Credicorp Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 8, 2023

There are 13 speakers on the call.

Operator

Good morning, everyone. I would like to welcome all of you to the Credicorp Limited First Quarter 2023 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp website. Today's conference call is being recorded. As a reminder, all participants will be in listen only mode.

Operator

There will be an opportunity for you to ask questions at the end of today's presentation. Now, it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Cinquenas. You may begin.

Speaker 1

Thank you and good morning everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer and Cesar Rios, our Chief Financial Officer. Participating in the Q and A session will also be Francesca Raco, Chief Innovation Officer Reynaldo Llosa, Chief Risk Officer Cesar Rivera, Head of Insurance and Pension and Carlos Sotelo, CFO at Mibanco. 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.

Speaker 1

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 start the call discussing our strategic initiatives, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance and provide an update on our outlook for 2023. Gianfranco, please go ahead.

Speaker 2

Thank you, Mr. Alvarez. Good morning, everyone, and good afternoon to those in Europe. Thank you for joining us on today's earnings call. As you all know, the Q1 of the year presented The social unrest at the beginning of the year coupled with the damage and disruption of cycloneyahoo in the north and central parts of Peru impacted GDP growth in the Q1.

Speaker 2

We now expect GDP to grow by 1.8% in 2023. Today, we will discuss the impact that these events had on our business, The actions we took in response as well as our outlook for the full year. Before going to our results, I would like to take a moment To comment on important progress related to our commitment to drive long term stakeholder value and to taking a leadership role in corporate governance in Latin America. We recently held our Annual General Meeting where our shareholders voted to strengthen our governance structure Through the election of 2 new Board members, increasing their knowledge on traditional banking, open finance and digital initiatives under representation of women on our Board to 1 third. This move not only underscores Our commitment to diversity and inclusion, but also our conviction to the importance of balanced representation in decision making.

Speaker 2

Our shareholders also ratified maintaining a majority of independent board members ensuring objective and unbiased guidance. 2022 was also a year of significant progress towards integrating sustainability at the course of our business strategy. As outlined in our recently published 2022 Annual and Sustainability Report, this reporting process We began with implementation of new materiality analysis, which confirmed that our 2020, 2025 strategic goals and initiatives continue to coincide with what our stakeholders consider relevant. The report not only presents our consolidated results, but also emphasizes Credicorp's role as a catalyst for change within the countries where we operate. Finally, we're happy to share That we finish the formulation of our corporate environmental strategy, whose implementation will start this quarter.

Speaker 2

The strategy covers the generation of capacities for the measurement of the carbon footprint of our portfolio, the promotion of transition financing Management of Environmental Risk among others. As we move forward, our commitment to sustainable growth and responsible business practices We'll remain at the center of all we do. Now moving on to the next slide, I will provide an Our results for the quarter Demonstrate the resilience of our businesses and the expertise of our management teams as we navigated a very challenging environment. Additionally, we were pleased to have recently announced a dividend of PEN25 per share after prioritizing the needs of each of our subsidiaries and taking for continued sustainable growth. Our net income grew 18.1% and ROE was 18.7% driven by strong income in Universal Banking and Insurance.

Speaker 2

Our balance sheet is strong and our liability management practices are prudent which positions us well to navigate the current economic environment and pursue initiatives that align with our value creation goals. However, due to the challenging environment in the Q1 and the shift in our loan mix towards higher risk retail customers, We've seen positions and the cost of risk increase as we anticipated, returning to pre pandemic levels. We've tightened origination standards in specific retail segment and adjusted our risk appetite accordingly at Mibanco. While the microfinance business faces some near term challenges, it remains an important long term opportunity for us. Despite these recent events, Peru's macroeconomic fundamentals remain robust.

Speaker 2

The country's debt to GDP ratio is low International results are at an important level. As we move forward, we remain committed to managing risk and leveraging our strengths to drive I noted that we will be giving you an update after the strategic assessment for the Investment Banking and Wealth Management businesses was completed. After 2022 characterized by political uncertainty in the region, deteriorating global macroeconomic dynamics And new industry trends, we've made some important adjustments to the Investment Banking and Wealth Management Business Strategy. Moving forward, our strategy will be focused on profitable and sustainable growth. We have designed a 3 year program that comprises income generating plans, This reorganization of our main lines of business and a rigorous governance methodology to monitor results and make timely adjustments.

Speaker 2

We will focus our growth on the more stable fee generating businesses such as wealth and asset management Along with Capital Markets transactional capabilities for our clients as opposed to volatile Investment Banking and Trading Businesses. Eduardo Montero, Head of Investment Banking and Wealth Management will go into more detail on these strategic adjustments at our Investor Day. Now I'll hand the call to Cesar, who will go into more detail on our operating and financial results as well as the current outlook.

Speaker 3

Thanks, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable operating and financial It is important to note that we are reporting the insurance business under IFRS The indications of the guidance in the P and L have impacted the formula used to calculate our efficiency ratio. Please refer to the release or Appendix 2 of this presentation for more details. We have restated 1st quarter and 2022 figures for comparative purposes in our analysis. As I discuss the highlights of the quarter, I will focus on the year over year results, which are not impacted by seasonality.

Speaker 3

NII grew 28% on the back of solid structural loan dynamics and a competitive funding base. Structural loans rose 9 point 7% measure on average daily balances driven primarily by retail banking at BCP and Mibanco. On asset quality metrics Due to an increasing delinquency driven by negative GDP growth in the Q1, which impacted the full year expectation, Social unrest and climate events, which adversely affected Mibanco's portfolio by weakening payment performance and tightening probabilities of default. Allowances for loan losses were equivalent to 5.6% of the structural loan book. Operating expenses increased 13.5% driven mainly by expenses at BCP and disruptive initiatives, while operating income increased 21% Through BCP and Mibanco in particular, the efficiency ratio improved 296 basis points and stood at 44.3% under IFRS 17.

Speaker 3

Finally, the recent banking crisis in the U. S. Has led financial to focus intently on adequate balance sheet management. We manage our business with sound governance and prudently saproactive I will provide details on some key metrics later on. Next slide please.

Speaker 3

Two main factors contributed to supportive conditions in emerging markets this quarter. 1st, the market expectation that the Fed has reached its terminal rate and second, Economic data from China showing that the loosening of COVID-nineteen restriction has boosted economic growth. Metal prices have remained high. Prices for copper, Peru and Chile's main export product returned to levels around $4 per pound after a brief drop in mid March. Gold, another of Peru's main export products reached its highest levels in August 2020.

Speaker 3

A weaker global dollar Has also supported high commodity prices. In this environment, Latin currencies have appreciated. Next slide please. In the Q1 of 2023, the Peruvian economy contracted around 0.4% year over year After by prolonged social progress, mainly in the south and heavy rains and floods, which hit harvest in the north, These factors mainly impacted non primary sectors via private consumption and private investments. In the primary sector, growth in corporate production from Quellaveco Peru Central Bank has held its policy rate stable over the last 3 months and reaffirmed its commitment Current conditions suggest that ongoing climate events may moderate And we are closely monitoring the possibility of a global El Nino later this year.

Speaker 3

GDP growth in Colombia is expected to slow and stand 1%, while Chile's GDP growth is expected to be 0. Finally, on the regulatory front in Peru, The Ministry of Finance published a regulation to create a minimum venture. It stipulates that funds in accounts that have been reached the minimum retirement balance We'll only be available to affiliates once they have formally retired. Next slide please. Notwithstanding the complicated context, BCP delivered a strong profitability regarding key quarter over quarter metrics.

Speaker 3

NII increased slightly despite a drop in loan volumes. The reduction in volumes reflect seasonality and more importantly, A countrywide downturn in economic activity due to social and climate events. Our NNI system reflects a disciplined approach to pass throughs Our ability to leverage a transactional funding base to mitigate raising funding costs. The aforementioned was partially offset by a drop in fee income After intercity transfers fees were eliminated, transaction levels fell due to adverse local effects and FX transactions dropped As volatility level off, provisions fell quarter over quarter but remain high. This decrease was driven by Wholesale Banking, which registered a drop in credit exposure.

Speaker 3

Expenses fell due to seasonal effects While we continue to invest in business transformation and disruptive initiatives, on a year over year basis, growth in net income was skewed by 40.1% increase in NII, which while bolstered by raising interest rates and 9.7% increase in the structurally loans Measured in average daily balances. Retail Banking grew 14.1% labor consumer, mortgages and SME payments segments, While wholesale banking expanded 5.3% labor working capital loans. The aforementioned growth was partially offset by a 230.6 percent increase in loan loss provisions over a very low base, Driven by Credit Card and Consumer segment, higher provision respond to a deterioration in payment behavior and a downturn in macroeconomic outlook. Operating expenses grew 14.9 percent fueled by growth in administrative and HE expenses and by an uptick in investments in the growth initiatives. Consequently, BCP's efficiency ratio stood at 36.8%, which reflects an improvement of 300 basis points.

Speaker 3

In this context, ROE reached 25.2%. At BCP Bolivia, our risk appetite remains low due to uncertainty on macroeconomic front. Since the beginning of the year, U. S. Dollar reserve in Bolivia Central Bank has dropped materially and banks have daily limits on U.

Speaker 3

S. Dollar withdrawals. Regardless, BCP Bolivia's net income remains stable. Next slide please. Yape continued its journey to monetization and has Launched 6 functionalities in the last 15 months to develop its 3 main ambitions.

Speaker 3

To become Peru's main payment network, Yape now offers top ups, QR, payments, POS and newbies and EasyPay and the local market acquired leading platforms. Check out through the web pages of affiliate establishment and since January a functionality to pay basic services. To Solve Yapero's financial needs, Yapero launched, micro loans in August of last year and to be present in Yapero's daily lives began offering Yapero promos in September. These six functionalities have improved client experience. Over the last year, the number of active users jumped From $5,100,000 to $8,800,000 and the monthly transactions volume rose from $69,000,000 to 160,000,000 The number of clients that generate income hit 3,900,000 in March 2023 and income per active user reached S1.6.

Speaker 3

Our client expenses, which stand at Sol 4.9 Soles per active user per month, still outpaces our revenue. Nonetheless, Yap is well on its way to reaching breakeven in 2024. Next slide please. Mibanco registered a drop in profitability this quarter. On a quarter over quarter basis despite a slide growth of 1.6% in structural loans, NII dropped 3.8% due to funding cost pressures.

Speaker 3

The loan portfolio has been impacted by social unrest and climate events and Mibanco has provided a special credit support to 6.8% of its loan portfolio where the severity of impacts varies by region and risk profiles. Mibanco's provisions reflect the best estimate we can offer at this time with information available. We have been tightening our approach to loan origination, which early adjustments made to the risk appetite in the second half of last year. Operating expenses fell 42% quarter over quarter driven by seasonality. From year over year perspective, net income grew 1.3% driven by a 16.9% increase in structural loans and disciplined pass through of rates.

Speaker 3

This result was offset by higher finding costs. Provision expenses rose 116%, driven by the same factors as those outlined in the quarter over quarter analysis. Operating expenses grew 5.2% year over year fueled mainly by IT expenses. Ratio rose to 54.1 percent, while ROE stood at 3.3%. Mibanco Colombia is facing a number of challenges, high inflation, which drives up costs, high funding costs and recent regulation that will reduce Interest rate caps by a weighted average of 5% and points.

Speaker 3

We believe that the microfinance market in Colombia has untapered potential and are adjusting the strategy to reflect current market conditions. Next slide please. Before explaining Grupo Pacifico's results, it is important to remember That as of the beginning of this year, we are reporting under IFRS 17. Under this standard, reporting items have changed and 2022 numbers have been restated for comparative purposes. The overall impact on net income is not material Please refer to our earnings release and the appendix of this presentation for specifics.

Speaker 3

Now let me explain Grupo Pacifico's results from a year over year Grupo Pacifico registered a significant year over year increase in profitability due to an uptick in insurance and the writing results in the life business An expansion in net financial income, the latter was attributable to growth in interest income and to a base effect associated with bond impairments in the Q1 of 2022. In this context, Grupo In the Life business, the insurance underwriting results improved 133.6 percent driven by an upswing in income from insurance services Through pension and life credit products, the pension segment benefited from higher fees under Cisco 6, while credit life improved via price adjustments Growth in bank Assurance placements, hand in hand with an uptick in loan volumes. These dynamics were partially offset by an increase In reinsurance results mainly via pension products. In the Property and Casualty business, insurance underwriting results fell 30.9%. This decrease was driven by higher expenses for insurance services due to growth in claims Through property and cash flow to risk and car insurance.

Speaker 3

In this context Grupo Pacifico's return on equity stood at unusually high 36.5 percent this quarter. Next slide please. The Investment Banking and Wealth Management business while and by the Wealth Management business through an uptick in assets under management. From a year over year perspective, assets under management dropped 17.7% driven by fund outflows mostly in Chile and by a decrease in the market value of funds. Despite the decrease in assets under management, business income increased 40%, driven mainly by Capital Markets, which reported gains on the proprietary fixed income portfolio in Colombia and by the Wealth Management business.

Speaker 3

As Gianfranco mentioned, This line of business has adjusted its strategy and will focus on fee income generating initiatives that target more stable businesses I'm optimizing the cost base to return to ROE levels in the high teens. Next slide please. Now we will look at Credicorp Consolidating Dynamics. On a quarter over quarter basis, our structural loan fell 0.7% driven by a seasonal contraction in Wholesale Banking at BCP. Core income fell 1.2% fueled by a drop in gains on FX transactions and fees.

Speaker 3

The contraction of the former reflected a decrease In exchange rate volatility in Peru, while the decrease in fees reflected the elimination of intercity transfer fees and a drop in transactional activity in Peru, Net income reported little variation. The net interest margin increased 9 basis points quarter over quarter. NIM reached 5.84 percent risk adjusted NIM increased to 4.54% on a year over year basis. Structural loans grew 9.7% measured in average daily balances, driven primarily by retail banking at BCP and Mibanco. Core income rose 18.8 percent fueled by growth in net interest income, which rose 28.2% on the back of High interest rate and expansion in the structurally loan book.

Speaker 3

In this scenario, NIM grew 136 basis points, while risk adjusted NIM increased 50 basis points. The aforementioned was partially offset by a 4 Let's look at the dynamics of the structurally nonperforming loans. On a quarter over quarter basis, growth in the structurally nonperforming loans was driven by an increase in the overdue loan volumes in wholesale banking, which has already been provisioned given that our models anticipate deterioration. In the impact of social and climate events and macroeconomic deterioration on Mibanco's portfolio where the overdue and refinance portfolio increased and an increase in the non performing loans in retail banking, which was concentrated in the high risk segments and offset by the sale of judicial portfolio and write offs. On a year over year basis, the structurally nonperforming loan volume increased Loans in Retail Banking and Mibanco was driven by the same factors as those seen in the quarterly analysis.

Speaker 3

In this context, the Structural coverage ratio stood at 110%. To analyze our structural coverage ratio, it is important to review the NPL portfolio mix In terms of secure and collateralized products, please refer to Appendix 2 for more details. Next slide please. Regarding provisions and cost of risk, we have consistently informed the market that our cost of risk will increase this year as we return to pre pandemic levels in each segment and shift our loan portfolio mix towards more retail and higher risk, higher yield profiles. Growth in both of these components was driven upward by unforeseen events, namely social upheaval and adverse climate occurrences, both of which contributed to a downturn in the macroeconomic outlook for the year.

Speaker 3

Going to a specific quarter over quarter dynamics, Provision remained high and rose slightly driven by retail banking, which exceeded a downturn in payment behavior in a specific segment and was impacted by new macroeconomic expectations And Mibanco, where social and climate events in Peru weakened climate payment behavior and increased probabilities of default. Those movements were partially offset by lower portfolio exposure in wholesale banking. On a year over year basis, provision increased over a low base at both BCP and Mibanco. Additionally, growth at BCP was led by the consumer and credit card segments after payment behavior deteriorated, particularly among higher risk clients. The uptick Mibanco followed the same pattern outlined in the quarter over quarter analysis.

Speaker 3

These dynamics were partially offset by an improvement in payment behavior in wholesale. In this context, the structural cost of risk stood at 2.1%. We are closely monitoring our asset quality metrics and have implemented guidance for specific segments within consumer, credit cards and SME PIMI and continue to adjust my bank on risk appetite, which began in the Q2 of last year. Next slide please. Operating expenses grew 13.5 Same year over year, driven primarily by core businesses at BCP and disruptive initiatives at the Credicorp level.

Speaker 3

At BCP, Core business costs fueled the uptick in expenses. If we analyze the core business excluding IT, general expenses increased after debit and credit card use rose, which led to an uptick in expenses for Fidelity program and to manage operating volumes. In terms of IT expenses, the increase was driven by cloud use as we software development to increase transactional and service capabilities. We have also attracted more specialized Do it year over year to ensure that we continue to lead the market in the long term. Operating leverage remained strong at BCP Standalone.

Speaker 3

Operating expenses on Mibanco remain under control by global slightly outpaced the expansion of registered for Inc. Efficiency ratio at the Credicorp level has been impacted by the application of IFRS 1722 Figures have been restated for comparative purposes. Our efficiency ratio stood at 44 point 3% this quarter, down 296 basis points compared to last year and driven by higher income at TCP and Pacifico. Next slide please. Now let's look at the structural balance sheet risk management framework.

Speaker 3

At Credicorp, we manage these risks through We performed annual stress testing to assure that we operate with a solid capital base. We closely monitor a variety of liquidity indicators. It is important to note that internal LCRs apply more stringent criteria than that required by the regulator. We actively manage the duration of assets and liabilities and monitor duration behaviors at DCP. The duration Our asset portfolio in Soles is around 2 years, very close to the duration behavior registered by our liability portfolio.

Speaker 3

The duration of liabilities in dollars, however, is longer than that of assets as a matter of prudence. To manage We maintain financial margins and economic value sensitivities within the limits established by stress simulations. Our balance sheet manages dual currencies and we hedge FX positions daily to maintain targeted GAAPs. We maintain a high quality investment portfolio, which is liquid and contains a high proportion of Central Bank and Sovereign instruments. For liquidity and liabilities indicators, in some indicators, we focus on BCP's standalone balance sheet as it concentrates materiality, 6% of assets, 70% of total liabilities.

Speaker 3

Mibanco, BCP Bolivia and ASB have a smaller and less complex balance sheets Pacifico has by design a structurally closed match books and adjustments are captured in IFRS 17. Next slide please. 1st, quarter profitability was fueled by better results as Universal 70 basis points year over year to stand at 18.7%. All in all, these results are a testament to our Now I will move on to the outlook. We maintained our 2023 outlook.

Speaker 3

However, given the implementation of IFRS 17, we are restating our efficiency Regarding GDP growth, our current estimate stands at 1.8%. Our structural loan portfolio measures in average daily balances continue to register growth. We expect expansion to stand above the lower end of our We expect NIM to stand within guidance. Regarding cost of risk, we now expect 2023 figures will closer to upper end of the range due to the impact of social unrest and weather events in the Q1. Our efficiency ratio calculation is being restated to reflect changes to Credicorp's P and L lines under IFRS 17.

Speaker 3

Accordingly, Previous range is equivalent to a 47%, 49% range under the new IFRS 17 efficiency ratio and we reaffirm this range. Finally, we still expect ROE to stand around 17.5%. With these comments, I would like to start the Q and A session.

Operator

We will now begin the Q and A session. Please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause for just a moment to allow everyone the opportunity for questions. We also ask that you please only ask one question at a time. After each question has been addressed by our speakers, You will then be allowed to ask as many follow ups as needed.

Speaker 4

Thank you.

Operator

Our first question is from Ernesto Gabilondo with Bank of America. Please go ahead.

Speaker 5

Thank you. Hi, good morning, Gianfranco and Cesar, and good morning, everybody. Congratulations in your Q1 results despite the headwinds of the social unrest and the weather conditions in Peru. So my first question will be on the political and economic outlook. How do you think about a lower probability for Peru To celebrate early elections in April 2024, which do you think would be The implications for the economy and for your business and also related to the economy, how do you see the threats Of the potential formation of El Nino.

Speaker 2

Yes. Good morning, Ernesto. Thank you for your words. That's a tricky question. So I will go with what our base case scenario is.

Speaker 2

As another part because of legislation is basically impossible to have elections By next year, by April of next year because of the time schedule you would need. Having said that, our base case scenario is that the Current government will finish its mandate, its constitutional mandate, which is by 2026. That's our base case scenario. Again, tricky question. You know how the political environment changes can change in Peru.

Speaker 2

Because of that, we believe we strongly believe that Peru is today in a much better position than it was 6 months Remember that 6 months ago was early November, we had a disastrous government at that time. Today, the new administration is even though they've maintained their political vision, They are much more professional and they're working on promoting Private investment. And that's not only at the central government level, but also the regional government level. As you may recall, the regional governments It changed at the beginning of this year and that happens every year there's a change in regional government. The investment the public investment in those regions A little bit slow at the beginning.

Speaker 2

So again, on the political side, we on top of the political Stability or tranquility we see today, we do believe that there's a much better environment today. So we expect private investment to pick up a little bit by in the rest of the year. Regarding the El Nino effect, still I would say it's too soon to tell. We're monitoring The NIMO reports, both international reports and local reports, so as to Evaluate what can be done. We're working with our clients both on the corporate side and also on the retail and microfinance side Trying to help them and educate them in how to reduce the potential impact they may have in their core businesses.

Speaker 5

Excellent, Gianfranco. Thank you very much. Just a second question on your ROE guidance. So You are maintaining the 17.5% for the year. However, well, the Q1 came almost at 19%.

Speaker 5

So Just wondering if your new guidance is conservative or do you see some risks ahead?

Speaker 2

Yes. Well, actually the reason the ones you just mentioned, we still have a question mark regarding El Nino Even though political the political environment is more stable today, again, it's not that we have a very strong government And we can play a longer provide a longer term vision. Recall that we our guidance is at around 17.5 percent, it's not 17.5 percent on the spot. So that's the reason we're maintaining it. I will first mention that the insurance business provided exceptional ROE this quarter.

Speaker 2

We don't expect That ROE to keep that ROE going forward, we expect the insurance business To go back to what ROEs we had we posted last year.

Speaker 3

It's probably it may add a couple of technical details. As you remember, we have seasonally a low level of expenses at BCP during the Q1. It happens every year and this is impacting our results. As Gianfranco mentioned, we have at Pacifico and an exceptionally good quarter.

Operator

The next question is from Renee Perez with Scotiabank. Please go ahead.

Speaker 4

Hello, good morning and congratulations everyone. Can you hear me?

Speaker 2

Yes, perfect. Good morning, Renee. Yes.

Speaker 4

So we wanted to ask on the effective tax rate. So moving forward, How should we think about this line? And should it remain at levels that we saw during this quarter? Thank you.

Speaker 3

Yes. I think it's the composition of our income this quarter that explain this, I will say low tax rate and is the relative importance of investments at BCP that has some advantages And the relative weight of the profits of Pacifico that also has a lower tax rate. This I will say not usual proportion of Main sources of income has decreased our tax rate during the quarter.

Speaker 4

Very helpful. Thank you, guys.

Operator

The next question is from Olavo Artuso with UBS. Please go ahead.

Speaker 6

Hi, good morning, good bye. Thanks for taking my question. Actually, I have just 2 very quick questions straightforward. The first one is related to the insurance results because I just wanted to understand If we could like to see these levels reported in the 1st Q as sustainable that we could consider for the following quarters. And my second question is related to the pay automation of the bank.

Speaker 6

If we could what could we expect Along this year and if you could also add for the next year a potential indications, it will be very helpful. Thank you very much.

Speaker 2

Good morning, Allava. We got your first question. I'll try to answer it and then I'll ask you to repeat the second question because It wasn't very clear. We didn't get it very clear because of the communications. As I mentioned, we don't expect the insurance business To report similar ROE results going forward, We can go into the details why we have had such higher ROEs this quarter.

Speaker 2

Having said that, We expect the insurance business to keep the ROEs we posted last year, which was in the High teens, low 20s. So we do believe that because of what we've been pursuing as a strategy in the insurance business, Focusing much more on retail on retail insurance, specifically on bank assurance, we expect that that ROEs of High teens, low 20s, it's sustainable going forward. If I answer your question, could you repeat the second one, please?

Speaker 6

Yes, Lance. That was very helpful. Sorry, I believe that you guys can hear me now. So my next question, my second question would be related The payout ratio because I just wanted to understand for the following quarters and For the next year, the Steel Dynamics for the Tier one ratio close to 11% And the ROE required on your guidance. I just wanted to understand what could we expect here for digital distribution this year?

Speaker 6

And also if you could add to this, the expectations for dividends for the next year, this would also be helpful.

Speaker 2

Sure. I'll ask Cesar to answer the specific question. Just a quick reminder, The policy we follow regarding dividends is we retain what is out of profits. We retain whatever is needed To capitalize specifically the banks so as to finance or fund from a capital standpoint, fund our Growth our expected growth for the upcoming years plus if we see any inorganic opportunities growth opportunities. That's correct.

Speaker 2

The philosophy we follow in general terms, I'll ask Cesar to compliment me.

Speaker 3

Yes. Actually, I couldn't add too much on that. And if you make very simple calculation thinking an ROE of 17.5%, the portfolio growing probably at Half of that, we can think in the short term as a result of that and not considering any potential acquisition, Probably 50 some payout ratio, but totally subject to the basic conditions that Gianfranco stated previously.

Speaker 2

Yes. I think I just want

Speaker 6

to confirm the calculation. Thank you very much guys.

Speaker 2

Welcome.

Operator

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

Speaker 7

Hello. Thanks very much for Taking the question. I just wanted to clarify on the loan growth guide because the Earnings release says single digits in the 4th quarter, it's at high single digit, now it's at single digit for structural loan growth. But the slides continue to say 6% to 10%. So which of those 2 Is it and then what has driven the tweak in the release?

Speaker 3

Thank you. Yes, probably a some clarification in the expression, but the concept is similar between 6% 10% with information that we have Now we are thinking in above the minimum, probably not at the maximum due to the events and the Q1 that already have impacted The size of the wholesale portfolio and guided us to be a little bit more cautious regarding growth in retail segments.

Speaker 7

Got it. Thanks very much.

Speaker 2

The

Speaker 8

question is on asset quality. We saw structural NPLs up slightly in the quarter. Do you expect further deterioration given the recent social and climate challenges in Peru? Or can asset quality remain mostly stable? And then just with that, we saw the cost of risk at 2% at the high end of the guidance.

Speaker 8

And you mentioned that for the full year, it can be customers can be at the high end, but do you think it could be a little bit higher in the coming quarters? And is it possible It could be above that range. Thank you.

Speaker 2

Good morning, Nicolas. I'll ask Reynaldo to answer that question.

Speaker 9

Yes. Hi, Nicolas. In terms of the NPL performance, we see some stability on the number. As As I was explaining, most of the increase in this quarter was due to another specific case In Wholesale Banking, so I would say that number should remain stable during the rest of the year, even if you decline a little bit. And in terms of the cost of risk, it is hard to tell right now, but our guidance is On the higher end of the number, we don't expect to go somewhat Larger than the 2% that is already precise on the presentation.

Speaker 8

Okay, great. Thank you. And then just on the efficiency ratio, we saw 44.3% in the Q1, well below the range. Think it's possible that efficiency ratio can be below your guidance range or if not what should lead to that ratio

Speaker 3

Nicolas, I think the 44.3% is driven mainly by seasonal effects that happens every year at DCP, As I mentioned previously, and the exceptionally good results are Pacifico. We maintain the guidance at the most likely scenario For the whole year.

Speaker 8

Great. Thank you very much.

Operator

The next question is from tashkira Mahesh with White Oak Capital. Please go ahead.

Speaker 10

Hi, thanks for taking my question. I have two questions. 1 on the comment you mentioned that the situation right now at Peru is Much better than 6 months ago. So could you remind us in terms of how many of your branches were affected back then and how many of them are Back in operations, is there any still logistics issues you're facing in terms of your operations?

Speaker 2

Sure. So maybe I'll answer the last part of the question first. All of our branches are normally operating today, Both at Mibanco or at DCP. I would say that in Puno, which is The most affected region in Peru where Mibanco has a relevant presence, we might be operating at, I don't know, 70%, 75% Of our capacity, so based and that's from a Credicorp standpoint is totally marginal, the effect. At the worst moment of the political and social unrest, about 25% of the branches at Mibanco We're shut down or operating on an hourly basis and something similar at DCP again in the Southern part.

Speaker 2

But today, we're still operating at normal activity whatsoever.

Speaker 10

Thank you. My second question is on a bit more data around Yape. So you outlined the Achievements Yape has done in payments and the new product launches that you have in mind. Could you also disclose Tell us what sort of market share in the payment system would Yate be having in Peru?

Speaker 2

Yes. Great question. You have to define what the payment market is in Peru because still, I would say 85% to 90% Payments in Peru are done retail payments in Peru are done in cash. So as of that huge market, Yape's penetration is still small. That's why we see a lot of potential.

Speaker 2

If you go back to More specific market which is the digital wallet market, there is no there are no official figures, But our calculations are that Yapa represents around 75% to 80% of that market.

Speaker 4

With the in

Speaker 10

the POS segment and the online checkout segment, How would it be? And that's my last question. Thank you.

Speaker 2

Yes. So on The POS, it's a relative small participation, Yape, even though it's growing At least double digits. However, I'll take advantage of your questions And invite you to the Investor Day in New York. We'll have a specific presentation on Yape and a lot of information, Actually more information than the one you're asking. So that would be a great opportunity to share more specifics on Yate.

Speaker 10

Looking forward to it. Thank you so much and congratulations on the quarter.

Operator

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

Speaker 11

Yes. Hi, good morning and thank you for the call. Yes, following up on Yape and the disruptive initiatives, I mean, when we look at expenses, The disruption expenses doubled year over year. And last quarter, you mentioned Tempo in Chile as one of the sources of that growth. Can you comment on Tempo and what's your road to profitability there given that you mentioned that Yape is on track to be breakeven by next year?

Speaker 2

Yes. So I would say Tempo is maybe after Yape, the largest disruptive initiative we have in terms of On vision and also on budget, the path I should share the next initiatives we're having at Tempo, but the path to profitability is by adding features to the Yes. Features to the value prop, yes, Tempo has in Chile and the first one the first relevant one should be launched by the Q3 of this year. So you have to bear in mind that Tempo was launched after Yape. So it's a relatively younger initiative.

Speaker 2

Plus in Chile, we don't have the muscle we have In Peru through DCP. So as we speak, we're what happened with Tempur results, But it's still again, these are in a less mature stage. And unfortunately, I cannot share the next launches For this year.

Speaker 11

Okay. Thank you, Francois. Is Stenco already generating revenue? Just to get a

Speaker 2

Yes, sure. It is generating revenue. Actually, it started just generating revenue before Yape. Obviously, it's still cash flow narrative.

Speaker 11

Okay. Thank

Operator

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

Speaker 12

Good morning and thank you for your presentation and the opportunity to ask questions. My first question is regarding the microfinance business. This quarter, you posted a weak ROE. How long do you think it's going to take for the operation in Peru to Return to more closer to historical profitability levels. And when you look at your Colombia operations For microfinance, I remember in the past you considered the possibility of making further acquisitions in order to increase the scale.

Speaker 12

Given the challenges now in terms of wealth funding and regulatory environment, are you still thinking as this as a good

Speaker 9

Yes, sure.

Speaker 2

Two questions and two answers to those questions. The first answer is on a more longer term vision. We're very happy with the results of the microfinance business, We've just calculated our the ROE for the last over 10 years actually. And it's over 21%, I believe. So quite happy with those results.

Speaker 2

And we strongly believe and Keep believing that we have a competitive advantage not only in Peru, but that the model is exportable to all parts of LatAm. Regarding Peru, yes, we have had a very bad Q1. We expect because of the social unrest sorry, the social unrest impacted heavily Mibanco, We expect that next quarters to pick up in terms of ROE. So the year should be much better than what we've seen In the Q1. Regarding Colombia, Colombia today is a very as you mentioned complicated environment.

Speaker 2

Rates on deposits have gone up. Rate caps in general have gone down. So margins are much slimmer today and we are basically in a wait and see position today in Colombia, Not only I would say not only regarding the potential acquisitions, but also in slowing down our growth. On a longer term vision, we're still positive on what can be done in Colombia, but obviously the Current environment is not a positive one to be as active as we've been in the past.

Speaker 12

Thank you, Gianfranco. And talking about the Investment Banking and Wealth Management business, you said you expect with these 3 year plans to attain To our high end high teens, sorry, type of ROE. What is needed To reach that level, is it a matter of scale and will you consider making acquisitions in this segment Or it's a matter of efficiency and on the contrary you are planning to scale back certain part of the business? And if I add just One point to that question. If you can remind us what is in the past, you had at the holding level, You have a rainy day fund, which you may have considered for doing M and A.

Speaker 12

If you can update us on what is the number that you are seeing after paying dividends for the holding company? Thank you.

Speaker 2

Yes. So regarding the investment banking and wealth management will be a lot of material will be Much more specific on the Investor Day, but basically going to your question is both actually. So we've seen some businesses Which we have no competitive advantage and the cost to income or the efficiency ratios on those business are Way off the mark. And so the idea is to focus on the more stable Businesses and where we have competitive advantages in the markets where we play. And in that sense, we will be Active not only in making more efficient and more successful our businesses, but also in looking for inorganic growth.

Speaker 2

And obviously, we will pull out of some of other businesses in order to reduce operating costs And on top of that and maybe more important, complexity. We built a company expecting Tailwinds in the region and actually what we expect in the upcoming years is headwinds. So we have to adapt. Regarding the fund, today we are rebuilding that fund after paying dividends, the dividend that we mentioned at beginning of the call, we will still have around $200,000,000 At the corporate level?

Speaker 3

Net position.

Speaker 2

Yes, net position. That's a good point. Because remember that we have Around $500,000,000 in debt issued at Credicorp. We issued that during the COVID, during the pandemic, but that's Basically squared with short term investments.

Speaker 12

That's very clear. Thank you, John.

Operator

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.

Speaker 2

Thank you and thank you all for your questions. I'll begin my comments by noting the difficult environment we've been navigating in Peru, marked by the waves of social unrest in the south and the adverse weather events in the northern and central coastal areas. I'd like to give you a better understanding of how we remain close to our clients and support our communities during difficult times. We have not only contacted our clients We evaluate impact and offer suitable financial relief alternatives, but also provided help through donations to the affected region. As of the end of March, BCP and Mibanco had granted payment relief to almost 60,000 clients.

Speaker 2

Furthermore, our businesses contributed to the affected regions through donations and our employees participated in volunteer programs to bring emergency kids and non perishable food to vulnerable families. Our work on this front is not done as we foresee Continued uncertainty ahead on the political and climate fronts. Despite this, political risks have clearly diminished and Peru's macroeconomic landscape has improved compared to 6 months ago. In this context, Credicorp is well positioned to capture and create value for all our stakeholders based on the significant opportunities ahead. Our dedication to financial inclusion and education, essential elements in poverty reduction remains firm, supported by the solid fundamentals of our country.

Speaker 2

We're committed to investing in digital transformation, Promoting innovation and attracting and developing talent to fulfill our long term promise. As we pursue these goals, We'll be prudent in managing risk and controlling our spending. We'll closely monitor our targeted efficiency ratio and ROE to ensure that we achieve our financial objectives. By striking a balance between innovation and financial discipline, We'll be well positioned to deliver sustainable growth and value to our shareholders over the long term. Again, thank you for your trust in us and we look forward to seeing many of you in New York on June 20.

Speaker 2

Goodbye.

Operator

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

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Earnings Conference Call
Credicorp Q1 2023
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