Credicorp Ltd Q3 FY2023 Earnings Call

Good morning everyone. I would like to welcome all of you to the Credicorp Limited Third 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. Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Ciguenas. You may begin.

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 Yape's progress. Finally participating in the Q&A session will 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 expectations and beliefs and are subject to a number of risks and uncertainties. We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Cesar, please go ahead.

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 benefiting from robust brand recognition and strong customer loyalty. Our solid capital base represents a strength particularly within a challenging credit cycle where the impact of soft macro conditions on payment performance in specific segments is evident. We believe strongly in the importance of continuing to invest in both the technological transformation of our core businesses and in disruptive initiatives to maintain and enhance our strong competitive moats and future sustainability. By embracing our agile and self-disruptive mindset we are building a diverse business, capturing synergies, maximizing our main profit pools, targeting new client segments, and developing our disruptors as we seek to retain a healthy and sustainable ROE. Raimundo will now provide an update on the sustained progress at Yape.

Thanks, Cesar. And good morning, everyone. Yape 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 this service offers to both clients and the ecosystem in general. Top-ups are a clear example of how Yape is helping us decouple 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%. Last January, we enabled bill payments through Yape and have seen an upward trend with over 20% of Yaperos now using the service. We are currently at just 5% of our expected time for bill payments, so there is still an immense opportunity for continuous growth. Similarly, use of our features in each business line including POS, QR codes, payments, microloans, financial services, and promos within the 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-fold pace from non-existent in early 2022 to around 5% at the end of Q3. Our long-term aspiration is above 20%. Unitary economics continue to move toward 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 evolution as a SuperApp with multiple product launches.

Thank you, Raimundo. I will share now the key financial highlights of the quarter focusing primarily on quarter-over-quarter evolution to emphasize the recent shift in trends. 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% backed by positive dynamics and revenues from debit cards, 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's credit cycle continued to deteriorate. A structural NPLs ratio 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, as the recent change in macro and climate perspective will more than likely weigh significantly on our profitability for the rest of the year. In the third quarter, the Peruvian economy is suspected to have registered its third consecutive quarter decline year-over-year. Several factors have driven weak performance, including social protests, climatic events, and insufficient governmental efforts to stimulate the economy. Despite this disappointing performance, Peru's macroeconomic fundamentals remain robust, with low levels of public debt and high international reserves. We continue to closely monitor the evolution of El Nino and its impact on our businesses. The El Nino Costero weather phenomenon that has affected Peru this year is associated with a sustained rise in sea surface temperature along the northern or central coast of Peru. El Nino Costero has battered the fishing, agriculture, and textile sectors in particular. Given that there was no winter season this year in the coastal region, performance in these key sectors of the economy has exercised a multiplier effect and exacerbated contraction in the non-primary sectors. BCP results were impacted by the economic downturn described earlier. This has pressured provisions and impacted loan growth. Provisions remain high in a prolonged recessive high inflation environment that has affected the payment capacity of vulnerable segments in individuals and higher risk segments in SME-Pyme. Despite this, we see positive trends continuing into the future. ROE this quarter decreased to stand at 16.2%, reflecting our resilience and ability to adapt to challenging circumstances. 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 likely to stand around 15.5% for the full year. We will now begin the Q&A session.

Thank you, we will now begin the Q&A session. Thank you. Our first question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for the call and taking my question. I guess my question, looking at the revised guidance of 15.5% ROE for the full year, this would imply about $700 million in earnings in Q4, which would be around a 9% ROE. I assume that's all because of much higher provisions. Can you clarify if that sounds correct?

Hi, Tito, thank you for the question. I would say that you are more or less in line. You are correct that the main driver for the decreased profitability of the quarter is the increased provisions due to expected losses by El Nino. Comparing Q4 with Q3, there is also a seasonal increase in expenses at BCP that happens every fourth quarter.

Okay, that's very clear. Thanks for clarifying. My follow-up question would be on the provisioning. How much of this is just due to expected losses? Will cost of risk normalize next year, and if yes, what would be a normalized level of cost of risk for 2024?

Yes, Tito. That will depend on the severity of the El Nino. Today, we have accumulated an impact on the fourth quarter that is very relevant, which explains the increase in the cost of risk projected for the whole year. Having said that, we have a strong NIM, and we will probably see an impact in provisioning during the first semester of next year.

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

Okay, perfect. Great. Thank you so much.

Thank you. Hi, good morning. Gianfranco, Cesar, Francesca. Thank you for taking my call. My question would be regarding your ROE expectations for next year.

Hi, Ernesto. As you know, we will provide guidance for 2024 in the next call. Directionally, I would say that, if the impact of El Nino aligns with our current expectations, ROE for '24 should be relatively better than this one.

Okay, excellent. My second question relates to management's efforts in investing in technology and digital transformation. If we enter a medium to strong El Nino, will you consider postponing some of these investments?

What we have done in the past reflects our general strategy. When GDP growth expectations began to deteriorate earlier in the year, we adjusted expenses to better align with income generation capacity without neglecting investment in the transformation of the business. We are committed to long-term profitability while managing prudently.

Hello, thanks for taking my question. Could you quantify how much of the additional provisioning expected in Q4 relates to El Nino?

Yes, it explains almost all of that change between our guidance and the previous quarter. It has both a specific regional impact, which could be severe if we have a strong El Nino along with an impact on the overall economy.

Hi, guys. Good morning. What will be the main source of revenue for Yape in the near future?

Currently, we expect payments to continue growing as our number one line of revenue. But in two or three years, lending will become much more relevant. I would say that around 40% to 50% will be payments revenue, with about a third coming from lending.

Hello. So far, so good, right? Your NII is still really healthy. But what is the outlook for 2024?

If we have the impact of El Nino as expected, we should see a slight increase in revenues, driven by managed NII and increasing volumes, likely starting in the second quarter of the year. We still expect fees to increase, driven by transactional activity. I would consider a single-digit increase for next year, with GDP expected to be around 2%. Totally Correct. We are concluding the deterioration of the bad portfolio experienced this year, with the most impacted areas linked to El Nino. Our expectations, putting El Nino aside, is that we would reach the highest cost of risks during middle of next year, followed by a decline during 2024. We view the environment properly today and will adjust our underwriting policies for sectors that could be affected by northern Peru, but our long-term strategy remains the same. We expect significant impacts of El Nino that could affect clients in vulnerable sectors. However, we are prepared to adjust actions based on its evolution. Thank you all for your questions. As discussed, challenging circumstances persist in Peru due to weak economic performance and the probability of El Nino worsening in the upcoming summer season. However, we are confident that our preventive measures will help us navigate these challenges effectively. It's important to remember that El Nino is a transitory shock, and historically, we have seen the economy rebound after prior El Nino events.

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