year. Accordingly, annual GDP growth will be lower than expected and stand around 0 or slightly below. Several factors both expected and unexpected have driven weak performance. First, the social protests at the beginning of the year, which were prolonged in the country's house. 2nd, climatic events namely cyclone yaku and El Nino Posero, which heavily impacted the agricultural, fishing and manufacturing sectors.

Speaker 2

I will go into more detail on El Nino topic on the next slide. 3rd, the weak private investment and sluggish consumption led to non primary sectors contract for the government's efforts to stimulate the economy have been insufficient. It's important to note The confluence of these factors has led the country to register its lowest print for economic performance in 25 years, excluding the pandemic. Despite this disappointing performance, Peru macroeconomic fundamentals remain robust with low levels of public debt and high international reserves. Additionally, there is a significant package of public and private projects that impact by political intent Additionally, the policy rate has been good by 50 basis points.

Speaker 2

Next slide, please. The El NeoPostero weather phenomenon that has directly affected Peru this year is associated with a sustained rise has battered the fishing, agriculture and textile sectors in particular in the 1st 8 months of the year. The fishing sector expected to register its work performance in 31 years, while textile production has record its more market decline in 28 years, With performance in these key sectors of the economy has exercised a multiplier effect and exacerbated contraction in the non primary sectors. Given this context, we continue to closely monitor the evolution of El Nino and its impact in our businesses. I will look BCP results were impacted by economic downturn described early.

Speaker 2

This has pressured provisions over and impacted loan growth. Analyzing key quarter over quarter dynamics, the 1.5% increase in NII was driven by several dynamics. On the mix side, wholesale loans registered a contraction due to low private investments, while SME payment loans reported an up 20. This dynamic helped mitigate an increase in the funding cost, which was pressured by a more expensive deposit mix. It is important to note that migration from low cost time deposits have decelerated in recent months.

Speaker 2

This quarter, BCP's fee income was bolstered by an uptick in fees from debit cards, collection services of business clients and bill payment services provided to Yape. Provisions remain high in a prolonged recessive high inflation environment that has affected payment capacity of vulnerable segments in individuals and higher risk segments in SMEP. In individuals, growth was driven mainly by consumer loans and credit cards followed by mortgages. This uptick was partially offset by a reversal of provisions in wholesale banking. On a year over year basis, a 16% increase in NII was driven by raising interest rates and by Loan loss provisions increased 87.6 percent due to the same quarter over quarter dynamics.

Speaker 2

On a year to date basis, operating expenses grew 6.1%, which primarily reflects growth in core business IT expenses due to an increase in digital transactions and to significant investment in new capabilities and investment in disruptive initiatives. In this context, BCP's efficiency ratio stood at 37.8 percent. Finally, ROE stood at 20% in this quarter and 22 point 20. Next slide, please. 20.

Speaker 2

After a difficult 1st semester where social and climate events as well as ongoing deceleration have hit clients hard, Mibanco registered a decrease in loan origination in risk assessments and higher provisions on a quarter over quarter basis. Net interest income rose 3.2% despite lower loan growth. These favorable results reflect disciplined interest rate management, which helped offset the uptick in the funding costs. In this context, NIM increased 80 basis points and stood at 13.5 20. Provisions remained high this quarter given that social protests and weather anomalies continue to impact our customers' payment capacity.

Speaker 2

Other income fell 3.5 percent fueled by a drop in bank assurance fees follow a reduction in disbursements. From a year over year perspective, NII rose 1.9 percent, is fueled by an increase in structural loans and interest rate pass throughs, which mitigated the impact of rising funding costs. Mibanco's provision froze due to the same dynamics mentioned earlier. On a year to date basis, operating expenses 20. Duration to rise to 52.6 percent.

Speaker 2

Finally, ROE stood at 8.3% this quarter and 7% on a year to date basis. Mibanco Colombia is facing high inflation, high funding costs, lower interest rate ceilings and a deterioration in economic expectations. We have adapted our strategy to record profitability. Next slide, please. ROE at Grupo Pacifico was high this quarter and stood at 34.7% as we continue to On quarter over quarter terms, net income rose 19%.

Speaker 2

Growth was primarily boosted by an uptick in insurance underwriting results in the life business after claims fell, primarily by Credit Life and individual life products. An increase in the net gain from exchange difference also contributed to the positive evolution this quarter. These developments were partially offset by a decrease in net financial income. Year over year profitability was up 37%, primarily driven by positive dynamics for insurance and the right of results in the life business, 20. Pension products reported an uptick in income, which was attributable to better prices and more favorable volume dynamics, 20.

Speaker 2

ROE for the Investment Banking and Wealth Management line of business stood at 8.2%, impacted by a drop in income generation at our more volatile businesses. Income from our capital market business Market volatility also impacted our asset management business where income decreased by 0.8%, impacted by losses in the market value of seed capital in the funds we manage. Despite market headwinds, our assets under Manas remain Relatively flat, growing by 2% 2.4% quarter over quarter in the asset management unit We have made progress in this front, but it's important to emphasize that the process is gradual. Next slide please. Now we will look at Credicorp's consolidated dynamics.

Speaker 2

On a quarter over quarter basis, our structurally loan measure in average daily balances grew 1% or 0.3% with FX neutral. Growth in BCP Retail Banking, which has shifted away from the most vulnerable segment, was offset by a contraction in wholesale banking at BCP and Mibanco. Our deposit base expanded 3.5% or 1.2% with FX neutral. This evolution was driven by an uptick in time deposits and demand deposit, which was partially offset by a drop in saving deposits. Additionally, the migration of funding in Soles from low cost to time deposits decelerated.

Speaker 2

20. On a year over year basis, structurally loans increased 1.2% measured in average daily balances, Low cost deposits has filed system wide and currently represent 63.7% of our total deposits. Our market share in low cost deposits by the end of August stand at 40.3%. Next slide, please. Now let me explain core income dynamics.

Speaker 2

On a quarter over quarter basis, core income rose 1.4% on the back of NII, When analyzing the results for fee income and FX transactions, it is important to note that both lines have been transactions. Excluding BCP Bolivia, fee income rose 2.9% quarter over quarter, driven by an uptick in transactional levels from debit card collection services and bill payments at BCP and gains in FX operations diminished 2.6% quarter over quarter due to a drop in FX transaction volumes at BCP. On a year over year basis, core income increased 8.8% on the back NII, which rose 12.9% due to an uptick in the structural loan volumes and our active interest rate management. Excluding BCP Bolivia fee income diminished by 1.9% on the back of lower fees. At primaifepay, it was an adjusting in the fee framework applicable to These dynamics were partially offset by gains and FX transactions, which grew 1.4%.

Speaker 2

In terms of margins, Net interest margin rose 9 basis points quarter over quarter to a stand at 6.11%. Risk adjusted NIM fell marginally over the same period due to an increase in provisions and stood at 4.45%. Next slide please. Let's look at the dynamics of structural and non performing loans. As indicated early, adverse events in 2023 and weak economic performance structurally non performing loans was driven by wholesale banking where specific clients in the hospitality and commercial real estate sectors Became delinquent.

Speaker 2

Individuals where the debt service capacity of clients continue to face challenges due to over indebtedness and sustainable employment. 20. SME payment where low ticket subsegments have poor payment performance. Amnibanco where the increase in delinquency was concentrated On a year over year basis, the structured nonperforming loan volumes increased due to an uptick in refinance loans from Wholesale Banking. The evolution of non performing loans in retail banking on Mibanco was driven by the same factors as in the quarterly analysis.

Speaker 2

The NPL coverage ratio fell quarter over quarter year over year driven by wholesale banking clients, which represent a deterioration that has Moving on to provisions, the cost of risk has risen once again and it stands at 2.5%, While the structural cost of risk stand at 2.6%, this reflects the fact that client payment capacity has deteriorated alongside ongoing macroeconomic contraction. Provisions for the individual segment at BCP have risen since, as I just explained, Reflect increased expected losses on lending to clients who have reported an uptick in delinquencies in consumer products or in other entities. Provisions at SME payment, BCP and Mibanco are also up, driven by the downturn in payment performance that I just described. The aforementioned was partially offset by reversals in wholesale banking after some clients in the corporate segment registered improvements in the credit ratings or canceled obligations. Next slide, please.

Speaker 2

We will review the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operational expenses grew 11% in the 1st 9 months of the year, driven primarily by core business at BCP and disruptive initiatives cloud as clients become more digital investments to enhance digital capabilities and improve cybersecurity and Expenses for disruptive initiative at Credicorp level increased 64.3% as some of these initiatives has scaled up. In this context, our efficiency ratio is 2 to 45.1 percent for the 1st 9 months of the year, down 160 basis points year over year driven by positive operating leverage at BCP and Pacifico. Next slide please. This quarter profitability was sustained by solid results in our Universal Banking and insurance business.

Speaker 2

ROE this quarter decreased to a stand at 16.2%. Meanwhile, ROE for the 1st 9 months of the year was 20.8%. All in all, these results are a testament to our resilience and ability to adapt to challenging To exert some caution, we have decided that no additional dividends will be distributed this year. Now before commenting on our perspective for the rest of the year, I would like to briefly discuss current expectations on the magnitude Our outlook contemplated an El Nino phenomenon that was either weak or moderate in intensity. The combined probability of these two scenarios It was 75%.

Speaker 2

Currently, projection from expected experts indicate that the 2 most likely scenarios entail an El Nino that is either moderate or a strong intensity. The combined probability of these two scenarios stands at 96%. Furthermore, the probability of a strong El Nino over the summer has grown by more than 4 fold and currently stand at 49%. 20. It is important to consider that the levels of risk and exposure associated with this phenomenon The share of Credicorp's loan portfolio located in impacted geographies areas stands at 6.2%, The levels of impact will vary across areas and clients.

Speaker 2

We have rolled out multiple measures 1st to mitigate the adverse effects of El Nino on our client businesses and the country in general. In a coordinated effort with Pacifico, BCP and Mibanco, We have proactively developed a communication plan to educate our clients and the population about taking specific predictive measures to mitigate potential damage to homes or businesses. Additionally, we have adjusted our underwriting policies for the most exposed clients in retail banking at BCP and Mibanco. We have also leveraged our extensive network of relationship managers The new under way is expected to generate impact that are strong, not catastrophic, such as that seen in 19 Next slide please. Significantly weaker than The economic performance for Peru coupled with a material change in the outlook for El Nino over the coming summer has triggered changes In the perspective for our business, particularly for cost of risk and consequently ROE, our new estimates are in line with We now expect the full year cost of risk to stand between 2.6% and 2.9%, impacted substantially by provisions related to expected losses caused by El Nino.

Speaker 2

We still expect a consolidated efficiency ratio 20. Between 45% 47% as BCP and Mibanco continue to demonstrate positive operating leverage. 20. Given the aforementioned dynamics, ROE is not likely to stand at around 15.5% for the full year. 20.

Speaker 2

With these comments, I would like to start the Q and A session.

Operator

Thank you. We will now begin the Q and A session. 20 turned off to allow your signal to reach our equipment. We will pause for just a moment to allow everyone the opportunity for 20 speakers. Thank you.

Operator

Our first question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Speaker 3

Hi, good morning. Thank you for the call and taking my question. I guess my question, if I look at the revised guidance of 15 point 25% ROE or roughly for the full year. Just given where you're coming from, Rough math here, that would imply about $700,000,000 in earnings in 4Q, which would be around a 9% ROE, and I assume that's all because of much higher provisions. Just to, I guess, wonder if you can does that math sound correct?

Speaker 3

Is that what What we should expect more or less for 4Q?

Speaker 2

Tito, thank you for the question. I will say that roughly, you are more or less in line. When we talk about 15.5 percent, around is specifically, this is around. But you are correct that the main driver for the Increased profitability of the quarter is the increased provisions due to expected losses by El Nino. And if you compare the 4th quarter with the 3rd quarter, the other I think relevant is the seasonal increase in expenses at BCP that happens all 4 quarters.

Speaker 3

Okay. No, that's very clear. Thanks for clarifying. So I guess my follow-up question would be on the provisioning. How much of this is just You mentioned due to expected losses, but you think a lot of it will be in anticipation.

Speaker 3

Does that mean cost of risk should normalize next year? If so, what would be a normalized level of cost of risk for 2024? And if there's further impacts from El Nino, Could there be additional provisions in next year as well?

Speaker 4

Reynal? Yes, Tito. That will depend on the severity of the El Nino. Today, we have estimated an impact On the Q4, that is very relevant and explains the increase in the cost of risk projected for the whole year. Having said that, if we have a strong Nino, we will probably see an impact in provisions during the 1st semester of next year.

Speaker 4

And then we based on what all we've done in managing the portfolios, both in the SME and consumer market, We should expect a much more stable cost of risk during the 2nd semester of 2024. So we see this as a peak That will depend on the impact of El Nino that, as you know, carries a lot of uncertainty For the degree of the impact that this would have on the economic side of the country in general and specifically in the northern side of the Ocayo.

Speaker 3

Okay. No, that's helpful. And one, I guess, More weather related, I guess. But how long could El Nino go on for? Is there a timeframe where you would then feel comfortable that, okay, you're past The worst, just any thoughts on that?

Speaker 2

Yes. Usually, El Nino occurs during December, January February can extend a little bit more or less than that.

Speaker 3

Okay, perfect. Great. Thank you so much.

Operator

Thank you. The next question is from Ernesto Gabilondo with Bank of America. Please go ahead. 20.

Speaker 5

Thank you. Hi, good morning, Gianfranco, Cesar, Francesca. And good morning, all your team. Thanks for taking my call. My question will be on your ROE expectations for next year.

Speaker 5

I understand you're still running numbers, But considering that you will create an important number of provisions anticipating to this medium to strong El Nino, How should we think about the ROE for next year? Can we expect it to be higher when compared to 2023 levels?

Speaker 2

Hi, Ernesto. As you know, we are going to provide a guidance for 2024 in the next call. By directionally, I would say that 'twenty four, if the impact of El Nino is according to our current expectation, should be We need to really assess the impact at the beginning of the year, so we should expect probably more cautious credit loan origination at the beginning of 2024.

Speaker 5

Okay. Now excellent. So just for my second question, you have said in the past that 20. Management has been doing a lot of important efforts to invest in technology and in the digital transformation. However, if at some point we get it into a medium to strong El Nino, probably you will be thinking Maybe to relay some of these investments to protect the profitability and maybe to return to those investments After getting away from El Nino.

Speaker 5

Are you still thinking about this or you will continue the investment phase?

Speaker 2

I would say that what we did in the past probably is a good reflection of our general strategy. At the beginning of the year, then the expectations of the GDP growth were starting to deteriorate. We adjust the general expenses trend For getting investment in the transformation of the business. So we are going to manage prudently, but we are committed to long term Profitability to build capabilities for the future. So we are going to manage prudently, but we are not contemplating stopping Developing new capabilities, investing the initiatives that are creating new business for the future.

Speaker 2

Perfect.

Speaker 5

Thank you very Yes. Thank you very much, Cesar.

Operator

The next question comes from Jeffrey Elliott with Autonomous. Please go ahead.

Speaker 6

It's another one on the cost Risk outlook. Could you just quantify for us how much of The additional provisioning that you're expecting in Q4 relates to El Nino Looking like it's going to be worse than you were expecting back in August. Just trying to isolate that impact from the impact of the

Speaker 4

It could be severe if we have a strong nino and it also has an impact on the overall economy of the country because there is an important level of sales That allowed channel through the northern businesses. So it has a double impact, as I explained. So I would say, I cannot give you a specific number of the amount of the difference between both numbers, But it's basically seen by those two effects.

Speaker 6

Thank you. And if I could just squeeze another one in, more a Clarification that nothing's changed, but on the sensitivity to lower rates, if you could just quickly give U. S. Dollar rates and peso

Speaker 2

20. Yes. This topic has been Review carefully internally, and now we think it's below than we previously communicated, below 20 basis points for 100 basis points from instantaneous adjustment. So The composition of our portfolio is flexible enough to allow us to converge to a sustainable NIM, Assuming that we can control the effect of reducing rates with a shift in the portfolio mix.

Speaker 6

Okay. Thanks very much.

Operator

The next question is from Thiago Batista with UBS. Please go ahead.

Speaker 7

Yes. Hi, guys. Good morning. My question is about Yassy. When we look in a couple of years for YAPI, what do you believe will be the main source of revenues of YAPI?

Speaker 7

And among the 10,000,000 monthly active users of Yapex, how much of those guys were already busy or in Credicorp?

Speaker 2

Excuse me, could you repeat the first part of your question? Because I had some interference.

Speaker 7

Yes. Not sure if the line is better now. Yes. But when you look in a couple of years, What we believe will be the main source of revenues of YAPI.

Speaker 2

Okay. Great. Very clear.

Speaker 7

And among the 10,000,000 clients of Yate, how much of those guys are already basically your Credicorp clients?

Speaker 2

Okay. So in your first question, we currently expect payments to continue growing as our number one line of revenue, but definitely we're expecting 2 or 3 years lending to become much more relevant. So I would say that around 40% to 50% will continue to be payments revenue, then a third around the lending and the rest will become from the retailer market That's more or less where we're aiming to and what we expect. Of course, that might change a bit. Regarding the second part of the 10,000,000 clients, It's a tough question because there were a lot of so there's like $2,500,000 of those clients that are with the NAI that they opened exclusively an account without being BCP clients.

Speaker 2

But of the ones that We're BCP clients. There's a big group that opened the BCP account to have Yape in the history. So really, It's a mixed number. Definitely a lot of those clients are much more active in JAPE than at BCP. So I know it's half and half of the $10,000,000 I would say that you could attribute to Yape.

Operator

The next question comes from Yuri Fernandes with JPMorgan. Please go ahead.

Speaker 8

Hello, everyone. I have a question on revenues. So far, so good, right? You have margin expanding, So your NII is still pretty healthy. But what is outlook for 2024?

Speaker 8

Because you already mentioned that credit origination It should be lackluster given like a more cautious outlook and makes total sense.

Speaker 4

You have lower rates, 20. Right.

Speaker 8

That should be bad for your sensitivity on margins. And on the fee side, I guess, it's a weaker economy, right? So my question is, What should we expect for revenues NII for the next year? Should we be a little bit more cautious on these also? Like what is the I know you don't have a guidance, But just on a train, what should be the outlook here for revenues?

Speaker 8

Thank you.

Speaker 2

Thank you, Yuri, I think if we have the impact of El Nino as we expect, We should expect a slight increase in revenues. That is the combination of a managed NII and Increasing volumes starting probably in the Q2 of the year. In terms of fees, We still expect an increase in fees driven by the transactional activity that we are developing and increasing through our traditional channels And Yape in particular.

Speaker 8

But you think like loans should accelerate in 2024 versus 20. 2023 or should we remain at those low single digits, just as a more

Speaker 2

I will think in single digits. We still expect next year GDP to be around 2%, no, a booming year.

Speaker 8

Perfect. Super clear. And if I may, just asset quality, To see if I got it correctly, this quarter, the 30Q, you had a very high new NPL formation, higher charge offs. So this was basically the client's payment behavior we're seeing, right? The provisions, everything we saw now.

Speaker 8

And for the 4th Q, The increase you should see on the guidance, this is the El Nino. This is more or less, the delta should be mostly the El Nino, right? So this quarter, Basically, bad macro and for the next quarter, a little bit of bad macro, but also the El Nino, right? Is this correct, like a misunderstanding on asset quality?

Speaker 4

Totally correct. Yes, that's 100% correct. We are ending up the digestion of the bad portfolio we had During the year, but most impact is explained by any as you have mentioned.

Speaker 8

Perfect. Thank you very much guys.

Operator

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

Speaker 9

20. All of my questions would be on asset quality and cost of risk. I'm very surprised to see this Significant jump in Q3, especially on wholesale loans or wholesale NPLs, I should say. Could you comment what do you mean by 22 percent of Credicorp NPL volumes, which were refinanced loans? What are these loans?

Speaker 4

Well, basically, what we have done is there have been 2 specific cases in the 20. Tourism sector and then real estate, commercial real estate without falling in default, which are recognized in the NPLs. But also we are now that the activity is starting to recover in some of those activities on those businesses and We are able to project a cash flow for those businesses. We are refinancing those loans, and that portfolio is included on the NPL ratio. So that's basically why this number has been growing during the year.

Speaker 9

So are you saying that these loans or these borrowers had hit problems and You basically refinance the loans so that they're going to be performing again. I don't quite understand like how Are these borrowers in trouble or is that just an issue of having you extended and Maybe soften some terms so that they can pay on a different schedule. How should I think about the underlying credit quality of these borrowers?

Speaker 4

Yes. Two things about your comment. Those were loans that we were managing in the short term because we were unable to project our cash flow in the long term. Once we extend structurally the final term of the loans, We mark them as refinanced loans, and then we include them in the NPL ratio. And having said that, these are loans that have significant collateral, mostly over 150%, because they are basically hotels and real estate projects, which have guarantees that support extensively the amount of our disposition with those clients.

Speaker 9

Okay. So these at the moment these borrowers are paying, right? They're not in default. They're paying on the As you refinance it, they continue to pay interest and principal. Is that correct?

Speaker 4

Yes. Basically, they were before they were paying only interest. Now they are Starting to pay principal as well.

Speaker 9

Okay. All right. And then Also on the consumer book, my impression my very distinct impression from the last call was that you guys What you communicated actually was that you tightened the credit standards in consumer book. You obviously foresaw this macro You know, macro pain, so to speak, so you tighten the credit standards. I was on the impression that that should help in terms of You know, asset quality, but it doesn't look like that was really what transpired.

Speaker 9

So can you explain why Your reduced risk appetite didn't translate into better credit quality on the consumer book side?

Speaker 4

What we're doing is refocusing on our appetite on those clients that we know better. And that's basically what explains why we are growing in the consumer portfolios. Basically, in times like this, when we don't have 20. GDP growth, we obviously become more conservative in our approach to those plans that we know better. We still do some pilots with the specific segment, but relatively with a much less proportion that what we have done in the previous years.

Speaker 4

That's basically what explains that our strategy today. Yes. Probably may I add something.

Speaker 2

I think what I understand what you are hearing too. Of course, we adjust our credit origination policy and the new vintages are being originated and actually are coming with lower risk profiles. But the already booked loans has soured as is expected. So we have a combination of all books that Are already deteriorating on a higher rate and new vintages that are smaller in size, Higher quality. And the result that you are going to see during the next quarter is a combination of these two dynamics.

Speaker 9

Okay. And then is there any way to so I'm going to put El Nino aside because that's completely unpredictable phenomenon that depends on nature. It's not up to you. I understand all that. But if you looked at your underlying borrower health, so to speak, and kind of a cost of risk trends and NPL trends.

Speaker 9

Again, putting Alina aside for a moment, Are you seeing that we're sort of at the bottom of this cycle or there's more pain and So if it's later, how much more pain are we going to see in here?

Speaker 4

Yes. Our expectations, putting Dan Nino aside, as you mentioned, is that we would 20. The higher cost of risk of those portfolios during this year and during 2024, that will be We will see a we would have seen a decline. Having said that, the Nino is around the corner, so we have to consider that on our projections.

Speaker 9

Okay. So at El Nino, you should see decline in cost of risk in 'twenty four relative to 'twenty three.

Speaker 2

For specific portfolios, I also want to emphasize that we are shifting gradually the portfolio towards a more retail. So the cost of risk for specific portfolios are going to decline, but the long term trend is to shift the portfolio towards a more Retail one that entails higher cost of risk. That's important to consider.

Speaker 9

Yes, yes. No, that's a longer trend. But like in the shorter term, you're going Like maybe that's the question actually like in the shorter term, are you going to maybe pull back on retail a little bit and really Manage risk because I think that's where a lot of pain is going back, right?

Speaker 2

No, there is no change in the strategy. What is an adjustment to react to the current macroeconomic conditions is an adjustment in a specific sector that are more vulnerable, But the long term strategy remains the same, I would say, in general terms.

Speaker 9

Okay. And last question because it's also related. So as of I believe as of Q3, right, you had 3.1% of your loan portfolio, which is these ReActiva loans, right? So they are very They're only they're very thinly covered, right? It's only 17%, I think NPL coverage on that specific segment, Because obviously, they're government backed.

Speaker 9

So if you let's assume you're going to All of them will be paid down by the end of the year. When you grow your retail book From year on year that new originated loans in retail that would have to be covered Up from 17% to probably, I don't know, let's assume 100%. So wouldn't that how much if that's the if I'm describing this dynamic correctly, What would be the incremental delta in the cost of risk that you would see from that specific point?

Speaker 2

I will give you some general comments and after Reynaldo can complement me. First, the Reactiva loan At this point, it's around PEN4 1,000,000,000 only. It's not going to be entirely paid down at the end of the year. The leverage of coverage is significant. The wholesale part is 84%, 91% in retail BCP and 97 20.

Speaker 2

So the risk associated with this is substantially covered by the government and this portfolio It's going to be paid down substantially over the next year, but not at the end of this year. The payment of this year will be around $900,000,000 out of the

Speaker 4

$4,000,000,000 Having said that, I mean, your assumption that these will require higher provisions, It's true, but also we will provide a much higher margin because remember that in the reactiva loans, there were very, very low government funded interest rates that almost only cover operating costs. Back to normal, they will provide a much higher yield on those loans as well. That will compensate the higher provisions you mentioned. Okay.

Speaker 9

Okay. So by the end of the year, only $100,000,000 will be paid down and they will be paid down gradually over next 13 or 16 months or whatever. So and I guess I know that your strategy is Do you think it would be prudent to perhaps emphasize wholesale book more in this next 12 to 16 months? Are you still going to emphasize retail as well? Like, I'm just trying to see how you think about growth in this challenged environment.

Speaker 4

Well, we view this permanently. Today, we see it proper to adjust our underwriting policies on the Specific segments that could be affected in the northern side of Peru and those specific industries like fish meal and agriculture that could be affected, But that's in permanent revisions. I mean, we will see how the NIMO evolves and then we will adjust either further We lost a little bit our underwriting policies as well. It's a permanent process, as you know. Today, we are providing With the best information we have at hand.

Speaker 2

Yes. I think it's worthwhile to remember that this is a cyclical event. We have experienced different levels of a nino each 5, 7 years has been several severe ninos in the past and we have Developed the capacity to manage that. The whole country is not paralyzed by El Nino. During the presentation, we shared some figures relating to the level of direct exposure Our Credicorp portfolio in the northern part is around 6% directly exposed.

Speaker 2

And so the rest of the country has spillover effects, but 1 is working and we expect a modest but a rebound in economic growth next year.

Speaker 9

Okay. All right. That's fine. Thank you.

Operator

The next question comes from Carlos Gomez with HSBC. Please go ahead.

Speaker 10

Hello, good morning. Thank you for the call. I want to ask you again about expenses. At the beginning of the year, you mentioned that your budget for transformation was equivalent to 1.5% of ROE, which We calculated to around $175,000,000 Has that changed? And what is your expectation going

Speaker 2

I think this is more than a budget. This is an appetite and a boundary. And we adjust that according to the dynamics of the underlying business and the specific disruption initiatives. So I will say that this is a rough number. That is a guide for us.

Speaker 2

It's a boundary, but I wouldn't qualify that as on a budget.

Speaker 10

Okay, Pat. I mean, should we understand that you have been adjusting it during the year? And Should we expect more or less in 2024?

Speaker 2

As I mentioned, this is, I would say, an upper limit and And we are going to be operating under this upper limit.

Speaker 7

Okay. Thank you.

Operator

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

Speaker 11

20. My question is regarding your macro assumptions 2024. I believe, as I mentioned, you have in your numbers 2% GDP growth. Is that what you have, the implicit for the cost of risk that you are guiding to This year, it already incorporates this assumption for 2% growth next year. And when I look at the weather pattern that you Showing your presentation on the Slide number 10, which is quite interesting.

Speaker 11

It looks like it's turning increasingly similar to the 1997 event. And based on that experience, Is that the type of growth that you may expect? I remember back then, The economy was growing the year before El Nino. The economy was growing 7% and it came to a decrease of 1%, so a dramatic 20 slowdown. Are you still expecting it makes sense to expect a recovery next year considering that this sort of El Nino can materialize?

Speaker 2

I think it's a very relevant question. We still have an expectation of a 2% GDP growth for 2024 that it considers an impact of El Nino. The Nino considering this GDP growth is moderate to strong, Already considered and still we are considering that the year of reference as It's also good to remember that at the end of the century in 1998, we have A combination of El Nino and the debt crisis, an international debt crisis. So this Significant drop in GDP that we mentioned is a combination, probably a stronger EMEA that is now expected and an international monetary price.

Speaker 11

That's very, very helpful, Cesar. And regarding monetary policy, now that Peru is officially in a recession. Do you see additional space for this and the actual inflation is Sprinting pretty well. Do you see additional space for the Central Bank to cut rate that more aggressively that it has done or you believe that The carry trade will prevent a more aggressive move.

Speaker 2

I think the carry trade is a factor, but another very important one is the Fed funds. Looking only to internal factors, probably the Central Bank will be more aggressive cutting rates, but a combination of El Nino that usually Cap inflationary effects in the short term and the higher for longer guidance from the Fed Suggest that the Central Bank has only limited room to decrease rates until middle of next year.

Speaker 11

Perfect. That's very clear. Thank you so much.

Operator

It appears there are no further questions at this time. I will now turn the call back over to Chief Financial Officer, Mr. Cesar Rios for his closing remarks.

Speaker 2

20. Thank you all for your questions. As discussed, challenging circumstances persist in Peru. Given weak economic performance and higher probability of El Nino, a scenario worsening to moderate to strong in the upcoming 2024 summer season. Nevertheless, we are confident that the preemptive measures that we are taking together with our flexibility to adapt to changing conditions rapidly will allow us to effectively navigate these near term challenges.

Speaker 2

It's important to keep in mind that El Nino is a transitory shock And historically, we have seen the economy rebound after prior El Nino events. We expect to see the same trend again. Prior to closing today's call, I would like to leave you with these 4 key messages. First, Credicorp is resilient and has the ability to 20. We delivered a healthy risk adjusted margin this quarter even as we increased provisions for specific customer segments We've weakened payment capacity given a prolonged regressive and inflationary environment in Peru.

Speaker 2

2nd, We have increased our efforts across different fronts to mitigate the negative impacts of El Nino on the population, our customers and our businesses. Pacifico, Bessepay and Mibanco are promoting preemptive actions to limit damage to homes and businesses through various educational programs. In addition, we have modified our underwriting policies for the most exposed retail segment at BCP and Mibanco. Anticipate the likely financial requirements. Beyond the private sector, the government's capacity to unlock and execute projects will be key to jump start growth.

Speaker 2

There is significant there's a significant package of projects that will be key to jump start growth. There is There are a lot of projects in the pipeline. The global long term trend to transition to a green economy favors copper consumption. As a leading global copper producer with the lowest production cost and the highest copper reserves, Peru stands to benefit from this trend. Thus, It is imperative to accelerate execution of mining projects.

Speaker 2

3rd, the strength of our balance sheet, prudent management and leading franchise built upon top notch transactional capabilities provide solid foundation for us to weather short term challenges. Lastly, We continue to investing into the future. We remain focused on executing our mid term strategy with the goal of decoupling from the macro and securing a healthy long term ROE. We are committed to continue to develop our disruptors to strengthen our competitive modes while further enhancing the efficiency of our core businesses through technological transformation. In closing, we thank you for your continued support and are committed to delivering on our value creation strategy.

Speaker 2

Thank you for joining us in this call. Goodbye.

Operator

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

Remove Ads
Powered by Quartr
Earnings Conference Call
Credicorp Q3 2023
00:00 / 00:00
Remove Ads