Credicorp Ltd. (NYSE:BAP) Q4 2023 Earnings Call Transcript

Credicorp Ltd. (NYSE:BAP) Q4 2023 Earnings Call Transcript February 9, 2024

Credicorp Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: 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 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. [Operator Instructions] Now it is my pleasure to turn the conference call over to Credicorp’s IRO, Milagros Ciguenas. You may begin.

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; Diego Cavero, Head of Universal Banking; Cesar Rivera, Head of Insurance and Pension; and Carlos Otello, CFO at Mibank. Before we proceed, I would like to make the following Safe Harbor statement. Today’s call will contain forward-looking statements, which are based on management’s current expectations and beliefs and are subject to a number of risks and uncertainties. And I refer you to the forward-looking statements sections 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 change 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: 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 stability. 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, 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 NIMs achieved through disciplined interest 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. These strategic moves 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 strengthened 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 Nino.

Moreover, the central bank’s reduction of the investment rate lays the foundation for a gradual 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 reinforced our results. In universal banking, BCP solidified local market leadership by expanding transactional levels and offering a seamless multichannel 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. When we adjusted our risk appetite and implemented stricter origination guidelines in mid-2022, we acknowledged 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 evaluating 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-plus percent. 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 is 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 in 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 our prepayment 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 1 and Stage 2 surpassing our expectations, we are optimistic about the strong 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 are 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: Thank you, Gianfranco. And good morning everyone. In addition to the usual seasonality and 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 banking. 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 mean despite sequential reference rate reductions over the last four months of the year. 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 favorably as BCP took advantage of an uptick in demand for foreign exchange operations at the end of the year. Credicorp Capital registered solid increase 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 $250 million soles to cover year end expectations for a lean. In this context, the cost of risk increased 71 basis points to 3.2%, while our structural NPL ratio rose seven basis points to a stand at 5.6%.

Finally, structural NPL coverage increased 101 basis points to a 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 level, supported by the global transition towards green technology and despite a moderation of China’s economic growth. Peru GDP is expected to grow around 2.5% this year, with [indiscernible]. 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 deep 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. The movement is repeated in January. Finally, in Chile, GDP is expected to register 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 peak. Next slide please. The probability of a strong El Niño over the summer has faded to the background over the last week, and then 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 and then assigns a higher probability to a [indiscernible]. This is undoubtedly a favorable development and contrasts significantly with a scenario in play for our last call when the expectations of a moderate to a 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 economic 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 improvement in the funding mix. Demand and saving deposits grew more than 6%, which allow us to optimize the funding base.

Additionally, SME-Pyme, SME-Business disbursement rose, which changed the portfolio mix. This quarter, 1.8% growth in BCP’s quarter-over-quarter input 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 Nino related expected losses for approximately PEN200 million. We exclude this effect, provisions remained at high levels and decreases 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 reversal of specific mortgage sub-products. In this context, the cost of risk stood at 2.91%.

Provisions for El Nino 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 structurally loans measured in average daily balances. This growth was laid by SME-Pyme working capital loans and mortgages, which grew 13.7 and 5.9, respectively. Despite elimination of intercity 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 macro climate and social events. Operating expenses grew 10%, driven by for business IT expenses to support a strong growing transactions and the development of digital capabilities and investment in disruptive initiatives.

Growth in operating income outpaced 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 four 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, MPS increased nine basis points – percentage points, sorry, year-over-year to stand at 80%. Growth in engagement fee income and MPS 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 apps 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 for 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 user which was attributed 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 felt 3.9%, which was primarily attributable to a drop in loan balances. After we further adjust our appetite and riskier segments to focus on lending to better risk profiles.

In this context, NIM decreased 30 basis points and stood at 13.35%. Provisions were already elevated gross further this quarter, after registering a provision of approximately PEN50 million for expected losses for El Nino phenomenon. If we exclude this effect, provisions failed due to loan contraction from a full year perspective, NIM increased 1% in 2023. This growth, albeit the slide, reflects the fact that the impact of high interest rate 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 PEN64 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 and the writing results and by nonrecurring 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 6.6 option. Other life products such as credit life and good life also reported higher insurance underwriting results driven by higher income and an important reduction in claims in comparison to 2022, is still affected by COVID-19. Finally, NIM 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 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 undermanaged measuring U.S. dollars by 9% and 11% in Wealth and Asset Management, respectively. Next slide, please. Now, we will look at Credicorp consolidating 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 rate, allowed the yield on interest-earning assets to remain flat while the funding costs decreased 12 basis points on a year-over-year basis.

Interest-earning assets follow the same mixed 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. This dynamics coupled with the rerating of our asset portfolio led to an increase of 99 basis points in the yield of inter-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 increase 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 yield. On the funding side, the recent uptick in low cost deposits would 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 cost. Next slide, please. Recent balance sheet and interest rate dynamics led NIM and NII to increase quarter-over-quarter and in a full year basis boosting core income growth. On a quarter-over-quarter basis, NIM increased 10 basis points and stand at 6.21%, risk 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 all 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 fully year basis, NIM registered a 92 basis point, an uptick and stand 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 a 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 a structural non-performing loans. As [indiscernible] in 2023, our weak economic performance continue to impact client payment performance, albeit to a lesser extent than in previous quarter. On a quarter-over-quarter basis, growth in BCP is structured 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, the increase in NPL volume 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 a judicial loan recovery, both associated with specific corporate clients.

On a year-over-year, structurally 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 into a lesser extent in refinance 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 rising 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 in a specific provision of approximately S/215 million for El Niño Phenomenon based on the best information available at the closing of the quarter.

Let me go through quarter-over-quarter dynamics for provision expenses, excluding the charts related to expectations for El Niño impact. Provisions grew 3% driven by a base effect in wholesale banking 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 an upturn 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 a cumulated basis to isolate the impact of seasonal effects. Expenses for disruptive initiatives at the Credicorp level increased 60.6% where the most relevant initiative were Yape and Tenpo, which accounted for approximately two-thirds of this year expenses. Operating expenses grew 9.8% in 2023, driven primarily by disruptive initiative at Credicorp level and with the in core businesses at BCP. At BCP, core businesses fuel growth in expectants 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 the advertising to boost deposits and digital sales. 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 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 macro finance 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 by an increase in the withholding tax provisions and 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 S/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. As previously mentioned, we expect Peru’s GDP to grow around 2.5% in 2024. Regarding loan growth, we are changing our guidance indicator as reactive and 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 amortization. To ongoing shift on our loan book towards higher yielding niche coupled with favorable dynamics in our funding structure should positively impact NIM.

Accordingly, we expect NIM to stand between 6% to 6.4%. The cost of risk guidance is between 2% and 2.5%. This range reflects the shift of our loan portfolio mix toward 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 underwriting results. Regarding the quarter, 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 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.

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Q&A Session

Operator: Ladies and gentlemen, we’ll now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question today comes from Ernesto Gabilondo from Bank of America. Please go ahead with your question.

Ernesto Gabilondo: 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 it should 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 P&L should we start to see higher revenues from this business? Thank you.

Gianfranco Ferrari: Thank you, Ernesto. Good morning. This is Gianfranco. I’ll ask Cesar to go on the – actually, both questions?

Cesar Rios: Yes, I think there 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 expenses goes in another line. So we shouldn’t take into consideration to explain the underlying dynamics of the business. In general trends, we expect to have similar dynamics in growth in expenses, but mention that the relative weight of the new initiative is growing significantly. So as you can see in the report, over the last year to 2023, the relative weight had increased and we expect this relative weight of the new initiative 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 on Yape markets.

Ernesto Gabilondo: Excellent. Thank you very much, Cesar.

Operator: Our next question comes from Olavo Arthuzo from UBS. Please go ahead with your question.

Olavo Arthuzo: 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: Thank you. Thank you, Olavo. And the answer is, yes. I believe we mentioned it. I don’t know if last call of – 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 that it’s 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 over as a portfolio should be cash flow neutral. So, yes, the answer is yes.

Olavo Arthuzo: Okay. Thank you very much again.

Operator: Our next question comes from Sergey Dubin from HL. Please go ahead with your question.

Sergey Dubin: Yes, 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? What’s going to drive the NIM improvement? And you can discuss both the yields and funding cost in that context.

Gianfranco Ferrari: So, good morning, Sergey. Cesar to discuss the yield [ph] question.

Cesar Rios: 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, 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 loan 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 contributed 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 on 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. And 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 rates.

These are going to be positive contribution to the margin. In the flip side, we are refinancing medium-term bonds, sorry. And they are going to increase the marginal cost. All in all, the results is the guidance that we have just provided.

Sergey Dubin: Okay, that’s helpful. Okay. My second question is regarding cost of risk. So I understand that there’s a bunch of provisions taken for El Nino, which is fine, but then when I back that out, actually, even if 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 to year, not quarter, quarter. Mibanco was 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: Yes, Otello?

Carlos Otello: Yes. 2023 has been a challenging – 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 specifically related, as we have explained in two portfolios, the SME book, as well as the consumer and credit card portfolios.

Sergey Dubin: Yes. So my question is really why, because you have Mibanco, which is lending to these less affluent, 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 it seems like, is that because you took the pay early in Mibanco? What’s driving that disconnect in provision increase between Mibanco and BCP?

Gianfranco Ferrari: You have to check the base here. In BCP, we had an average cost of risk of around 1.5 and we doubled as you mentioned. In Mibanco, in last year we were around 6%. So it has grown marginally only 10%. But taking into consideration the base of portfolios, that’s the basic explanation. It’s 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: Okay, well, I’ll check the math and come back to you on that.

Gianfranco Ferrari: Okay.

Sergey Dubin: And then my last question was also addressed partially, but not really fully, so – can you, like, when you’re talking about your cost of – cost to income ratio, efficiency ratio, right. So I think you mentioned that this year you’re going to have 10% to 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 – and 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: Yes, Sergey, it’s because as an example, Yape is going to become – it’s going to reach breakeven this year. But the cost to income of Yape is 100%. Let’s assume if it gets breakeven that the cost to income of Yape is going to be 100% this year. And Yape, relative to the overall portfolio is going to be larger this year than the previous year. And that is exactly the same to the other initiatives. So the other initiative or the disruptive initiatives. So the disruptive initiatives keep improving their cost to income, but they’re not obviously, they’re weigh higher than 45%, and as they become larger, they have a negative impact on the cost to income ratio.

Sergey Dubin: Okay. I see. I see. So basically, until your disruptive initiative cost to income ratio reach your average, whatever, 46% or 47% they’re going to still weigh down on the consolidated.

Gianfranco Ferrari: Exactly. Exactly.

Sergey Dubin: Okay.

Gianfranco Ferrari: Exactly. 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 – as an overall portfolio, we’re balancing that cost to income ratio and not deteriorating the cost to income further.