Credicorp Ltd. (NYSE:BAP) Q3 2023 Earnings Call Transcript
Credicorp Ltd. (NYSE:BAP) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good morning everyone. I would like to welcome all of you to the Credicorp Limited Thrd Quarter 2023 Conference Call. A slide presentation will accompany today's webcast which is available in the Investor section of Credicorp's website. Today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode, there will be an opportunity for you to ask questions at the end of today's presentation. [Operator Instructions] Now it is my pleasure to turn the conference over to credit corpse IRO, Milagros Ciguenas. You may begin.
Milagros Ciguenas : Thank you and good morning, everyone. For today's call our Chief Financial Officer Cesar Rios will be providing the introductory comments in addition to his usual discussion of the macro environment and financial performance, as our CEO Gianfranco Ferrari could not be with us today. In addition to speaking on today's call will be, Raimundo Morales, CEO of Yape, who will give us an update on the Yape's progress. Finally participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer; Reynaldo Llosa, Chief Risk Officer; Cesar Rivera, Head of Insurance; and Pension; and Carlos Otello, CFO at Mibank. 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 and -- current expectations and beliefs and are subject to a number of risks and uncertainties.
And I refer you to the forward-looking statements sections 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 change events or circumstances. Cesar, please go ahead.
Cesar Rios : Thank you, Milagros. Good morning, everyone. Thank you for joining us in our third quarter 2023 conference call. While the macro environment has been more challenging than expected Credicorp has continued to demonstrate its distinctive resilience in Peru, thanks primarily to our diversified and prudently managed loan portfolio and funding advantage. Its strong NII is complemented with an increasing share of the core non-interest income streams, including those from insurance and Yape, which are partially mitigating the impact of the loan portfolio deterioration. While there is still work to be done, we are pleased with the progress in increasing core non-interest income, which is a key part of our strategy of recovering from the macro.
Our strong track record demonstrates our ability to successfully navigate complex environments. We have built a diverse portfolio of businesses, most of them benefitting from robust brand recognition and a strong customer loyalty. This privileged position further solidify our leadership, especially in challenging conditions. We are registering healthy margins even after high provision supported by long mix shift is stricter origination in vulnerable segments, dynamic pass throughs and our funding advantage. Our solid capital base represents a strength, particularly within a challenging credit cycle where the impact of soft macro conditions of payment performance in specific segments is evident. We have already stated, we believe strongly in the importance of continuing to invest in both the technological transformation our core businesses, and in disruptive initiatives to maintain and enhance our strong competitive moats and future sustainability.
Please, next slide. By embracing our agile and self-disruptive mindset we are building a diverse business capturing synergies, maximizing our main profit pools, targeting the new client segments and developing our own disruptors as we seek to retain a healthy and sustainable ROE. Our focus on gaining a deep understanding of what pricing and upcoming market trends allow us to meet our customers' changing needs, solidify our leadership and increase penetration in new markets. Raimundo will now provide an update on the sustained progress at Yape, which in just over seven years has become the main payment network in Peru and is the most mature example of our disciplined approach to disruption and innovation as we advance towards our goal of decoupling from macro.
Raimundo, please go ahead.
Raimundo Morales : Thanks, Cesar. And good morning, everyone. Yepe is an example of a rigorous approach to innovation and our commitment to meeting current and future market needs. Hitting the PEN10 million mark for Yaperos over a year ago was a turning point for us. We initiated our monetization plan by rapidly launching new business lines and functionalities driving both scale and engagement. At the close of Q3, Yape had over 9 million monthly active users conducting an average of 29 transactions per month, up over 160% year-on-year, making interoperability a reality. Yape continues growing at an exponential rate, a clear sign of the benefits of this service offers to both clients and the ecosystem in general. Yape is not only the primary payment network in Peru, it is also the digital brand that boasts the highest awareness level in the country.
Please turn to the next slide. As the number of active Yaperos continues to grow, with each new feature added, the use of individual features also increases, driving gains in market share, attracting even more Yaperos from partners, while operating more and more efficiently reinforces our flywheel effect. Top-ups a clear example of how Yape is helping us decouple a row from the macro. BCP's top-up market share used to be around 10%, but after launching this functionality through Yape, our market share rose to 46% which represents 5x growth in just 18 months. Last January, we enabled bill payments through Yape and have seen an upward trend for mostly growth with over 20% of Yaperos now using the service. We are currently at just 5% of our expected time for bill payments, so still have an immense opportunity for continuous growth.
Similarly, the use of our features in each business line including POS, QR codes and payments, microloans and financial service, and promos within marketplace is still incipient but quickly growing each month. Rapid adoption of this product is allowing a revenue generating TPV to grow at a three extra pays of our total TPV which has grown from non-existent in early 2022 to around 5% at the end of Q3. Our long-term aspiration is above 20%. Please turn to the next slide. Unitary economics continue to move towards an expected breakeven in 2024. Revenues are growing and moving closer to cash costs as we incorporate new features. Monthly revenue per active user stands at PEN2.9 in the quarter compared to a cash cost per active user of PEN4.3. Q4 will be key in Yape's evolutions for SuperApp with multiple product launches.
In marketplace, Yape at the end will initially focus on electronics, which typically represents 50% of e-commerce sales. We're also launching other high engagement products such as ticketing through our acquisition joining gaming and gift cards. In financial, we are introducing small multifamily loans with longer tenures through 100,000 pre-approved fleet. In payments. We're competing our portfolio of solutions with FX transactions and remittances, among others. We are also providing collection services for CPG companies. On the functionalities front we're enhancing our UX to include the critical capabilities of a SuperApp. So as you can see, we're going to remain very busy. Yape continues to progress towards monetization by pursuing its medium term target of being the payment, the main payments network in Peru being an integral part of Yaperos daily life and addressing their financial requirements.
We look forward to updating you again in the future on our continuous progress. I'll turn the call back over to Cesar.
Cesar Rios : Thank you, Raimundo. I will share now the key financial highlights of the quarter focusing primarily quarter-over-quarter revolution to emphasize the recent shift in trends, both structurally launch and low cost the positive or positively quarter-over-quarter growth in the structural loss measuring average daily balances stood at 1% fueled primarily by retail banking at BCP. Meanwhile, low-cost deposits grew 1.2% and accounted for 50.9% of our funding base at quarter-end. Similarly, most of our income stream registered relevant sequential increases. NII grew 1.6% driven by asset mix dynamics, which were partially offset by a higher cost of funding for bank deposits. Fees also grew 1.6% of the back of positive dynamics and revenues from debit card, collection services and bill payments.
Insurance underwriting results rose 11.6% as earnings in the life business continue to trend upwards. We navigated asset quality headwinds as Peru credit cycle continued to deteriorate such because of risks each up to 2.5%. A structural NPLs ratio is stood at 5.6% given that weak economic performance took a toll on payment performance in specific segments, all in all, we delivered resilient results despite negative GDP growth, and have maintained solid capital levels at our subsidiaries. Having said that, a note of caution is in order to cease as we'll elaborate later, the recent change in macro and climate perspective will more than likely weigh significantly in our profitability for the rest of the year. Next slide, please. In the third quarter, the Peruvian economy is suspected to have registered its third consecutive quarter decline year-over-year.
Accordingly, annual GDP growth will be lower than expected, and is stand around zero or slightly below. Several factors both expected and unexpected has driven weak performance for the social protests at the beginning of the year, which were prolonged in the country's health. Second, climatic events namely cyclone Yaku and the El Nino Costero, which heavily impacted agricultural fishing and manufacturing sectors. I will go into more detail on El Nino topic on the next slide. Third, there a weak private investment on a sluggish consumption led to non-primary sector to contract. Fourth, the government's efforts to stimulate the economy have been insufficient. It's important to note that growth in the mining sector mainly to increase copper production at Quellaveco has remained a bright spot.
The confluence of these factors has led the country to reduce at its lowest print for economic performance in 25 years, excluding the pandemic. Despite this disappointing performance, Peru macroeconomic fundamentals remain robust, with low levels of public debt and high international reserves. Additionally, there is a significant package of public and private projects that impact by political intent and deploy quickly could generate growth down the road. Regarding inflation, price pressures have eased in Peru and inflation expectation has falling. Additionally, the policy rate has been good by 50 basis points. Next slide please. The El Nino Costero weather phenomenon that has directly affected the Peru this year is associated with a sustained rise in sea surface temperature above certain thresholds along the north or central coast of Peru.
El Nino Costero has battered the fishing agriculture and textile sectors in particular in the first eight months of the year. The fishing sector is set to record its worst anchovy catch in 25 years after the first fishing season was canceled. Agricultural production in turn is expected to reduce overall resource performance in 31 years while textile production has record its more market declined in 28 years, excluding the pandemic and the global financial crisis. Given that there was no winter season this year in the coastal region. With performance in these key sectors of the economy has exercised a multiplier effect and exacerbated contraction in the non-primary sectors. Given this context, we continue to closely monitor the evolution of El Nino and its impact on our businesses.
I will look at the expected evolution El Nino to the summer of 2024 and its potential impacts later. Next slide, please. BCP results were impacted by economic downturn described earlier. This has pressured provisions hour and impacted loan growth. Analyzing key quarter-over-quarter dynamics. The 1.5% increase in NII was driven by several dynamics on the mix side wholesale loans reduced our contraction due to low private investments while SME-Pyme reported in an upswing in disbursements that entail less risk. These dynamics helped mitigate an increase in the funding costs, which was pressured by a more expensive deposit mix. It is important to note that migration from low cost time deposits have decelerated in recent months. This quarter BCPs fee income was bolstered by an uptick in fees from debit cards collection services of business clients and build payment services provided through Yape.
Provisions remain high in a prolonged recessive high inflation environment that has affected payment capacity of vulnerable segments individuals and higher risk segments in SME-Pyme. In individuals growth was driven mainly by consumer loans and credit cards followed by mortgages. This uptick was partially offset by a reversal of provisions in Wholesale Banking. On a year-over-year basis, a 16% increase in NII was driven by raising interest rates by a 1.2% increase in structural allowance, which was primarily attributable to an 8.1% uptick in retail banking loans. Loan loss provisions increased 87.6% due to the same quarter-over-quarter in dynamics. On a year-to-date basis, operating expenses grew 6.1% which primarily reflects growth in core business IT expenses due to an increase in digital transactions and to significant investment in new capabilities and investment in disruptive initiatives.
In this context, BCPs efficiency ratio is stood at 37.8%. Finally, ROE is stood at 20% in this quarter and 22.2% on a year-to-date basis. Next slide please. After a difficult first semester, where social and climate events as well as ongoing deceleration have hit clients hard, Mibanco registered a decrease in loan origination in riskier segments and higher provisions, on a quarter-over-quarter basis. Net interest income rose 3.2% despite lower loan growth. This favorable results reflect disciplined interest rate management, which help us offset the uptick in the funding costs in this context, and NIM increased 80 basis points and stood at 13.5%. Provisions remain high this quarter given that social protests and weather anomalies continue to impact our customers' payment capacities.
Other income fell 2.5% fueled by a drop in bank insurance fees follow a reduction in disbursements. From year-over-year perspective, NII rose 1.9% is fueled by an increase in structural loans and interest rate pass throughs which mitigated the impact of rising funding cost. Mibanco's provision froze due to the same dynamics mentioned earlier. On a year-to-date basis, operating expenses rose 5.8%, reflecting on increasing IT related cost. Fee income in turn, grew at a slower pace, which led to efficiency ratio to rise to 52.6%. Finally, ROE is stood at 8.3% this quarter and 7% on a year-to-date basis. Mibanco Columbia is facing high inflation, high funding costs, lower interest rate ceilings, and a deterioration in economic expectations. We have adapted our strategy to record profitability.
Next slide, please. ROE at Grupo Pacifico was high this quarter, and is stood at 34.7% as we continue to capitalize in transitory tailwinds in the life insurance business on top of a strong underlying business. From quarter-over-quarter trends, net income rose 19%. Growth was primarily boosted by an uptick in insurance underwriting results, in the life business after claims fell primarily by credit life and individual life products. An increase in the net gains from exchange difference also contributed to the positive evolution this quarter. These developments were partially offset by a decrease in net financial income. Year-over-year profitability was up, 37% primarily driven by positive dynamics for insurance and the right off results in the life business.
Pension products reported an uptick in income, which was attributable to better prices and more favorable dynamics. While credit life and personal accident products registered decrease in service expenses. Next slide please. ROE for the investment banking and wealth management line of business has stood at 8.2% impacted by a drop in income generation at our more volatile businesses. Income from our capital markets business decreased 5.9% quarter-over-quarter pressured by market dynamics that negatively impacted our proprietary fixed income portfolios. Market volatility also impacted our asset management business where income decreased by 0.8% impacted by losses in the market value of seed capital in the funds we manage. Despite market headwinds, our assets under management remained relatively flat, growing by 2% 2.4% quarter-over-quarter in the asset management unit and contracted by 1% quarter-over-quarter in the wealth management unit.
As we shared with you on our Investor Day we took the strategic decision to reduce exposure to the most volatile business of this line of business. We have made progress in this front, but it's important to emphasize that the process is graduate. Next slide please. Now, we will look at credit cards consolidating dynamics. On a quarter-over-quarter basis our structural loan measure and average daily balances grew 1% or 0.3%, with FX [indiscernible] growth in BCP, retail banking, which has shifted away from the most vulnerable segments was offset by a contraction in Wholesale Banking at BCP and Mibanco. Our deposit base expanded 3.5% or 1.2% with FX neutral. This evolution was driven by an uptick in time deposits and demand deposit, which was partially offset by a drop in saving deposits.
Additionally, the migration of funding in sols from low costs to time deposits decelerate. On a year-over-year basis, structurally loans increased 1.2% measuring average daily balances fueled primarily by retail banking, at BCP on Mibanco. Deposit balance dropped 2.8% or 0.5% with FX neutral. Low cost deposits as far as system wide and currently represents 63.7% of our total deposits. Our market share in low cost deposits by the end of all is stand at 40.3%. Next slide, please. Now, let me explain core income dynamics. On a quarter-over-quarter basis core income rose 1.4% on the back of NII, which rose 1.6%. Growth was attributable for more favorable interest earning asset mix and to our interest rate management. When analyzing the results for fee income and FX transactions, it is important to know that both lines have been affected by our operation in BCP, Bolivia, where we charge fees to FX clients to offset losses on buy-sell FX transactions.
Excluding BCP, Bolivia, fee income rose 2.9% quarter-over-quarter driven by an uptick in transactional levels from debit card collection services and bill payments at BCP and gains in FX operations diminish 2.6% quarter-over-quarter, due to a dropping FX transaction volumes at BCP. On a year over year basis, core income increased 8.8% on the back of NII, which rose 12.9% due to an uptick in the structural loan volumes and our active interest rate management. Excluding BCP, Bolivia, fee income diminished by 1.9% of the back of lower fees, at [Indiscernible] paid was an adjusting in the fee framework applicable to a significant share of affiliates at Credicorp Capital primarily due to lower assets under management in the third party fund distribution business.
These dynamics were partially offset by gains in FX transactions, which grew 1.4%. In terms of margins, net interest margin rose 9 basis points quarter-over-quarter to stand at 6.11%. Risk adjusted NIM fell marginally over the same period due to an increase in provisions and is stood at 4.45%. Next slide please. Let's look at the dynamics of a structurally non-performing loans. As indicated early adverse events in 2023 and weak economic performance continue to client impairment performance and consequently portfolio quality. In this scenario, on a quarter-over-quarter basis growth in structural and non-performing loans was driven by Wholesale Banking where specific clients in the hospitality and commercial real estate sectors became delinquent.
Individuals were the debt service capacity of clients continue to face challenges due to over indebtedness, unsustainable employment. SME-Pyme where low ticket sub-segments have poor payment performance, and Mibanco where the increase in delinquency was concentrated in over indebted clients, clients impacted by social conflicts at the beginning of the year or those affected by climatic anomalies. On a year year-over-year basic, is structural non-performing loan volumes increased due to an uptick in refinance loans from Wholesale Banking. The evolution of non-performing loans and retail banking at Mibanco was driven by the same factors as in the quarterly analysis. In this context, the structural coverage ratio is stood at 101.4%. The NPL coverage ratio fell quarter-over-quarter and year-over-year driven by Wholesale Banking clients, which represents a deterioration that has been previously provisioned and high, high and have high levels of collateral.
Please refer to appendix two for more details. Next slide, please. Moving on to provisions. The cost of risk has risen once again and stand at 2.5% while the structural costs of risk is stand at 2.6%. This reflects the fact that client payment capacity has deteriorated alongside ongoing macroeconomic contraction. Provisions for the individual segments at BCP have risen since, as I just explained payment performance has been impacted mainly to consumer and credit cards. Additionally, individuals provision for mortgages increases to reflect increased expected losses on lending to clients who have reported an uptick in delinquencies in consumer probes or in other entities. Provisions at SME-Pyme and BCP and Mibanco are also up driven by the downturn in payment performance as I just described.
The aforementioned and was partially offset by reverse effect, Wholesale Banking, after some clients in the corporate segment register improvements in the credit ratings or canceled obligations. Next slide, please. We will review the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operational expenses grew 11% in the first nine months of the year, driven primarily by core business at BCP and disruptive initiatives at the Credicorp level. At BCP, core business fueled growth in expenses through an uptick in IT expenses related to increased use of cloud as clients go more digital investments, enhanced digital capabilities and improved service security and most to attract more specialized digital talent.
Marketing expenses, mainly driven by the advertising to boost deposits and digital sales. Expenses for disruptive initiative at Credicorp level increased 64.2% as some of these initiatives has scaled up. Operating leverage remains strong at BCP and Mibanco. Operating expenses remain under control, but operating income is still a challenge. In this context, our efficiency ratio is stood at 45.1% for the first nine months of the year, down 160 basis points year-over-year, driven by positive operating leverage at BCP, and Pacifico. Next slide please. This quarter profitability was sustained by solid results in our universal banking and insurance business. ROE this quarter decreased to stand at 16.2%. Meanwhile, ROE for the first nine months of the year was 17.8%.
All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. To exercise caution, we have decided that no additional dividends will be distributed this year. Now before commenting on our perspective for the rest of the year, I would like to briefly discuss core expectations on the magnitude for El Nino phenomenon for coming months. Next slide please. At the time of our last conference call, our outlook contemplated El Nino phenomenon that was either weak or moderate in intensity. The combined probability of these two scenarios was 75%. Currently projection from expected -- experts indicate that the two most likely scenarios entail an El Nino that is either moderate or strong in intensity. The combined probability of these two scenarios stands at 96%.
Furthermore, the probability of a strong El Nino over the summer has grown by more than fourfold and currently stands as 49%. It is important to consider that the levels of risk and exposure associated with this phenomenon vary by region but are concentrated in specific areas that experience heavy rains and flooding. The share of Credicorp's loan portfolio located in impacted geographies areas is stand at 6.2%, which is comprises of 10% of retail banking portfolio BCP and a 10% of Mibanco's bank's portfolio. The levels of impact will vary across areas and clients. We have rolled out multiple measures to mitigate the adverse effects of El Nino on our client businesses and the country in general. In a coordinated effort with Pacifico, BCP and Mibanco, we have proactively developed a communication plan to educate our clients and the population about taking specific proactive measures to mitigate potential damage to homes or businesses.
Additionally, we have adjusted our underwriting policies for the most important clients in retail banking, or BCP and Mibanco. We have also leveraged our extensive network of relationship managers who are working with clients in advance to solve a potential financial needs and help them to be better prepared. The El Nino underway is expected to generate impacts that are strong, not catastrophic, such as that seen in 1982 for example. We are rolling up preventions and response plan with anticipation to reduce impacts and support clients. Next slide please. Significantly weaker than expected economic performance for Peru coupled with a material change in the outlook for El Nino over the coming summer has triggered changes in the perspective for our business, particularly for costs of risk and consequently, ROE.
Our new estimates are in line with that a scenario of a moderate to a strong El Nino. As previously mentioned, our updated macro scenario for 2023 now reflects a GDP growth estimates close to zero percent with a downward risk. A structural loan growth measuring average daily balances remain in line with guidance. NIM in turn remains resilient and such is expected to sit within guidance. We now expect the full year cost of risk to stand between 2.6% and 2.9% impacted substantially by provisions related to expected losses caused by El Nino. We still expect a consolidated efficiency ratio between 45% and 47% as BCP and Mibanco continue to demonstrate positive operating leverage. Given the aforementioned dynamics ROE is not likely to stand at around 15.5% for the full year.
With these comments, I would like to start the Q&A session.
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