Credicorp Ltd. (NYSE:BAP) Q2 2023 Earnings Call Transcript

Credicorp Ltd. (NYSE:BAP) Q2 2023 Earnings Call Transcript August 12, 2023

Operator: Good morning, and welcome to the Credicorp Second Quarter 2023 Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Milagros Ciguenas. Please go ahead.

Milagros Ciguenas: 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; Cesar Rivera, Head of Insurance; and Pension; and Carlos Otello, CFO at Mibank.; and Diego Cabero, CEO or Head of Universal Banking. Before we proceed, I would like to make the following safe harbor statements. Today’s call will contain forward-looking statements, which are based on management’s current expectations and beliefs and are subject to a number of risks and entities. And I refer to you to the forward-looking statements section of our earnings release and recent filings with the SEC.

We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Gianfranco Ferrari will start the call commenting on the highlights of our strategy, followed by Cesar Rios, who will comment on the macro environment in which we work our financial performance and provide on an update of our outlook for 2023. Gianfranco, please go ahead.

Gianfranco Ferrari: Thank you, Milagros. Good morning, everyone. Thanks to all of you who are able to join us during our June 20 Investor Day where you heard directly from our leadership team on the progress of our businesses. It was also a highly valuable opportunity for us to hear from you. I’d like to take a few moments before discussing our Q2 results to recap some of the key takeaways. First, we’re taking a disciplined approach to investing in businesses that we expect will begin in the midterm to further decouple our performance from that of the macro context. Two undertakings include expanding the share of retail business across our portfolio as well as increasing our noninterest income through adjacent businesses. While generally, our disruptive initiatives have a long-term orientation, Yape stands out as a venture that plays a pivotal role in this strategy in the shorter term.

It has already shown very promising results with income approaching cash cost and is on track to reach breakeven by 2024. Thus, we intend to further invest in expansion as well as in other disruptive initiatives with the potential to generate value across our businesses. We heard our — your requests to provide more information on Yape’s trajectory and have increased our disclosure on the business. Our goal is to provide you with meaningful updates as Yape continues to evolve. Second, while we’re proud to be the market leader, we don’t take that position for granted. We’re strengthening our competitive modes by becoming increasingly digital and harnessing the power of data. Our priority is and will continue to be attracting and retaining the best talent so that we maintain our competitive edge.

Finally, we’re committed to enhancing our governance and transparency while continuing to pursue social impact initiatives. We aim to set a progressively real influence on our clients and communities to strengthen their sustainability efforts while playing a partial role in financing the energy transition. Now let’s turn to this quarter’s results. While the political scenario in the second quarter improved, the impact of — from the social unrest, the disruption from Cyclone Yaku as well as the added effect from the Coastal El Nino resulted in a [indiscernible] first half of the year in Peru. Despite this backdrop, Credicorp turned in favorable results this quarter. Net income expanded 22.6% year-on-year, with ROE for the quarter at 18.6%, driven by strong results in the Universal Banking and Insurance businesses as well as a modest recovery in the microfinance business.

Loan volumes, however, experienced a slight drop as we manage on the retail side and wholesale demand showed reflecting the economic climate. And even though we saw a decrease in low-cost deposits, along with a system-wide contraction, we continued our market leadership in capturing these deposits, thanks to our long-term client relationship, trusted brand and extensive reach. Our strong balance sheet provides us sustained resilience to navigate the current weak macro backdrop as we continue to execute our value creation strategy. Cost of risk has increased primarily due to SME-Pyme and the most vulnerable sub segments in individuals. Mibanco’s cost of risk is still high, but diminished this quarter. This evolution reflects the impact of an environment of lower internal demand.

High inflation and high interest rates on payment capacity of clients. We have strengthened great risk management and remain focused on maintaining stringent origination standards and disciplined loan pricing. Our disruption initiatives continued to gain traction during the quarter, driven in inclusion of a growing number of Peruvians. Nonetheless, having registered strong income at BCP and Pacifico this quarter, we have managed our cost-to-income ratio. Regarding macro perspectives for this year, CESA will elaborate further, but social and climate events resulted in a tougher first half than we expected. At this time, our GDP growth forecast for 2023 is 1%, even though we foresee a rebound of around 2% growth in the second half, driven by stimulus measures taken by the government.

During the second half — second quarter, sea surface temperature anomalies associated with El Nino Costero motivated the cancellation of the industrial anti-efficiency session and also impacted the agricultural sector. El Nino Costero phenomenon is expected to continue until the summer of 2024 as a consequence of the high probability of development of El Nino and El Pacifico Central. For the summer of 2024, the highest probability scenario today is that El Nino Costero will have a week to moderate magnitude. As the situation unfolds, we will keep you up to date on the experts’ outlook and its potential impact on our businesses. It is important to remember that Peru’s macroeconomic fundamentals remain strong. After El Nino Costero [indiscernible] shock, Peru will be in a favorable position to convert to Latin America average income per capital level.

The speed of catch-up will depend on Peru’s ability to promote and unlock private investment, which has been the most important growth driver in the past. Thank you. And let me now turn the call over to Cesar.

Cesar Rios: Thank you, Gianfranco and good morning, everyone. As Gianfranco mentioned, we delivered favorable lower financial results. I will start with a brief comment on quarter-over-quarter dynamics, but will focus on the year-over-year evolution. On a sequential basis, a structural loan growth in retail banking at BCP and the bank was offset by a contraction in wholesale banking. On the funding side, the deposit mix continued shifting towards higher yield deposits. Low-cost deposits fell across the system and at Credicorp. Nonetheless, we maintained our undisputable leadership position in this funding source with 41% market share. Asset quality metrics deteriorated, reflecting the impact of challenging macro dynamics in the first half of the year from a year-over-year perspective.

NII grew 21.5%, driven by raising interest rates and the structural loan dynamics and partially offset by higher funding costs. Structural loans rose 5.5% measuring average daily balances, fueled primarily by retail banking at BCP and Mibanco. We are managing our asset quality metrics with a challenging backdrop. The structural cost of risk increased 127 basis points to 2.3%, driven mainly by SME-Pyme individuals BCP and by Mibanco. Allowances for loan losses were equivalent to 5.7% of the structural loan. The insurance underwrite result rose 53%, which reflected increased profitability in the life business and a stable year-over-year result for property and cashflow. Operating expenses increased 9.1%, driven mainly by core expenses at BCP and disruptive initiatives while operating income increased 16.6% fueled by BCP and Pacifico.

The efficiency ratio improved 310 basis points and stood at 44.6%. In summary, this quarter, positive results and an ROE of 18.6% over a sound capital base were driven mainly by Universal Banking and Insurance businesses. Having said this, a note of caution is in order, as I will explain when I present our updated guidance, we expect softer results in the second half of the year. Next slide, please. For the second quarter, the Peruvian economy is expected to have registered a fly contraction impacted by El Nino Costero, which pushed growth rates in the agricultural fishing and manufacturing cycles into negative terrain, growth in the mining sector attributable to increased copper production at Quellaveco and the recovery of production at Las Bambas after temporary should launch last year, partially offset this decline.

Photo by Jose Vazquez on Unsplash

These dynamics, hopefully, with the impact of the first quarter marked by social and wealth and climate events could lead to a 0.5% decline year-over-year in economic activity in the first semester of 2023. This represents the most significant reported decline in 22 years, excluding the pandemic period. Domestic demand fell 2% year-over-year in the first half driven by a sharp 10% decline in private investment and a sluggish 0.6% growth in private consumption. Price pressures are finally easing and inflation expectation has dropped materially in LatAm. Central banks in Chile and Brazil have already started the red cutting cycles and Peru Central Bank is expected to follow suit in the last quarter of this year. Regarding our outlook, Peru GDP is expected to grow around 1% this year.

GDP growth in Colombia is expected to slow to 1.6%, while Chile GDP growth is expected to be flat. As you know, we are closely monitoring the evolution of El Nino Costero weather phenomenon and it’s impacting our businesses. In its last official statement on July 21 and 10 assigned a 40% probability that El Nino Costero will be weak during the summer of 2024, 36%, it will moderate and 11% that it will be strong. In his last speech of July 28, President Boluarte communicated the importance of private investment as a tool for economic growth and development, moving apart from the previous government stance. She announced, for instance, that $1.8 billion worth of infrastructure projects will be awarded in the second semester through [indiscernible], the investment promotion agency.

Peru’s macroeconomic fundamentals remain robust with low public debt and net international reserves equivalent to 33% of GDP and 29%, respectively. This government’s ability to unlock and mobilize private and public investments will be keep moving forward. Next slide, please. BCP results were favorable despite this context. Regarding the key quarter dynamics. NII increased 0.9% despite a slight 1% drop in loan volumes. This drop reflects a downturn in economic activity, primarily in wholesale banking and more conservative origination guidance in retail. Our NII reflects a disciplined approach to pass-through and our ability to leverage a transactional funding base to mitigate raising funding costs. BCP fee income rose on the back of higher transactional levels, particularly through digital channels and POS provisions in consumer loans and credit cards remain at high levels as a recessive high inflation environment in the first half of the year affected the payment capacity of vulnerable sub segments, which are more leveraged and stable jobs.

Additionally, SME-Pyme segment drove the uptick in provisions. On a year-over-year basis, growth in net income was pure by a 29.6% increase in NII. This evolution was driven by raising interest rates and 5.2% increase in structural loans, which was driven primarily by a 10.9% uptick in retail banking loans through SMEP credit card and mortgages. Loan loss provisions increased 177.8% over a low base. Additionally, growth was driven by an increase in provisions on consumer loans, credit cards and SMP, which were affected by economic conditions. Operating expenses grew 8.3%, driven mainly by IT and marketing expenses and investment in disrupted initiatives. This increase was partially offset by a nonrecurring tax expense reversal. Consequently, BCP’s efficiency ratio dropped 420 basis points and stood at 37%, while ROE reached 24.2%.

At BCP Bolivia, our risk appetite remains low. Since the beginning of this year, U.S. dollar reserves in Bolivia Central Bank has dropped materially, and banks have daily limits in U.S. withdraws regardless BCP Bolivia and Encino remains stable. Next slide, please. Yape continues to progress towards monetization by pursuing its medium-term targets: one, to be the main payment network in Peru; second, be please present in the daily loose apparels and finally meet the financial needs of the apparels. Features launched in the last 18 months have allowed Yape to continuously grow its active use base, engagement and incongeneration. Monthly active users reached the 9 million mark at the average monthly transaction level for this group has risen from 14.9% to 23.5% in just 1 year.

Currently, 5.2 million users generate income. Our main monetization drivers continue to be rooted in the past 6 months, monthly mobile top-up transactions grew 20% to total 11 million transactions at the end of June in just three months. Utilities payments have grown 4.8x and stand at the end of June and 2.2 million transactions. To Yape promos, the gross merchant volume grew 4.8x to stand and PEN25 million at the end of June, notably in the last 6 months, monthly disbursements of micro loans rose 18%. In the aforementioned context, unit economics are moving towards breakeven. The revenue per active user per month is growing and start at PEN2.5, while the cash cost per active user per month stood at PEN4.4 at the end of June. Next slide, please.

Mibanco’s profitability began to recover this quarter after a challenging start early this year on a quarter-over-quarter basis, Net interest income rose 4.6% after a structural loan disbursement recovered from a difficult first quarter. Disciplined loan pricing bolster II and offset the impact of an uptick in the funding cost. Consequently, NIM increased 80 basis points and stood at 13.5%. Other income rose 3.5% after the bancassurance fee level rose alongside growth in disbursements. Mibanco’s provision expense dropped slightly after risk models were fine-tuned to better reflect client payment behavior, but main high due to a deterioration in payment capacity. From a year-over-year perspective, NII rose 1% to an uptick in structural loans and interest rate pass-through, which mitigated the impact of raising funding costs.

Non-interest income rose 26.6% due to the same factors are those outlined in the quarter-over-quarter and agro. [indiscernible] provision rose fueled by a downturn in payment performance and a more challenging macroeconomic outlook. Operating expenses rose 5.9% and the efficiency ratio stands at 52.4%. Finally, ROE rebounded to 9.5% in the quarter. Mibanco Colombia is facing high inflation, high funding costs, lower interest rate ceilings and a deterioration in economic expectations. We have adopted our strategy accordingly, and we believe that untap potential exists in the Colombian microfinance market. Next slide, please. Grupo Pacifico was high this quarter and stood at 32.1% driven by the Life business. Regarding quarter-over-quarter dynamics, net income deteriorated on the back of a lower net gain from associates.

This evolution reflected a downturn result for corporate health insurance over a particularly high base last quarter. Year-over-year profitability was up, driven primarily by the Life business and secondarily by property and [indiscernible]. In the life business, the insurance and the rotor results improved due to an upswing in income from insurance service through pensions, Life Group and Credit Life, which benefited from better prices and more favorable volume dynamics. Reduced expenses for claims also contributed to this improvement. In the property and casualty business, the insurance and the router results rose 5.1% through an improvement in medical assistance results, which was partially offset by a downturn in the result for cars. Next slide, please.

As you know, our strategy is to focus on recurring businesses to improve ROE in the medium term. Nonetheless, the uptick in profitability in recent quarters has mainly been driven by nonrecurring income. On a quarter-over-quarter basis, income was boosted primarily by the treasury department with managed ASV cash surplus via structural portfolios and short-term investments. In terms of recurring businesses, assets under management, wealth management grew 4.2% and drop income growth, while the assets under management level in the Asset Management business remains stable. Year-over-year, income increased 32%, driven mainly by the capital markets business, which reported gains on the proprietary fixed income portfolio in Colombia and by the Treasury Department, we generated earnings via the same dynamics seen quarter-over-quarter.

Regarding recurring businesses, wealth management, assets under management grew 9% and drop income growth, while assets under management homes contracted 17% driven by outflows in third-party funds and income decreased slightly as these outflows generate lower fees. Next slide, please. Now we will look at Credicorp’s consolidated dynamics. On a quarter-over-quarter basis, our restructural loans measured in average daily balances fell 0.6% or increased 0.2% with FX neutral. Growth in BCP, Retail Banking and Mibanco was offset by a contraction in wholesale banking at BCP. Our deposit base constructed 3.5% or 1.8% with FX neutral. This evolution was driven by a drop in low-cost deposits, which was partially offset by growth in time deposits. On a structural year basis, structure loans increased 5.5% measured in average daily balances, fueled primarily by retail banking at BCP and Mibanco.

Deposit balances dropped 2.7% or 0.2% with FX neutral. Low-cost deposits has fallen system-wide, but our market share has risen to 40.6% and currently represent 65.1% of our total deposits. Next slide, please. Now let me explain core income dynamics. Core income rose 3.3% quarter-over-quarter and 15% year-over-year on the back of NII. NII grew 2.3% quarter-over-quarter and 21.5% year-over-year. Different was attributable to volume dynamics discuss early and to discipline in pass-throughs. In this context, the net interest margin rose 18 basis points quarter-over-quarter and 110 basis points year-over-year to stand at 6.02%. Risk-adjusted NIM increased marginally to 4.56%. We’re analyzing the results for fee income and [indiscernible] transaction.

It is important to note that both lines has been affected by our strategy at Bolivia in which we have adjusted our fee framework for foreign chances to offset the impact of FX transaction due to restrictions on foreign currency availability. If we exclude this impact, fee income increased 4.1% quarter-over-quarter and a kick in transactions while the result of SF transaction remained flat — on a year-over-year basis, excluding Bolivia, fee income contracted 3.3% driven by lower fees in the pension business and the elimination of intercity fees. Next slide, please. Let’s look at the dynamics of structural nonperforming loans. As indicated earlier, adverse events in the first quarter of the year, coupled with a contraction in internal demand, high inflation and high interest rates have notably impacted client payment performance and consequently portfolio quality this quarter.

In this scenario, on a quarter-over-quarter basis, growth in the structural nonperforming loans was driven by Mibanco after loan reprogram in the first quarter fell delinquent by SME-Pyme, where low ticket risk subsegment reported poorer garment performance and credit cards and consumer loans where the debt service capacity of vulnerable segment fell due to over indebtedness and a stable employment. The aforementioned was partially offset by a sale of a delinquent portfolio in the energy sector in hotel banking, which had been previously provisioned. On a year-over-year basis, extract nonperforming loan volumes increased due to an uptick in refinance collateralized loans in the retail state and tourist sectors served by Wholesale Banking. The evolution of nonperforming loans in retail banking, Omnibanco was driven by the same factors as those seen in the quarter analysis and was partially offset by the sale of a delinquent retail banking portfolio during the first quarter of the year.

In this context, the structural coverage ratio stood at 108% to analyze our structural coverage ratio, it’s important to review the NPL portfolio mix in terms of unsecured and collateralized products. Please refer to Appendix 2 for more details. Next slide, please. Moving on the provisions and the cost of risk, we have consistently indicated that our cost of risk will increase as we shift our loan portfolio mix towards small retail. Additionally, cost of risk have further increased as client payment capacity has been impacted by macroeconomic conditions. Provisions in consumer loans and credit cards at BCP and Mibanco remain at high level as a recessive high inflation in bio in the first half of the year affected the payment capacity of clients at BCP, vulnerable subsegments, which are more leveraged and have a stable jobs were the most impacted, while Mibanco clients were severely hit by the first quarter events.

Additionally, SME segment at BCP drove the uptick in provisions quarter-over-quarter. In this context, the structural cost of risk stood at 2.3%. We are closely monitoring our asset quality metrics, have refined our client segmentation by risk profile and have gradually implemented a stricter origination guidelines for individuals, SME-Pyme and Mivan, Nonetheless, the impact of recent measures on asset quality metrics will take some time to fully materialize. We will be view in this page the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operating expenses grew 11.2% in the first half of the year, driven primarily by core businesses at BCP and disruptive initiatives at Credicorp level. At BCP, core businesses fueled growth in expenses through and a tick in IT expenses related to an increasing usage of cloud and client become more digital, more usage of IT applications, license and other software to enhance capacities and improve car security and move to attract more specialized digital talent.

Marketing expenses mainly driven by advertisement to boost deposit and digital sales and growth in not product expenses. The aforementioned dynamics were partially offset by a nonrecurring tax expense results. Expenses by disruptive initiatives at credit core level increased 70% to ensure market leadership in the long term. Operating leverage remained strong at BCP stand-alone, at Mibanco operating expenses remain under control, but income grew at a slightly lower pace. Our efficiency ratio stood at 44.4% this first half, down 310 basis points compared to last year and driven by high income and BCP and Pacifico. Next slide, please. Similar to the previous quarter, record quarter profitability was driven by strong results in our nasal banking and insurance businesses.

ROE this quarter expanded by 130 basis points year-over-year and stands at 18.6%. Meanwhile, ROE for the semester was 18.9%. Note that we have benefited from relatively low effective tax rate in this semester due to the strong performance of our insurance business and due to the fact that Axent interest income accounted for a larger share of the revenue mix at BCP. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. Now I will move to our updated guidance. Next slide, please. Our updated macro scenario for 2023 is now a GDP growth of around 1%, which incorporate the scenario of a week to moderate El Nino Costero at year-end. Regarding loan growth, the social and climate events of the first part of the year, coupled with a sluggish internal demand are taking at all on our client borrowing capacity, particularly in our consumer loans, credit card and SME segment at BCP.

Accordingly, we adopted a stringent origination guidance in those segments. In addition, demand for loans in wholesale banking has weakened, which reflects a downturn in business activity. These dynamics led to lower expected structural loan growth, which now stands at between 1% and 4% measured in average daily balances. Our NIM guidance remains unchanged between 5.8% and 6.2% as we higher than initially expected cost of funds will offset the positive impact of a higher yield from the loan portfolio, which was triggered by a reduction in wholesale loan share in the total mix. We expect the cost of risk to stand between 2.1% and 2.5%, largely driven by the impact of the macro conditions on BCP performance. Note that BCP and Mibanco are likely to have diverging dynamics on this front during the second semester as Mibanco started its cycle of loan deterioration of credit restrictions before BCP.

We achieved solid efficiency levels in a context marked by an acceleration in investment to develop future businesses. Our ongoing efforts to [indiscernible] are expected to partially offset the aforementioned input headwinds and results in an efficiency ratio between 45% and 47%. Finally, we remain — maintain our ROE guidance of around 17.5%, but now acknowledge downside risk associated with asset quality deterioration in El Nino Costero. With these comments, I would like to start the Q&A session.

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Q&A Session

Operator: We’ll now begin the question-and-answer session. [Operator Instructions] Our first question will come from Ernesto Gabilondo with Bank of America. You may now go ahead.

Ernesto Gabilondo: Thank you. Hi. Good morning, Gianfranco, Francesca and Cesar, and good morning, everyone. Congrats in your second quarter results. My first question is on your ROE guidance for the year. As you mentioned, it was maintained at 17.5%, although anticipating softer loan growth and a higher cost of risk. So can you elaborate on which would be the other lines that can help to compensate the softer loan growth and higher cost of risk? And what are the trends that you’re expecting for loan growth and cost of risk next year?

Gianfranco Ferrari: So this is Gianfranco. I’ll ask Cesar to go into the details for the answer.

Cesar Rios: Okay. Thank you, Ernesto. First, effectively, we are maintaining our guidance of around 17.5%. At the beginning of the year, we have probably a conservative approach mentioning 17.5%. Now I have already mentioned that we have some downside risk due to potential credit deterioration. This is as a general framework. It’s important to note that we already have gone through half of the year with very positive results with an ROE north of 18%, around 18.6%. Down the road, what we are expecting is effectively on a softer loan growth with a composition that is going to be tilted to retail, but with lower yields than previously expected because we are being more conservative in our origination approach. This is going to be accompanied by higher cost of risk and the usual acceleration of non-income sources, [indiscernible] and transactional activity that is usually higher during the second part of the year.

And finally, by the seasonal increase in expenses that has two main components the normal seasonality of the last part of the year that I previously mentioned and the trend in the acceleration of IT and disruptive initiatives. All in all, we think that with these elements, we can be around the 17.5% previously mentioned.

Gianfranco Ferrari: Maybe just to add on what Cesar mentioned, Ernesto. Also when we provided the original guidance and the expected results at Pacifico were not the results we’re getting. So as we mentioned in the previous call and at the Investor Day, the — due to some specific events, Pacific is having an outstanding year this year, and that may — that is going to offset in part what Cesar just mentioned.

Ernesto Gabilondo: Perfect. Thank you. Just a follow-up in terms of the cost of risk, you are guiding between 2.1% and 2.5%. So looking into next year, would that be the same trend that we should expect? Or do you think most of the worst part will happen in 2023 and probably it should be normalizing when thinking about next year?

Gianfranco Ferrari: Reynaldo?

Reynaldo Llosa: Yes, Ernesto, this is Reynaldo Llosa. We — as you know, we don’t provide guidance for next year, and we will do it in the first — during the first quarter of 2024. Having said that, there’s a lot of uncertainty in terms of the impact of El Nino. So we need to confirm that information, eternto have a better projection of the number. But also, we expect next year to have much better results due to all the things we are doing in terms of managing the risk in the consumer and SME portfolios, both in BTP and Mibanco So there are headwinds and tailwinds, and we will have more information on that regard by the first months of 2024.