Credicorp Ltd Q1 FY2024 Earnings Call

Good morning, everyone. I would like to welcome all of you to the Credicorp Limited First Quarter 2024 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. Now, it is my pleasure to turn the conference call over to Credicorp's IRO, Milagros Cigüeñas. You may begin.

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&A session will also be Alejandro Perez-Reyes, Chief Operating Officer; Francesca Raffo, Chief Innovation Officer; Reynaldo Llosa, Chief Risk Officer; Cesar Rivera, Head of Insurance and Pensions; Carlos Sotelo, Mibanco Chief Financial Officer; and Diego Cavero, Head of Universal Banking. 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 events or circumstances. Gianfranco Ferrari will start the call with opening remarks about our improved macro environment and brief comments on our strategic initiatives, followed by Cesar Rios, who will present in more detail the evolution of key macro figures, our financial performance, and revised outlook for 2024. Gianfranco, please go ahead.

Thank you, Milagros. Good morning, everyone. Thank you for joining us. Despite our strong structural macroeconomic figures, the persistent fragility of the government and its limited capacity to implement timely policies aimed at stimulating investment and economic growth has prompted S&P to downgrade our sovereign credit rating to BBB minus. This downgrade is expected to affect investor appetite for our country. In our view, however, we do not expect the economic growth agenda that has been put in place this year by the executive branch to change prior to the 2026 general elections. The overall economic outlook remains positive with expected GDP growth revised upward to 3% in March from the previous projection of 2.5% made in our last call. Beyond better weather conditions benefiting the fishing, agriculture, and textile sectors as El Niño has ended, several factors support a gradual recovery of economic activity during the upcoming quarters. Copper and gold prices have increased significantly and are expected to remain high. A lower inflation rate, which will benefit consumers, and lastly, the stimulative effect of counter-cyclical economic policies, such as a lower central bank policy rate and higher dynamism of public investment, which will start to feed into the economy. Despite its challenges, the Peruvian government has placed explicit focus on promoting investment to contribute to business confidence recovery. In the first quarter alone, awarded infrastructure investments reached $3.0 billion. Additionally, the government's plan to establish a unified office for infrastructure investments marks a significant step forward. Economic expectations indicators have trended upward since the end of last year. Anticipated long growth is on the horizon as private sector confidence strengthens. Additionally, inflation stands low compared to other Latin American countries and formal sector wages have experienced recent growth. The Congress' recent approval of the seventh withdrawal of pension funds underscores again the need to reform the current private pension model in Peru. Turning to our first quarter results, we delivered a strong ROE of 18.2%, including the impact from the reversal of provisions at BCP and Mibanco. This was achieved in the context of weak long growth and an economy that is slowly starting to recover. Risk-adjusted needs remain resilient, reflecting our disciplined interest rate management strategy, further supported by lower provisions and our leading low-cost funding position. Additionally, our strong solvency has allowed us to increase our dividend to $0.35 per share, while also contemplating our plans for continued sustainable growth. Our resolute focus on advancing innovation and strengthening our digital capabilities has fortified our competitive advantages. This has not only elevated our relationships with current clients but has also contributed to expanding financial inclusion. With respect to the macro backdrop, as I just mentioned, we anticipate sustained economic improvement during the year, and Cesar will discuss this in more detail shortly. Now, moving on to strategic development, we remain focused on strengthening our core businesses while also complementing them with disruptive initiatives. As one of the few banks to embrace self-disruption to remain ahead of the competition, we are committed to allowing clients to decide where and how they bank, as has been evident since Credicorp's inception. These strategic initiatives position Credicorp for continued digital advancement and customer-centric growth. At Mibanco, which mainly provides financing to micro-businesses, we are reaffirming our hybrid model strategy. This strategy leverages high-touch in-person visits from relationship managers and digital tools, including centralized risk assessment. After making significant adjustments in terms of pricing and origination guidelines over the past six months, we're observing improved payment performance in new vintages. Additionally, we're now selectively growing within the lower-ticket, higher-yielding segments that have relatively better risk profiles. Our planned advancements are on track, and we expect a rebound in profitability at Mibanco this year. I want to address a question we have been hearing from you on the road related to the potential overlap of Mibanco and Yape clients. Yape prioritizes consumers as its lending business, and Mibanco provides financing mainly to micro-businesses. While we acknowledge that there is little distinction between the pocket of the individuals and the micro-entrepreneurs, the lending business at Yape is at a very early stage, and we're a long way from seeing any overlap. Now, let me turn the call over to Cesar, who will discuss in more detail the micro-environment and the operational and financial performance of our business units.

Thank you, Gianfranco, and good morning, everyone. As Gianfranco mentioned, we delivered strong overall operational and financial results. As I discuss the highlights of the quarter, I will focus on the year-over-year results, which are not impacted by seasonality. Our shift towards retail, coupled with the repricing of our dollar book, allowed us to deliver higher NIM despite a reduction in interest rates. Total loans dropped 3.1%, measuring average daily balances, driven primarily by lower volumes in wholesale banking and amortization of government program loans. The share of low-cost deposits in our funding base stood at 53.7%. NII grew 9.4%, boosted by the aforementioned dynamics. Other core income, which is the sum of income and gains in FX operations, also evolved favorably, boosted by BCP and to a lesser extent by Credicorp Capital. Core income at BCP benefited from monetization initiatives at Yape and solid transactional activity through credit and debit cards. Lastly, insurance underwriting results dropped 5.8%, which reflected a reduction in income from disability and survivorship products in the life business. The cost of risk increased to 2.3%, which incorporates a $250 million release in provisions associated with El Niño. Throughout this presentation, our analysis of provision expenses and cost of risk will isolate the impact of El Niño provisions registered in the fourth quarter of 2023 and reversed in the first quarter of 2024. We will refer to these adjustments as isolating the impact of El Niño provisions. After adjustments, cost of risk increased to 3%. The evolution was driven by a deterioration in payment capacity in SME-Pyme and credit cards and by a downturn in payment performance in consumer loans. The NPL ratio rose 77 basis points to 6.2% as delinquency increased across various segments and in older vintages in particular. As a result, NPL coverage stood at 93.5%. Overall, we delivered strong results on the back of solid growth in our margin and an uptick in transactional activity and disciplined cost control. In addition, we recently announced a dividend payout of 35 soles per share as we pushed capital levels closer to targets across our subsidiaries. Next slide, please. The Peruvian economy is gradually recovering from a very challenging 2023. Economic activity grew 2.8% year-over-year in February, its best figure in almost two years. Furthermore, all the expectation indicators from the macro Central Bank survey stood in the optimistic range for the first time in five years and remained in that range in April. Even though we expect a slowdown in economic activity in March, a rebound should follow in April. The global economic outlook has also improved. Recently, the IMF upgraded its 2024 world GDP forecast as positive indicators continue to point towards a soft landing. Importantly, commodity prices, particularly for copper and gold, which combined represent around 50% of our exports, have risen significantly and are expected to remain high. Peru has accelerated public investments, which increased 40% year-over-year in real terms in the first quarter, representing the highest increase reported in 14 years, excluding the pandemic. ProInversión announced that as of April 2024, the government has already advanced 48% of its 2024 goal to award $8 billion in public-private investment projects. This goal is more than triple the amount awarded in 2023. This positive backdrop has been clouded somewhat by a Standard & Poor's downgrade of Peru's sovereign credit rating to the lowest rank to qualify as an investment-grade country. The agency indicated that this change was motivated by political uncertainty, the actions of a fragmented Congress, and a weak executive branch, which negatively impacted investment sentiment in the private sector and constitute an opportunity cost to growth. In this context, Peru's capacity to rebuild fiscal space is challenged. Given the aforementioned and despite political noise, we forecast Peru's GDP will grow around 3% after highly negative shocks last year due to poor weather conditions and heightened social turmoil. Next slide, please. The United States' strong economy continues to surprise. In fact, due to better-than-expected economic data and hot inflation readings, market participants have pushed back their Fed rate cut expectations once again. Hence, higher-for-longer dollar rates will continue to pose a dilemma for emerging markets. In Peru, inflation has continued to slow and stands within the Central Bank's target range. Since September 2023, the country's Central Bank has decreased its policy rate by 175 points. In Colombia, inflation remains among the highest in the region at 7.2% as of April. Accordingly, the country's Central Bank has adopted a cautious stance and has lowered its policy rate by 150 points since December. Finally, in Chile, inflation is gradually converging toward target. In response, the Central Bank has cut its rate by 475 basis points since its peak. Next slide, please. BCP delivered a strong result, which in part reflected a reversal of provisions set aside last quarter for anticipated El Niño losses. Analyzing key quarter-over-quarter dynamics, total loans measured in average daily balances fell 1.4% driven by a contraction in wholesale loans and repayments of government-programmed loans in SME-Pyme segments. NII rose 1.5%. This evolution was led by a drop in lending costs after term deposits were renewed at lower rates. Interest income increased quarter-over-quarter as we managed our liquidity balances profitably in a context of lower loan growth. The provision expenses, after isolating the impact of El Niño provisions, increased mainly in mortgages due to a base effect and SME-Pyme due to weaker payment capacity of clients in a context of gradual economic recovery. Other income grew 3.1%, fueled mainly by a strong volume of credit card transactions and higher fee channels and secondarily by fee income at Yape. On a year-over-year basis, NII grew 9.3% driven by a shift towards retail loans and pricing improvements. Loan loss provisions, excluding the reversal of El Niño provisions, increased 65.7% driven by deterioration in payment capacities in SME-Pyme and credit cards and by a downturn in payment performance for consumer loans. Other income was up 10.5% underscored by solid growth in fee income through Yape as well as credit and debit card transactions. Operating expenses increased 8.1% driven by an uptick in expenses for specialized IT personnel and disruptive initiatives. In this context, BCP's contribution to ROE stood at 24.7%. Next slide, please. Yape continues to grow and in March registered more than 11.5 million monthly active users who conducted an average of 36 transactions per month. 75% of these active users already generate fee income. Improvements in the lines of business and their functionalities have resulted in pure growth in engagement. Fee income and NPS at the end of March showed that Yaperos used an average of 2.2 functionalities a month. Fee income generated through Yape increased 24.1% quarter-over-quarter, and the NPS reached 78. As a result, Yape obtained an income per active user of 3.7 soles, while expenses for active users dropped to 3.9 soles due to seasonal factors. Yape is closest to reaching breakeven in the coming months. Next slide, please. To reach breakeven, Yape is accelerating income growth by diversifying its sources of revenue. To achieve this, it has been adding functionality to its three lines of business. Yape Payments business is the top revenue producer and has transitioned from offering P2P payments to having a portfolio of fee-generating functionalities, where mobile top-up is the most mature, and bill payments, payment with POS, and checkout functionalities are gaining traction. In the financial business line, in addition to the margin received for floating based on deposit balances, we have two products generating income: lending and insurance. Within lending, disbursements of single-installment and multi-installment loans grew 2.2-fold year-over-year. In insurance, we currently provide statutory accident insurance for vehicles and plan to extend our offerings in the short term. The financial business line is still in the early stages. We are developing differentiated risk management capabilities based on the unique relationship and level of engagement that Yape has built with its users. Finally, within the marketplace business, we have new features such as Yape Promos and Yape Tienda. Yape Promos offers yapero discounts for consumption in affiliated restaurants, cinemas, and other establishments. The gross merchant volume for Yape Promos grew threefold year-over-year. Yape Tienda was launched in September and offers appliances and electronics via e-commerce. Next slide, please. Moving on to Mibanco. On a quarter-over-quarter basis, total loans measured in average daily balances fell 3.1%, driven by stricter origination policies, as we continue to refine our risk models and processes. Additionally, we are selectively starting to grow our small-ticket higher-yielding loans. NII increased 1.4%, mainly due to a drop in the cost of funding, which was triggered by the repricing of the funding base. In this context, NIM increased 7 basis points and stood at 13.4%. Provisions, excluding the impact of El Niño, increased 29.2% due to higher delinquency related to old vintages. From a year-over-year perspective, NII was up 5.3%, primarily due to an uptick in interest income as active loan pricing management mitigated the impact of a loan contraction. The increase in NII was offset by a rise in funding costs. Provisions, excluding reversals for El Niño provisions, fell 10.8%, mainly due to a base effect, considering that the first quarter of '23 required more provisions because of social and climate events. Operating expenses rose 2% over the same period and remained under control, as we continue to invest in digital capabilities. In this context, efficiency stood at 53.3% year-over-year with ROE reaching 13.2%. Mibanco in Colombia has been challenged by a deterioration in economic conditions and ongoing high inflation, very high funding rates, and a reduction in the interest rate ceiling. We have a profitable growth strategy where we have to slow down the growth rate of the portfolio by emphasizing risk control and efficiency. We remain committed to the long-term potential of this business. Next slide, please. Profitability of Grupo Pacifico expanded this quarter with ROE standing at 28.9%. In quarter-over-quarter trends, insurance underwriting results remained relatively flat as favorable dynamics in the property and casualty business were offset by lower results in the life business. It is important to note that the disability and survivorship products continue to demonstrate sequential expansion as the anticipated decrease in revenue was offset by a reduction in claims. Despite flat underwriting results, net income grew 60%, bolstered by a base effect as non-recurring expenses were reported last quarter and an increase in net financial income. From a year-over-year perspective, Grupo Pacifico net income dropped 2%. This decline was primarily attributable to a drop in life insurance underwriting results, which was driven by individual life and group life issues. Improved performance in the property and casualty business, notably within property and casualty risk product, coupled with increased net financial income partially offset these dynamics. Next slide, please. Profitability in the investment management and advisory business line increased this quarter with ROE remaining virtually flat at 14.1%. On a quarter-over-quarter basis, net income rose 9%. This evolution was driven primarily by a seasonal drop in operating expenses and growth in income from our wealth management business, where assets under management in U.S. dollars increased by 9%. The impact of these variations was partially offset by the elimination of the corporate finance business unit and less favorable treasury results. It is important to note that despite the increase in net income, ROE remained unchanged. This was attributable to the average net equity balance, which was boosted by the revaluation of available-for-sale securities as ASB. On a year-over-year basis, net income increased 8%, bolstered by higher income from our capital market business, which registered an increase in transactional activity among corporate and retail clients. Our wealth management business also contributed positively as assets under management rose 19% in U.S. dollars. Next slide, please. Now we will look at Credicorp consolidating dynamics. On a quarter-over-quarter basis, interest-earning assets posted a slight increase as cash and due from banks offset the decline in loan balances, particularly for wholesale loans. The yield on interest-earning assets increased 4 basis points, mainly due to a repricing of the loan portfolio. On the liability side, we maintain our funding advantage in low-cost deposits. Our term deposit volume, which has risen, has been repriced downwards, driving a decrease in our cost of funds by 5 basis points. Additionally, BCP issued a senior bond as part of a strategy to manage long-term debt. On a year-over-year basis, our interest-earning asset mix shifted, reflecting increases in retail loans and investment balances as wholesale loans contracted somewhat, in line with market dynamics. On the funding side, low-cost deposits remain the primary source of funding. A favorable funding structure and, to a certain extent, a steepening yield curve led the yield in our interest-earning assets to rise 73 basis points and outpace the increase of 37 basis points registered for our funding costs. Next slide, please. Recent balance sheet and interest rate dynamics led NIM and NII to increase, boosting core income growth on a quarter-over-quarter basis. NIM increased 10 basis points and stood at 6.3%. Risk-adjusted NIM grew 75 basis points to 4.85%. If we isolate the effect of provisions for expected losses for El Niño, risk-adjusted NIM fell 16 basis points. Core income was boosted mainly by NII, which increased 2.3% quarter-over-quarter. When analyzing the results for fee income and FX transactions, it is important to note that both lines have been affected by our operations in Bolivia, where BCP has adopted its fee structure for foreign transfers to offset the losses reported for FX sell-purchase transactions. Excluding BCP Bolivia's operations, other income grew 1.3% quarter-over-quarter, driven by a 3.1% uptick in fee income at BCP, primarily from credit card transactions, with registered growth in e-commerce channels and by an increase in transactions to Yape and Prima due to growth in payroll contributions volume. On a year-over-year basis, NIM rose 46 basis points, and risk-adjusted NIM increased by 31 basis points. If we exclude BCP Bolivia operations, core income increased 8.5% on the back of NII, which grew 9.2%, primarily driven by BCP through an uptick in transactions to Yape credit cards and debit cards. Next slide, please. Let's look at the dynamics for non-performing loans. On a quarter-over-quarter basis, growing non-performing loans were led by BCP, followed by Mibanco. Within BCP, NPL growth was driven by consumer mortgages and wholesale, partially offset by SME-Pyme. In consumer, NPL growth was related to refinancing of vulnerable clients, while growth in mortgage NPL was fueled by clients who also experienced delinquency and other issues. The NPL volume in wholesale was impacted by refinancing for a specific corporate client. This evolution was partially offset by a contraction in NPLs at SME-Pyme, which reflected the impact of loan collateral on or in process for government loans. At Mibanco, delinquency was concentrated across all vintages where clients were affected by macroeconomic, social, and environmental impacts in 2023. On a year-over-year basis, NPLs increased mainly at BCP and Mibanco. Within BCP, NPLs grew primarily in consumer, which is experiencing an uptick in refinanced loans and delinquency among all vintages, and in mortgages after the payment performance of indebted clients deteriorated and refinancing increased. In Mibanco, the drivers of NPL growth year-over-year were the same as those seen in the quarterly analysis. In this context, the NPL coverage ratio stood at 93.5%, while the NPL coverage ratio isolating government programs stood at 97.2%. Next slide, please. Moving on to provisions. The cost of risk stood at 2.3%; isolating the effect of El Niño provisions, the underlying cost of risk increased 45 basis points quarter-over-quarter to stand at 3%. Let's go through the dynamics of provision expenses, which isolate the aforementioned impact. Provisions grew 16% quarter-over-quarter, driven by a base effect in mortgages, which reflected reversals for specific products last quarter, and in SME-Pyme, which reported higher write-offs and a deterioration in payment capacity in a context of gradual economic recovery. At Mibanco, growth in provisions was due to higher delinquency related to all vintages. On a year-over-year basis, provisions rose 46.9%. Growth was fueled by a deterioration in payment capacity in SME-Pyme and credit cards and a downturn in payment performance in consumer loans. The aforementioned was partially offset by a drop in provisions in wholesale banking at Mibanco. Next slide, please. We will review the evolution of efficiency on a year-over-year basis to isolate the impact of seasonal effects. Operating expenses grew 6.9% year-over-year, driven primarily by disruptive initiatives at the credit card level and within core businesses at BCP. Expenses for disruptive initiatives at the credit card level increased 31.8%. The most significant expenditures were in Yape and Tenpo, which together accounted for 60% of this quarter's disruptive expenses. At BCP, core businesses drove growth in expenses through an uptick in IT expenses related to moves to attract more specialized digital talent and increased usage of the cloud as clients become more digital and transaction levels increased. Operating leverage remained strong at BCP core businesses due to controlled expenses. At Mibanco, operating expenses remained under control, and operating income is starting to turn around. In this context, our efficiency ratio stood at 43.6% in the first quarter of 2024, down 70 basis points year-over-year, driven mainly by positive operating leverage at BCP. Next slide, please. First quarter profitability was sustained by strong results in our universal banking and insurance businesses and by a recovery in our macro finance business. In addition, we benefited from a considerable uptick in the performance of our investment portfolio at the holding level. In this context, ROE for the first quarter stood at 18.2%. Now, I will move on to our updated guidance. As previously explained, our GDP growth guidance improved to around 3%. Regarding our profitability drivers, first, given the low demand in wholesale banking and still cautious origination volumes in retail banking at BCP and Mibanco, we expect loan growth measured by average daily balances to be at the lower end of the guidance range. Second, we expect NIM, cost of risk, and efficiency to stand within our guidance range. Finally, we are observing better-than-expected dynamics for fee income and insurance underwriting results. Given all of the aforementioned, we maintain our ROE guidance for 2024 at around 17%. With this, we can turn to the Q&A.

Our first question today is from Ernesto Gabilondo with Bank of America.

Thank you very much for your presentation, and congrats on your better-than-expected net income and the ROE for the quarter at 18%. My first question will be on fees. So, we saw a strong expansion in fees of 20% on a yearly basis. You mentioned that we're starting to see the benefits from Yape in your revenues. So, just wondering if there is a target for how much Yape could be contributing to your fee income revenues, and what can we expect for the growth of fees in 2024?

Yes. I'll take a more conceptual answer, and then I'll ask Cesar to go into the details. Regarding the impact of Yape in terms of fees, it's quite a complex question because what is happening with Yape is that there's a sort of J-curve in terms of businesses and, therefore, income generation. So, we surpass each target we set every month, quarter, or whatever. So, we're very positive on what Yape is going to have as a positive impact in the long run, in the medium and long term. On the other hand, on fees in general, I would argue that what is paying off is that the strategy we launched a few years ago, which we called War on Cash. We've been heavily investing, mostly at BCP, in how to become the payment hub in Peru, and obviously, this is paying off. I'll ask Cesar to complement me with the details.

As Gianfranco mentioned, the main structural drivers are long-term capabilities that we have been building. I would like to highlight that this 20.5% is slightly distorted by the situation in Bolivia. I would say that a more structural figure will be in the low teens. The situation in Bolivia is that we charge a higher fee and registered a loss in the FX transaction. But we, if you take this out, we can be in the low teens, which is driven by higher transactional activity, the expansion of different products that we are introducing and scaling very rapidly in Yape. I also want to highlight that other subsidiaries of the group are starting to increase fee income growth, which is very positive. This implies that we are starting to have the capacity to navigate with more than two engines at this point.

And then for my second question regarding regulation. We have recently seen some proposals in Congress. Can you elaborate on what could be the potential impacts on your business? I think there was something related to banking transfers and credit card payments. And also, I don't know if there's a latest update on pension reforms.

That's a more complex question than the first one, actually. Congress in Peru is Congress in Peru. Having said that, I'll start with the last question. Unfortunately, all the efforts that have been made both by regulators, as I mean technical regulators, and actually by us as Credicorp and so on, in reform proposals regarding the pension funds haven't been approved or taken into account by Congress. And unfortunately, they decided to approve a seventh withdrawal. As I've mentioned before, in our opinion, the pension system in Peru, in general, has been deteriorating for the last three to four years. Therefore, unless we have a structural reform, we are endangering the pension system or the retirement plan for Peruvians in the next 10 to 15 years. That is in pensions, and I would say that's the most structural reform needed in Peru. Regarding specific regulation in terms of fees, yes, it fluctuates. If you go, I don't know, back five to ten years in time, many fees have been removed by Congress. It is what it is. What we're doing is trying to work with the technical regulators to understand the reasonability for charging those fees.

But is there any potential impact, any timeline for this to be approved or not?

We really don't know. As you mentioned, specifically on the interbank fees, it was approved at the first voting phase. There should be a second vote, and nothing has happened. That might be approved or not; we really don't know. It's really a question mark. That's why I said this question is more complex than the first one. The level of populism at Congress has risen a lot over the last few years.

The next question is from Renato Meloni with Autonomous.

My question is on the guidance. What is your perspective on how you reconcile achieving the growth guidance that has been lagging with your goal of achieving the cost of risk guidance, particularly in light of the tight coverage ratio that you currently have?

Sure. I'll ask Cesar and Reynaldo to answer that question.

Yes. I think you are probably referring to higher GDP expectations, similar loan growth, and cost of risk all put together. It's a matter of timing and mix. The GDP growth perspective is improving, but our clients are already impacted. So, we have corporate clients that are very credit-worthy, but they are still very conservative in their demands. We are also being internally more conservative in the origination of the loan and retail loan portfolio. This implies that even with a higher expectation of GDP growth, the combined loan portfolio is going to be in a similar range that we were expecting with lower GDP growth. And in terms of cost of risk, Reynaldo can complement and correct me, but we are seeing significant improvement in the cost of risk for new vintages, but the deterioration of the existing portfolio is still there, and we need to go through a process where these clients experience sufficient deterioration to charge off a certain percentage, and after that, these older vintages will be extinguished and come down in relative volumes at the end of the year.

Yes. This is basically what Cesar has mentioned. We expect to see the impact of new vintages and a better-looking economic outlook, especially in the second half of the year. So, that's why we decided to maintain our guidance for cost of risk for the year.

Understood. Then, in terms of loan growth, do you expect the inflection point to also happen in the second quarter when you start accelerating growth?

Yes. Yes, because we have two factors. One factor is the gradual effect of economic growth, the reduction in interest rates, but also a comparison base because last year we had a decrease in volumes throughout the year, so we need to go through this process, which I would describe as a sun rising, where we are gradually starting to have less tough comparisons as the year progresses. I don't know if this is clear. Last year, we had higher volumes at the beginning and lower volumes at the end, and we expect to have the reverse this year. Thus, through the quarters, we will have less tougher comparisons as the year progresses.

That's clear. Thank you. The next question is from Thiago Batista with UBS.

I have a follow-up question on Ernesto, about Yape. By the way, Yape is presenting impressive numbers. But you have already achieved 11.5 million active clients, and this is probably half of the adult population in Peru. So, how many more clients can Yape add? Looking four or five years from now, how do you believe Yape's revenues will look? Do you see any big change in the type of revenues that Yape will generate?

Yes, great question, Thiago. So let me go back to how the strategy regarding Yape has evolved. When we launched Yape, the main focus was to gain users, or 'Yaperos' as we call them. Once we gained traction in that sense, we switched our focus to usage. As you can see, the level of usage has risen dramatically over the last few years. Nowadays, the focus is on how to monetize that usage while also releasing new features and functionalities to solve the daily lives of Peruvians. Regarding your first question, the main target today is not so much to keep adding new users, although the number of users is increasing by roughly 300,000 users per month. However, the main strategy today is usage and monetization. Regarding your second question, again, I refer to my earlier comments about fees, as raised by Ernesto. There is a J-curve regarding the usage of Yape. Therefore, going forward, we expect Yape to have different sources of income. We don't know exactly what those sources are today, but the more mature ones will obviously be more relevant in the near future. Nevertheless, we are constantly looking for alternatives and benchmarks in wallets that are more developed in countries where Yape operates in Peru.

If you allow me to add, we have a page in the presentation that helps to understand this because in payments, that is the more mature business, we are starting to add new functionalities. The composition has changed, incorporating relative volumes of the new ones. In second place is lending, which is starting to gain traction and relative volumes, and in third place is the marketplace. We expect the composition to change. We don't know exactly what is going to happen, but if you see this as a combination of compounding businesses, the second areas are starting to grow in relative weight down the road.

The next question is from Tito Labarta with Goldman Sachs.

My question is on your margin. Good performance there. It continues to expand within the guidance range. But just thinking about the evolution from here, do you see any room for the NIM to continue to increase? I know you expect loan growth to pick up maybe in the second half of the year, but it's still been negative, right? So, and even if it increases, it's increasing to mid-single-digit levels. So, given the relatively muted loan growth expected, can the margin increase further? And can you also remind us of the sensitivity of margins as rates continue to decline?

Cesar?

Yes. We think that we can maintain these levels of net income, and I would like to remind you that these levels are more than 100 basis points higher than prior to the pandemic. These are significantly high levels of net income. Ultimately, what we actually manage and monitor is the risk-adjusted NIM, which is a combination of this and the cost of risk. Within the dynamics, we have had the capacity to extend the duration of the solid portfolio. Due to international rates, we expect to continue having dollar rates in a high range for some time, which will allow us to converge this further decrease with the change of the portfolio towards a more retail base. So, I think it's reasonable to expect stable NIMs while striving to improve the combination of NIM and cost of risk, shifting the profile of the portfolio down the road. I believe this is a reasonable assumption, and when this process converges, we expect to see a higher positive loan growth that will enhance total results in the following years.

The next question is from Yuri Fernandes with JPMorgan.

I have a question about your operating expenses and overall efficiency ratio. You are tracking below guidance, and yet you are still not changing. I understand for seasonal reasons, so maybe this is part of the explanation. However, when we look at your breakdown of disruption expenses, we see that line, although it's still growing a lot, is also decelerating, right? It used to be growing 50% to 60% year-over-year, and now it's growing more like 30% year-over-year. So, my question is, how should we think about this? Can't you be a little bit more efficient? Thinking long-term, I understand for this year the guidance is 46% to 48% for efficiency. But what is your goal in the long run? Can we see Credicorp running below 40%? Like anything you can comment. So, my question is, is there a chance that this year you surprise us on the long end of the guidance? And where should efficiency sit? Because now most of the new projects are getting more mature. We have the app, and you have Tenpo getting larger scale. So, I'm trying to understand if we could see a positive trend in your efficiency and operating expenses.

Yes. If we were not investing in any new technology, I totally agree with you that the cost-income ratio could go down. If you recall, a couple of years ago, we said that by 2025, the disruptive initiatives in terms of cash flow should be cash flow neutral. We have reaffirmed that position. We do not expect that; actually, it might be slightly better than what we stated a few years ago. That said, we all know that many new technologies are coming up, specifically one that springs to mind is artificial intelligence. In the short run, that might have a negative impact in terms of cost to income. Obviously, in the long run, it should improve cost to income. Therefore, I would divide the question into two parts. If we were not investing in any new technologies, the cost to income could go down. However, we are making investments; we recently launched an internal AI program that we are going to invest in, focusing initially on cost reduction, but that's not going to have a positive impact in the short run.

I would like to complement something. If you see our figures year-over-year, our expenses have grown almost 7%, 6.9%. However, I'd like to highlight that this was achieved with a 31% increase in disruption. Nevertheless, this disruption is creating businesses that are gradually becoming more profitable and gaining scale. For instance, these expenses were 9% of the total cost base one year ago. Now, it's over 11%. Thus, what we expect is an overall figure that may not change significantly, but a significant alteration in the composition of expenses following the strategy that Gianfranco mentioned, where traditional business gains in efficiency and the disruptive ones maintain a relatively high cost-income ratio and gain relative weight, while building new businesses and capabilities down the road. This is very visible in our figures already, with BCP showing a 4.7% year-over-year growth, including almost an 18% increase in IT-related costs.

I just have a hard time. Your low growth will accelerate; your margins should mostly be stable from here, right? And the new initiatives are getting more mature, right? When you look at the cost to serve and the RPAC of Yape, they are almost crossing each other, right? So the breakeven is real and is getting closer. So I struggle to see efficiency moving from 44% to 46% or 48%, which is your guidance, and I wish we could see some upside here. That was my point, but it's very clear.

You're right. Your view is correct. Maybe the only caveat is that if there were new investments to be made in either innovation or new technologies, we would pursue them, and that might have a negative impact. But your view is correct.

The next question is from Carlos Gomez-Lopez with HSBC.

You've discussed extensively about Yape. Could you perhaps refer to the other initiatives, like Tenpo in Chile and EO in Peru? How are those advancing so far?

Yes. I'll cover Tenpo, and then I'll ask Diogo or Francesca to talk about EO. Tenpo is right on track. Remember though, Tenpo is still far from breakeven. That said, the leading operational indicators are on track, and some are outperforming our initial expectations. We filed an application for a full banking license for Tenpo in Chile, which should be approved in 18 to 24 months. In summary, Tenpo is performing well. We do not expect breakeven in the short run, and maybe in the next call or in a couple of calls, we can provide more specific Tenpo figures. I’m not sure if Francesca or Diogo want to elaborate on EO.

Yes. Regarding Tenpo, I think there are two promising paths. One is the transactional base on prepaid and debit cards that is still growing, and now the credit card path is also around 40,000 customers already onboarded and using it with a healthy transaction base. So, GPD is solid, and we're on track on those two main entry points. If you look at the brand landscape, whether it's credit card or debit card, EO is among the top 10 brands in Chile. This indicates a good position. The other venture that you didn't mention is Kulki, the acquiring business. I think that's another very mature business that BCP is now leveraging in their SME business to continue growing, as it complements the value proposition, and it's still expanding in fee income; GPD volumes are robust, and the customer base continues to grow. As for EO, we are focusing more on the mass affluent segment in Peru with a new value proposition that is completely digital. Growth is still slow; we're growing because we have a value proposition that is still incomplete without a credit card. However, we see good transaction levels and active user retention, indicating promising prospects.

So, if you're going to expand on EO, are you already at the general advertising level or still in the friends and family phase?

No, we're at the general advertising level. We still utilize a lot of digital marketing more than traditional media. However, we are open to the public using only BCP's risk policies at this point. Therefore, we target customers who are not currently BCP customers with a credit card.

Can we have an idea of the approximate quantity of customers you have, either activated or registered? Again, not exact numbers, but how many are we talking about? 100,000? 10,000?

No, we're at the 10,000 mark still, yes.

The next question is from Andres Soto with Santander.

My question is regarding dividends. You declared a dividend that implies a significant increase versus last year, 40%. And yet, when I look at the capitalization levels of your main subsidiaries, they are still above what you say is the minimum you expect. Specifically, when I look at BCP, BCP is currently at 12%, and you say that the target post-dividends is 11%. Mibanco is at 16% versus 15% that you set as a target. So my question is, what prevented you from being more aggressive in terms of dividend distribution, and do you see any room for additional distribution, especially dividends throughout the year?

First, I will address the capital levels of the operating units, and then discuss the dividend at Credicorp level. We actually set up a minimum of 11%, as you rightly mentioned, at BCP, and we usually add a small cushion. Particularly at the end of the quarter in BCP, we saw a decrease in corporate loans that exceeded our expectations. For that reason, we have a Core Equity Tier 1 above what was originally going to be an unexpected level, just some decimal points. At the Credicorp level, we expect to have a growing dividend throughout the year. So we feel that this was a significant increase compared to last year, and based on the capital needs for the remainder of the year, we can evaluate further dividends.

The next question is from Alonso Aramburu with BTG Pactual.

I wanted to ask also about Yape. Regarding the multi-installment loans, which you guys have been growing lately, can you comment on the asset quality behavior of those loans? What are the sizes of those loans? Are these going to be new clients, non-BCP clients? And have you been able to develop a risk model based on Yape data, or are you still using the BCP risk models?

I would say, going to the specifics, in Yape, we started with a one-installment loan, a very short duration, less than 30 days. NPLs have been very, very low—surprisingly low, I would say. This has mostly targeted using BCP's model. We've learned from these loans, and now we've launched multi-installment loans, which have longer tenures and larger ticket sizes. Currently, we are also using data and piloting to enhance models at BCP that haven't worked solely with BCP data, and also leveraging Yape's data. Today, as I mentioned in my initial words, we're still in very early stages in the lending business at Yape, but so far, the performance of that business is looking very promising.

The next question is a follow-up from Yuri Fernandes with JPMorgan.

Just to follow up on capital, two topics. Do you have excess capital at the holding? I remember sometimes in the past, the Credicorp holding had excess capital, so just checking if there is any capital there. And secondly, the Sol has been mostly stable, but can you remind us of any impact? Does FX impact your capital base? Since you have, I don't know, loans in dollars, this may affect your RWA? Can you refresh us on FX volatility for you?

I'll answer your first question and then ask Cesar for the second one. We previously explained that our policy is to retain whatever is needed from profits at the subsidiaries level to fund growth regarding the Common Equity Tier 1 that we've decided to keep. From that, which basically involves Mibanco and BCP, and obviously at Pacifico concerning the Solvency ratios we need to maintain. Beyond that, the policy at the subsidiaries is to pay dividends to Credicorp on the excess funds needed. As Cesar mentioned, we are following the policy of usual dividends rising on a yearly basis, and that is the reason we've increased this current dividend. Based on the performance of the economy, the growth of our businesses, and potential inorganic growth opportunities, we may issue an extraordinary dividend in the last quarter or second half of the year. That's how we manage it. To specifically answer your question, yes, we have excess capital, but the logic is as I explained.

Yes. And regarding the second question, I'd like to remind you that our functional currency is soles, and our books are, by policy, structurally balanced and neutral. Thus, we try to maintain all subsidiaries within a very short range, except for specific trading operations managed through a balanced book. Hence, we expect to have some impact from FX in P&L, but structurally we are neutral in operating currency at the subsidiary level. That said, we have operations outside Peru that conduct business in other currencies, like U.S. dollars and Colombian and Chilean pesos, where the volatility of FX impacts P&L and the relative exchange rate translates to unrealized losses or gains on the balance sheet. Currently, these impacts are very moderate.

It appears there are no further questions at this time. I will now turn the call back over to Mr. Gianfranco Ferrari, Chief Executive Officer, for closing remarks.

Thank you. Thank you all for your questions. As Cesar mentioned, we're optimistic about Credicorp's ability to realize our revised guidance for 2024 and reiterate our 2024 ROE guidance. Furthermore, I'd like to reaffirm our confidence in our ability to achieve an 18% sustainable ROE by 2025, based on the following drivers: a resilient NIM, as we have managed the sensitivity of our margins to market interest rates through our asset liability management and our ongoing shift towards retail loans; a reduced cost of risk as we leave the current through-the-cycle behind; and enhanced efficiency as Yape and other disruptive initiatives mature. Moreover, the political environment is markedly more stable than it was a year ago, and we anticipate that the current administration will remain in office until 2026. This is undoubtedly positive for business confidence. However, the recent S&P downgrade should serve as a wake-up call for us. Merely having stable governments is insufficient to catalyze the robust growth needed to alleviate poverty in Peru. We require our executive and legislative authorities to take bold steps forward in fostering growth and safeguarding democracy. This entails implementing structural reforms in education and health, as well as eliminating the bureaucratic barriers that hinder the execution of our mining and infrastructure projects. As leaders, it is our responsibility to advocate for policies that unlock our country's untapped potential and drive progress. On that note, I would like to mention that we recently published our 2023 Annual and Sustainability Report, and I take this opportunity to reaffirm our commitment to our purpose: to contribute to improving lives by driving the changes that our countries need. Finally, I would be remiss if I did not mention that this marks Cesar Rios' final presentation in our quarterly earnings calls. I wish to express my gratitude for his invaluable contribution during his tenure as CFO. Starting July 1, he will transition to the role of Chief Risk Officer at Credicorp and BCP, leading our risk management strategy into a new chapter as we continue to tap new segments and markets. Additionally, I look forward to working closely with Alejandro Perez-Reyes in his new position as CFO of Credicorp and BCP. Our experienced leadership team has a long track record of successfully managing through both challenging economic and regulatory environments. We remain focused on driving sustainable, profitable growth and building long-term value for our shareholders through prudent capital and risk management. Thank you all for participating in today's call.

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