Credicorp - Q4 2023

Transcript

Operator (participant)

Good morning, everyone. I would like to welcome all of you to the Credicorp Limited fourth quarter 2023 conference call. A slide presentation will accompany today's webcast, which is available in the investor section of Credicorp's website. Today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. If you would like to ask a question, please signal by pressing star and one on your telephone keypads. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screens. 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 call over to Credicorp's IRO, Milagros Cigueñas. You may begin.

Milagros Cigueñas (Head of Investor Relations)

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 Francesca Raffo, Chief Innovation Officer, Reynaldo Llosa, Chief Risk Officer, Diego Cavero, Head of Universal Banking, 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 a forward-looking statement section of our SEC 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 changes, events, new or changed events or circumstances.

Gianfranco Ferrari will start the call commenting on the highlights of our 2023 results and the milestones achieved by our main businesses, followed by Cesar Rios, who will comment on the macro environment, our financial performance, and provide our 2024 guidance. Gianfranco, please go ahead.

Gianfranco Ferrari (CEO)

Thank you, Milagros. Good morning, everyone. Thank you for joining us. We met market expectations for the fourth quarter and achieved resilient full year results in the face of one of the most challenging environments of the last 25 years, excluding the pandemic. Despite the challenge faced in 2023, Peru's current prospects stand considerably stronger than they did just 12 months ago. At the start of 2023, we were navigating disruptive protests and enduring political instability. The first quarter also had an inflation rate of 8% and a high reference rate of 7.75. Additionally, the country faced Cyclone Yaku and braced for the projected impact of a severe El Niño phenomenon for this summer.

However, as the year ended, Peru demonstrated its inherent resilience by effectively managing inflation, maintaining low level of public debt, and sustaining high levels of international reserves. The current stable, yet fragile political environment, improving macro with inflation down to 3.2% and the reference rate at 6.25, as well as lower probabilities for a severe El Niño, it starkly contrasts with the conditions at the beginning of 2023. At Credicorp, we have strategically built a diverse portfolio of businesses characterized by a robust brand recognition and strong customer loyalty. Our strength is further bolstered by a solid capital base and a prudently managed loan portfolio. Our digital capabilities have been key to enhancing our transactional and funding advantages, enabling us to respond swiftly in volatile environments.

As an example, at the onset of the year, when we foresaw a challenging trade cycle in 2023, we quickly reassessed our risk appetite and adjusted the pricing of our portfolio accordingly. By providing payment facilities to our clients when they needed it the most, we also fortified our client relationships. We delivered a full year ROE of 15.8%, which includes a substantial charge in the fourth quarter, attributed to expected losses linked to the El Niño phenomenon. This result was underpinned by the strength of our increasing NII. We maintained a resilient risk-adjusted NIM, achieved through disciplined interest rate, rate pass-throughs in the first half of the year. Additionally, we prepared our balance sheet for the declining interest rate cycle by reducing the duration of our liabilities and increasing that of our investment portfolio.

Having strengthened our transactional value proposition, we secured the sustainability of our funding advantage. Finally, we leveraged our cost-effective digital platforms to accelerate growth in the retail segment. We reinforced our diligent approach to risk management while maintaining a close connection to customers. This strategic move not only allowed us to sustain adequate capital levels, but also equipped us to anticipate and minimize headwinds in loan quality throughout the year. We remain committed to advancing innovation and our digital capabilities, which strengthen our competitive position. This approach not only enhanced our existing client relationships, but also paved the way for greater financial inclusion. For 2024, we anticipate an improvement in macroeconomic conditions. Our GDP outlook is now 2.5%, with a potential upside, considering the lower risk of a strong El Niño.

Moreover, the central bank's reduction of the reference rate lays the foundation for a global recovery in domestic demand and consumption. Additionally, we anticipate proactive government initiatives to facilitate the unlocking of macro projects in both the public and private sectors, particularly in mining and infrastructure. Next slide, please. A well-balanced and diversified business portfolio reinforces our results. In universal banking, BCP solidified local market leadership by expanding transactional levels and offering a seamless multi-channel experience. Mobile banking NPS improved with a growing digital client base. Enhanced IT and digital capabilities supported a low cost of funds, risk management, and digital sales. These factors collectively contributed to optimizing efficiency. In microfinance, Mibanco Peru has been negatively influenced by the challenging macro I already described. While we adjusted our risk appetite and implemented stricter origination guidelines in mid-2022, we acknowledge that these efforts were not sufficient.

It took us time to fully grasp the impact of this concurrent event on our clients, but we have now made heightened adjustments. The legacy portfolio continues to impact performance, yet our most recent vintages demonstrate improvement. We continue to assess our risk management capabilities, confident in our tools for further refinement. In the medium term, we aim to diversify our business through increased transactional and fee-based activities. Given the structural challenges in Colombia, we are reevaluating the business there and will adjust our strategy to mitigate short-term risks while maintaining focus on its long-term potential. In insurance, an accelerated digital strategy has led to an improved client NPS, increased sales of digital policies, and self-service customer transactions. We optimize distribution channels, notably in retail segments, resulting in the best year in its history.

We leverage bancassurance and Yape to strengthen our presence and expect to deliver a long-term sustainable ROE of 20%+. In wealth management and advisory, we've completed the first phase of the restructuring plan, strengthening the business and meeting our 2023 targets. We are on track to achieving our objective of a sustainable ROE in the high teens. At Credicorp, sustainability is integrated in our strategy, driving us to act as catalyst for positive change in the operating countries. In addition to our achievement in financial inclusion in 2023, we launched our new corporate environmental strategy, communicating it in our first TCFD report in December. We're investing in our innovation portfolio to complement our lines of business, aiming for disruptive initiatives to contribute 10% of Credicorp's risk-adjusted income by 2025.

Now, let's have a look at how we are progressing in our most mature initiatives. Next slide, please. Our approach to disruptive initiatives involves a nuanced perspective, an early stage plus VC view that guides informed graduation decisions within our portfolio. A mature example is Tenpo in Chile, which entering the scaling stage this year with a dedicated focus on revenue growth and monetization. Additionally, Yape intensified focus on revenue growth and is on track to break even towards 2024. Cesar will provide a more detailed update on Yape, but I would like to shift our attention to the rapidly growing Tenpo. We started with a prepaid bus payment business, achieving exponential growth in monthly active users and engagement. Currently, we're in the second stage, leveraging our recently obtained license to issue credit cards, positioning Tenpo as the first fully digital credit card issuer in Chile.

We've also filed for a full banking license. With early indicators from stage one and stage two surpassing our expectations, we're optimistic about the strong potential, potential of this new initiative. As we look ahead, our innovation approach will increasingly encompass the area of cognitive AI, where we are already making progress. We're targeting high-impact transformations across internal processes, external engagement, and most notably, in customer experience through unique, tailored interactions. Focusing first on productivity and customer experience, we're implementing short-term value generation opportunities throughout specific use cases. We're also initiating the development of transformative use cases, envisioning innovation that propels us into sustained progress and evolution. This holistic approach is supported by a comprehensive framework, which ensures the responsible and secure implementation of AI. Cesar, please go ahead.

Cesar Rios (CFO)

Thank you, Gianfranco, and good morning, everyone. In addition to the usual seasonality in expenses, this fourth quarter was impacted by provisions set aside for El Niño based on the best information available at the closing of the books, and by a goodwill impairment for Mibanco Colombia, mainly. I will share now the key financial highlights for the quarter, focusing primarily on quarter-over-quarter evolutions. Favorable balance sheet dynamics allow us to deliver an increasing NIM, despite sequential reference rate reductions over the last four months of the year. The structural loans grew 0.4%, measuring average daily balances, driven by retail banking at BCP. In addition, the share of low-cost deposits in our funding base rose to 54.5%, which represents an increase of 360 basis points versus the figure at the end of September.

Other core income also evolved favorable, as BCP took advantage of an uptick in demand for foreign exchange operations at the end of the year. Credicorp Capital registered solid increases in fee income. In contrast, insurance underwriting results dropped 13.2%, reflecting higher claims expenses in our P&C and life insurance businesses, which affected profitability this quarter. It is worth noting that we reported unusually high insurance underwriting results through the year. On the credit risk front, we significantly increased provisions by including an expense of approximately PEN 250 million to cover year-end expectations for El Niño. In this context, the cost of risk increased 71 basis points to 3.2%, while our structural NPA ratio rose 7 basis points to stand at 5.6%.

Finally, structural NPL coverage increased 101 basis points to stand at 102%. All in all, we delivered resilient results in a context marked by a larger than expected contraction in GDP, and we have maintained sound capital levels of our Peruvian banking businesses as a matter of prudence. Now, as the risk of a severe El Niño has faded, it is our intention, subject to board approval, to deliver a higher dividend payout through the year to move towards our long-term target levels. Next slide, please. For the year 2024, the outlook for emerging markets look more positive, bolstered by expectations of lower policy rates and high commodity prices. In the United States, the slowdown in inflation and labor market rebalancing led financial markets to expect Fed rate cuts in the second quarter.

The price of copper is expected to remain at high levels, supported by the global transition towards green technology and despite a moderation of China's economic growth. Peru's GDP is expected to grow around 2.5% this year, with risk tilted to the upside. This estimate assumes El Niño continues to dissipate, no new negative shocks occur, a less restrictive monetary policy is in place, and progress is made on key infrastructure and mining projects. The country's central bank has cut the policy rate by 150 basis points since its peak, in response to a sustained dip in inflation and lower inflation expectations.

Additionally, we expect the government to accelerate advances on key infrastructure projects, such as Chavimochic III, and the mining front progress is expected on the Zafranal copper project, and the government is likely to approve an extension to Antamina's life of mine soon. Regarding Colombia, we believe that GDP growth will accelerate slightly to 1.7% in 2024. Inflation, in turn, continues to be persistent and stood at 8.4% as of January. The country's central bank delivered its first interest rate cut in December, a movement is repeated in January. Finally, in Chile, GDP is expected to reduce their 2.1% growth in 2024 after stagnating in 2023. Meanwhile, inflation situated at 3.8% as of January. In this context, the country's central bank reduced its policy rate by 400 basis points since its peaks.

Next slide, please. The probability of a strong El Niño over the summer has faded to the background over the last weeks. ENFEN, the multisectoral committee that studies El Niño phenomenon in Peru, has made downward revisions to the probability assigned to this event. Currently, a weak intensity is expected in February, and from March onwards, ENFEN assigns a higher probability to a no Niño. This is undoubtedly a favorable development and contrasts significantly with the scenario in play for our last call, when the expectations of a moderate to strong magnitude El Niño was above 90%. We continue to monitor the probabilities assigned to El Niño, given the high volatility. In the current scenario, the economy is expected to edge up gradually. Next slide, please. BCP's 2023 results were solid, despite unfavorable events this year.

Analyzing key quarter-over-quarter dynamics, the 5.1% increase in NII was driven primarily by an improvement in the funding mix. Demand and saving deposits grew more than 6%, which allow us to optimize the funding base. Additionally, SME lending and SME business disbursement rose, which changed the portfolio mix. This quarter, 1.8% growth in BCP's other core income was mainly fueled by 11.6% uptick in FX transactions. In line with our previous explanation, provisions at BCP increased 28.9%, mainly due to a specific provision for El Niño-related expected losses for approximately PEN 200 million. We exclude this effect. Provisions remained at high levels and decreased slightly by 1%.

The marginal increase in wholesale banking provisions was attributable to a base effect, while growth in SME PYME provisions were triggered by a negative payment performance. Both of the aforementioned increases were offset by reversals of specific mortgage sub-products. In this context, the cost of risk stood at 2.91%. Provisions for El Niño accounted for approximately 68 basis points of this figure. On a full year basis, NII was bolstered by high interest rate and by a 3.8% increase in structural loans measured in average daily balances. This growth was led by SME PYME working capital loans and mortgages, which grew 13.7 and 5.9 respectively. Despite the elimination of interchange fees, fee income remained stable this year.

Loan loss provisions increased 113.3% in 2023, driven mainly by a deterioration in the payment performance of clients that were negatively impacted by concurrent macroclimate and social events. Operating expenses grew 10%, driven by core business IT expenses to support a strong growth in transactions and the development of digital capabilities and investment in disruptive initiatives. Growth in operating income outpaced the expansion in expenses this quarter, which led BCP efficiency ratio to contract 190 basis points and stand at 38.8%. In this context, BCP's full year ROE contribution stood at 20.6%. Next slide, please. As Gianfranco commented, Yape continues to scale. Its pace of revenue generation is steadily climbing and on track to hit breakeven this year.

At the close of the fourth quarter, Yape had almost 11 million monthly active users, who conducted an average of 35 transactions per month, up 20% quarter-over-quarter. Nearly 74% of these active users already generate fee income. Furthermore, NPS increased nine basis points, percentage points, sorry, year-over-year, to stand at 80%. Growth in engagement, fee income, and NPS was attributable to new user-friendly features in Yape three business lines. At the end of the fourth quarter, Yape had 12 functionalities. The payment business feature are the most used and mature, where top-ups and bill payments were the highest contributors to growth in fee income. Monthly revenue generated in the payment business more than doubled year-over-year. In the financial service business, two features, one for insurance and another for multi-installment loans, were added to the initial offering of mono-installment products.

Monthly revenue generated by financial services grew more than fourfold year-over-year. Finally, we see high potential in the marketplace, where two new functionalities has been added to our discount and ticketing features, gaming and electronic sales. Yape increased its income per active user 35% quarter-over-quarter, and it's on track to reach and breakeven, despite a seasonal increase in the expenses for monthly average users, which was attributable to an uptick in transactions, the development of IT capabilities and expenses triggered after achieving specific milestones. Next slide, please. In 2023, Mibanco's results were negatively impacted by macro conditions, social conflicts, and climate anomalies, which generated higher than expected impacts on our clients. As Gianfranco commented, new portfolio vintages demonstrate improvement, and we continue to assess our risk management capabilities. We are very confident that we possess the tools needed to improve and resume growth.

On a quarter-over-quarter basis, NII fell 3.9%, which was primarily attributable to a drop in loan balances, after we further adjusted our appetite in riskier segments to focus on lending to better risk profiles. In this context, NIM decreased 30 basis points and it stood at 13.35%. Provisions, which were already elevated, rose further this quarter after registering a provision of approximately PEN 50 million for expected losses for El Niño phenomenon. If we exclude this effect, provisions fell due to loan contractions. From a full year perspective, NII increased 1% in 2023. This growth, albeit slight, reflects the fact that the impact of high interest rates on loans successfully offset the effect of rapidly rising funding costs. Our disciplined interest rate management was key to maintain NII in 2023. Provision expense increased significantly this year.

Operating expenses increased 4.3% in 2023 and remain under control. Nonetheless, a near flat evolution in operating income led the efficiency ratio to rise to 52.7% in 2023. Mibanco Colombia has been challenged by a deterioration in economic conditions, ongoing high inflation, very high funding rates, and a reduction in the interest rate ceiling. Due to this context and the consequent deterioration in business performance, we are recognizing a contraction in this company's value and have registered a goodwill impairment of PEN 64 million at the Credicorp level. Additionally, as Gianfranco mentioned, we are currently reassessing the business and redefining our strategy to better adapt to current market conditions. We remain committed to the long-term potential of this business. Next slide, please. Profitability at Grupo Pacifico contracted this quarter, with ROE standing at 17.9%.

On quarter-over-quarter terms, net income decreased 45%, impacted by a 23% drop in insurance underwriting results and by non-recurring items. The contraction in insurance underwriting results was primarily driven by higher claims expenses in P&C and life businesses. From a full year perspective, Grupo Pacifico's net income rose 74%, primarily driven by positive dynamics in insurance underwriting results in the life business, mainly in disability and survivorship. Profitability in disability and survivorship product was boosted by favorable pricing and volume terms secured under the SISCO VI auction. Other life products, such as Credit Life and Group Life, also reported higher insurance underwriting results, driven by higher income and an important reduction in claims in comparison to 2022, still affected by COVID-19. Finally, net financial income posted a 14% increase, driven by both our investment optimization strategy and an increasing interest rate through the year.

All in all, these extraordinary results were driven by both the disciplined development of internal capabilities and transitory tailwinds. Next slide, please. ROE for the investment management advisory line of business increased this quarter and stood at 14%, driven by quarter-over-quarter income growth at our more volatile businesses. In particular, robust capital markets performance at year-end boosted our capital markets business and our treasury results by 26% and 90% quarter-over-quarter, respectively. In addition, income from our asset management business edged up 8%, and assets under management rose 6% in U.S. dollars. On a full year basis, net income rose 53% as we benefited from market performance, favorable business dynamics in our wealth management business, and a rigorous cost control program.

Notably, treasury results reversed 2022 losses, and wealth management income increased 11%, as we took advantage of the rate environment to improve our intermediation margins. We managed to increase assets under management, measuring U.S. dollar, by 9% and 11% in wealth and asset management, respectively. Next slide, please. Now, we will look at Credicorp's consolidated dynamics. On a quarter-over-quarter basis, our interest earning assets mix shifted, marking an uptick in retail loans and the investment portfolio and a contraction in wholesale loans. In the funding mix, there was an uptick in low-cost deposits and a contraction in more expensive funding sources, such as term deposits. These dynamics, which unfolded in a context marked by decreasing interest rates, allowed the yield on interest-earning assets to remain flat, while the funding cost decreased 12 basis points on a year-over-year basis. Interest-earning assets followed the same mix dynamics.

On the funding side, the increase in term deposits, and to a lesser extent, in due to banks, was driven by a contraction in low-cost deposits and secondarily by a reduction in bonds. These dynamics, coupled with the rerating of our asset portfolio, led to an increase of 99 basis points in the yield of interest-earning assets, compared to 68 basis points increase in the funding cost. Going forward, we expect our balance sheet structure to support resilient margins in a decreasing interest rate environment. On the asset side, we increased the duration of our investment portfolio; we will take longer to rerate. Additionally, our loan book is growing at a faster pace in retail loans, which offer higher yields and are less sensitive to interest rate movements. These dynamics will provide stability to our asset yields.

On the funding side, the recent uptick in low-cost deposits will help sustain our funding strength. In addition, the balance of term deposits, which are more concentrated in wholesale clients, will quickly reprice downward, which will help lower our funding costs. Next slide, please. Recent balance sheet and interest rate dynamics led NIM and NII to increase quarter-over-quarter and on a full-year basis, boosting core income growth. On a quarter-over-quarter basis, NIM increased 10 basis points and stands at 6.21%. This adjusted NIM fell 35 basis points to 4.10%. Provisions for the El Niño phenomenon generated a negative impact of 45 basis points. Core income was boosted mainly by NII, which increased 2.9% 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 operation in BCP Bolivia, where we charge fees to FX clients to offset losses in buy-sell FX transactions. Excluding BCP Bolivia operations, other core income grew 2.1% quarter over quarter, driven by an uptick in FX volumes, where BCP leveraged higher end volumes and higher fee income and Credicorp Capital.... On a full year basis, NIM registered a 92 basis point uptick and stands at 6.01%. This improvement more than offset the impact of higher provisioning this year. In this context, risk-adjusted NIM rose 9 basis points to stand at 4.38%. Core income increased 11.4% on the back of NII, which grew 16.6%. Next slide, please.

Let's look at the dynamic of the structural non-performing loans. Adverse events in 2023 and weak economic performance continued to impact client payment performance, albeit to a lesser extent than the previous quarter. On a quarter-over-quarter basis, growth in BCP structural non-performing loans was driven by SME-Pyme, consumer, and credit cards. In SME-Pyme delinquency was concentrated in all vintages, while early delinquency indicators of new vintages show improvement. In consumer and credit cards, increasing NPL volumes was concentrated in loans overdue more than 120 days. Mibanco's delinquency was concentrated in higher-ticket loans, where we have recently implemented tougher credit policies. This increase was partially offset by a payment of an overdue loan and an additional loan recovery, both associated with specific corporate clients.

On a year-over-year basis, structural non-performing loan volumes increased mainly through SME-Pyme, consumer, credit cards, and Mibanco, driven by the same factors as those seen quarter-over-quarter. Wholesale banking NPL was impacted by an uptick in overdue loans to a lesser extent in refinanced loans from the tourism and real estate sectors. In this context, the structural coverage ratio stood at 102%. Next slide, please. Moving on to provisions, the cost of risk has risen and stood at 3.2% for fourth quarter and 2.5% for the full year. The structural cost of risk stood at 3.3% for the fourth quarter and 2.5% for the full year.

The quarterly figures reflect the fact that we included a specific provision of approximately PEN 250 million for the El Niño phenomenon, based on the best information available at the closing of the books. Let me go through quarter-over-quarter dynamics for provision expenses, excluding the charts related to expectation for El Niño impact. Provisions grew 3%, driven by a base effect in wholesale banking and by a drop in client payment performance in SME-Pyme due to adverse macro conditions. These movements were partially offset by reversals for specific sub-products in mortgages and at Mibanco due to a contraction in loans. On a full year basis, provisions rose 105%, driven by retail banking at BCP, which rose across consumer, credit cards, and SME-Pyme due to an uptick in deterioration of older vintages.

Provisions at Mibanco were also up, driven by a downturn in the payment performance of clients. The aforementioned was partially offset by reversals in wholesale banking through the year. Next slide, please. We will review the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Expenses for disruptive initiatives at the Credicorp level increased 60.6%, where the most relevant initiatives were Yape and Tenpo, which accounted for approximately two-thirds of this year's expenses. Operating expenses grew 9.8% in 2023, driven primarily by disruptive initiatives at Credicorp level and within core businesses at BCP.

At BCP, core businesses fueled growth in expenses through an uptick in IT expenses related to increased use of the cloud as clients become more digital and transactional levels increase, investments to enhance digital capabilities and improve cybersecurity, and moves to attract more specialized digital talent. Marketing expenses mainly driven by advertising to boost deposits and digital sales. Operating leverage remained strong at BCP. At Mibanco, operating expenses remain under control, but operating income is still challenged. In this context, our efficiency ratio stood at 46.1% in 2023, down 142 basis points year-over-year, driven by positive operating leverage. Next slide, please. Credicorp's full-year profitability was sustained by solid results at our universal banking and insurance businesses, which mitigated weak performance at our microfinance units.

On top of the recurring dynamics, it is important to note that Credicorp's results were influenced by the goodwill impairment related to Mibanco Colombia, and by an increase in the withholding tax provisions at the holding level, which were set aside to cover the impact of an expected increase in dividends. In this context, ROE for the full year stood at 15.8%. Credicorp's net equity in 2023 was bolstered by an uptick of $730.6 million in other comprehensive income, which was mainly attributable to a reduction in unrealized losses for the available-for-sale portfolio. Now, I will move on to the outlook. Previously mentioned, we expect Peru's GDP to grow around 2.5% in 2024. Regarding loan growth, we are changing our guidance indicator as Reactiva no longer constitute a significant share of our portfolio.

We expect our total loan book measure in average daily balances to grow between 3% and 5%, driven mainly by retail banking at BCP and a slight drag it down by Reactiva amortizations. The ongoing shift from our loan book towards higher yielding mix, coupled with favorable dynamics in our funding structure, should positively impact NIM. Accordingly, we expect NIM to stand between 6%-6.4%. The cost of risk guidance is between 2% and 2.5%. This range reflects the shift of our loan portfolio mix towards retail and a partial reversal of El Niño related provisions. In 2024, we will continue to invest significantly in digital transformation and disruptive initiatives to bolster our long-term competitive position.

Thus, we expect the efficiency ratio to situate between 46% and 48%, and will reflect an increase in the weight of expenses for disruptive initiatives. At this point, we consider it's appropriate to provide you with some qualitative guidance on two key income streams, net fees and insurance, and the underwriting results. Regarding the former, we expect fee growth to pick up towards high single digits in 2024 as activity accelerates and our efforts to further increase our transaction capabilities gain traction. Additionally, insurance and the underwriting results will contract after reaching unusually high levels in 2023, as profitability in the life insurance business converges to very good sustainable levels. Given the aforementioned dynamics, we expect our ROE to stand at around 17% for the full year. With these comments, I would like to start the Q&A session.

Operator (participant)

Ladies and gentlemen, we'll now begin the question and answer session. If you would like to ask a question, please signal by pressing star and one on your telephone keypads. 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 to unmute your phones 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 today comes from Ernesto Gabilondo from Bank of America.

Please go ahead with your question.

Ernesto Gabilondo (Director)

Hi, good morning, Gianfranco and Cesar, and good morning to all your team. Thanks for taking my call. My question will be on your expectations for OpEx growth this year. Just wondering if, if it should be similar to the pace of growth observed in 2023, or a little bit lower, especially after removing the goodwill impairment in Colombia. How much do you expect OpEx to be related to the recurring business, and how much do you expect it to be related to the digital transformation? And also related to this question, when do you see Yape becoming profitable, and in which lines of the PNL should we start to see higher revenues from this business? Thank you.

Gianfranco Ferrari (CEO)

Good, good. Thank you, Ernesto. Good morning. This is Gianfranco. I'll ask Cesar to go on the first. Actually, on both questions.

Cesar Rios (CFO)

Yes, I think they are very relevant questions. I am going to address one by one. In terms of growth, I would like to emphasize that the impairment is not considered an operating expense, goes in another line, so we shouldn't take into consideration to explain the underlying dynamics of the business. In general terms, we expect to have similar dynamics in growth and expenses, but mention that the relative weight of the new initiative is growing significantly.

So, as you can see in, in the report, over the last year to 2023, the relative weight has increased, and we expect this relative weight of the new initiative to continue to increase significantly. They are not going to increase 66%, as was in the year of 2023, but being more significantly, changing from around 10% to around 15% of the expenses, the relative weight of these new expenses are going to be more relevant in the whole. This is one of the question.

In terms of Yape profitability, we expect to have breakeven during this year with a very significant dynamic in which we are going to start having more fee income streams, not only related to the transactional activity, but gradually a more relevant contribution from the financial services and Yape market.

Ernesto Gabilondo (Director)

Excellent. Thank you very much, Cesar.

Operator (participant)

Our next question comes from Alonso Aramburú from UBS. Please go ahead with your question.

Speaker 11

Yes, good morning, everybody. Good morning, Gianfranco and all of the team. Just a broader question here, with this guidance, for 2024 of an ROE of 17%, I just wanted to confirm the indications of an ROE around 18% in 2025, that you guys provided during the investor day last year. So should we continue thinking about this 18%, or after the operational performance, from last year, there should be some change in that? And also, if you could include your thoughts on the sustainable ROE of the consolidated bank, I would also appreciate. Thank you very much, guys.

Gianfranco Ferrari (CEO)

Thank you. Thank you, Alonso. And the answer is yes. I believe we mentioned it in, I don't know if last call or a couple of calls ago. We see 2024 as a transition year. That's the reason why the expected ROE in the guidance is around 17%. We expect that by 2025, the expected ROE should be 18%, and then onwards. So we expect a sustainable ROE in the medium term to be 18%. Bear in mind that we've also stated that we expect that by 2025, the digital initiatives overall as a portfolio should be cashflow neutral. So yes, the answer is yes.

Speaker 11

Okay. Thank you very much again.

Operator (participant)

Our next question comes from Sergey Dubin from Harding Loevner. Please go ahead with your question.

Sergey Dubin (Portfolio Manager)

Yeah, good morning. Thanks for the call. Three questions, but I'll start one by one. On net interest margin guidance, I guess you guys are guiding to improving net interest margin for 2024, even though Central Bank of Peru is obviously cutting rates. Could you go over one more time in kind of, like, more detail, exactly why, you know, what's gonna drive the NIM improvement? And you can discuss both asset yields and funding costs in that context.

Gianfranco Ferrari (CEO)

So good morning, Sergey. Cesar, please go ahead with the question.

Cesar Rios (CFO)

Yes. I think the question is significantly derived from a balance sheet perspective, the mix. We have positioned the book, trying consciously and purposely to lend the duration of the asset side and shorten the duration of the liability side. This strategy through this 2023 year has positioned our balance sheet in order to benefit from the reduction of the interest rate in the following manner: In the asset side, we have increased the duration of the investment portfolio, and we consider that we can change the mix of the long growth, tilted toward more retail loans.

This is going to increase the yield of the part of the portfolio, and in some cases, we think that these yields are going to be not only more contributive because of the underlying yield, but they are also less volatile and less connected to the underlying reference rate. Of course, the wholesale loans are going to reprice according to the market in a timely fashion. In the liability side, we have going to have two factors that are going to increase our funding structure, and one is going to be probably in the other direction. In the positive side, we have ended up the year with a better funding mix. In the last quarter, the proportion of low-cost deposits increased 360 basis points, and we are considering the positive dynamic to continue.

So maintain a significant proportion of low cost funds. Reflecting the funding strategy that I described at the beginning, we have increased the percentage of term deposits, very short-term deposits, that are going to reprice accordingly with the decrease in the reference rate. These are going to be positive contribution to the margin. In the flip side, we are refinancing medium-term loans, bonds, sorry, and they are going to increase the marginal cost. All in all, the result is the guidance that we have just provided.

Sergey Dubin (Portfolio Manager)

Okay. That's helpful. Okay, my second question is regarding cost of risk. So I understand that, you know, there's a bunch of provisions taken for El Niño, which is fine, but then when I back that out. Actually, even it just look like line by line, I see that BCP had a significant increase in cost of risk, almost doubled from last year. I'm talking about year to year here, not quarter-to-quarter. Mibanco is actually a very modest increase, and then other was also very significant in percentage terms. So can you comment on what drove increase in BCP cost of risk specifically?

Gianfranco Ferrari (CEO)

Yes, Reynaldo?

Reynaldo Llosa (Chief Risk Officer)

Yes, 2023 has been a challenge, a very challenging year for us as a whole. Besides the specific events in terms of what we had at the beginning of the year, as you know, the economy had shrunk during this year. And as such, I mean, we have much more provisions than expected and much more provisions than in 2022. This explains basically the difference between both years and is specifically related, as we have explained, in two portfolios, the SME book, as well as a consumer and credit card portfolio as well.

Sergey Dubin (Portfolio Manager)

Yeah, so my question is really why, because you have Mibanco, which is, lending to these less affluent, you know, less credit quality customers, their provisions have only increased 16% year-on-year, but your BCP provisions have doubled? So are you feeling, why is there a disconnect? Like, why are you not increasing provisions in the most vulnerable, segment of the population? And, you know, it seems like, is that because you took the pay early in Mibanco, or what, what's driving that disconnect in, provision increase between Mibanco and BCP?

Gianfranco Ferrari (CEO)

You have to check the base here in BCP, we had a like an average cost of risk of around 1.5, and we double as you mentioned. In Mibanco last year we were around 6%, so it has grown marginally only 10%, but taking into consideration the base of both portfolios. That's the basic explanation. Is the base of last year as compared to this year. In absolute terms, BCP is less than half of what Mibanco has provisioned in this year.

Sergey Dubin (Portfolio Manager)

Okay. Well, I'll check the math and come back to you on that. And then my last question was also addressed partially, but not really fully. So, can you, like, when you're talking about your cost income ratio, efficiency ratio, right? So I think you mentioned that this year you're gonna have 10%-15% of expenses from disruptive initiatives, but then you also said that in, by 2025, you would expect 10% of revenue coming from disruptive initiatives as well. So presumably, in 2024, there will be also some portion that comes in, in revenue coming from that. So why are you still having efficiency ratio deteriorating as opposed to improving, especially in the context of Yape breaking even this year?

Gianfranco Ferrari (CEO)

Yeah. Sergey, that's because, as an example, Yape is gonna reach breakeven this year, but the cost to income of Yape is 100%. Let's assume if it gets breakeven. The cost to income of Yape is gonna be 100% this year. And Yape in relative to the overall portfolio is gonna be larger this year than the previous year. And that's something. It's exactly the same to the other initiatives. So the other disruptive initiatives. So the disruptive initiatives keep improving their cost to income, but they're not obviously. They're way higher than 45%. And as they become larger, they have a negative impact on the cost to income ratio.

Sergey Dubin (Portfolio Manager)

Okay, I see. So, so basically, until your disruptive initiative cost income ratio reach your average, whatever, 46% or 47%, they're gonna still weigh down on, on the consolidated.

Gianfranco Ferrari (CEO)

Exactly.

Sergey Dubin (Portfolio Manager)

- CIR.

Gianfranco Ferrari (CEO)

Exactly.

Sergey Dubin (Portfolio Manager)

Okay.

Gianfranco Ferrari (CEO)

Exactly. So what we're, as management team, what we're trying to do is, with the, let's say, traditional business, how to make it much more efficient, so that as to, for, as, as Credicorp, as an overall portfolio, we're balancing that, that cost to income ratio and not deteriorating the, the cost to income, further.

Sergey Dubin (Portfolio Manager)

Okay, got it. Okay, that's, that's all for me. Thank you very much.

Operator (participant)

Our next question comes from Carlos Gomez, from HSBC. Please go ahead with your question.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Yes, hi, good morning, and congratulations on the results. I wanted to know if you can give us an idea about how much you have invested in Tenpo in Chile, and what your expectation is for future investments until it reaches profitability. And second, I don't know if you have mentioned this already, but what do you expect for dividend this year, and what will your target CET1 be? I think you are at 13.2%. That, that's probably a bit higher than what you normally operate as. So that would be it. The capital dividend and Tenpo. Thank you.

Gianfranco Ferrari (CEO)

Yeah. So I'll Good morning, Carlos. I'll take the second question, and then I really don't have the figures for Tenpo top of mind. Maybe Cesar can help me here. Regarding dividends, obviously we cannot provide a figure now, since the dividend has to be approved by the board in April, I believe. But what is relevant, what I would say is relevant, is the logic behind paying dividends. Over, along the history of Credicorp, what we've done is that the subsidiaries pay whatever is in excess of what they need for growth, in terms of capitalization, and they pay dividends to Credicorp, and then obviously Credicorp, if it doesn't have any transformational investment or something like that, it pays dividends.

Last year, in 2023, we decided to withhold some dividends at the, specifically at Mibanco and at BCP, because of the social unrest and the projections of a strong El Niño we had at the time. That's the reason why, as you correctly mentioned, BCP is today, the Common Equity Tier 1 of BCP, is much higher than what we normally have, which is 11.5 or 11, i think Milagros?

Milagros Cigueñas (Head of Investor Relations)

11.

Gianfranco Ferrari (CEO)

11. Which is 11, and as you mentioned, it's, it's above 13%. So yeah, that's, that's the answer regarding dividends. I don't know if that's enough for you.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Well, I mean, so we should expect, therefore, more distribution from the subsidiaries to the holding, and therefore, perhaps more general distribution this year than, than in previous years. That's the logic, right?

Gianfranco Ferrari (CEO)

That's the correct math.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Okay.

Gianfranco Ferrari (CEO)

Sorry, I cannot be more specific, but the board has to approve that

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

No, no, I know. I understand. I understand. But obviously the board is going to

Gianfranco Ferrari (CEO)

Yeah.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

to listen what management says about what

Gianfranco Ferrari (CEO)

Totally, totally, totally budget, valid logic. Yeah.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Mm-hmm. Very good.

Gianfranco Ferrari (CEO)

Regarding Tenpo, Cesar, can you help me with that?

Cesar Rios (CFO)

We have to run in a general figure, but I would say Tenpo can be around PEN 170 million-100 million around of cash costs.

Gianfranco Ferrari (CEO)

To, as of today? As of today, yes. And maybe what is more relevant, Carlos, is that how we manage the disruptive initiatives is that now that we are fully committed for the next, I don't know, five years. It's that each of the initiatives we set indicators, what we call early or operating indicators, depending on the stage. And if they hit, if they achieve those indicators, our capital or the capital calls are met. We are constantly supervising, and Francesca's team is constantly looking at the performance of the initiative, and that's the way we manage them.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Okay. But it's fair to say that, I mean, and you have highlighted Tenpo, indeed, that's something which is working. So one would expect

Gianfranco Ferrari (CEO)

Yeah.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

that you will invest more in this particular venture, because you are far from breakeven as well, right?

Gianfranco Ferrari (CEO)

Yes. Yes. And far, not only in terms of, of money, but also in terms of, time. Yes, that's correct.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Okay.

Gianfranco Ferrari (CEO)

We cannot provide an exact figure as of today, but let us revise it, and we will be more specific maybe next call.

Carlos Gomez-Lopez (Head of LatAm Financial Institutions)

Thank you so much.

Operator (participant)

Our next question comes from Beatriz Abreu, from Goldman Sachs. Please go ahead with your question.

Beatriz Abreu (VP of Equity Research)

Hi, everyone. Good morning, and thank you for taking my question. I have a question on provisions. Do you expect any additional provisions related to El Niño at all in the coming quarters? And is there any risk of El Niño becoming more severe in the next couple of quarters, maybe, and you having to make additional provisions related to that? And then, going forward, what would be a more normalized cost of risk that we should consider, and how should we think about the evolution of cost of risk throughout the year also? Thank you.

Gianfranco Ferrari (CEO)

Yes, good morning. Good morning, Beatriz. Reynaldo, could you take that one, please?

Reynaldo Llosa (Chief Risk Officer)

Yes. Beatriz, with the latest information we have, we don't expect at all any extra provisions for the El Niño effect. As Cesar has mentioned, we even are considering, as of today, a reversal of a provision we made in the last quarter of 2023. And in terms of the normalized guidance, it will depend how successful are we in terms of the projected growth in the retail portfolio, which, as you can understand, we would require a higher cost of risk than the wholesale portfolio. So basically, it will be around the current number, but it could grow a little bit if we are successful in the growth in the retail market.

Gianfranco Ferrari (CEO)

Maybe just to complement, Reynaldo, what we look at is a risk-adjusted NIM. So yeah, that's what Reynaldo just mentioned is totally correct. But the retail portfolio has higher NIMs, therefore, they can bear higher cost of risk. What matters is risk-adjusted NIM.

Beatriz Abreu (VP of Equity Research)

Just to, just to make sure I understand: So in case retail loan portfolio growth does turn out to be better this year, then cost of risk should be closer to the top end of the guidance? Is that what you mean, Reynaldo?

Reynaldo Llosa (Chief Risk Officer)

Yes, that would be the case, but with a higher NIM as well. So overall, it would be better for the bank to be in that case.

Beatriz Abreu (VP of Equity Research)

Perfect. Very clear. Thank you.

Operator (participant)

Our next question comes from Yuri Fernandes from JP Morgan. Please go ahead with your question.

Yuri Fernandes (Executive Director)

Hello. Hi, Gianfranco, Cesar, Milagros, everybody. I joined the call a little bit late, so I'm not sure if this was explored or not, but I'm having a hard time to conciliate your 17 ROE with your expenses growing somewhat in line with 2023. So if you can provide a little bit more color, I know you discussed that NIM should remain resilient, loan growth accelerating, cost of risk, but it's still, you know, it seems too positive, and I would like to understand a little bit the bridge. Perhaps this is the app getting to breakeven, but if you can, you know, help us understand the ROE path to the 17%, that would be great. Thank you.

Gianfranco Ferrari (CEO)

Sure.

Yes.

Good morning, Yuri. Cesar, please, could you answer that?

Cesar Rios (CFO)

Yes, please. I would like to invite you to revise the basic of this year. You, we have this year 15.8%.

If we consider that next year, we're considering an increase in average daily balances and an improvement in NIM, we are going to have a relevant increase in net interest margin and a controlled cost of risk that shouldn't increase in absolute terms over the last year. Adding to that, we are going to have an acceleration in fee income, driven by the underlying businesses and also by the disruptive initiatives, mainly Yape. This is going to provide an, I would say, a pre-expenses significant improvement in income.

As we add up to these figures, costs that increases more or less in line with previous year, with a change in the composition, as Gianfranco has explained, for the relative weight of the new initiative, we can have a higher profitability this year than the 2023. With the addition that we are not considering one-time events, like the provision of El Niño and the impairments that impacted 2023.

Gianfranco Ferrari (CEO)

Yeah. Maybe, maybe, Yuri, just to complement Cesar, I let me go back to my original comment regarding the overall situation of Peru. It's not only the macro, macroeconomics, but also the social, social situation, the political situation, and so on. So we see a much better. We feel that we're in a much better position as a country, I mean, today, than what we were exactly 12 months ago.

Yuri Fernandes (Executive Director)

Oh, perfect, guys. And it makes sense, and good luck with that. If I may, just a second one, and a kind of a follow-up on Yape, and congrats on the numbers for Yape, like, impressed, again. I just note an increase on the cost to serve, like you provide this, this chart in the presentation, and ARPAC is almost crossing the cost to serve, but the cost to serve was up, I don't know, like some 20%, quarter-over-quarter, in the 4Q. So just asking if the cost to serve is seasonal, like, when you say break even of Yape, is this cost to serve getting a little bit more normalized and returning to, I don't know, like the previous levels of PEN 4 per active user?

Or is this their pack, you know, crossing the cost to serve? So just checking, the cost to serve on Yape.

Gianfranco Ferrari (CEO)

Yeah, Yuri, you're right on your assessment, that the, I mean, Cesar mentioned it during the speech. The last quarter, we have some. Well, first of all, there's seasonality, because of the number of transactions. There's a spike in the last quarter, especially in December. Plus, there were some costs related to performance. But we expect that cost to serve to go back to similar to previous levels.

Yuri Fernandes (Executive Director)

Mm-hmm.

Gianfranco Ferrari (CEO)

Therefore, Cesar said, we're gonna reach break even this year. I would say we're gonna reach break even the first half of the year. So we're on the right track.

Yuri Fernandes (Executive Director)

No, super clear, Gianfranco. Thank you, and congrats on the results and the guidance. Thank you.

Gianfranco Ferrari (CEO)

Thank you.

Operator (participant)

Once again, if you would like to ask a question, please press star and then one. To withdraw your questions, you may press star and two. Our next question comes from Andres Soto. Please go ahead with your question.

Andres Soto (Executive Director of LatAm Equity Research)

Good morning to all, and thank you for the presentation. I have a couple of questions. The first one is a follow-up on your NIM. I would like to understand if you can remind us what is the percentage of your loan book that is variable rate, and how that compares with your liability side, on your deposits, how much of that is variable rate?

Cesar Rios (CFO)

Okay. First, as we have commented previously, we have no variable rates or no relevant variable rates proportion of portfolio. The explanation of the NIM performance is the composition of the balance sheet that is going to change, and the positioning that we have engineered during 2023 to shorten the duration of the liability side, that is going to benefit the cost of funds through 2024 as the reference rate decreases.

Andres Soto (Executive Director of LatAm Equity Research)

Thank you, Cesar. So it's a matter of also duration, I imagine, right?

Cesar Rios (CFO)

Yes.

Andres Soto (Executive Director of LatAm Equity Research)

You don't have variable rates. It's a matter of how long are you around your assets versus your liability.

Cesar Rios (CFO)

Yes, yes.

Andres Soto (Executive Director of LatAm Equity Research)

Can you give us a sense of what is the gap at this point?

Cesar Rios (CFO)

Yes, exactly. It's a matter of durations and, I will say, pass-through sensibility of different kind of instruments.

Andres Soto (Executive Director of LatAm Equity Research)

Right. And can you give us some numbers in terms of what, what is the duration on your assets versus your liabilities?

Cesar Rios (CFO)

At this point, the duration of the assets is a little bit more than two years, and the liability is slightly shorter.

Andres Soto (Executive Director of LatAm Equity Research)

Perfect. Thank you so much. My second question is regarding the loan growth guidance. You know, the tone that you are setting for the country sounds quite optimistic. However, when I see the multiplier that you are assuming for loan growth is just a multiplier of one to nominal GDP

Cesar Rios (CFO)

Yes.

Andres Soto (Executive Director of LatAm Equity Research)

What are the factors preventing you to have a more

Cesar Rios (CFO)

Yes

Andres Soto (Executive Director of LatAm Equity Research)

of loan growth?

Cesar Rios (CFO)

I think it's a very valuable question, because if you're thinking an inflation of 2.5%-3%, and GDP growth of 2.5, you can think in a nominal GDP of around 5.5 or something about that. And the usual multiplier has been around 1.5%, but this 1.5% is not a clock.

That is perfect every year. But we have now, and another factor that is relevant, is that when we provide guidance, we are talking about average daily balances, and we have a decrease in the balances through the year during 2023. So we have, at the beginning of the year, have lower amounts, sorry, higher amounts at the end of the year, and we need to rebuild the portfolio starting in a lower base. And another factor that was mentioned, probably very briefly during my presentation, is that we are still going to have some impact of Reactiva. We are no longer providing the guidance based on a structured portfolio, but in total portfolio.

But we are going to still have an impact that is slightly less than 2% due to the payment of the remaining Reactiva loans that we already have on books.

Andres Soto (Executive Director of LatAm Equity Research)

Perfect. That's very clear. Thank you so much.

Operator (participant)

Ladies and gentlemen, it appears there are no further questions at this time. Now, I'd like to turn the floor back over to Mr. Gianfranco Ferrari, Chief Executive Officer, for closing remarks.

Gianfranco Ferrari (CEO)

Thanks to everyone for joining us today and for your questions. The journey we've undertaken over the past year has been both challenging and transformative. Our resilient full year results underscore the strength of our organization and our ability to adapt to an evolving landscape. This outcome is grounded in a solid foundation, including a diverse portfolio, integrated digital capabilities, and a prudent approach to risk management. Our success spans various lines of businesses, including universal banking and insurance, as well as asset and wealth management, where our turnaround plan is delivering expected results. While acknowledging the process, we are aware of the work needed to strengthen and revitalize our microfinance business for sustainable growth. Looking forward to 2024, we anticipate an improvement in macroeconomic conditions.

With a dissipating El Niño phenomenon, a more favorable GDP outlook, a reduced local reference rate, and controlled inflation, we are more optimistic than three months ago about the opportunities that lie ahead. Cesar shared with you our detailed 2024 guidance, which reflects a year in transition. For the medium term, we expect to maintain a resilient NIM, as the sensitivity of our margins to decreasing interest rates has diminished year-over-year, and we continue to shift our loan portfolio towards retail. Our cost of risk should maintain a downward trend as we finalize digesting the current rate cycle. We also see some room for efficiency optimization as our disruptive initiatives mature. Taken together, we should be back on track to deliver our sustainable ROE of around 18%.

As we move forward, our commitment to talent, innovation, sustainability, and shareholder value creation remains unwavering. The investments we're making today are paving the way for a more resilient and sustainable future for Credicorp. Before closing, I want to comment on some management changes announced at the end of the year. We bid farewell to Reynaldo Llosa, who will retire from his roles as the corporate and BCP CRO after an impeccable 30-year career. I extend my personal gratitude to Reynaldo for leaving us in a stronger position. Cesar Ríos will be transitioning into the CRO role for Credicorp and BCP. With more than 30 years of diverse organizational experience and exceptional capabilities, I am confident that he will guide us into a new era of risk management. This will empower us to adaptively leverage developing technologies to expand our reach into new segments and markets.

Finally, I look forward to collaborating closely with Alejandro Perez-Reyes, who steps into the role of Chief Financial Officer at both Credicorp and BCP, leveraging his 25 years of diverse experience, experience within the company. Thank you to all of you for participating in the call, and see you or talk to you in next quarter. Have a nice weekend.

Operator (participant)

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