Credicorp - Q3 2023
November 3, 2023
Transcript
Operator (participant)
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 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 an opportunity for you to ask questions at the end of today's presentation. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment.
Now, it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Cigueñas. You may begin.
Milagros Cigueñas (Investor Relations Officer)
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, 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 also be Francesca Raffo, Chief Innovation Officer; Reynaldo Llosa, Chief Risk Officer; Cesar Rivera, Head of Insurance and Pensions; and Carlos Sotelo, CFO at Mibanco. 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.
I refer you to the forward-looking statement 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. Cesar, please go ahead.
Cesar Rios (CFO)
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. A 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 decoupling from the macro. Our strong track record demonstrate our ability to successfully navigate complex environments. We have built a diverse portfolio of businesses, most of them benefiting from robust brand recognition and a strong customer loyalty.
This privileged position further solidifies our leadership, especially in challenging conditions. We are registering healthy margins even after high provision, supported by loan mix shift, a stricter origination in vulnerable segments, dynamic pass-throughs, and our funding advantage. Our solid capital base represents a strength, particularly within a challenging credit cycle, where the impact of soft macro conditions on payment performance in a specific segment is evident. As we have already stated, 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. Please, next slide. By embracing our agile and self-disruptive mindset, we are building a diverse business, capturing synergies, maximizing our main profit pools, targeting new client segments, and developing our own disruptors as we seek to retain a healthy and sustainable ROE.
Our focus on gaining a deep understanding of both present and upcoming market trends allow us to meet our customers' changing needs, solidify our leadership, and increase penetration in new markets. Raimundo will now provide an update on the sustained progress at Yape, which in just over seven years has become the main payment network in Peru, and is the most mature example of our disciplined approach to disruption and innovation as we advance towards our goal of decoupling from the macro. Raimundo, please go ahead.
Raimundo Morales (CEO)
Thanks, Cesar, and good morning, everyone. Yape is an example of our rigorous approach to innovation and our commitment to meeting current and future market needs. Hitting the 10 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. Yape is not only the primary payment network in Peru. It is also the digital brand that boasts the highest awareness level in the country.
Please turn to the next slide. As the number of active Yaperos continues to grow with each new feature added, the use of individual features also increases, driving gains in market share, attracting even more Yaperos and partners, while operating more and more efficiently, reinforces our flywheel effect. Top ups are a clear example of how Yape is helping us decouple our growth from the macro. BCP's top up market share used to be around 10%, but after launching this functionality through Yape, our market share rose to 46%, which represents 5x growth in just 18 months. Last January, we enabled bill payments through Yape and have seen an upward trend for monthly growth with over 20% of Yaperos now using the service.
We are currently at just 5% of our expected TAM for bill payment, so still have an immense opportunity for continued growth. Similarly, the use of our features in each business line, including POS, QR codes in payments, microloans in financial service, and promos within Marketplace, is still incipient but quickly growing each month. Rapid adoption of these products is allowing our revenue generating TPV to grow at a 3x the pace of our total TPV, which has grown from nonexistent in early 2022 to around 5% at the end of Q3. Our long-term aspiration is above 20%. Please turn to the next slide. Unitary economics continue to move towards an expected breakeven in 2024. Revenues are growing and moving closer to cash costs as we incorporate new features.
Monthly revenue per active user stands at PEN 2.99 in the quarter, compared to a cash cost per active user of PEN 4.3. Q4 will be key in Yape's evolution toward a super app with multiple product launches. In Marketplace, Yape Tienda will initially focus on electronics, which typically represents 50% of e-commerce sales. We are also launching other high engagement products, such as ticketing through our acquisition, Joinnus, gaming, and gift cards. In financial, we are introducing small multi-installment loans with longer tenures through 100,000 pre-approved leads. In payments, we are completing our portfolio of solutions with FX transactions and remittances, among others. We are also providing collection services for CPG companies. On the functionalities front, we are enhancing our UX to include the critical capabilities of a super app.
So, as you can see, we are going to remain very busy. Yape continues to progress towards monetization by pursuing its medium-term target of being the payment, the main payments network in Peru, being an integral part of Yaperos' daily life, and addressing their financial requirements. We look forward to updating you again in the future on our continued progress. I'll turn the call back over to Cesar.
Cesar Rios (CFO)
Thank you, Raimundo. I will share now the key financial highlights of the quarter, focusing primarily quarter-over-quarter evolution to emphasize the recent shift in trends. Both structural loans and low-cost deposits evolved positively quarter-over-quarter. Growth in structural loans measuring average daily balances stood at 1%, fueled primarily by retail banking at BCP. Meanwhile, low-cost deposits grew 1.2% and accounted for 50.9% of our funding base at quarter-end. Similarly, most of our income streams registered relevant sequential increases. NII grew 1.6%, driven by asset mix dynamics, which were partially offset by a higher cost of funding for bank deposits. Fees also grew 1.6% off the back of positive dynamics in 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 credit cycle continued to deteriorate. As such, the cost of risk edged up to 2.5%. A structural NPL 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, since as we'll elaborate later, the recent change in macro and climate perspective will more than likely weigh significantly in our profitability for the rest of the year. Next slide, please. In the third quarter, the Peruvian economy is expected to have registered its third consecutive quarter decline year-over-year.
Accordingly, annual GDP growth will be lower than expected and stand around zero or slightly below. Several factors, both expected and unexpected, have driven weak performance. First, the social protests at the beginning of the year, which were prolonged in the country's health. Second, climatic events, namely Cyclone Yaku and El Niño Costero, which heavily impacted the agricultural, fishing, and manufacturing sectors. I will go into more detail on El Niño topic on the next slide. Third, very weak private investment and a sluggish consumption led to non-primary sectors to contract. Four, the government's efforts to stimulate the economy have been insufficient. It's important to note that growth in the mining sector, mainly through increased copper production at Quellaveco, has remained a bright spot. The confluence of these factors has led the country to register its lowest print for economic performance in 25 years, excluding the pandemic.
Despite this disappointing performance, Peru macroeconomic fundamentals remain robust, with low levels of public debt and high international reserves. Additionally, there is a significant package of public and private, private projects that, when backed by political intent and deployed quickly, could generate growth down the road. Regarding inflation, price pressures have eased in Peru and inflation expectation has fallen. Additionally, the policy rate has been cut by 50 basis points.... Next slide, please. The El Niño Costero weather phenomenon that has directly affected Peru this year is associated with a sustained rise in sea surface temperature above certain threshold along the northern central coast of Peru. El Niño Costero has battered the fishing, agriculture, and textile sectors, in particular, in the first eight months of the year. The fishing sector is set to record its worst annual catch in 25 years after the first fishing season was canceled.
Agricultural production, in turn, is expected to register its worst performance in 31 years, while textile production has recorded its worst market decline in 28 years, excluding the pandemic and the global financial crisis, given that there was no winter season this year in the coastal region. Weak performance in these key sectors of the economy has exercised a multiplier effect and exacerbated contraction in the non-primary sectors. Given this context, we continue to closely monitor the evolution of El Niño and its impact in our businesses. I will look at the expected evolution of El Niño through the summer of 2024 and its potential impacts later. Next slide, please. BCP results were impacted by economic downturn described earlier. This has pressured provisions hour and impacted loan growth. Analyzing key quarter-over-quarter dynamics, the 1.5% increase in NII was driven by several dynamics.
On the mix side, wholesale loans registered a contraction due to low private investments, while SME-Pyme loans reported an upswing in disbursements that entailed less risk. These dynamics helped mitigate an increase in the funding cost, which was pressured by a more expensive deposit mix. It is important to note that migration from low-cost time deposits has decelerated in recent months. This quarter, BCP's fee income was bolstered by an uptick in fees from debit cards, collection services of business clients, and bill payment services provided through Yape. Provisions remain high in a prolonged, recessive, high inflation environment that has affected payment capacity of vulnerable segments in individuals and higher risk segments in SME-Pyme. In individuals, growth was driven mainly by consumer loans and credit cards, followed by mortgages. This uptick was partially offset by a reversal of provisions in wholesale banking.
On a year-over-year basis, a 16% increase in NII was driven by raising interest rates and by a 1.2% increase in structural loans, which was primarily attributable to an 8.1% uptick in retail banking loans. Loan loss provisions increased 87.6% due to the same quarter-over-quarter dynamics. On a year-to-date basis, operating expenses grew 6.1%, which primarily reflects growth in core business IT expenses, due to an increase in digital transactions and to significant investment in new capabilities and investment in disruptive initiatives. In this context, BCP's efficiency ratio stood at 37.8%. Finally, ROE stood at 20% in this quarter and 22.2% on a year-to-date basis. Next slide, please.
After a difficult first semester, where social and climate events, as well as ongoing deceleration, have hit clients hard, Mibanco registered a decrease in loan origination in riskier segments and higher provisions. On a quarter-over-quarter basis, net interest income rose 3.2%, despite lower loan growth. These favorable results reflect disciplined interest rate management, which helped us offset the uptick in the funding cost. In this context, NIM increased 80 basis points and stood at 13.5%. Provisions remain high this quarter, given that social protests and weather anomalies continue to impact our customers' payment capacities. Other income fell 3.5%, fueled by a drop in bancassurance fees, following a reduction in disbursements. From a year-over-year perspective, NII rose 1.9%, as fueled by an increase in structural loans and interest rate pass-throughs, which mitigated the impact of rising funding costs.
Mibanco's provisions rose due to the same dynamics mentioned earlier. On a year-to-date basis, operating expenses growth rose 5.8%, reflecting an increase in IT-related costs. Income, in turn, grew at a slower pace, which led to efficiency ratio to rise to 52.6%. Finally, ROE stood at 8.3% this quarter, and 7% on a year-to-date basis. Mibanco Colombia is facing high inflation, high funding costs, lower interest rate ceilings, and a deterioration in economic expectations. We have adapted our strategy to record profitability. Next slide, please. ROE at Grupo Pacífico was high this quarter, and it stood at 34.7%, as we continue to capitalize in transitory tailwinds in the life insurance business of the top of a strong underlying business. On quarter-over-quarter terms, net income rose 19%.
Growth was primarily boosted by an uptick in insurance underwriting results in the life business after claims fell, primarily by credit life and individual life products. An increase in the net gains from exchange difference also contributed to the positive evolution this quarter. These developments were partially offset by a decrease in net financial income. Year-over-year profitability was up 37%, primarily driven by positive dynamics for insurance and the return results in the life business. Pension products reported an uptick in income, which was attributable to better prices and more favorable volume dynamics, where credit life and personal accident products registered a decrease in service expenses. Next slide, please. ROE for the investment banking and wealth management line of business stood at 8.2%, impacted by a drop in income generation at our more volatile businesses.
Income from our capital market business decreased 5.9% quarter-over-quarter, pressured by market dynamics that negatively impacted our proprietary fixed income portfolios. Market volatility also impacted our asset management business, where income decreased by 0.8%, impacted by losses in the market value of seed capital in the funds we manage. Despite market headwinds, our assets under management remain relatively flat, growing by 2%, 2.4% quarter-over-quarter in the asset management unit, and contracted by 1% quarter-over-quarter in the wealth management unit. As we shared with you on our Investor Day, we took the strategic decision to reduce exposure to the most volatile business of these lines of business. We have made progress in this front, but it's important to emphasize that the process is gradual. Next slide, please.
Now, we will look at Credicorp's consolidating dynamics. On a quarter-over-quarter basis, our structurally loan measure in average daily balances grew 1%, or 0.3% with FX neutral. Growth in BCP Retail Banking, which has shifted away from the most vulnerable segment, was offset by a contraction in wholesale banking at BCP and Mibanco. Our deposit base expanded 3.5% or 1.2% with FX neutral. This evolution was driven by an uptick in time deposits and demand deposits, which was partially offset by a drop in savings deposits. Additionally, the migration of funding sources from low cost to time deposits decelerated. On a year-over-year basis, structurally, loans increased 1.2%, measuring average daily balances, fueled primarily by retail banking at BCP and Mibanco. Deposit balances dropped 2.8% or 0.5% with FX neutral.
Low cost deposits have fallen system-wide and currently represent 63.7% of our total deposits. Our market share in low cost deposits by the end of August stand at 40.3%. Next slide, please. Now, let me explain core income dynamics. On a quarter-over-quarter basis, core income rose 1.4% on the back of NII, which rose 1.6%. Growth was attributable to a more favorable interest earning asset mix and to our interest rate management. When analyzing the results for fee income and FX transactions, it is important to note that both lines have been affected by our operation in BCP Bolivia, where we charge fees to FX clients to offset losses on buy, sell FX transactions.
Excluding BCP Bolivia, fee income rose 2.9% quarter-over-quarter, driven by an uptick in transactional levels from debit cards, collection services, and bill payments at BCP, and gains in FX operations diminished 2.6% quarter-over-quarter due to a drop in FX transaction volumes at BCP. On a year-over-year basis, core income increased 8.8% on the back of NII, which rose 12.9% due to an uptick in structural loan volumes and our active interest rate management. Excluding BCP Bolivia, fee income diminished by 1.9% on the back of lower fees. At Prima AFP, due to an adjustment in the fee framework applicable to a significant share of affiliates at Credicorp Capital, primarily due to lower assets under management in the third-party fund distribution business.
These dynamics were partially offset by gains in FX transactions, which grew 1.4%. In terms of margins, net interest margin rose 9 basis points quarter-over-quarter to stand at 6.11%. Risk-adjusted NIM fell marginally over the same period due to an increase in provisions and stood at 4.45%. Next slide, please. Let's look at the dynamics of structurally non-performing loans. As indicated early, adverse events in 2023 and weak economic performance continued to impact client payment performance and consequently, portfolio quality. In this scenario, on a quarter-over-quarter basis, growth in structurally non-performing loans was driven by wholesale banking, where specific clients in the hospitality and commercial real estate sectors became delinquent. Individuals, where the debt service capacity of clients continued to face challenges due to over-indebtedness and unsustainable employment.
SME-Pyme, where low ticket subsegments have poor payment performance, and Mibanco, where the increase in delinquency was concentrated in over-indebted clients, clients impacted by social conflicts at the beginning of the year, or those affected by climatic anomalies. On a year-over-year basis, the structural non-performing loan volumes increased due to an uptick in refinance loans on wholesale banking. The evolution of non-performing loans in retail banking on Mibanco was driven by the same factors as in the quarterly analysis. In this context, the structural coverage ratio stood at 101.4%. The NPL coverage ratio fell quarter-over-quarter and year-over-year, driven by wholesale banking clients, which represent a deterioration that has been previously provisioned on a high, high, and have high levels of collateral. Please refer to Appendix Two for more details. Next slide, please.
Moving on to provisions, the cost of risk has risen once again and stand at 2.5%, while the structural cost of risk stand at 2.6%. This reflect the fact that client payment capacity has deteriorated alongside ongoing macroeconomic contraction. Provisions for the individual segment at BCP have risen since, as I just explained, payment performance has been impacted mainly to consumer and credit cards. Additionally, in individuals, provision for mortgages increases to reflect increased expected losses on lending to clients who have reported an uptick in delinquencies in consumer products or in other entities. Provisions at SME, PYME, at BCP, and Mibanco are also up, driven by the downturn in payment performance that I just described. The aforementioned was partially offset by reversals in wholesale banking, after some clients in the corporate segment registered improvements in the credit ratings or canceled obligations.
Next slide, please. We will review the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operational expenses grew 11% in the first nine months of the year, driven primarily by core business at BCP and disruptive initiatives at the Credicorp level. At BCP, core business fueled growth in expenses through an uptick in IT expenses related to increased use of cloud as clients become more digital, investments to enhance digital capabilities and improve cyber security, and moves to attract more specialized digital talent. Marketing expenses mainly driven by advertising to boost deposits and digital sales. Expenses for disruptive initiatives at Credicorp level increased 64.3%, as some of these initiatives have scaled up. Operating leverage remains strong at BCP. At Mibanco, operating expenses remain under control, but operating income is still challenged.
In this context, our efficiency ratio stood at 45.1% for the first nine months of the year, down 160 basis points year-over-year, driven by positive operating leverage at BCP and Pacífico. Next slide, please. This quarter, profitability was sustained by solid results in our universal banking and insurance business. ROE this quarter decreased to a stand at 16.2%. Meanwhile, ROE for the first nine months of the year was 17.8%. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. To exercise caution, we have decided that no additional dividends will be distributed this year. Now, before commenting on our perspective for the rest of the year, I would like to briefly discuss current expectations on the magnitude for El Niño phenomenon for coming months. Next slide, please.
At the time of our last conference call, our outlook contemplated an El Niño phenomenon that was either weak or moderate in intensity. The combined probability of these two scenarios was 75%. Currently, projection from expected experts indicate that the two most likely scenarios entail an El Niño that is either moderate or the strong in intensity. The combined probability of these two scenarios stands at 96%. Furthermore, the probability of a strong El Niño over the summer has grown by more than fourfold and currently stands at 49%. It is important to consider that the levels of risk and exposure associated with this phenomenon vary by region, but are concentrated in specific areas that experience heavy rains and flooding.
The share of Credicorp's loan portfolio located in impacted geographies areas stands at 6.2%, which comprises 10% of retail banking portfolio at BCP and 18% of Mibanco's portfolio. The levels of impact will vary across areas and clients. We have rolled out multiple measures to mitigate the adverse effects of El Niño on our clients, businesses, and the country in general. In a coordinated effort with Pacífico, BCP, and Mibanco, we have proactively developed a communication plan to educate our clients and the population about taking specific preventive measures to mitigate potential damage to homes or businesses. Additionally, we have adjusted our underwriting policies for the most exposed clients in retail banking at BCP and Mibanco.
We have also leveraged our extensive network of relationship managers, who are working with clients in advance to survey potential financial needs and help them to be better prepared. The El Niño underway is expected to generate impacts that are strong, not catastrophic, such as that seen in 1982, for example. We are rolling out preventions and response plan with anticipation to reduce impact and support clients. Next slide, please. Significantly weaker than expected economic performance for Peru, coupled with a material change in the outlook for El Niño over the coming summer, has triggered changes in the perspective for our business.... particularly for Cost of Risk and consequently ROE. Our new estimates are in line with the scenario of a moderate to strong El Niño.
As previously mentioned, our updated macro scenario for 2023 now reflects a GDP growth estimate close to 0% with a downward risk. A structurally long growth measure in average daily balances remain in line with guidance. NIM, in turn, remains resilient, and such is expected to stay within guidance. We now expect the full year cost of risk to stand between 2.6% and 2.9%, impacted substantially by provisions related to expected losses caused by El Niño. We still expect a consolidated efficiency ratio between 45% and 47%, as BCP and Mibanco continue to demonstrate positive operating leverage. Given the aforementioned dynamics, ROE is not likely to stand at around 15.5% for the full year. With these comments, I would like to start the Q&A session.
Operator (participant)
Thank you. We will now begin the Q&A session. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause for just a moment to allow everyone the opportunity for questions. We also ask that you please only ask one question at a time. After each question has been addressed by our speakers, you will then be allowed to ask as many follow-ups as needed. But again, please only ask one question at a time. Thank you. Our first question comes from Tito Labarta with Goldman Sachs. Please go ahead.
Tito Labarta (VP)
Hi, good morning. Thank you for the call, and thank you for my question. I guess my question, if I look at the revised guidance of 15.5% ROE, or roughly, for the full year, you know, just given where you're coming from, rough math here, that would imply about $700 million in earnings in 4Q, which would be around a 9% ROE. And I assume that's all because of much higher provisions. Just to, I guess, wonder if you can. Does that math sound correct? Is that what we should expect more or less for 4Q?
Cesar Rios (CFO)
Hi, Tito. Thank you for the question. I think I will say that roughly, you are more or less in line. When we talk about 15.5% around, it's specifically this, it's around. But, you are correct that the main driver for the decreased profitability of the quarter is the increased provisions due to expected losses by El Niño. And if you compare the fourth quarter with the third quarter, the other thing, relevant is the seasonal increase in expenses at BCP. That happens all four quarters.
Tito Labarta (VP)
Okay. No, that's very clear. Thanks for clarifying. So I guess my follow-up question would be on the provisioning. How much of this is this, you know, you mentioned due to expected losses, but you think a lot of it will be in anticipation. Does that mean Cost of Risk should normalize next year? If so, what would be a normalized level of Cost of Risk for 2024? And if there's further impacts from El Niño, could there be additional provisions in next year as well?
Reynaldo Llosa (Chief Risk Officer)
Yes, Tito. That will depend on the severity of the El Niño. Today, we have estimated an impact on the fourth quarter that is very relevant and explains the increase in the cost of risk projected for the whole year. Having said that, if we have a strong Niño, we will probably see an impact in provisions during the first semester of next year. And then we, based on what we've done in managing the portfolios, both in the SME and consumer market, we should expect a much more stable cost of risk during the second semester of 2024.
So we see this as a peak that will depend on the impact of El Niño, that, as you know, carries a lot of uncertainty for the degree of the impact that this could have on the economic side of the country in general and specific in the northern side of Peru.
Tito Labarta (VP)
Okay. No, that's helpful. And one, I guess, more weather related, I guess, but how, how long could El Niño go on for? Is, is there a timeframe where you would then feel comfortable that, okay, you're past the worst? Just any, any thoughts on that?
Cesar Rios (CFO)
Yeah. Usually, El Niño occurs during December, January and February, can extend a little bit more or less than that.
Tito Labarta (VP)
Okay, perfect. Great. Thank you so much.
Operator (participant)
Thank you. The next question is from Ernesto Gabilondo with Bank of America. Please go ahead.
Ernesto Gabilondo (Director LatAm Financials)
Thank you. Hi, good morning, Gianfranco, Cesar, Francesca, and good morning, all your team. Thanks for taking my call. My, my question would be on your ROE expectations for next year. I understand you're still running numbers, but considering that you will create an important number of provisions anticipating to this medium to strong El Niño, how should we think about the ROE for next year? Can we expect it to be higher when compared to 2023 levels?
Cesar Rios (CFO)
Hi, Ernesto. As you know, we are going to provide a guidance for 2024 in the next call, but directionally, I would say that, 2024, if the impact of El Niño is according to our current expectation, should be relative, better than this one. Given that, as Reynaldo has explained previously, we need to really assess the impact at the beginning of the year, so we should expect a probably more cautious credit loan origination at the beginning of 2024.
Ernesto Gabilondo (Director LatAm Financials)
Okay, now, excellent. So just for my second question, you have said in the past that management has been doing all, a lot of important efforts to invest in technology and in the digital transformation. However, if at some point we get it into a medium to strong El Niño, probably you will be thinking maybe to delay some of these investments to protect the profitability, and maybe to return to those investments after getting away from El Niño. Are you still thinking about this, or you will continue the investment phase?
Cesar Rios (CFO)
I would say that, what we did in the past probably is a good reflection of our, general strategy. At the beginning of the year, when the expectations of the GDP growth were starting to deteriorate, we adjust the general expenses trend to better adjust to the income, generation capacity, without, forgetting investment in the transformation of the business. So we are going to manage prudently, but, we are committed to long-term, profitability to build capability for the future. So we are going to manage prudently, but we are not contemplating stopping, developing, new capabilities, invest in the initiatives that are creating, new business for the future.
Ernesto Gabilondo (Director LatAm Financials)
Perfect. Thank you very much, yes.
Cesar Rios (CFO)
Okay.
Ernesto Gabilondo (Director LatAm Financials)
Thank you very much, Cesar.
Operator (participant)
The next question comes from Geoffrey Elliott with Autonomous. Please go ahead.
Geoffrey Elliott (Director of Research)
Oh, hello. Thanks very much for taking the question. It's another one on the cost of risk outlook. Could you just quantify for us how much of the additional provisioning that you're expecting in Q4 relates to El Niño looking like it's gonna be worse than you were expecting back in August? Just trying to isolate that impact from the impact of the broader macro weakness. Thank you.
Reynaldo Llosa (Chief Risk Officer)
Yes, it explains almost all of that change between our guidance on the previous quarter. And basically it has two impacts. It has an impact in a specific region, which could be severe if we have a strong Niño, and it also has an impact on the overall economy of the country, because there is an important level of sales that are channeled through the northern businesses. So it has a double impact, as I explained. So I would say it is. I cannot give you a specific number of the amount of the difference between both numbers, but it's basically explained by those two effects.
Geoffrey Elliott (Director of Research)
Thank you, and if I could just squeeze another one in, more of a clarification that nothing's changed. But on the sensitivity to lower rates, if you could just quickly give US dollar rates and peso rate sensitivity to a 100 basis point cut?
Cesar Rios (CFO)
Yes. This topic has been reviewed carefully internally, and now we think it's below than we previously communicated, below 20 basis points for 100 basis point from this instantaneous adjustment. So, the composition of our portfolio is flexible enough to allow us to converge to a sustainable NIM, assuming that we can counter the effect of reduction rates with a shift in the portfolio mix.
Geoffrey Elliott (Director of Research)
Okay. Thanks very much.
Operator (participant)
The next question is from Thiago Batista with UBS. Please go ahead.
Thiago Batista (Executive Director)
Yes. Hi, guys, good morning. My question is about Yape. When you look in a couple of years for Yape, what do you believe will be the main source of revenues of Yape? And among the 10 million monthly active users of Yape, how much of those guys were already BCP or credit card clients?
Raimundo Morales (CEO)
Excuse me, could you repeat the first part of your question? Because, I had some interference.
Thiago Batista (Executive Director)
Yes. Not sure if the line is better now.
Raimundo Morales (CEO)
Yes.
Thiago Batista (Executive Director)
But, when you look in a couple of years, what do you believe will be the main source of revenues of Yape?
Raimundo Morales (CEO)
Okay, great. Now very clear.
Thiago Batista (Executive Director)
Among the 10 million clients of Yape, how much of those guys are were already BCP or credit card clients?
Raimundo Morales (CEO)
Okay. So in your first question, we currently expect payments to continue growing as our number one line of revenue. But definitely we expect in two or three years lending to become much more relevant. So I would say that around 40%-50% will continue to be payments revenue, then a third, around the, the lending, and, and the rest will become from the retailer marketplace. That's more or less where we're aiming to and, and what we expect. Of course, that might change a bit.
Regarding the second part of the 10 million clients, it's a tough question because there were a lot of- so there's like 2-2.5 million of those clients that are, Yape with, with DNI, that they open exclusively an account without being BCP clients. But of the ones that, that were BCP clients, there's a big group that opened the BCP account to have Yape in, in the history. So, so really it's a, it's a mixed number. Definitely a lot of those clients are much more active in Yape than at BCP, you know? So I know it's half and half of the 10 million, I would say, that you could attribute to Yape.
Reynaldo Llosa (Chief Risk Officer)
No, very clear. Thanks.
Operator (participant)
The next question comes from Yuri Fernandes with JPMorgan. Please go ahead.
Yuri Fernandes (Executive Director)
Hello, everyone. I have a question on revenues. So far, so good, right? You have margin expanding, so your NII is still pretty healthy. But what is the outlook for 2024? Because you already mentioned that credit origination should be, you know, like, luster, given, like, a more cautious outlook, and makes total sense. You have lower, lower rates, right? That shouldn't be bad for your sensitivity on margins. And on the fee side, I guess it's a weak economy, right? So my question is: What should we expect for, you know, revenues, NII, for the next year? Should we be a little bit more cautious on this also? Like, what is the... I know you don't have a guidance, but just on a trend, what should be the outlook here for revenues? Thank you.
Cesar Rios (CFO)
Thank you, Yuri. I think if we have the impact of El Niño as we expect, we should expect a slight increase in revenues. That is the combination of a managed NII and increasing volumes, starting probably in the second quarter of the year. In terms of fees, we still expect an increase in fees driven by the transactional activity that we are developing and increasing through our traditional channels and Yape in particular.
Yuri Fernandes (Executive Director)
But you think, like, loans should accelerate in 2024 versus 2023? Or should remain at those, you know, low single digits, just as a more, you know, conservative-
Raimundo Morales (CEO)
I would think in single digits. We still expect next year GDP to be around 2%, not a booming year.
Yuri Fernandes (Executive Director)
No, perfect. Super clear. And if I may, just asset quality, just to see if I got correctly. This quarter, the third Q, you had a very high new NPL formation, higher charge-offs. So this was basically the client's payment behavior worsening, right? The provisions, everything we saw now. And for the fourth Q, the increase you should see on the guidance, this is the El Niño. This is more or less, the delta should be mostly the El Niño, right? So this quarter, basically bad macro, and for the next quarter, a little bit of bad macro, but also the El Niño, right? Is this correct, like this understanding on asset quality?
Raimundo Morales (CEO)
Totally correct.
Reynaldo Llosa (Chief Risk Officer)
Yeah, that's 100% correct. We are ending up the digestion of the bad portfolios we had during the year, but mostly that is explained by El Niño, as you have mentioned.
Yuri Fernandes (Executive Director)
Perfect. Thank you very much, guys.
Operator (participant)
The next question is from Sergey Dubin with HL. Please go ahead.
Sergey Dubin (Portfolio Manager)
Yes, hello. All of my questions would be on asset quality and cost of risk. I'm very surprised to see this, you know, significant jump in Q3, especially on wholesale loans or wholesale NPLs, I should say. Could you comment what, what do you mean by 22, you know, 22% of credit card NPL volumes, which were refinanced loans? What, what are these loans?
Reynaldo Llosa (Chief Risk Officer)
Well, basically, what we have done is. There have been two specific cases in the tourism sector and in real estate, commercial real estate, which have fallen in default, which are recognized in the NPLs. But also, now that the activity is starting to recover in some of those activities on those businesses, and we are able to project a cash flow for those businesses, we are refinancing those loans. And that portfolio is included on the NPL ratio. So that's basically why this number has been growing during the year.
Sergey Dubin (Portfolio Manager)
So are you saying that these, you know, loans or these borrowers had hit problems and you basically refinanced the loans so that they're gonna be performing again? I don't, I don't quite understand, like, how should I think about... Are these borrowers in trouble, or is that just an issue of having you extend it and, you know, maybe soften some terms so that they can pay on a different schedule? How should I think about the underlying credit quality of these borrowers?
Reynaldo Llosa (Chief Risk Officer)
Yes. I mean, two things about your comment. Those were loans that we were managing in the short term because we were unable to project a cash flow in the long term. Once we extend structurally the final term of the loans, we mark them as refinance loans, and then we included, we include them in the NPL ratio. And having said that, these are loans that have significant collateral, mostly over 150%, because they are basically hotels and real estate projects, which have guarantees that support extensively the amount of our exposure with those clients.
Sergey Dubin (Portfolio Manager)
Okay. So these, at the moment, these borrowers are paying, right? They're not in default, they're paying on the, what, you know, as you refinance them, they continue to pay interest and principal. Is that correct?
Reynaldo Llosa (Chief Risk Officer)
Yes. Basically, before they were paying only interest, now they are starting to pay principal as well.
Sergey Dubin (Portfolio Manager)
Okay. All right. And then also on consumer book, my impression, my very distinct impression from the last call was that you guys, which you communicated actually, was that you tightened the credit standards in consumer book. You obviously foresaw this macro, you know, macro pain, so to speak, so you tightened the credit standards. I was under the impression that that should help in terms of, you know, asset quality, but it doesn't look like that was really what transpired. So can you explain why your reduced risk appetite didn't translate into better credit quality on the consumer book side?
Reynaldo Llosa (Chief Risk Officer)
Yeah. What we are doing is refocusing our appetite on those clients that we know better. That's basically what explains why we are growing in the consumer portfolios. Basically, in times like this, when we don't have GDP growth, we obviously become more conservative in our approach to those clients that we know better. We still do some pilots with a specific segment, but relatively, with a much less proportion than what we have done in the previous years. That's basically what explains our strategy today.
Cesar Rios (CFO)
Yes. Probably, may I add something? But I think I understand what you are hearing too. Of course, we adjust our credit origination policy, and the new vintages are being originated and actually are coming with lower risk profiles. But the already booked loans have soured as is expected. So we have a combination of old books that are already deteriorating at a higher rate, and new vintages that are smaller in size, higher quality. And the result that you are going to see during the next quarters is a combination of these two dynamics.
Sergey Dubin (Portfolio Manager)
Okay. And then is there any way to... So I'm gonna put El Niño aside, because that's completely unpredictable phenomenon that depends on nature, it's not up to you. I understand all that. But if you looked at your underlying borrower health, so to speak, and kind of a Cost of Risk trends and NPL trends, again, putting El Niño aside for a moment, like, are you seeing that we're sort of at the bottom of this cycle, or there's more pain, and if so, if it's later, how much more pain are we gonna see in here?
Reynaldo Llosa (Chief Risk Officer)
Yes. Our expectations, putting the El Niño aside, as you mentioned, is that we would reach the higher cost of risk of those portfolios during this year. And during 2024, that would be we will see we would have seen a decline. Having said that, the El Niño it's around the corner, so we have to consider that on our projections.
Sergey Dubin (Portfolio Manager)
Okay. So ex-El Niño, you should see decline in cost of risk in 2024 relative to 2023?
Cesar Rios (CFO)
For the-
Sergey Dubin (Portfolio Manager)
Okay
Cesar Rios (CFO)
... specific portfolios. I also want to emphasize that we are shifting gradually the portfolio towards a more retail. So the cost of risk for a specific portfolios are going to decline, but the long-term trend is to shift the portfolio towards a more retail one that entails higher cost of risk. That's important to consider.
Sergey Dubin (Portfolio Manager)
Yeah, yeah. No, that's a longer trend. But like in the shorter term, you're gonna... It's like maybe that's a question actually, like in the shorter term, are you gonna maybe pull back on retail a little bit and really you know manage risk?
Cesar Rios (CFO)
No.
Sergey Dubin (Portfolio Manager)
Because that's, I think that's where a lot of pain is being felt, right?
Cesar Rios (CFO)
No, there is no change in the strategy. What is an adjustment to react to the current macroeconomic conditions. It's an adjustment in a specific sectors that are more vulnerable, but the long-term strategy remains the same, I would say, in general terms.
Sergey Dubin (Portfolio Manager)
Okay. Last, last question, because it's also related. So, as of, I believe, as of Q3, right? You had 3.1% of your loan portfolio, which is these Reactiva loans, right?
Cesar Rios (CFO)
Yeah.
Sergey Dubin (Portfolio Manager)
They're very thinly covered, right? There's only 17%, I think, NPL coverage on that specific segment, because obviously they're government-backed. So if you, you know, let's assume you're gonna all of that will be paid down by the end of the year. When you, when you grow your retail book, you know, from, on year-over-year, that new originated loans in retail, that would have to be covered, you know, up from 17% to probably, I don't know, let's, let's assume 100%. So would that, how much, if that's the case, if I'm describing this dynamic correctly, what would be the incremental delta in the cost of risk that you would see from that specific point?
Cesar Rios (CFO)
I will give you some general comments, and after, Reynaldo can complement me. First, the Reactiva loan, at this point, is around PEN 4 billion only. It's not going to be entirely paid down at the end of the year. The leverage of coverage is significant. The wholesale part is 84%, 91% in retail BCP, and 97% in Mibanco. So the risk associated with this is substantially covered by the government, and this portfolio is going to be paid down substantially over the next year, but not at the end of this year. The payment of this year will be around PEN 900 million, out of the PEN 4 billion.
Reynaldo Llosa (Chief Risk Officer)
Having said that, I mean, your assumption that this will require higher provisions is true, but also we will provide a much higher margin. Because remember that in the Reactiva loans, there were very very low government-funded interest rates that almost only covered operating costs. Back to normal, they will provide a much higher yield on those loans as well, that will compensate the high provisions you mentioned.
Sergey Dubin (Portfolio Manager)
Okay. So by the end of the year, only PEN 100 million will be paid down, and they will be paid down gradually over the next 13 or 16 months or whatever. So, and I guess I know that your strategy is grow retail book longer term, but again, given the macroeconomic pain, and then this El Niño coming up, do you think it would be prudent to perhaps emphasize wholesale book more in this next 12-16 months? Or are you still gonna emphasize retail as well? Like, I'm just trying to see how you think about growth in this challenged environment.
Reynaldo Llosa (Chief Risk Officer)
Well, we review this permanently. Today, we see it proper to adjust our underwriting policies on the specific segments that could be affected in the northern side of Peru and those specific industries like fish meal and agriculture that could be affected, but that's in permanent revisions. I mean, we will see how the Niño evolves, and then we will adjust either further or relax a little bit our underwriting policies as well. It's a permanent process as you know. Today, we are providing with the best information we have at hand.
Cesar Rios (CFO)
Yes. I think it's worthwhile to remember that this is a cyclical event. We have experienced different levels of El Niño each 5, 7 years. There has been several severe Niños in the past, and we have developed the capacity to manage that. The whole country is not paralyzed by El Niño. During the presentation, we shared some figures relating to the level of direct exposure for our credit card portfolio in the northern part, is around 6% directly exposed. And so the rest of the country has a spillover effect, but it's still working, and we expect a modest but a rebounding economic growth next year.
Sergey Dubin (Portfolio Manager)
Okay. All right. That's fine. Thank you.
Operator (participant)
The next question comes from Carlos Gomez with HSBC. Please go ahead.
Carlos Gomez-Lopez (Head of LatAm Financial Institutions)
Hello, good morning. Thank you for the call. I want to ask you again about expenses. At the beginning of the year, you mentioned that your budget for transformation was equivalent to 1.5% of ROE, which we have calculated to around $175 million. Has that changed? And what is your expectation going into next year?
Cesar Rios (CFO)
I think this is more than a budget. This is an appetite and a boundary, and we adjust that according to the dynamics of the underlying business and the specific disruption initiatives. So, I would say that this is a rough number that is a guide for us. It's a boundary, but I wouldn't qualify that as a budget.
Carlos Gomez-Lopez (Head of LatAm Financial Institutions)
Okay, but, I mean, should we understand that you have been adjusting it during the year, and should we expect more or less in 2024?
Cesar Rios (CFO)
As I mentioned, this is, I would say, an upper limit, and we are going to be operating under this upper limit.
Carlos Gomez-Lopez (Head of LatAm Financial Institutions)
Okay. Thank you.
Operator (participant)
The next question is from Andres Soto with Santander. Please go ahead.
Andres Soto (Executive Director, LatAm Equity Research)
Good morning, and thank you for the presentation and the opportunity to ask questions. My question is regarding your macro assumptions for 2024. I believe you, Cesar, mentioned you have in your numbers 2% GDP growth. Is that what you have, you know, the implicit for the cost of risk that you are guiding to this year? It already incorporates this assumption for 2% growth next year? And when I look at the weather pattern that you show in your presentation on slide 10, which is quite interesting, it looks like it's turning increasingly similar to the El Niño to the 1997 event.
Based on that experience, is that the type of growth that you may expect? I remember back then, the economy was growing, the year before El Niño, the economy was growing 7%, and it came to a decrease of 1%, so a dramatic slowdown. Are you still expecting, it makes sense to expect a recovery next year, considering that this sort of El Niño can materialize?
Cesar Rios (CFO)
I think it's a very relevant question. We still have an expectation of a 2% GDP growth for 2024, that it considers an impact of El Niño. The El Niño considered in this GDP growth is moderate to strong, already considered, and still we are considering that the year of reference as El Niño is 2017. It's also good to remember that at the end of the century, in 1998, we have a combination of El Niño and the debt crisis, an international debt crisis. So, this significant drop in GDP that you mentioned is a combination of probably a stronger El Niño that is now expected, and an international monetary crisis.
Andres Soto (Executive Director, LatAm Equity Research)
That, that's very helpful, Cesar. And regarding monetary policy, now that Peru is officially in a recession, do you do you see additional space for this? And the actual inflation is printing pretty well. Do you see additional space for the central bank to cut rate more aggressively than it has done? Or you believe that, you know, the carry trade will prevent a more aggressive move?
Cesar Rios (CFO)
I think the carry trade is a factor, but another very important one is the Fed funds. Looking only to internal factors, probably the central bank will be more aggressive cutting rates. But a combination of El Niño, that usually have inflationary effects in the short term, and the higher for longer guidance from the Fed, suggests that the central bank has only limited room to decrease rates until middle of next year.
Andres Soto (Executive Director, LatAm Equity Research)
Perfect. That's very clear. Thank you so much.
Operator (participant)
It appears there are no further questions at this time. I will now turn the call back over to Chief Financial Officer, Mr. Cesar Ríos, for his closing remarks.
Cesar Rios (CFO)
Thank you all for your questions. As discussed, challenging circumstances persist in Peru. Given weak economic performance and higher probability of El Niño, the scenario worsening to moderate is strong in the upcoming 2024 summer season. Nevertheless, we are confident that the preemptive measures that we are taking, together with our flexibility to adapt to changing conditions rapidly, will allow us to effectively navigate these near-term challenges. It's important to keep in mind that El Niño is a transitory shock, and historically, we have seen the economy rebound after prior El Niño events. We expect to see the same trend again. Prior to closing today's call, I would like to leave you with these four key messages: First, Credicorp is resilient and has the ability to adapt to challenging circumstances.
We delivered healthy risk-adjusted margins this quarter, even as we increased provisions for specific customer segments with weakened payment capacity, given a prolonged regressive and inflationary environment in Peru. Second, we have increased our efforts across different fronts to mitigate the negative impacts of El Niño on the population, our customers, and our businesses. Pacífico, BCP, and Mibanco are promoting preemptive actions to limit damage to homes and businesses through various educational programs. In addition, we have modified our underwriting policies for the most exposed retail segments at BCP and Mibanco. Only about 6% of our portfolio is in the areas expected to be directly impacted. Our teams are working closely with clients in these areas to anticipate the likely financial requirements. Beyond the private sector, the government's capacity to unlock and execute projects will be key to jumpstart growth.
There's a significant package of projects that will be key to jumpstart growth. There are a lot of projects in the pipeline. The global long-term trend to transition to a green economy favors copper consumption. As a leading global copper producer with the lowest production costs and the highest copper reserves, Peru stands to benefit from this trend. Thus, it is imperative to accelerate execution of mining projects. Third, the strength of our balance sheet, prudent management, and leading franchise, built upon top-notch transactional capabilities, provides solid foundation for us to weather short-term challenges. Lastly, we continue to investing into the future. We are remain focused on executing our mid-term strategy, the goal of decoupling from the macro, and securing a healthy long-term ROE.
We are committed to continue to develop our disruptors to strengthen our competitive moats, while further enhancing the efficiency of our core businesses through technological transformation. In closing, we thank you for your continued support, and are committed to delivering on our value creation strategy. Thank you for joining us in this call. Goodbye.
Operator (participant)
Thank you, ladies and gentlemen. This concludes today's presentation. You may now disconnect.