Credicorp Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 11, 2023

There are 15 speakers on the call.

Operator

Good morning, and welcome to the Credicorp Second Quarter 2023 Conference Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Milagro Sironia.

Operator

Please go ahead.

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 Raffo, Chief Innovation Officer Reynaldo Llosa, Chief Risk Officer Cesar Rivera, Head of Insurance and Pension and Carlos Otelo, CFO at Miban. And Diego Cabero, CEO or Head of Universal Banking. Before we proceed, I would like to make the following Safe Harbor statement.

Speaker 1

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 to 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 commenting on the highlights of our strategy, followed by Cesar Rios, who will comment on the macro environment in which we work our financial performance and provide an update of our outlook for 2023. Gianfranco, please go ahead.

Speaker 2

Thank you, Milagroff. Good morning, everyone. Thanks to all of you who are able to join us during our June 20 Investor Day, Well, you heard directly from our leadership team on the progress of our businesses. It was also a highly valuable opportunity for us to hear from you. I'd like to take a few moments before discussing our Q2 results to recap some of the key takeaways.

Speaker 2

First, we're taking a disciplined approach to investing in businesses that we expect will begin in the midterm to further decouple Our performance from that of the macro context. 2 undertakings include expanding the share of retail business across our portfolio as well as increasing our non interest income through adjacent businesses. While generally, our disruptive initiatives have a long term Orientation, Yape stands out as a venture that plays a pivotal role in this strategy in the shorter term. It has already shown very promising results with income approaching cash cost and is on track to reach breakeven by 2024. Thus, we intend to further invest in expansion as well as in other disruptive initiatives with the potential to generate value across our businesses.

Speaker 2

We heard our request your request to provide more information on Yape's trajectory and have increased our disclosure on the business. Our goal is to provide you with meaningful updates as Yate continues to evolve. 2nd, while we're proud to be the market leader, we don't take that position for granted. We're strengthening our competitive modes by becoming increasingly digital and harnessing the power of data. Our top priority is and will continue to be attracting and retaining the best talent so that we maintain our competitive edge.

Speaker 2

Finally, we're committed to enhancing our governance and transparency While continuing to pursue social impact initiatives, we aim to exert a progressively greater influence Now let's turn to this quarter's results. While the political scenario in the 2nd quarter improved, The impact from the social unrest, the disruption from cyclone Yacu as well as the added effects The Costa El Nino resulted in a stagnant first half of the year in Peru. Despite this backdrop, Credicorp turned in favorable results this quarter. Net income expanded 22.6% Year on year with ROE for the quarter at 18.6%, driven by strong results in the Universal Banking and insurance businesses as well as a modest recovery in microfinance business. Low volumes, however, experienced a slight drop as we manage on the retail side, and wholesale demand showed reflecting We continued our market leadership in capturing these deposits, thanks to our long term standing client relationship, Trusted brand and extensive reach.

Speaker 2

Our strong balance sheet provides us sustained resilience to navigate the current weak macro backdrop as we continue to execute our value creation strategy. Cost of risk has increased primarily due to SME, PIME and the most vulnerable subsegments in individuals. Mibanco's cost of risk is still high, but this diminished this quarter. This evolution reflects the impact of an environment of lower internal demand, high inflation and high interest rates on payment capacity of clients. We have strengthened credit risk management and remain focused on maintaining stringent organizational standards and disciplined low pricing.

Speaker 2

Our disruption initiatives continue to gain traction during the quarter, During the inclusion of a growing number of Peruvians. Nonetheless, having registered strong income at BCP and Pacifico For the quarter, we have managed our cost to income ratio. Regarding macro perspectives for this year, Cesar will elaborate further, but social and climate events resulted in a tougher first half than we expected. At this time, our GDP growth forecast for 2023 is 1%, even though we foresee a rebound of around 2% growth in the second half, driven by stimulus measures taken by the government. During the second half second quarter, Sea surface temperature anomalies associated with El Nino Costero motivated the cancellation of the industrial anchovy fishing session and also impacted the agricultural sector.

Speaker 2

El Nino costero phenomenon is expected to continue until the summer of 2024 As a consequence of the high probability of development of El Nino and El Pacifico Central. For the summer of 2024, The highest probability scenario today is that El Nino Costero will have a weak to moderate magnitude. As the situation unfolds, we will keep you up to date on the experts' outlook and its potential impact on our businesses. It is important to remember That Peru's macroeconomic fundamentals remain strong. After NeoPostero transitory shock, Peru will be in a favorable position Converged to Latin America average income per capital level.

Speaker 2

The speed of catch up will depend on Peru's ability to promote and unlock private investment, which It has been the most important growth driver in the past. Thank you. And let me now turn the call over to Cesar.

Speaker 3

Thanks, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered favorable overall financial results. I will start with a brief comment on quarter over quarter dynamics, but we'll focus on the year over year evolution. On On a sequential basis, a structural loan growth in retail banking at BCP and Mibanco was offset by a contraction in wholesale banking. On the funding side, the deposit mix continues shifting towards higher yield deposits.

Speaker 3

Low cost deposits fell across the system and at Credicorp. Nonetheless, We maintain our indisputable leadership position in this funding source with 41% market share. Asset quality metrics deteriorated, reflecting the impact of challenging macro dynamics in the first half of the year. From a year over year perspective, NII grew 21.5%, driven by raising interest rates and the structural loan dynamics And partially offset by higher funding costs. Structural loans rose 5.5%, measuring average daily balance Fueled primarily by retail banking at BCP and Mibanco.

Speaker 3

We are managing our asset quality metrics with a challenging backdrop. The structural cost of risk increased 127 basis points to 2.3%, driven mainly by SME premium individuals At BCP and Baimibanco, allowances for loan losses were equivalent to 5.7% of the The insurance and the right results rose 53%, which reflected increased profitability in the Life business and a stable year over year result for Property and Casualty. Operating expenses increased 9.1%, Driven mainly by core expenses at BCP and disruptive initiatives, while operating income increased 16.6% fueled By BCP and Pacifico, the efficiency ratio improved 310 basis points and stood at 44.6%. In summary, this quarter positive results and an ROE of 18.6 percent over a Sound capital base was driven mainly by Universal Banking and Insurance Businesses. Having said this, A note of caution is in order.

Speaker 3

As I will explain when I present our updated guidance, we expect softer results in the second half of the year. Next slide please. For the Q2, the Peruvian economy is expected to have registered a slight contraction impacted by El Nino Hosteo, which pushed growth rates in the agricultural, fishing and manufacturing sectors into negative Growth in the mining sector attributable to increased copper production at Quellaveco and the recovery of production at Las Bambas After temporary shoot launched last year partially offset this decline. These dynamics coupled with the impact of the Q1 marked by Social unrest and climate events could lead to a 0.5% decline year over year in economic activity in the 1st semester of 2023. This represents the most significant reported decline in 22 years excluding the pandemic period.

Speaker 3

Domestic demand fell 2% year over year in the first half of twenty twenty three, driven by a sharp 10% decline in private investment And on a sluggish 0.6% growth in private consumption. Price pressures are finally easing and inflation expectations have Central Banks in Chile and Brazil have already started the rate cutting cycles And Peru Central Bank is expected to follow suit in the last quarter of this year. Regarding our outlook, Peru GDP is expected to grow around 1% this year. GDP growth in Colombia is expected to slow to 1.6 percent while Chile GDP growth is expected to be flat. As you know, we are closely monitoring the evolution of El Nino Costero weather phenomenon And it's impacting our businesses.

Speaker 3

In its last official statement on July 21, 10 assigned a 40% probability That El Nino Costero will be weak during the summer of 2024, 36%, it will moderate and 11% that it will be strong. In her last speech of July 28, President Buluarte communicated the importance of private investment As a tool for economic growth and development, moving apart from the previous government stands, she announced for instance That $1,800,000,000 worth of infrastructure projects will be awarded in the 2nd semester Through Pro Inversion, the investment promotion agency. Peru's macroeconomic fundamentals remain robust With low public debt and net international reserves equivalent to 33% of GDP and 29%, respectively, This government's ability to unlock and mobilize private and public investments will be key moving forward. Next slide please. BCP results were favorable despite this context.

Speaker 3

Regarding the key quarter dynamics, NII increased 0.9% despite a slight 1% drop in loan volumes. This drop reflects a downturn in economic primarily in wholesale banking and more conservative origination guidance in retail. Our NII Reflects a disciplined approach to pass throughs and our ability to leverage a transactional funding base to mitigate Raising funding costs, BCP fee income rose on the back of higher transactional levels, particularly through digital channels and POS. Provisions in consumer loans and credit cards remained at high levels as a recessive high inflation environment in the first half of the year Affected the payment capacity of vulnerable subsegments, which are more leveraged and have unstable jobs. Additionally, SME P and E segments drove the uptick in provisions.

Speaker 3

On a year over year basis, growth in net income was by a 29.6% increase in NII. This evolution was driven by raising interest rates and 5.2% increase in loans, which was driven primarily by a 10.9% uptick in retail banking loans through SME payment credit card and mortgages. Loan loss provisions increased 177.8 percent over a low base. Additionally, Growth was driven by an increase in provisions on consumer loans, credit cards and SME payment, which were affected by macroeconomic conditions. Operating expenses grew 8.3%, driven mainly by IT and marketing expenses and investment in disruptive initiatives.

Speaker 3

This increase was partially offset by a nonrecurring tax expense reversal. Consequently, BCP's efficiency ratio dropped 4 20 basis points and stood at 37% while ROE reached 24.2%. At BCP Bolivia, our risk appetite remains low. Since the beginning of this year, U. S.

Speaker 3

Dollar reserves in Bolivia Central has dropped materially and banks have daily limits in U. S. Withdrawals regardless BCP Bolivia and Echinco remains stable. Next slide, please. Yape continues to progress towards monetization by pursuing its medium term targets.

Speaker 3

1, to 2nd, be present in the daily life of Yaperos and finally, meet the financial needs of Yaperos. Features launched in the last 18 months has allowed Yape to continuously grow its active use base, engagement and income generation. Monthly active users reached the 9,000,000 mark at the average Monter transaction level for this group has risen from 14.9 To 23.5 in just one year. Currently, 5,200,000 users generate income. Our main monetization drivers continue to bear fruit.

Speaker 3

In the past 6 months, monthly mobile top up transactions grew 20% To total $11,000,000 transactions at the end of June, in just 3 months, utilities payments have grown 4.8 times And stand at the end of June and 2,200,000 transactions. Through Yape Promos, the gross merchant volume grew 4.8 times to and 25,000,000 soles at the end of June. Notably, in the last 6 months, monthly disbursements of micro loans rose 18%. In the aforementioned context, unit economics are moving towards breakeven. The revenue per active user per month is growing and stand at PEN2.5 while the cash cost per active user per month stood at PEN4.4 at the end of June.

Speaker 3

Next slide please. Mibanco's profitability began to recover this quarter after Challenging start early this year. On a quarter over quarter basis, net interest income rose 4.6% After a structural loan disbursement recovered from a difficult Q1, disciplined loan pricing bolstered PII And offset the impact of an uptick in the funding cost. Consequently, NIM increased 80 basis points and stood at 13.5 Other income rose 3.5% after the bancassurance fee level rose alongside growth in disbursements. Mibanco's provision expense dropped slightly after risk models were fine tuned to better reflect client payment behavior, but remain high due to a deterioration in payment capacity.

Speaker 3

From year over year perspective, NII rose 1% to an uptick Structural loans and interest rate pass through, which mitigated the impact of raising funding costs. Non interest income rose 26.6% Due to the same factors are those outlined in the quarter over quarter and outlook. Mibanos' provision rose Fueled by a downturn in payment performance and a more challenging macroeconomic outlook. Operating expenses rose 5.9 And the efficiency ratio stands at 52.4%. Finally, ROE rebounded to 9.5 in the quarter.

Speaker 3

Mibanco Colombia is facing high inflation, high funding costs, lower interest rate ceilings And a deterioration in economic expectations. We have adopted our strategy accordingly and we believe that Take potential exists in the Colombian microfinance market. Next slide please. ROE at Grupo Pacifico Was high this quarter and stood at 32.1% driven by the Life business. Regarding quarter over quarter dynamics, net income deteriorated on the back of a lower net gain from associates.

Speaker 3

This evolution reflected a downturn result For Corporate Health Insurance over a particularly high base last quarter, year over year profitability was up driven primarily By the Life business and secondarily by Property and Casual. In the Life business, the insurance underwriting results improved Due to an upswing in income from insurance service through Pensions Life Group and Credit Life, which benefited from In the Property and Casualty business, the insurance underwriting results rose 5.1% through an improvement in medical assistance results, which was partially By a downturn in the result for Cars. Next slide please. As you know, Our strategy is to focus on recurring businesses to improve ROE in the medium term. Nonetheless, the uptick in profitability in recent quarters Has mainly been driven by nonrecurring income.

Speaker 3

On a quarter over quarter basis, income was boosted primarily by the Treasury Department Managed ASV cash surplus via structurally portfolios and short term investments. In terms of recurring businesses, Assets under management, wealth management grew 4.2% and dropped income growth, while the assets under management level in the asset management business Remain stable. Year over year, income increased 32%, driven mainly by the Capital Markets Business, Which reported gains on the proprietary fixed income portfolio in Colombia and by the Treasury Department, we generated earnings We have the same dynamics seen quarter over quarter. Regarding recurring businesses, Wealth Management, assets under management grew 9% And drove income growth, while assets under management, ALMS contracted 17% driven by outflows in third party funds and income Now we will look at Credicorp's consolidated dynamics. On a quarter over quarter basis, Our restructuring loans measured in average daily balances fell 0.6% or increased 0.2% with FX neutral.

Speaker 3

Growth in BCP Retail Banking on Mibanco was offset by a contraction in Wholesale Banking at BCP. Our deposit base constructed 3.5% or 1.8% with FX neutral. This evolution was driven by a drop in low cost deposit, which was partially offset by growth in time deposits. On an structural year basis, structural loans increased 5.5% measured in average daily balance, Fueled primarily by retail banking at BCP and Mibanco. Deposit balances dropped 2.7% or 0.2% with FX neutral.

Speaker 3

Low cost deposits have fallen system wide, but our market share has risen to 40.6% and currently represents 65.1% of our total deposits. Next slide please. Now let me explain core income dynamics. Core income rose 3.3% quarter over quarter and 15% year over year on the back Of NII, NII grew 2.3% quarter over quarter and 21.5% year over year. This result Was attributable to Volundynamics' skills early and to discipline in pass throughs.

Speaker 3

In this context, the net interest margin rose 18 basis Quarter over quarter and 110 basis points year over year. Tristan, at 6.02%, risk adjusted NIM increased marginally To 4.56 percent, we are analyzing the results for fee income and tax transaction. It is important to note that both lines have been affected By our strategy at BCP Bolivia in which we have adjusted our fee framework for foreign transfers to offset the impact of FX transaction due to restrictions on foreign currency availability. If we exclude this impact, fee income increased 4.1% quarter over quarter and are seeking transactions while the result of excess transactions remain flat. On a year over year basis, excluding Bolivia, fee income contracted 3.3%, driven by lower fees in the pension business and the elimination of Next slide please.

Speaker 3

Let's look at the dynamics of the structurally non performing loans. As indicated earlier, adverse events in the Q1 of the year coupled with a contraction in internal demand, high inflation and high interest rate Have notably impacted client payment performance and consequently portfolio quality this quarter. In this scenario, On a quarter over quarter basis, growth in the structurally non performing loans was driven by Mivago after loans reprogrammed in the Q1 fell delinquent By SMAPIMA, where low ticket riskier subsegments reported poorer payment performance and credit cards and consumer loans where the debt service Vulnerable segment fell due to over indebtedness and a stable employee. The aforementioned was partially offset by a sale delinquent portfolio in the energy sector in hotel banking, which had been previously provisioned. On a year over year basis, Historically non performing loans volumes increased due to an uptick in refinance collateralized loans in the retail estate and tourist sectors 3rd, by Wholesale Banking.

Speaker 3

The evolution of non performing loans in retail banking on Mibanco was driven by the same factors as those seen in the quarter analysis was partially offset by the sale of a delinquent retail banking portfolio during the Q1 of the year. In this context, The structural coverage ratio is stood at 108%. To analyze our structural coverage ratio, it's important to review The NPL portfolio mix in terms of unsecured and collateralized products. Please refer to Appendix 2 for more details. Next slide please.

Speaker 3

Moving on the provisions and the cost of risk, we have consistently indicated that our The cost of risk will increase as we shift our loan portfolio mix towards more retail. Additionally, cost of risk have further increased As client payment capacity has been impacted by macroeconomic conditions, provisions in consumer loans and credit cards at BCP and Mibanco remain at High level as a recessive high inflation environment in the first half of the year affected the payment capacity of clients. At BCP, Vulnerable subsegments, which are more leveraged and have stable jobs were the most impacted, while at Mibanco, clients were severely hit by the Q1 events. Additionally, SME PIM segment and BCP drove the uptick in provisions quarter over quarter. In this context, The structural cost of risk stood at 2.3%.

Speaker 3

We are closely monitoring our asset quality metrics, Have refined our client segmentation by risk profile and have gradually implemented a stricter origination guidance for individuals, SME, Nonetheless, the impact of recent measures on asset quality metrics will take some time to fully materialize. We will review in this page the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operating expenses grew 11.2% in the first half of the year, driven primarily by core businesses at BCP and initiatives at Credicorp level. At BCP, core businesses fuel growth in expenses through and our ticket and IT expenses related to An increasing usage of cloud and try and become more digital, more usage of IT applications, license and other software to mainly driven by advertisement to boost deposit and digital sales and growth in loyalty program expenses. The aforementioned dynamics were partially offset by a nonrecurring tax expense reversal.

Speaker 3

Expenses by disruptive initiatives At Credicorp level increased 70% to ensure market leadership in the long term. Operating leverage remained strong at BCP standalone. AdmiBank operating expenses remain under control, but income grew at a slightly lower pace. Our efficiency ratio stood 44.4% this first half, down 3 10 basis points compared to last year and driven by high income Next slide please. Similar to the previous quarter, Record quarter profitability was driven by strong results in our Universal Banking and Insurance businesses.

Speaker 3

ROE this quarter expanded by 130 basis points year over year and stand at 18.6%. Meanwhile, ROE for the semester Was 18.9%. Note that we have benefited from relative low effective tax rate this semester Due to the strong performance of our insurance business and due to the fact that tax exempt interest income accounted for a larger share of the revenue mix at BCP. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. Now I will move to our updated guidance.

Speaker 3

Next slide please. Our updated macro scenario for 2023 is now a GDP growth of around 1%, Which incorporate the scenario of a weak to moderate El Nino Costero at year end. Regarding loan growth, The social and climate events of the 1st part of the year coupled with the sluggish internal demand are taking a toll On our client borrowing capacity, particularly in our consumer loans, credit card and SME segments at BCP. Accordingly, we adopted a stringent origination guidance in those segments. In addition, demand for loans in Wholesale Banking has weakened, which reflects a downturn in business activity.

Speaker 3

These dynamics led to lower expected structural loan growth, which now between 1% 4% measured in average daily balances. Our NIM guidance remain unchanged between 5.8% and 6.2% as we higher than initially expected cost of funds will offset the positive impact of a higher yield from the loan portfolio, which was triggered by a reduction in wholesale loan share in the total mix. We expect the cost of risk to stand Between 2.1% and 2.5%, largely driven by the impact of the macro conditions on BCP Note that BCP and Mibanco are likely to have divergent dynamics on this front during the 2nd semester as Mibanco started It's cycle of loan deterioration and credit restrictions before BCP. We achieved solid efficiency levels in a context marked by an acceleration in investment to develop future businesses. Our ongoing efforts to bend the expense curve are to partially offset the aforementioned income headwinds and results in an efficiency ratio between 45% 47%.

Speaker 3

Finally, we remain maintain our ROE guidance of around 17.5%, but now acknowledge Downside risk associated with asset quality deterioration and El Nino, Gostero. With these comments, I would like to start the Q and A session.

Operator

Our first question will come from Ernesto Gabilondo with Bank of America. You may now go ahead.

Speaker 4

Thank you. Hi, good morning, Gianfranco, Francesca and Cesar, and good morning, everyone. Congrats on your second quarter results. My first question is on your ROE guidance for the year. As you mentioned, it was maintained at 17.5%, although anticipating the softer loan growth and So can you elaborate on which would be the other lines that can help to compensate The softer loan growth and higher cost of risk?

Speaker 4

And what are the trends that you're expecting for loan growth and cost of risk next year. Thank you.

Speaker 2

Good morning, Ernesto. This is Gianfranco. I'll ask Cesar to go into the details

Speaker 3

Okay. Thank you, Ernesto. First, effectively, we are Our guidance of around 17.5%. At the beginning of the year, we have probably Conservative approach mentioned is 17.5%. Now I have already mentioned that we have some Downside risk due to potential credit deterioration.

Speaker 3

This is a general framework. It's important to know We already have go through half of the year with very positive results with an ROE north of 18% around 18.6%. Down the road, what we are expecting is effectively on a softer loan growth with a composition that is going to be tilted to retail, but with lower yields than previously expected because we are being more conservative in our origination approach. This is going to be accompanied by higher cost of risk and the usual acceleration of non Income sources, FX and transactional activity that is usually higher during the 2nd part of the year. And finally, by the seasonal increase in expenses that has two main components, the normal seasonality of the last part of the year that I Previously mentioned and the trend in the acceleration of IT and disruptive initiatives.

Speaker 3

All in all, We think that with these elements, we can be around the 17.5% previously mentioned.

Speaker 2

Maybe just to add on what Cesar mentioned, Ernesto, also when we provided the original guidance, The expected results at Pacifico were not the results we're getting. So as we mentioned in the previous call and At the Investor Day, due to some specific events, Pacific is having an outstanding year this year And that may that is going to offset in part what Cesar just mentioned. Perfect.

Speaker 4

Thank you. Just a follow-up in terms of the cost of risk, You are guiding between $2,100,000 $2,500,000 So looking into next year, would that be the same trend that we should expect? Or do you think most of the worst part will happen in 2023 and probably should be normalizing when thinking about next year?

Speaker 5

Yes, Ernesto. This is Reynaldo Oyoza. As you know, we don't provide guidance for next year, we will do it during the Q1 of 2024. Having said that, there is a lot of uncertainty in terms of the impact of So, we need to confirm that information in terms of a better projection of the number. But also, we expect next year to have much better results due to other things we are doing in terms of managing The risk in the consumer and SME portfolios, both in BCP and Mibanco.

Speaker 5

So there are headwinds and tailwinds, And we will have more information on that regard by the 1st months of 2024.

Speaker 4

Perfect. Thank you very much. And just second question related to the ROE of your subsidiaries. You have a nice Chart in your report showing all the ROEs per subsidiary. And we can see that BCP, Standalone, Grupo Pacifico, Prima, ASV Bank, all of them continue to deliver ROEs above 20%.

Speaker 4

But on the other side, We're looking to BCP Bolivia, Mibanco, Credicorp Capital, we continue to see ROEs at most at 10%. So What are the strategies that you're implementing to improve the ROEs across the subsidiaries? And I don't know if you have like a medium target In each of

Speaker 2

them. Yes. Thank you for your question, Ernesto. Let me go 1 by 1. Actually, How we manage Critical Capital and ASP is we manage them as a business unit and Correct me if I'm wrong, Cesar, but that business is with an ROE of 17%.

Speaker 2

So it is close to what they Always, we're expecting for that business. Having said that, this first half, we have had some Non recurrent positive impact that helps obviously the ROE. But going forward, we have established Transformational plan for that business aiming to have an ROE of Between 16% to 17% by 2025. Regarding Mibanco, both Mibanco Peru and Mibanco Colombia, The microfinance business is a much more volatile business, and we're definitely in a downturn of the business. But we're working both in the short run and the long run.

Speaker 2

The short run basically focus On risk, in the long run, we need to revisit the whole business model so as to go back to the ROEs of over 20% we have had in the past in that business. And finally, Bolivia, Bolivia is Bolivia. That's my answer. We're doing whatever the best we can do in Bolivia. The ROEs are if you compare our ROEs to the banking system in Bolivia, they're quite good.

Speaker 2

There's not much more to do in that business.

Speaker 4

Excellent. Thank you very much.

Operator

Our next question will come from Juan Ricaldi with Scotiabank. You may now go ahead.

Speaker 6

Hi, good morning. Congrats on the strong results and thank you for the opportunity. My questions are related to JAPe. So first, The fee income generating monthly active users have been increasing as a percentage of total users. So I was wondering if you can provide some colors on what are the drivers here and how you are increasing monetization.

Speaker 6

And the second question is related to the strong growth in payment volumes that we saw in JAPES and also related to The growth in the services payments. So my question there is, how much of the TPV growth Has been driven by the service payments? What are the other drivers of TPV growth?

Speaker 2

Francesca, are you there?

Speaker 7

Yes. Hi, thank you for the question. Yape, as mentioned in the Investor Day, Has plans on many monetization lines of business. So the growth In terms of PTV, it's growth basically around P2P transactions, On the monetization side, growth is mainly around QR usage where we see an MDRC, utility statement that is beginning to grow, it is one of the newest Having said that, we are slightly exploring the lending, which is growing. We see an increase The number of transactions and also on average amount of revenue per customer, the promotions that Reynaldo mentioned as an engagement tool, there's also take rate that is also growing.

Speaker 7

And we are actually exploring ticket sales, gaming and different A venue for growth that are coherent with Gap's super app view in terms of

Speaker 6

Thank you, Francesca. That's helpful. And then I had another question related to fee income, which was quite strong this Quarter held by the Bolivian operations. So how much of the fees in Bolivia are a one off and how sustainable are these levels?

Speaker 3

Cesar? Yes. I wouldn't consider that one off. I will consider more than temporarily. And the distortion is an accounting thing, let's say.

Speaker 3

What you are doing is charging a fee and recognizing in the other part of the equation higher FX Exchange. For that reason, I will say we have a positive margin, but it's reflected on an abnormally high fee and an abnormally Loss in FX. So it's an structural business that in this moment has more volume and And why there is spread in these two variables. That is part of the business in Bolivia.

Speaker 2

But maybe on top of that Juan, what we're seeing in the fee income business is that What we've been investing for, I would say, decades now, we are when I say we, basically BCP, Peru, What the transaction will happen in Peru, that's obviously paying off. And what we're also seeing and maybe Yape is part of it is The amount transacted in non cash alternatives is Constantly increasing beyond the payment, debit, credit and things like that. And obviously, that is also an important Driver for fee income generation.

Speaker 6

That's helpful. Thank you for the comments.

Operator

Our next question will come from Yuri Fernandes with JPMorgan. You may now go ahead.

Speaker 8

Hi, guys. Thank you. Good morning. I have a question regarding your cost of risk. I understand you have So now you're calling for a challenging outlook, lower GDP.

Speaker 8

My call is regarding 2024, I guess, the scenario is still we don't uncertain here. But In this 2.1 to 2.5 cost of risk, the level we should expect for 2024 or basically you are going to build Those anticipatory provisions for the tough environment now and maybe for the next year we should see cost of risk Running at a more normalized level. So just trying to understand if this is like somewhat a new normal for the short term Or maybe no, maybe you're just doing this now because you're seeing challenging environment and given you do expect the losses, things will improve At some point. That's the first one. And I would like to check the box on the portfolio sale.

Speaker 8

I guess you put out that some of the wholesale NPL improvement was regarding a portfolio sale. How big was that? Just to understand how that affected your new NPL formation. Thank you.

Speaker 5

Ricardo? Yes. In terms of the guidance for next year, what I can mention So today, Yuri, is that I mean, our estimations, our levels of provisions today include the impact of El Nino with a probability between weak and moderate, that is reflected on our provision level today and that's included in the guidance For the year end of between $2,100,000,000 $2,500,000,000 Regarding next year, as I mentioned before, it is too soon to tell And we will be able to provide you more information in the following months, in next two quarters probably. And in terms of the sale of that specific Keith, in the wholesale banking, it's around $30,000,000

Speaker 2

That was that's the sovereign bond Exchange we made and we no,

Speaker 5

we're talking about the yellow thermometer.

Speaker 2

Okay, sorry.

Speaker 5

It was A lot we had in our books and we would be we had an impact in terms of the NPL of the wholesale book of around $30,000,000

Speaker 8

But did you recognize any gain on that? Like did you need to provision and sell at face value? Or did you have like an economic Just trying to understand like information, right, because if this was an offer from a loan, probably you had some amount of provisions. Yes. Just trying to understand the moving parts on the economics here too.

Speaker 5

Yes. We I mean, as compared to the provision level, we had A profit? So we estimated a higher loss than what we finally obtained by the sales. So it had a positive impact on our levels of provisions In a word.

Speaker 8

Okay, clear. Thank you.

Operator

Our next question will come from Jeffrey Elliott with Autonomous. You may now go ahead.

Speaker 9

Hello. Thanks very much for taking the question. So the cost of risk has been 2.1% In the first half, and you're guiding to 2.1 to 2.5 for the full year. So that Seems to capture, particularly at the 2.5 end of the range, quite a big step up in Provisions in the second half. I'm just trying to understand what sort of scenario it would take to Get that big step up and get you to the high end of the range and how cautious you feel like you're being now with that 2.1 to 2.5?

Speaker 5

Yes. What I can mention is, remember that we haven't finished Digesting all the impact that we've had in the 1st semester in our current level of provision, so that's incorporated in the projection of the 2nd semester, All those loans that are default, but not fully provisioned as by the end of the 1st semester. And it included what I had just mentioned in the forecast of the impact that Nino would have under current informations In terms of the portfolio looking forward. So that's why we are we have increased the guidance in the cost of risk expected For the year as a whole.

Speaker 9

Okay. So if El Nino ends up being more severe, then there's some further risk that That it could go even higher. Is that

Speaker 2

fair? Yes. That's a fair statement, yes.

Speaker 5

Thank you.

Operator

Our next question will come from Tito Labarta with Goldman Sachs. You may now go ahead.

Speaker 10

Hi, good morning. Thanks for the question. Thanks for the call and taking my question. I have two questions. One is on your insurance results, you know, continue to deliver Just to understand, how do you think about the sustainability of that going forward?

Speaker 10

Should that we saw a bit of a decline this quarter? Should that Normalize or can it remain above historical levels for some time? Any color you can give on that would be helpful. And my second question, just if you can remind us the sensitivity of your margin To a lower rate environment, your margin has been doing well so far, but do you think that how much pressure could there be as rates go down? You also show there the risk adjusted margin, which has been relatively stable.

Speaker 10

Do you think that can continue to be stable as we've seen recently? Thank you.

Speaker 2

Hi, Tito. I'll ask Cesar Cabrera to answer the first question.

Speaker 11

Hello, Tito. Thank you. Well, maybe it's important to explain or to comment About the important results in the insurance business for these first two quarters. Maybe one of the explanation is the higher investment results we obtained in our because the reinvestment rates We obtained in our investment portfolio and because the good performance of our investment portfolio in general. The second reason of this higher results is the higher profits we have obtained in the disability and Vibershift Insurance.

Speaker 11

This is the insurance that is related of the affiliates to the AFP, the Iprepaid, sorry. Because in the last bidding contest, we obtained an important portion for these contracts And with an interest increase in the rates, so we have obtained an interest increase in premiums Without the COVID claims that we expected some part of COVID claims for this year, so This has generated high profit for this business. And the service relation is related with the High profits that we have obtained in the Group Life and Medical Life business due to the repricing we made In the previous years, considering the bad results we have obtained during the COVID pandemic. So, considering that and following the market trends and the competitive Situation in the market, we expect some reductions in their Collective group life business in the next months. And we will obtain good results for this year, but we expect to have a sustainable ROI around the Low 20 for the next and the following years.

Speaker 2

Yes. And Cesar, Rios, please could you answer the second question?

Speaker 3

Yes. With an instant adjustment, think our sensibility is around 25 basis points the 1st year of the adjustment, a little bit higher than we mentioned Probably a couple of years ago when the interest rates start to rise because the portfolio has shortened. And our expectation is that We can maintain a margin, a NIM similar to the actual one Product of the increase in retail banking in BCP and a more accelerated growth in Mibanco.

Speaker 10

Okay. So the stable ish NIM, but you meant 25 bps, that's for about 100 bps cut in rates. Is that the right sensitivity? And also you can comment on the risk adjusted NIM also, particularly as you go in retail.

Speaker 3

Yes. And I will emphasize you ish because it's Roughly, we are not talking about fine decimals.

Speaker 10

Sure.

Speaker 2

Okay.

Speaker 10

And on the risk adjusted NIM and any comments particularly as you go in retail?

Speaker 3

Yes. The risk adjusted NIM should improve the short term level when we adjust Accordingly, the cost of risk down the road. But this is not a precise guidance. This is a trend, what I have mentioned at this point.

Speaker 10

Okay. Yes. So as the asset quality normalizes, you can see some improvements, but a bit more medium term it sounds.

Speaker 2

Yes.

Speaker 10

Okay, great. Thank you.

Operator

Our next question will come from Carlos Gomez with HSBC. You may now go ahead.

Speaker 5

Yes.

Speaker 12

Hello, good morning. First of all, thanks again for your improved disclosure on capital and on the digital initiatives. You started last quarter, but I mean it continues to improve and we really appreciate that. It gives us a better insight about how things are going. Two questions.

Speaker 12

One is different from what you want to hear. You emphasized your detachment from the macro, but we would like to know what you think That growth can be in Peru in the long term and your credit growth can be in Peru in the long term. And the second one is on the digital initiatives, if you can tell us more about Tempo and IEL at this point. Thank you.

Speaker 2

Sure. Hi, Carlos. Yes, as of today, and again, correct me if I'm wrong, Our chief economist expects Peru to grow 2.5% 2024. Is that correct?

Speaker 3

24, at this point, I think it's more around 2.1 because we are considering a basic scenario with a combination of weak and moderate El Nino at the beginning of the year. The number of Mibanco mentioned is more representative without the impact of the

Speaker 2

So anything between 2% to 2.5% growth, Carlos. Just a quick comment on that. Peru needs to grow much faster. This comment goes beyond the impact on our business. If the level of poverty in Peru was reduced dramatically over the last, I don't know, 20 years until COVID, We went back like in a couple of years, like 10 years in terms of that ratio.

Speaker 2

And To go back, we need to grow as a country at least 4%. So that's the challenge we have. Again, this goes Beyond our business. Regarding TENPO and EO, let me start with EO. EO is Actually, our friends and family proof of concept with very good results, And we're going to launch it, I believe, in a couple of weeks.

Speaker 2

So we could talk much more about Initial results in next call, but the initial results are quite good in terms of user experience. That's the only indicator we have today. Regarding Tempo, it's performing quite well, Again, in operating indicators, we recently got as Otempo recently got the approval From the Chilean superintendency to issue credit cards, we're in that process. And so that's The next relevant stage in the Tempo original business case, so As soon as we start to get more relevant information, we plan to and the Tempo business becomes More relevant for Pericorp, we plan to do something similar to what we're doing with JAPE regarding information disclosure.

Speaker 12

Thank you. And if I can go back to the beginning, you mentioned, yes, this is what Peru needs to grow, one could agree. So that's my question is, in the medium term, what is your realistic expectation We're in the business about what Peru can do over the next 3 to 5 years and also how does that translate into credit growth for you? Thank you.

Speaker 8

Yes.

Speaker 2

So long term in Peru is much less than 3 to 5 years. We have had 6 presidents in 6 years, So it's quite difficult. I don't think and this is a personal opinion. I don't think With the current scenario, political, social and macroeconomic scenario, I don't think that it is achievable for Peru to grow 4% over the next few years. We need to do a lot of structural reforms We don't see them being done in the near future.

Speaker 2

Regarding growth, The portfolio growth, I would I rather don't provide an answer in that Because there's a lot of variables regarding the multiple of portfolio growth Related to GDP growth, that's the main reason why or one of the main reasons why we've started to Try to decouple from GDP growth so as to keep growing at a much faster multiple.

Speaker 12

Very clear. Thank you so much. Our

Operator

next question will be a follow-up Yuri Fernandes with JPMorgan.

Speaker 8

Hey, guys. It's me again. Hello, it's me again. I have a follow-up regarding costs Here, let's put the worst case scenario, right? This is not a moderate EMEA, this is a strong EMEA.

Speaker 8

You need to revise your cost of risk. You need to decelerate your low growth and this impacts your profitability. Can you cut your expenses on the investment plan like the same was 150 bps on ROE headwind. I'm just trying to understand what you can do. Like if there is a worst case scenario, what Can you do on all your digital initiatives or if the bank will prefer to say no, hey Yuri, we prefer to have ROEs below 16, below 15, whatever, but keep investing Technology and keep expenses high.

Speaker 8

Just trying to understand if expenses could be evolved for the company In the case there is a ice cream event, that's one. And regarding also Alnio, I remember in 2017, you had extraordinary provisions for the event And later, I guess, reverted like it was not as bad as we expected. So in the case, the teams get clear that this is a moderate to a So, El Nino, if the company could do like voluntary anticipatory provisions as you did, I guess, in 2017? Thank you.

Speaker 2

Yes. Regarding your first question, Yuri, maybe a quick previous comment, which we shared on the Investor Day also. Most of the investments we're doing in the digital ventures and the digital transformation, we Register them as expenses rather than as investments. The main reason there is that if obviously, there's a high risk In this investment, we'd rather be conservative. And if something goes out, we don't want to surprise the market.

Speaker 2

So going to your question, your specific question, there is some room. We are not planning to do that whatsoever. We are Because of the results we're having in the digital ventures and the discipline we're pursuing in the investment we're making, We don't plan to cut as of today, obviously, we don't plan to cut any investments in that sense. Obviously, if there is a major Dramatic scenario which we don't see today, there's some room to cut expenses. I don't think having said that, I don't think that the expenses we can cut will offset All the negative impact we may have in a dramatic scenario.

Speaker 2

But again, I highlighted the word dramatic scenario.

Speaker 5

Yes. I'll ask Reynaldo to answer the second question. In terms of our level of provisions, If we have information by the last quarter that I mean that we have a Nino coming that is of higher impact of At the moderate level, that's what we have already considered in our projections. Of course, we would start increasing our level of provisions. Having said that, comparing to what we had in 2017, we have a totally different situation.

Speaker 5

Companies are more prepared In the wholesale segments more exposed to the Nino phenomenon. And we have learned a lot during the last crisis, the COVID situations and the social unrest and the political situation we had to provide assistance and help to those clients in The retail banking that are exposed to these kinds of events. So in terms of the level of deteriorations in those Portfolios, we expect to have a relatively a lesser impact than what we had in 2017, where the situation was totally different. So that's in general our strategy, but we'll have more information in the following months.

Speaker 2

And maybe to complement Yuri, I would say that as a country, we're better prepared than what we were in 2017. And on top of that, and this is A spoiler to my closing remarks, Almost all of the subsidiaries at Credicorp were closely working with our clients, both at the corporate level and at the retail level In educating them and helping them to be much better prepared if an El Nino Major effect will come.

Speaker 8

Thank you, Gianfranco. And I don't want to sound super bearish here. I'm just Now checking the box, what would it be like if this happens, what would be your message and thank you for being candid and I mentioned that We don't want to cut expenses, but if there is a need, you may do so. So thank you for the clarification.

Operator

Great. Our next question will come from Sergey Dubin with Harding Loebner. You may now go ahead.

Speaker 13

Yes. Good morning, gentlemen. Thanks for the call. Three questions actually. So the first one, There was some news around some ongoing or resurfacing political unrest again in Peru In July, has that died down?

Speaker 13

Is that continuing? And kind of how do you see the trend there? Maybe that's the first question. Sure.

Speaker 2

I'll take that one. Hi, Sajay. Good to hear from you. I don't want to downplay the social noise that there was in July. As we mentioned in the Investor Day, what we see is like that we have a fragile Stability today in Peru, but first of all, political stability, I mean.

Speaker 2

But the noise the social noise we had in July, It was very little. There's nothing going on or basically nothing going on today. Obviously, nothing to compare to what we saw last year by year end and in January February of this year. So today, we're again going through a fragile stability and we hope that that stability improves as we move forward.

Speaker 13

Okay, great. And then my second question is regarding Cost of risk. So I'm a little confused about this Alamo. It looks like From the presentation, it's going to be a summer 2024 event, if I understood this correctly, but you also Talked about how your cost of risk for 2023 is already incorporating that. So can you help me With the timing of are you expecting anything in 2023 or is that entirely 'twenty four event?

Speaker 13

That's first Part of this question. And the second part is, you mentioned that you expect cost of risk grants to diverge in the second half with Mibanco Kind of going down and perhaps BCP going up. Can you help explain why that is? Is that related to the steps that you've taken in terms of curbing the risk of appetite? But any color around that would be helpful.

Speaker 5

Yes. In terms of 2023 closing June numbers, We included everything that we expect for the year, incorporating some outlook of the level of growth that is impacted For 2024. That, in general, it includes all the events that are Under our control and that we foresee for the remaining of the year. And in terms Of Mibanco and BTP, as Cesar mentioned, Mibanco started with some specific measures before BTP. So the remaining provisions left for both institutions vary.

Speaker 5

I mean, the need for Mibanco provisions For the rest of the year, are relatively lower than we will see in BTP. That's what Cesare specifically mentioned.

Speaker 13

Okay. And these steps that you're talking about, that relates to what? I mean, are you curbing are you curtailing risk or curtailing loans to more risky segments? Could you explain what it is that The Banco already did and BCP hasn't done yet.

Speaker 5

You are totally right. I mean, the things we have done in both banks I've limited the growth of the portfolios. As you've seen, it hasn't been a very good year in terms of loan growth In terms of the 1st 6 months of the year, and that's a reflection of our stringent more stringent credit policies in both banks. So that's what we've seen and that's what we expect to have A better outlook in terms of the new loans, but we still have in our portfolio some loans that were impacted By the macro trends and the specific events that happened in Peru in the Q1.

Operator

Okay.

Speaker 13

And the third question is regarding NIM trajectory. So I believe you mentioned in the beginning of the call that You know a bunch of Latin American Central Banks already cut interest rates and you expect Peruvian Central Bank to cut the rates in Q4 of this year. So could you remind me what again, what is the sensitivity of NIM to, I don't know, let's say 25 bps of rate cuts and then how would you expect NIM to sort of shape up if you see successive rate cuts in 2024.

Speaker 3

Yes. First, As I mentioned previously, the sensitivity of our Anistan Tani's 100 basis points reduction in the portfolio is around 25 Basis points the 1st following year. That's the sensitivity. Our guidance is to Remain in the same level that we previously mentioned, but a combination of factors. We are going to grow the retail portfolio less than was previously But at the same time, the wholesale portfolio has already reduced in some degree.

Speaker 3

So the combination of these factors Lead us to maintain our guidance in terms of NIM. The expected result of our decrease In reference rate, it's a gradual compression of the NIM that is going to be offset for the A faster growth of the retail segments and Mibanco as I already mentioned previously. At this point, we are not providing guidance for 2024.

Speaker 13

Okay. So just to make sure I heard clearly, 100 basis point cut in interest rate leads to 25 Basis point NIM compression was a 12 month lag or next year essentially, right? Is that correct?

Speaker 3

The instantaneous effect, no change in the composition of the portfolio is that if you have the entire portfolio and you reduce At one hundred basis points, the impact through the year is 25 basis points with a combination of maturities, Sensitivity and so forth and so.

Speaker 13

Okay. I understand. Okay. That's fine. Thank you.

Operator

Our next question will come from Andres So to with Santander. You may now go ahead.

Speaker 14

Good morning, Gianfranco and team. Thank you so much for the presentation. Most of my questions have already been answered, but I would like to take the opportunity to ask For an update regarding the strategic plan for Investment Banking and Wealth Management. In the past, you commented that you wanted to implement a plan to Increased scale, specifically in the Wealth Management business that may potentially include the money activity. I would like to get a sense of How is that shaping up and when can we expect news about that?

Speaker 2

Yes, sure, Andres. We shared Eduardo Montero, actually, who runs our business, shared in detail at the Investor Day. Basically, the plan is to focus in wealth and asset management. We're in that process. We already we're pulling off Most of the investment banking business, part of it is we're closing basically The M and A businesses in Colombia and Chile, obviously, it has to it's not a one time asset.

Speaker 2

It's like you have to Pulled off as we finish our the mandates we have. And we already transferred The lending business that we had improved to BCP. So today, I would say that by year end, we will have positive results in terms of we will have finished All the cost reductions we expected and be very in shape to start growing both organically and if there are opportunities inorganically in that business going forward.

Speaker 14

Understood. Thanks again and congratulations on the strong result despite this challenging environment.

Speaker 2

Thank you.

Operator

This concludes our question and answer session.

Speaker 2

I would like to turn

Operator

the conference back over to Gianfranco Ferrari for any closing remarks.

Speaker 2

Thank you all for your questions. As Cesar noted, our GDP growth expectation considers sales of weak to moderate As well as announced government reactivation plans. Additionally, while the macro scenario will likely improve in the second half, We still expect to see a lag effect, which is reflected in our credit risk management approach and expectations for full year structural loan growth and cost of risk. Importantly, we've been managing efficiently better than initially expected Despite accelerating investments to strengthen our future businesses. All in all, we maintain our ROE guidance Around 17.5 percent, while noting potential downside risk mainly associated to asset quality deterioration and El Nino costel.

Speaker 2

Looking ahead, we remain confident in delivering a longer ROE of approximately 18%. This is underpinned by Peru's strong fundamentals and our emphasis on broadening non interest income via disruptive investments to decouple from the macro, complemented by our potential to leverage our brand strength, expand our client network and seize Structural growth opportunities as they reemerge. These efforts are fortified by our strategic advantage in acquiring low cost deposits and realizing efficiency improvements through transformational investments. Now I'd like to give you a better understanding of We are currently helping our clients and investing in a more prosperous future for Peru. We're working across And leveraging synergies to develop and deliver educational content and support in the face of climatic threats.

Speaker 2

Through both mass distribution channels and targeted individual actions. Examples include Pacifico Seguro's Comunidad Seguro program aimed at promoting a culture of risk prevention through workshops and conferences For families, micro entrepreneurs and community leaders. Additionally, Pacifico and BCP are sharing recommendations On how to manage climatic events through their financial education podcast and popular webcast, while Mibanco is distributing educational content on prevention across multiple channels. We are implementing a strategic approach Driven by the need to safeguard our portfolio and more importantly, minimize the adverse effects on the lives and businesses of individuals in Peru. We firmly believe that these are the crucial investments that will yield long term benefits and unlock the vast opportunities in Peru.

Speaker 2

Thank you all for your continued support. Have a great week.

Operator

The conference has now concluded. Thanks for attending today's presentation. You may now

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Credicorp Q2 2023
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