Credicorp Ltd. (NYSE:BAP) Q4 2022 Earnings Call Transcript February 10, 2023
Operator: Good morning, everyone. I would like to welcome you all to the Credicorp Limited Fourth Quarter 2022 Conference Call. A slide presentation will accompany today’s webcast, which is available in the Investors 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 opportunity to ask question at the end of today’s presentation. . Now it is my pleasure to turn the conference over to Credicorp’s IRO, Milagros Cigüeñas. You may begin.
Milagros Cigüeñas: Thank you, and good morning. Speaking on today’s call will be Gianfranco Ferrari, our Chief Executive Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Reynaldo Llosa, Chief Risk Officer; Dario Ferrari, Head of Universal Banking; Francesca Raffo Chief Innovation Officer, Cesar Rivera, Head of Insurance and Pension; and Carlos Sotelo, Mibanco’s Chief Financial Officer. Before we proceed, I would like to make the following safe harbor statements. Today’s call will contain forward-looking statements, which are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties and I refer you to the forward-looking statements section of our earnings release and recent filings with the SEC.
We assume no obligation to update or revise any forward-looking statements to reflect new or changed event or circumstance. Gianfranco Ferrari will open the call and will comment on the key milestones achieved in 2022, followed by Cesar Rios, who will comment on the macro environment in which we work, our financial performance and provide our guidance for 2023. Gianfranco, please go ahead.
Gianfranco Ferrari: Thank you, Milagros. Good morning, everyone. Thank you for joining us. While we reported a solid quarter, I would like to reflect on some of the key accomplishments of the year. First of all, I am closing my first year as CEO of Credicorp. As you know, when I came into the role earlier in 2022, I had already spent many years with the group, and in particular, at BCP. I had worked as part of the prior leadership to establish the foundation of what are the key strategic initiatives that guide us today. In particular, I am very proud of the important work we’ve done in advancing our governance and operating structures over the last three years aimed at ensuring that sustainability would remain an important part of how we do business.
Today, sustainability is being integrated into our strategy, propelling our ability to become the changed agent that we aspire to be and driving positive impact in the countries in which we operate as sustainability becomes more inclined with the core of our business strategy, which is present in how we think and act every day. We have shifted the way we operate in record time because our purpose and commitment have been embraced from top down to bottom up, leveraging our competitive advantages to be a key enabler of financial inclusion and financial education in the Andean region. We’ve launched multiple initiatives across our subsidiaries. I would like to highlight that in 2022, we have financially included more than 1.1 million people through Yape and our financial educational web series from BCP surpassed 47 million views.
This year has also been a year of learning for me and an opportunity to flex my strength. I reinforced my knowledge of all our businesses, including insurance and wealth management, which were newer to me. Moreover, I lend a hand to our overall digital transformation strategy based on my experience at BCP where we are more advanced in this area. Fundamentally, our digital strategy is aimed at facilitating our ability to live our purpose and achieve our sustainable growth objective for expanding our total addressable market and strengthening our operational drivers. We highlighted our Digital Day in March of last year, the innovation initiatives that are taking place through innovation labs were disrupting ourselves and expanding our tech capabilities and data-driven approach at each of our subsidiaries.
Our more mature disruptive initiatives such as Yape keep growing exponentially and are positively impacting society. At the end of the year, Yape had over 11 million users in Peru initial daily part of Yapero’s life solving their financial needs. To give you a sense of how prevalent Yaperos are in Peru, approximately half of the low population in Peru use Yape. We are on the track to be the payment network for Peru. Now please turn to Slide 1. Overall, we have had a very positive year, not only based on our solid financial results, but most importantly, I would say that as a holding, we have already absorbed the negative impacts due to COVID. On a full year basis, our net income grew almost 30% and ROE was 16.7%. We maintain our prudent stance in managing risk and our cost of risk is on the road to normalization.
We go into 2023 with a very strong balance sheet to both support our initiatives as well as navigate any near-term volatility in front of us. It is important to highlight that despite continued political stability, fundamentals in Peru remains strong, including the relatively low levels of debt to GDP, important levels of international reserves and an independent central bank led by a technical and experienced board. Having said that, there are some important highlights of the year that I would like to point out. First, the very strong performance of BCP turning in an ROE of 22% for the year. Second, Mibanco is on track to deliver the ROEs we expect from that business. And finally, Pacifico, a business where you have to express reservations in the past, has now reached an ROE of 19.2%.
We are optimistic about our ability to keep increasing the levels of penetration of this business. On the other hand, we still face a challenging environment for investment banking and wealth management, requiring us to redefine our strategy going forward to reach the ROEs we aspire with these businesses. I expect that we will be able to share more details on this regard during our next call. Before I pass the word to Cesar, I do want to acknowledge how concerned we are that, again, the continued political turmoil and the social unrest we’re experiencing in Peru after the failed coup on December 7, has resulted in near-term headwinds, not only to our businesses, but most importantly, to Peru and its citizens. We, at Credicorp, remain focused on fulfilling our purpose and take very seriously our responsibility and obligation to step up, speak up and more proactively work to solve the fundamental structural issues in the countries we operate.
We are accelerating our agenda of inclusion and financial allocation key factors related to poverty alleviation. Through greater inclusion, we aim to offer to those vulnerable granular levels of security through savings, income generation and economic independence. Cesar, please go ahead.
Cesar Rivera: Thanks, Gianfranco, and good morning, everyone. We are closing a very good year where the fourth quarter reflects less favorable macroeconomic perspective in Peru, which translated into higher provision and the habitual seasonality expenses at year-end. I want to start by highlighting some key quarter-over-quarter dynamics. The structural loans grew 0.8% measuring average daily balances, driven primarily by retail banking at BCP and Mibanco. Deposits contracted 3% due to a drop in demand deposits in a context marked by lower liquidity across the financial system. Low-cost deposits which have fallen in recent quarters after having increased significantly in 2020 due to the pandemic relief measures still represent a significant proportion of our funding base weighing in with 50.7% share at quarter end compared to 49% at pre-pandemic levels.
In terms of asset quality, the structural NPL ratio edged up to 4.95% after a financing growth in wholesale banking, particularly in real estate and tourist sectors, as we expected. The aforementioned was partially offset by the improvement of Mibanco and Consumer segment NPL portfolio. In turn, structural cost of risk increased by 85 basis points to a stand at 2.06%. At BCP, growth in provisions was driven by an update to our estimates for key macroeconomic variables such as inflation, interest rate and GDP growth and also reflects the negative impact that rising inflation has had on payment behavior in the Consumer segment. Provisions at Mibanco also increased materially this quarter due to an initially low comparative base and to an increase in the low portfolio default ratio.
This evolution was driven by maturities of specific vintages, which led us to change our credit policy in the second quarter of 2022. From a year-over-year perspective, net interest income registered very strong growth of 30.9%, driven by 10.4% expansion in structural loans measured in average daily balances, ongoing repricing of our portfolio in a context of higher rates and a very competitive funding base. Gains on FX transactions increased due to improvements in products and channels. Fee income decreased due to a drop registered in investment banking and wealth management, which was partially offset by growth at BCP stand-alone. Provision expenses increased materially over a typically low base last year. Asset quality remains adequate, and we continue to maintain a strong allowances for loan losses which are equivalent to 5.6% of structural loans.
Our coverage level or structured and nonperforming loans remained substantial at 112.2%. In the insurance business, the loss ratio fell significantly to 65.4%, which although close to pre-pandemic levels, still reflects the impacts of COVID-19. In the aforementioned in context, Credicorp registered in the quarter ROE of 15.3% and continued to maintain both, a sound capital base and a diversified business portfolio. Next slide, please. At the beginning of 2023, conditions for emerging markets improved due to two main drivers. First, inflation in the U.S. to the surprise of many is trending downward and is now far from its peak in June. This has raised expectations that the pinwheel has slowed down the pace of rate increases even further in what is already it’s most aggressive rate hike cycle in four decades.
Second, the Chinese government shifted gears and eased its highly restricted COVID-19 stands and move to shore up the real estate sector seeking to propel economic growth. Both of these factors have had a positive effect on metal prices. Prices for copper, Peru and Chile’s main export product reached the highest level in 7 months of around $4.2 per pound. Gold, another of Peru’s primary exports, shipped a nine-month high. As inflation decelerates, U.S. treasury yields have dropped which generates a more favorable environment for emerging markets as a whole. Next slide, please. Peru’s GDP is expected to grow around 2% this year and social unrest ceases this quarter. We believe that GDP in Colombia will decelerate to 1.3% after posting one of the highest growth rates in the world in 2022.
Chile in turn, is expected to contract 0.5%. LatAm Central Banks have been decisive in preventing the anchoring of inflation expectations. In the context of a slowing inflation, Chile Central Bank maintained the same monetary policy rate in four consecutive sessions. Colombia Central Bank, on the other hand, instituted rate hikes at a strong pace given the inflation shows no signs of peaking. In Peru, upside risk to inflation have emerged recently in a context of social outrage. As such, Central Bank decisions, indemnity in future are likely to be influenced by the impact of the current scenario, which may mean that record high interest rates continue longer than previously expected. Next slide, please. Despite the challenging context, BCP continues to deliver a strong profitability.
Regarding key quarter-over-quarter dynamics, results were driven by an increase of 8.4% in core income. This evolution was skewed while 12.2% growth in net interest income which rose despite the fact that the average daily balances of a structurally long registered little variation. Our disciplined approach to pass through in the context of rising interest rate coupled with our ability to lever as a transactional funding base to mitigate the impact of rising funding costs has bolstered our results. This quarter, gains in FX transaction growth as we leverage intelligence capabilities in a volatile FX market. Nonetheless, income fell this quarter after fees were eliminated for transfers between different cities in September 2022. Accordingly, transactional fees paid to third parties were up due to higher volumes.
The aforementioned growth was offset by an increase in provisioning mainly in retail banking due to new macroeconomic perspective for inflation, reference rates and GDP. Additionally, payment behavior in the consumer segment was impacted by raising inflation. Finally, provision expenses increased in wholesale banking over a low base last quarter. Operating expenses were also up due to seasonality in this context, return on average equity stood at 20.4% on a full year basis. Growth in net income was skewed by a 28.5% increase in net interest income, which was bolstered by raising interest rate and a 12.2% increase in structural loans measured in average daily balances. Wholesale Banking grew 12.3%, while retail banking expanded 12%. Additionally, fee income increased 11.3% fueled by an uptick in transactional levels, particularly through digital channels and POS and growth of 12.4% in the net gain in FX transactions as we manage FX volatility and roll out improvements in products and channel offerings.
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Loan loss provisions increased 55.6% driven by the Consumer and SME segments. In the Consumer segment, payment behavior was affected by higher observed inflation and an unusually low base in 2021. In SME-Pyme, higher provisions respond to growth in higher risk segments, particularly through the new digital offer, which correlates with higher interest rates. Operating expenses grew 13.4%, driven by growth in variable compensation which was in line with higher income, an uptick in IT expenses bolstered transactional capabilities and an increase in investments in disruptive initiatives. In this context, BCP’s efficiency ratio stood at 40.7% and ROE at 22%. These indicators reflect improvements of 270 and 230 basis points, respectively. Now please turn to the next slide.
Yape has more than 11 million users and 8.1 million active users. If we consider users that make at least one transaction per month, Yape is closer to reaching its 2026 target of 10 million active users. Currently, 42% of Yape’s active users generate revenue, and this number is on the rise. We continue to see positive trends across most of our metrics, including the measurement of our transactional volume which grew more than 2.6 time this year to reach PEN66.2 billion in 2022 with 19.5 monthly transactions per active users. Yape are trending upward and reached 9.8 million in December. This translated into market share of 25% of total pop-ups in the Peruvian market. As one of Peru’s most important distribution channel, Yape is creating new sources of income for Credicorp through Yape Promos and Yape micro loans.
By 2026, we expect 5 million affiliates will have access to financial product through Yape. Next slide, please. Mibanco registered a drop in profitability this quarter, which was primarily driven by growth in provisions. I would like to look at the key quarter-over-quarter in dynamics. The company hit a record high for disbursements, an uptick in disbursement yield helped us mitigate growth in the cost of funds. Nonetheless, results were impacted by higher provision due to two factors. First, as anticipated, we registered an initially low base last quarter after methodology improvements were incorporated to the model; and second, specific vintages mature which increased the portfolio default ratio. The higher risk reflect on these vintages was expected and drove our decision to review our risk appetite in the second quarter of 2022.
Mibanco’s structural NPL ratio dropped due to an uptick in write-offs and stood at 5%. As a result, Mibanco’s quarterly earnings dropped 68% quarter-over-quarter from a full year perspective. Net interest income grew 15% in 2022, driven by an increase in structural loans and in disbursement rates. Provision expenses rose 15% in 2022, which was attributable to loan growth and a variation in our risk appetite. Operating expenses grew 7% year-over-year, driven mainly by marketing and IT expenses and by variable compensation, which reflected growth in earnings and fulfillment of commercial targets. In this context, the efficiency ratio dropped to 51.3% in 2022, while ROE stood at 16.5%. At Mibanco Colombia, pricing strategies and significant loan growth were challenged by a quick rise in the cost of funds, which reflected the evolution of market rates.
Provision expenses were well controlled and operating expenses grew in line with portfolio expansion and initiative to develop new capabilities. Next slide, please. Grupo Pacifico’s net income is decreased 25.4% quarter-over-quarter. In the Life business, net earning premiums decreased over a particularly high pace due to seasonal effects. This dynamic was partially offset by a drop in net claims of COVID-19. In the PC business, net earning premiums increased primarily in commercial lines due to an uptick in renewals. This evolution was partially offset by higher claims in commercial lines from a full year perspective. Grupo Pacifico’s net income rebounded driven by both the Life and PC business. In the Life business, net earning premiums increased driven primarily by Group Life through price adjustments and an increase in sales of the complementary insurance for occupational risk product and secondarily by an increase in the affiliate base in disability and survivorship.
This positive dynamic was accompanied by a drop in COVID-19 claims which were substantial in 2021. In the Property & Casualty business, net earning premiums increased primarily in personal lines due to growth in sales of car protection products through bank assurance and oncological products via medical assistance. Claim growth, particularly in the commercial line after economic activities normalized. These dynamics led the total loss ratio to stand at 67%, which is close to pre-pandemic levels. In this context, Grupo Pacifico’s return on equity stood at 19.2% this year. Next slide, please. The investment banking and wealth management business, while still challenged by market conditions has registered a slight recovery in recent quarters. On a quarter-over-quarter basis, earnings rose driven primarily by capital markets where gains were registered in the proprietary fixed income portfolio and secondarily by corporate finance where a number of deals were closed at year-end.
Asset management and wealth management remained flat. From a full year perspective, assets under management dropped 18.7% driven by fund outflows in Peru and Chile and decreasing market value of funds. In this context, income fell 13.1% primarily in asset management. This reduction occurred over a high base last year when we registered a strong gain from anticipated redemptions and third-party upfront fees due to migration to offshore products in a context marked by political risk. The change in the market environment lets us to initiate a strategic review for this business, which is close to completion. We have identified key levers to achieve long-term profitability and are determining which business represent the greatest opportunity for row and which can be used as platform to capture efficiencies.
Next slide, please. Now we will talk about Credicorp consolidating dynamics. On a quarter-over-quarter basis, our interest earning assets fell 3.1% due to a drop in available funds, investments and Reactiva loans and structural loans grew 0.8% driven by Retail segments and Mibanco. Amortizations in wholesale banking clients partially offset this growth. Our funding base dropped 4.7% is skewed mainly by a decrease in demand deposits. The positive impact of asset repricing and higher yield assets structurally offset the increase in the funding cost in this context, the yield on our interest-earning assets rose 65 basis points versus an expansion of 29 basis points in the funding cost. On a full year basis, interest earning assets and funding follow trends similar to those in this quarter.
On the asset side, there was a shift in the mix where higher yield structurally launched name in micro finance and consumer loans reduced a higher growth than that seen in other segments. In terms of our deposit base, the mix tilted to higher cost products, where time deposits were up 23%. These dynamics and the fact that we maintain a large share of the market transactional deposits led to increase in our asset yields to obtain growth in the cost of funding. Next slide, please. Now I will discuss the evolution of core income. On a quarter-over-quarter basis, core income grew 5.6%, driven primarily by an increase in net interest income. Consequently, the net interest margin rose 42 basis points to stand at 4.73%, while structural NIM stood at 5.95%.
Risk adjusted NIM fell 6 basis points to stand of 4.44%. Moreover, the net gains FX transactions also increased. Nevertheless, fee income fell 2% driven primarily by the elimination of fees for intercity transfer and the decrease in fixed pay for third parties, mainly due to higher transactional volumes. On a full year basis, core income grew 17.9%, fueled by growth in net interest income which rose 23.1% in line with an uptick in loan volumes and interest rates. NIM grew 97 basis points and reached 5.07% in 2022 risk-adjusted NIM stood at 4.27%. Net gains on FX transactions grew 17.5% and also boosted the core income result. Fee for growth 4.2% driven by an uptick in POS transactions, higher fees for personal loans disbursements and an increase in bank-to-bank transfer.
The 9.4% increase in banking services fees was partially offset by a drop in fee income from mutual funds. Next slide, please. I will now move to Credicorp’s structural loan quality dynamics. On a quarter-over-quarter basis, our structural NPL volumes increased slightly. NPL volumes in increased mainly in wholesale banking after some clients in the retail and hotel sector abated of financing after having been reprogrammed during the pandemic. And SME-Pyme due to overdue loans of clients in a segment with higher risk profiles, but also higher margins. Asset quality in each segment remains within our expectations and provision levels remain adequate. The aforementioned increases were partially offset by a reduction in NPL volumes at Mibanco and in consumer loans due to write-offs.
Year-over-year, similar to quarter-over-quarter, the increase in NPL volumes was driven primarily by wholesale and SME-Pyme. Write-off in SME-Pyme and Mibanco are expected to continue given that regulatory restrictions or charge-off of loans to clients that possesses both structural and Reactiva loans has been lifted. Credicorp’s structural NPL ratio was basically flat at 4.95% after decreasing NPL volumes, while it was offset by higher loan balances. Next slide, please. Now let me explain structural loan loss provisions dynamics. On a quarter-over-quarter basis, growth in structural provisions was driven mainly by BCP and Mibanco. The main drivers at BCP were updates to macroeconomic projections for inflation, interest rate and GDP, which impacted retail banking in particular.
The impact of high inflation on payment behavior in the consumer segment at Mibanco, the main drivers were an unusually low base last quarter and the maturity of specific vintages which led to the fall ratios for the portfolio to rise. On a full-year basis, the structural provision expenses increased 38% over an exceptionally low base and are moving towards normalized levels. In this context, the structural cost of risk stood at 2.06% this quarter and 1.26% this year. The structural coverage ratio stood at 112.2%. Next slide, please. As mentioned last quarter, a significant portion of our annual expenses are registered in the last quarter of every year. To base our analysis and comparable figures, we explained the evolution of efficiency in accumulated terms.
Operating expenses grew 11.5% on a full year basis, which reflected an increase in administrative expenses and in salaries and employee benefits. Growth in administrative expenses was driven by an uptick in IT expenses related to cybersecurity new functionalities, a significant higher digital-transactional volumes, and an increase in expenses for fees which reflect growth in transactions; and finally, the acceleration in destructive initiatives. Salaries and employee benefits grew 10.5% driven by growth in variable compensation by an uptick in hiding of specialists for disruptive projects and IT. In this context, Credicorp’s efficiency ratio improved 150 basis points on a full year basis, driven by higher core income and BCP stand-alone and Mibanco.
If we exclude investments in disruptive initiatives such as Yape and Krealo, the efficiency ratio for the year stands at 41.6%, which represents a difference of 290 basis points from the reported figure. At BCP and Mibanco which accounts for a significant part of operating expenses, operating income grew faster than operating expenses in 2022. In this context, BCP efficiency ratio fell to 170 basis points and Mibanco 410 basis points. Next slide, please. Credicorp’s full year profitability was fueled by better results at Universal Banking and microfinance and a solid recovery on the insurance front. In addition, profitability was impacted by lower results at the holding level mainly due to a decrease in net financial results and higher expenses for withholding taxes.
Net financial results at the holding were impacted by an increase in the negative carry of the senior bond in line with the devaluation of the investments made with the use of these proceeds. Regarding tax expenses at the holding in 2022, the provisions for withholding tax increased, reflecting higher expectations of dividend payments. As a result, ROE for the full year stood at 16.7% this year, 276 basis points above the level of 2021. Finally, note that ROEs for the first and second semester were somewhat higher than the full year figure even the equity balance at the end of June was lower. This reflected dividend payments and the accumulation of unrealized losses at the end of the first half of the year. Now I will move on to the outlook.
Despite current political volatility and social unrest, Peru’s macro fundamentals remain solid, and we expect Peru GDP to grow between 1.8% and 2.2% in 2023. In terms of our loan portfolio, we expect our structural loan portfolio measured in average daily balances to grow between 6% and 10% driven mainly by retail banking. The evolution of total loans will depend on the pace at which Reactiva balances are amortized. High levels of interest rates, the shift our loan growth toward a higher yield mix and our competitive funding base will positively impact NIM. Accordingly, we expect NIM to stand between 5.8% and 6.2%. The cost of risk guidance is between 1.5% and 2%. This range reflects higher uncertainty and an ongoing trend back to pre-pandemic figures at the segment level and the shift of our loan portfolio mix towards retail.
In 2023, we will continue to invest significantly in digital transformation and disruptive initiatives to bolster our long-term competitive position. In this scenario, the efficiency ratio is expected to situate between 44% and 46%. In the aforementioned in context, we expect our ROE to situate around 17.5%. Finally, please consider that this guidance is based on the application of the IFRS 4 accounting standard. This may lead us to adjust these numbers in May as we implement IFRS 17 in the insurance business. With these comments, I would like to start the Q&A session.
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