Credicorp Ltd. (BAP) Q3 2022 Earnings Report, Transcript and Summary

Good morning, everyone. I would like to welcome all of you to the Credicorp Ltd. Third Quarter 2022 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. [Operator Instructions]. Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Ciguenas, you may begin.

Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer; Francesca Raffo, Chief Innovation Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Reynaldo Llosa, Chief Risk Officer; Diego Cavero, Head of Universal Banking; and Cesar Rivera, Head of Insurance and Pensions. 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 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 change events of circumstances. Gianfranco Ferrari will start the call discussing our strategic initiatives; followed by Francesca Raffo; and finally, Cesar Rios will comment on the macro environment in which we work our financial performance and provide an update on our outlook for 2022. Gianfranco, please go ahead.

Thank you, Milagros. Good morning, everyone. Thank you for joining us. We reported another solid quarter while executing on our strategic priorities. In terms of financial results, we continue to benefit from loan growth with disciplined pass-through of interest rate hike, a differentiated funding structure in which transactional deposits represent 56% of total funding and high transactional levels. As a result, we saw strong growth again in core income, which includes net interest income, fees and gains on FX transactions. With improving results across all 4 of our business lines, we registered an ROE of 19.6% this quarter on the strength of a solid balance sheet and prudent risk management. While there is still downside risk to overall growth in the region, the fundamentals of Peru remains strong, and our estimate of GDP growth is now 2.8% for this year. Unfortunately, the continued political noise is having clear negative impact on Peru's growth opportunity and deterring public and private investment. This is also detracting from what we should be focusing on with respect to financial inclusion and poverty reduction. Despite the environment in which we work, Credicorp remains committed to being an agent of change in our communities, and our digital transformation plays a fundamental role in aligning with our sustainability base responsibilities of financial inclusion, financial education and then developing the workforce of the future, among others. So our strategic initiatives were driving greater engagement and efficiencies throughout the organization to deliver sustainable growth and value creation. We are advancing on our goal of driving growth in digital clients. At BCP alone, digital customers represented 63% of total customers while over 250,000 individuals were financially included through Yape and Mibanco. Today, we'd like to highlight the progress we are achieving in the transformation at BCP. For this purpose, we have invited Francesca Raffo, Deputy CEO at BCP and Chief Innovation Officer at Credicorp, who has been leading this effort since the very beginning to provide an update on progress today. Francesca?

Thank you, Gianfranco. Good morning. I am pleased to share the progress we have made on the transformation journey at BCP, the subsidiary that began this process first and is most mature. As mentioned during the Digital Day, our customers are more demanding, want greater speed, simplicity and want to be delighted. We are accelerating our investment to become the most efficient bank in the region while maximizing the customer experience. These investments are heavily skewed towards our core enablers, data analytics, IT and cybersecurity, which in turn are driven by the best digital talent. Today, around 50% of our staff functions already have a digital profile. Now on the next slide, let me share more of our progress around our key enablers. We are a customer-centric, data-driven organization that is creating solutions through capturing data, the application of analytics and the development of technology within a cybersecurity framework. Starting with IT, our investments in technology have enabled us to increase uptime to world-class standards. We strive to maintain this level, improving our capability to bring value to the market by increasing the amount, quality and speed integrity. Over the last 4 years, we have gone from 4,500 to 28,000 releases yearly and increased the average speed from 28 to 6 days. The flexible and efficient infrastructure we are developing through APIs positions us well to continue advancing on our journey towards becoming a more digital and open bank. We leverage our data analytic capabilities to increase revenue, reduce risk and improve operational efficiency. Our data lake has more than 28,000 variables, which are organized, structured and can be safely deployed to build analytical and risk models or to develop customized products or service offerings. Our predictive models have enabled projects within the organization to realize more than PLN 400 million in additional gross margin in the last 4 years. With our APIs and data, we have deployed price discrimination strategies and have generated more than PLN 500 million of preapproved loans for SMEs. Finally, we are moving to empower our business units through a much more decentralized model. Improvements are required for the cybersecurity space through people, process and technology. We are combining cyber risk management with a strong focus on customer experience, leveraging customer-friendly and robust security capabilities through multifactor authentication for digital channels. Moreover, we continuously use advertising to educate and raise customers' awareness of risk. And constantly invest in people in employee training. Finally, we have deployed technology for in-depth protection against phishing, malware, data lakes, distributed denial of service, among others. We are attracting, upskilling and retaining diverse tech talent. We recruit throughout Latin America and hold a talent hub in Spain, [indiscernible] where we are hiring specialized data analytics and IT professional. In this tech-mindful arena, we practice what we preach and offer our tech talent the opportunity to develop leading-edge capabilities in an environment fully committed to leading in technology. Please move to Slide 6. We are constantly setting new targets for ourselves based on insights to achieve our strategy of being the principal bank for our customers. This slide shows how we increase engagement with consumer clients. With our digital applications, we collect and analyze data, including client profile, product and channel usage and preferences. With a deep understanding of our customer behavior inside and out the bank, we adapt our digital strategy and develop a specific value proposition by type and level of engagement for each segment. Our goal is to broaden and strengthen our current relationship with each customer becoming their principal bank. We have been obsessed with the digital sales and transactions models, and now we'll offer a more comprehensive value proposition, integrating safe service and advisory. On the next slide, we share the progress we are achieving with growing our customer base for individuals. Our disruptive mindset and execution capabilities have contributed to increase our digital customer base for individuals. BCP individual customers reached approximately 6 million, accounting for 63% of the total individual customers. The relationship with this group is more active in terms of number of digital transactions and digital product purchases. Growth in digital customers is enabling us to improve our cost to serve to income ratio for these customers. This quarter, we are introducing a more demanding methodology to calculate digital customers, which going forward, will refer to customers making at least 70% of their transactions through digital channels on a rolling 6-month basis. On the top right, you can see how the cost to serve to income ratio for digital clients under the new methodology stands at 23%, better than the prior methodology and significantly better than the 36% of nondigital customers. Reaching 70% of digital customers under this methodology would mean a huge stride towards our overarching north star cost to income. Now to Slide 8. We are deploying a similar approach to the SME segment and are seeing good traction. The primary focus has been on digital sales, bringing those capital capabilities to market and analyzing customer insight. The next step is to continue digital servicing while deepening our relationship. With our core analytics capabilities in risk management, we are expanding our SME client base and penetrating deeper into the segment. This is particularly the case for SMEs with no to very low indebtedness in the financial system. And that little to no credit history, limiting access to financing. Around half of the new clients finance in this segment are new to the financial system. This is a more digitally oriented and sophisticated SME customer base with a different value proposition from that of our clients at Mibanco and it is a strong complement. We offer the small SME personalized products distributed through digital channels and have seen an increase of around 50 percentage points in the percentage of digital sales of working capital loans since 2019. Now please turn to Slide 9 for an update on Yape, our most mature disruptive initiatives within BCP. Today, almost 1 in 3 Peruvians over 18 years of age are active Yape users. At 6.7 million, we are on track to reach our target of 10 million active users by 2026. Our initial strategy was to gain a large customer base then to increase engagement on monthly transactions, and now we are focused on generating income. We are seeing sustained positive trends across most of our metrics, including the volume transacted, which grew more than 30x since 2019 to more than PLN 40 billion year-to-date. We are now tracking to our initial 2026 goal of reaching PLN 150 billion in transactions by 2024. The number of active users and activity per user continues to grow, while 30% are generating revenue. As one of Peru's most important distribution channels, Yape is creating new sources of income from Credicorp to a marketplace strategy while also allowing us to distribute financial services products and drive fee growth. Last August, we launched Yape Promo with 22 sellers. 10% [indiscernible] already visited the site in the first month. And also, we launched the micro loans offering, which is showing promising results. We see significant opportunity to increase stickiness in the microentrepreneur segment. For example, a taxi driver transacts through Yape on average once every 2 days, while the top 5% heavy users transact almost 5 times a day. In summary, we are a more digitally and tech-mindful organization. We are attractive and retaining the best talent while investing in the key enablers. Every day, we are developing deeper relationships with our customers and becoming a more relevant part of their daily lives and their primary banking relationships. And yet, we are still at the initial stages of this digital journey. I look forward to providing additional updates on our progress across our different businesses in upcoming calls. Now let me turn the call over to Cesar.

Thanks, Francesca, and good morning, everyone. As Gianfranco mentioned, we delivered solid operating and financial results. I want to start by highlighting some key quarter-over-quarter dynamics. Structural loans grew 5.2% measuring in average daily balances, driven primarily by wholesale banking, consumer and SME business segments within BCP deposits resumed growth, particularly in time deposits as clients so to take advantage of high rates. Low-cost deposits, which have decreased in recent quarters still represent a significant proportion of our funding base, weighing in a 55.9% share at quarter end. In terms of asset quality, the structural NPL ratio dropped to 4.9% as newly formed NPLs were offset by write-offs. The structural cost of risk rose to 1.44%, reflecting our decision to grow in higher yield yet riskier SME PM segments. From a year-over-year perspective, structural loans grew 10.8%, outpacing 2% growth in transactional transacted deposits. In this scenario, core income includes net interest income, fees and gains on FX transactions registered a strong growth of 22.5% by 6.6% and 6.3%, respectively. Provision expenses increased materially, given that levels were atypically low last year. Asset quality remains adequate, and we continue to maintain a strong allowance for loan losses, which are equivalent to 5.6% of the structural loans. Our coverage level for structural and nonperforming loans remained substantial at 113.3%, which includes to prepandemic levels. In the insurance business, the loss ratio fell quarter-over-quarter to 63.6%, similar to pre-pandemic levels. In summary, Credicorp obtained a high ROE of 19.6%, while maintaining a sound capital base on the bank of gains in profitability across businesses. Next slide, please. GDP growth projections for 2022 situate Peru at 2.8%; Chile at 2.4%; and Colombia, which is expected to be the fastest-growing economy in the region this year, at 7.8%. The Central Bank in Peru, like so many other central banks around the world, has been decisive in controlling inflation expectations. We believe that interest rate increases are coming to a close. These and other policy measures have had a significant impact on liquidity, notably excess liquidity held by local banks as the Central Bank grew sharply during the pandemic to more than PLN 37 billion in January 2021, I mean contracyclical policies and fell to an average of PLN 5.1 billion in October, still slightly above prepandemic levels. In October 20, Fitch ratings revisit Peru outlook to negative from stable and affirmed that the rating BBB. Just 5 days later on October 25, Standard & Poor's affirmed Peru's BBB rating with a stable outlook. Peru's economic fundamentals remain strong. Public debt is one of the lowest in the region and stood at 34% of GDP at the end of the second quarter of 2022 while the 12-month rolling trade balance surplus stood at 5.4% of GDP in August. Fiscal deficit was just 1% of GDP as of September, while net international reserves stood close to 30% of GDP, which was the highest print in the region. Next slide, please. The nation's general prosecutor filed a constitutional complaint against President Pedro Castillo before the Congress of the Republic for alleged crime of criminal organization, influence peddling and collusion. The government has involved the organization of American states to activate the Inter-American charter in defense of democracy. The organization will send a mission to analyze the situation. On the regulatory front in Peru to increase the efficiency of the digital payments market, the Peruvian Central Bank mandated that payment service network in Peru must be interoperable. In response, the market's primary digital payment platforms, Yape and PLIN are expected to be interoperable by March 21, 2023. Additionally, the constitutional court of Peru declared that the suit challenging the constitutionality of withdrawal from private pension accounts was unfounded. In Colombia, the new government's policy proposals are driving Colombian pesos exchange rate and sovereign bond rates to historical highs. The tax reform on the table proposed increase in the income tax rate for financial institutions from 38% to 40% until 2027. And the withholding tax on dividends for nonresidents will rise from 10% to 20%. In Chile, 62% of voters in the referred had in September rejected the new constitution and it is not yet clear how and when the government will propose a new constitutional process. The executive submitted a pension reform proposal to Congress in coming weeks and a tax reform is still being discussed. Next slide, please. BCP continues to register a strong profitability. Regarding key quarter-over-quarter dynamics, Net interest income growth was driven by an uptick in structure loans, which was mainly attributable to Wholesale Banking and to consumer and SME business segments within retail banking. -- a disciplined approach to pass-throughs in the context of rising interest rates and leveraging a transactional funding base to mitigate the impact of an increase in funding cost. Provision expenses grew 65.4% over a very low base, reflecting an uptick in loan origination in higher yield segments, particularly in SME-Pyme. On a year-over-year basis, growth in net income was skewed by 31.6% increase in net interest income, which was bolstered by rising interest rate and a 10.6% increase in structural loans measured in average daily balances. Expansion was driven primarily by retail banking, which registered growth of 14.2% year-over-year led by consumer and SME-Pyme, where we were penetrating new lower ticket subsegments by leveraging data analytics and digital channels and secondarily by Wholesale Banking, which reported growth of 7.4%. Additionally, fee income increased 13.8% fueled by an uptick in transactional levels, particularly through digital channels and POS and by a 4.7% increase in net gains in FX transactions in a context of lower volatility and improvements in product and channel offerings. Loan provisions increased almost tenfold over a very low base last year. These levels remain low and are expected to stand at pre-pandemic levels by the end of 2023. Operating expenses grew 7%, driven by higher expenses for personnel, IT, transactional costs and more investments in disruptive initiatives. In this context, BCP's efficiency ratio stood at 38.8% and ROE was 24.3% this quarter. Next slide, please. Mibanco's earnings grew 14.9% quarter-over-quarter. After record high disbursements in the second quarter of this year, origination is low this quarter, which reflect a more prudent approach to lending. Mibanco's disciplined pricing approach boosted its net interest income, which grew 2.4%, provision expenses decreased 19.5%. The low level registered this quarter reflects methodological improvements. This particular set of adjustments will not be replicated next quarter. The structural NPL ratio also dropped due to higher write-offs and stood at 5.6%. Operating expenses were flat this quarter. From a year-over-year perspective, net interest income registered solid growth, driven by growth in structural loans and effective pricing strategies in a scenario of rising market rates. These dynamics were partially offset by an uptick in the cost of funds. Other income grew 38.9% in line with an uptick in total bancassurance fees, which was fueled by a strong origination, higher gains in FX transactions and a better use of third-party channels. Provision expenses fell 30.8% due to the aforementioned quarter-over-quarter dynamic and an environment post-COVID. Operating expenses grew 12% year-over-year, driven mainly by digital expenses. Traditional expenses remained very well controlled. Productivity rose this quarter due to application of the hybrid model which allow us to increase the structural portfolio and 22.6%, improving our loan officer productivity by 12.6% year-over-year. Growth in operating income topped the expansion reported for expenses, which led to efficiency ratio to drop to 49.6%. In this context, Mibanco's return on average equity increased significantly to 22.1% higher than expected run rate. At Mibanco Colombia, the positive effect of the increase in origination volumes and effective risk control were offset by a decrease in net interest income, where the cost of funds increased faster than our origination pricing speed, with the latter limited by the regulatory interest rate comes in a context of rising rates. Additionally, the Colombian Central Bank has decreased at the rate cap level, which will affect interest income in the coming quarters. Next slide, please. Grupo Pacifico's net income rose 57.7% quarter-over-quarter, driven by the Life business. This increase was associated with an upswing in net earning premiums, primarily through Credit Life, which registered higher sales via BCP and Banco de la Nación, Additionally, net claims in the Life business decreased this quarter due to drop in COV-19-related claims from a year-over-year perspective. In the Life business, net earning premiums increased driven by credit life, which registered growth in sales to the bancassurance channel. Group Life also evolved favorably due to price adjustments and an increase in sales in the complementary insurance for occupational risk product. This positive dynamic was further enhanced by a drop in claims due to a drop in COVID-19 claims and reversal of annuity reserves, which reflected adjustments in mortality rates. In the Property & Casualty business, net earning premiums increased primarily in medical assistance, which was attributable to growing sales of oncological products and to personal lines due to an uptick in sales of home mortgage and car protection products. Claims fell year-over-year, fueled by the commercial line which reported a decrease in claims frequency. These dynamics led to total loss ratio to stand at 63.6%, which marked a return to prepandemic levels. Grupo Pacifico's return on equity stood at 30.1%. This is important to mention that this particularly high annualized figure was the result of a combination of higher net premiums and seasonal effects, a lower loss ratio and reserve and a slight reduction in net equity, reflecting unrealized losses in the investment portfolio. Next slide, please. The investment banking and wealth management business registered an uptick in quarterly earnings but continues to be challenged by the current environment, where geopolitical issues and a macroeconomic environment impacted asset prices, market volatility and investment levels. On a quarter-over-quarter basis, assets under management decreased despite this effect, earnings from line of business rose boosted by earnings in the capital market business where gains were registered in the proprietary fixed income portfolio in Colombia. In the year-over-year analysis, assets under management dropped 18.1%, driven primarily by a decrease in fund volumes in Peru. In this context, income fell 17% due to withdrawals, a decrease in the market value of funds and a base comparison effect given that in the third quarter of 2021, strong gains were reported for anticipated redemptions and third-party upfront fees through offshore platforms. We are conducting a thorough analysis of our business in a context that points toward a more challenging market. Next slide, please. Now we will talk about Credicorp consolidating dynamics. On a quarter-over-quarter basis, structural loan dynamics remained strong and grew 5.2% driven by wholesale banking and the consumer and SME business segments within retail banking at BCP. The impact of asset repricing continued to outweigh the effect of an increase in funding costs. As a result, the yield of interest-earning assets increased 82 basis points versus an expansion of 48 basis points in the funding cost. On a year-over-year basis, the structural loan portfolio grew 10.3%, driven primarily by consumer, wholesale, SME-Pyme within the deposit base, time deposits grew 24.6%, reflecting the migration to higher yield products. At the quarter end, around 56% of our funding base was comprised of transactional deposits. It is important to note that despite this reduction, we continue to gain market share in this source of funding. In terms of yields, our effective asset repricing strategies led the interest-earning asset yield to increase 180 basis points, which surpassed the increase of 83 basis points in the cost of funds. Next slide, please. Now I will discuss the year-over-year evolution of core income. Core income grew 17.5% year-over-year, driven by an uptick in net interest income and fee income. Net interest income grew 22.5% year-over-year, in line with the evolution of the balance sheet and the yield dynamics explained earlier. Credicorp's net interest margin grew 108 basis points year-over-year to stand at 5.3% this quarter, while structural NIM stood at 5.6% and risk-adjusted NIM grew 56 basis points to stand at 4.5%. Ongoing improvement in NIM was partially offset by an increase in the cost of risk. Fee income increased 6.6%, driven by point of sales and interbank transfer, which grew 46.9% at 53.4%, respectively. Cashless transactions represent 45% of the total transaction amount as of September. The 11.7% increase in parking serving fees was partially offset by a drop in fee income from mutual funds. Net gains on FX transactions increased 6.3% year-over-year in a context marked by a decrease in FX volatility year-over-year, which was offset by broadening product and channel offerings. Next slide, please. I will now move to Credicorp's structural loan quality dynamics. On a quarter-over-quarter basis, our structural NPL volumes decreased slightly, given that the volume of new entrants to the NPL portfolio was offset by an uptick in the volume of write-offs, which was driven primarily by SME-Pyme and individuals. New entrants to the NPL portfolio were concentrated in SME-Pyme clients who took short-term working capital facilities, consumer loans and wholesale banking related to specific clients in the retail and hotel sector that received refinancing. Note that the asset quality in each segment remains within our expectations and adequately provisioned. Year-over-year, higher NPL volumes were mainly driven by SME-Pyme and wholesale banking at BCP for the same reasons described in the quarter-over-quarter basis. The increase in NPL volumes at BCP was offset by a decrease in volumes at Mibanco due to a base effect in the third quarter of 2021, which was impacted by the expiration of grace periods for reprogram loans. NPL ratios dropped across segments with the exception of Wholesale Banking. In this context, Credicorp's structural NPL ratio stood at 4.92%. Next slide, please. Structural loan loss provisions increased materially over an unusually low basis. Provisions are expected to rise next quarter, particularly at Mibanco following the expected trajectory. On a quarter-over-quarter basis, growth in structural provision was mainly driven by the growth in penetration of higher yield yet riskier SME-Pyme segment and a low base effect, particularly within the SME segment. In a year-over-year basis, structural provision expenses increased 197.5% over an exceptionally low base. In this context, the structural cost of risk stood at 1.44% year-over-year and was 1.04% year-to-date. The structural coverage ratio continues to trend back to pre-pandemic levels and stood at 113.3%. Next slide, please. Operating expenses grew 8.2% year-over-year, which reflected an increase in salaries and employee benefits and in administrative expenses. The salary line was up this quarter due to an increase in variable compensation, which reflects an uptick in earnings and achieving commercial goals. Growth in administrative expenses reflects an increase in transactional costs in line with higher transactional levels, an uptick in IT expenses related to cybersecurity, new functionalities, a significantly higher digital transactional volumes and an acceleration in disruptive initiatives. In this context, Credicorp efficiency ratio improved 68 basis points in the first 9 months of the year, driven by higher core income. Thanks to its hybrid model, Mibanco's operating expenses were controlled and up only 9% during the first 9 months of the year. Operating income was 19% over the same period. Mibanco's efficiency ratio improved 450 basis points in the first 9 months of the year. If we exclude OpEx from investment in disruptive initiatives such as Yape and [indiscernible], the efficiency ratio for the first 9 months stands at 41.3%, which represents a difference of 258 basis points from the reported figures. Next slide, please. ROE stood at 19.6% this quarter, driven by increased results across our 4 business lines. Over the course of the last 5 quarters, our ROE has consolidated in the high teens. Now I will move on to the outlook. Next slide, please. Despite current political volatility, Peru's macro fundamentals remain solid, and we expect GDP growth to stand at 2.9%, which is above our initial guidance. Loan growth in Mibanco, SME-Pyme and consumer loans is expected to continue decelerating. As such, we expect structural loans growth to be at the higher end of guidance at year-end. Given that interest rates continue to increase, the net interest margin should situate near the upper range of guidance at the end of 2022. The cost of risk is also expected to close the year in the upper end of guidance. Asset quality was continued to evolve within our expectations. But nonetheless, we are carefully monitoring the impact of higher inflation and interest rates on our clients' payment performance and the risk profiles. As transactional levels rise, our IT and digital investment increase, given that expenses for these components and concentrated in the last quarter every year, the efficiency ratio will move upward but close to year-end within guidance. Finally, we expect a lower ROE for 2022 to remain around our guidance around 17.5%. With these comments, I would like to start the Q&A session.

[Operator Instructions]. The first question comes from Jason Mollin with Scotiabank.

Congrats on BAP's profitability and from my perspective, the improvement in the KPIs across BAP's digital base. So my question -- my main question is on regulatory changes. First, you referred to it slightly how the cap on interest rate -- I want to understand how the cap on interest rates is impacting your business and how do you expect caps to evolve over time? And as a follow-up on regulation, the presentation mentioned that the Central Bank mandated that mobile wallets must be interoperable, how will that impact the Yape and BAP? And just continuing the regulatory theme. You mentioned the increase in income taxes for banks and taxes on dividends in Colombia. Do you expect higher taxes in Peru. And also, you mentioned on the regulatory side, the change in pension reform in Chile, how do you see pension reform in Peru?

Jason, there were like 4 questions in 1, but we'll address them.

Yes, I'm trying to get it in under one theme, but yes, -- so feel free to just address one if you'd like.

No problem. No problem whatsoever. Let me take a couple of them, and then I'll pass the other ones, the most difficult ones to Cesar. Regarding Yape and the interoperability, our vision since the very beginning, and this was, I don't know, 4, 5 years ago was the main competitor for digital wallets is not the other bank's digital wallet, but cash. So what we do see is that this interoperability is going to be -- it's the right move from the Central Bank and it's going to benefit the country, but also the digital wallets. And since Yape has -- there are no public figures, but roughly 70%, 75% of -- in terms of number of transactions. What we do see is that maybe Yape will reduce its market share, but the market is going to grow by an X factor. What I mean x factor is I don't know, 2x, 3x, whatever. So we are very positive on the regulation. And on top of that, we're moving forward in our strategy from basically -- what started as a P2P application. And as Francesco mentioned, we're moving forward to becoming Peru's super app. That one is regarding Yape. And I will take the other one regarding pension funds, the pension fee system, actually, in Peru. And I mentioned it in a previous call, I don't remember if it was the previous one or a couple of quarters ago. We strongly believe that the pension system in Peru has been turned down over the last, I don't know, 2, 3 years. Currently, we're not worried about what's going to happen to PRIMA to our pension fund, but what -- how the whole pension system should be redesigned and a reform should be put in place. As a matter of fact, both the executive power and the legislative power are supposedly working on something in that sense, in ourselves. We're working in a proposal that we will take public in the, I don't know, maybe next 30, 45 days. So that in order to contribute the whole pension system, again, not focusing specifically on our business. Cesar, could you take the other couple, please?

Yes. Franco, thank you. Probably first address regarding to the interest rate caps. The explicit mention was in Colombia. In Colombia, we have a standard cap that is 1.5x the average rate. And due to the profile of our portfolio in Mibanco Colombia, part of the portfolio is this worth, close to this limit. And so a slight modification in the regulation is going to affect a part of this portfolio. In the case of Peru, our main market, we also have an interest rate cap that is 2x the average rate due to the portfolio that we have particularly in BCP, but also in Mibanco, we operate at rates that are substantially below the cap. So in the short term and in the current circumstances, we don't have any particular worries. Beyond that, we explicitly mentioned in the case of Colombia that we also need to consider that in the case of Colombia, the environment of interest rates is more acute than in Peru. The reference rate is 11%, in Peru is 7%. So different environment. And in terms of income taxes, the regulation is specific to Colombia and is part of this broad very ambitious agenda of President Petro, who wants to collect significant taxes charging particularly oil, mining and financial sectors. But I think, again, it's a country-specific effect.

So no expectation of changes in the tax system or structure for Peru at this point?

No.

Next question comes from Ernesto Gabilondo with Bank of America.

Congrats on your bid an expected net income and your ROE above 19% in the quarter. My question will be on asset quality. We have seen cost risk is starting to normalize. And you were mentioning that we should expect the cost of risk in the upper guidance of roughly at 1.1% for this year. However, when looking to next year, how should we think about the cost of risk in the context of still high inflation and likely soft economic growth?

I'll provide a broader answer and then ask Reynaldo to go into the details. But -- as we've mentioned before, our expectations going forward is that the risk-adjusted NIM should go back to pre-pandemic levels. That -- those have been our comments in previous calls. If you were to ask me today, maybe the risk-adjusted NIM next year, it's going to be slightly higher than that because of the current inter-rate environment. Obviously, inflation may hit somehow the quality of the portfolio, but specifically in Peru, there are no variable rate loans or inflation adjusted rates loans. So basically, the bulk of our portfolio is at fixed rate. So our clients our portfolio or shouldn't get affected by inflation directly. Obviously, the repayment capacity may get hit because of inflation. Reynaldo, I don't know if you want to complement that.

Yes. I'd like to add 2 things, Ernesto. First of all, as we have mentioned, we expect in 2023 to get back to normal in terms of cost of risk. I mean we will provide further details in our guidance for 2023. But as a general number, that's our expectations. And the other thing regarding the inflationary context we are living -- remember that in IFRS 9, we incorporate the macroeconomic outlook. So we are starting to see those numbers in our projections and incorporate those on our provision levels as of today. So we are very active and following the macro environment and incorporate those in our models for provision estimations as well as for our underwriting policies.

Perfect. Franco and Reynaldo. So to think about cost of risk at prepandemic levels, would that number be around 1.5%, 1.6%.

Yes. Yes.

Perfect. And then just let me make a second question related to the ROEs at the subsidiaries. We have seen BCP stand-alone Mibanco, Grupo Pacifico Asetepima, all of them already with ROEs above the 22%. However, when looking to BCP Bolivia, Mibanco in Colombia, and AS Bank, we continue to see single-digit ROE. So what will be the strategy to improve the ROEs of those subsidiaries that I think at the end will help also to Credicorp's ROE at a consolidated level? Yes. Great question. Three different answers actually. Mibanco, Colombia is in -- is actually in a growth mode actually. The -- I totally agree with you, ROEs are still low, but they are totally in line to our projections when we decided to step up the business in Colombia, we're really positive on what we can do -- what's been -- being done in Colombia and the future for Mibanco in Colombia. That's the first answer, sorry. Bolivia is a completely different story. Unfortunately, in Bolivia, there are rate caps both on the deposit side and on the lending side. There the taxes are quite high. And unfortunately, the whole system ROE is quite low. So we're trying to optimize the business there. We've been already for 28 years there, but we don't see an improvement, at least in the short term. And finally, the investment banking and wealth management business -- or Credicorp Capital, sorry. And Cesar mentioned before, going forward, what we see is that the Lat Am markets are going to be smaller than what we expected. So we're currently in the process of making decisions actually -- in the process of a project so as to define our strategy going forward.

Our next question comes from Thiago Batista with UBS.

As for the results. In the slides, in the beginning of the slides, you showed some information about the digital innovation on BSP. When you guys look for Mibanco, do you believe it's only a question of time to see this evolution of the digitization process? Or do you believe it's more difficult to really implement these digital innovations on Mibanco operation? And a follow-up on this, the banks or Credicorp ratio is right at the low 40s, which is not so different from the pre-COVID level. Your guidance for this year is mid-40s. But when you look for the medium term, what's the target for efficiency ratio of Credicorp considering this increase in utilization that probably tend to improve your efficiency ratio?

Yes, Francesca, can you take the one on Mibanco's digital strategy? .

Yes. Part of the conversation we'll be hang around a Corp's innovation strategy and the domains that we shared in the Digital Day. Mibanco has been working hard towards digitizing their current process and gaining great efficiencies and seeing opportunities for growth. Moving forward, what we see is a definite opportunity for a neo bank around digital. But because looking at Credicorp's entire strategy, we have Yape, which is entering the micro entrepreneur segment as well. We still have a way to understand the approach we're going to take. If it's going to be something built on the side, if it's something more of an ecosystem view looking at Credicorp. So this is what we're working on, and we're going to be addressing during 2023 for sure.

And maybe just to complement Francesca's answer. The main lever for efficiency at Mibanco is workforce, is the sales force, sorry, RM. And actually, what Mibanco is currently doing is what they call the hybrid model under which the core model hasn't changed, but with adding efficiency to those RMs through digital tools. That's building on what Francesco mentioned. And that's the reason why you see the cost to income at Mibanco has decreased substantially over the last quarters. Going forward and regarding your question on Credicorp's cost to income, it's a tricky question really. And the reason is, obviously, the digital investments we're doing are helping or helping in reducing our cost to income. Having said that, we really don't know when are we going to stop investing in digital transformation. In digital, I wouldn't call it a transformation anymore. In digital investments, so as to become more efficient and provide a much better customer experience going forward. As I mentioned in the previous call, we are not going to be shy in terms of investing in order to keep providing the best customer satisfaction in Peru and in the countries in which we operate.

Our next question comes from Daer Labarta with Goldman Sachs.

A couple of questions. First, just on your guidance. Looking at the year-to-date results and the third quarter results. It looks like there could be some upside to your NIM, right, if it's running above like around 5.3%, the guidance year-to-date 4.8%. Is there some potential upside? Or do you expect any pressure in 4Q kind of similar for the ROE, right? Our guidance around 17.5%, you're already above that. through September. And if ROE stays around this 20%, there could be some upside to that. So just how should we think about the guidance? And then I have a second question afterwards.

Sure. You're right. Obviously, we're in November, we're not going to change the guidance for the next, I don't know, 45 days. But yes, we will -- we expect to be in the upper side of the of the guidance we've provided. And specifically on ROE, that's a -- our vision was around 17.5%. We're currently above that but still around. So your comments are right. We may end up in slightly higher ROE going forward.

Okay. Great, Gianfranco. That's clear. My second question, I guess, was on the insurance. You mentioned it's 30% ROE this quarter. You mentioned there were some write-offs that went directly to equity, which impacted that. Could you -- how much was that? And how should we think about the normalized level of ROE for insurance?

Yes. Let me answer the broad question, and then I'll ask Cesar to complement me. If you recall a couple of calls ago, what we said was that our vision and expectations on the insurance business should be that should navigate in the medium term around 18% to 20%. That's what we do believe is a sustainable ROE going forward. Cesar, can you complement me on the specifics on the question on -- for this quarter?

Well, thank you very much for the question. And maybe important to remember that during the last year, basically after the pandemic -- the main pandemic impact, we strengthened our underwriting policies to reduce our exposure to not vaccinated candidates. We increased rates, we increased premiums mainly in the group life insurance, it includes corporate insurance, credit life and mandatory growth and the disability survival ship insurance we have with AFP with the ISPs. And we enforce our ALM control to manage the impact in inflation and the change in interest rates. During this quarter, we have important impacts in some seasonality, new premiums related with group life insurance that have good results during this quarter. And during this quarter, we have had a low loan ratio, especially in the life insurance business. It means that we have had this good result for this quarter. Because this impact and because this -- actually we did during the last year and during this year. And for the future, as Gianfranco said, we expect to be around this 20% of return of equity. And of course, we need to continue our investment in the capabilities and the technical teams, and of course, maintaining our discipline in underwriting and investment management. So we expect to be around this 30% of ROE.

Okay. Great. That's helpful. And could you just quantify how much was the specific write-off this quarter that impacted equity?

There was not -- sorry, this is a was not a write-off. The mention was to unrealized losses in the long-term investment portfolio was a minor effect but it's not a write-off. It's only the reflection of higher interest rate in the price of the assets that we have on books..

Our next question comes from Yuri Fernandes with JPMorgan.

I have a question regarding margins here, this 5.3, is very close to the previous 5.4 or 5.5 in 2018, '19. So my question is how much more can expand next year because we still see active amortization, you have been repricing our assets -- and I guess the concern here is regarding funding costs, right, because funding costs today, they are running at 2.1. Rates are at 7. So this is about 30% of the rates. I know like in Peru, most of the time deposits, they are fixed rate, right? But you reprice your time deposits, right? And I see here BCP paying around 6.5%, some banks paying 90%. So my -- my question is, can you keep funding costs so low like considering this level of interest rates? And again, how NIMs will behave, right, in 2023, '24? Like can you expand above the levels you had in 2018, '19?

Cesar?

Okay. Thank you. I will split my question in probably a couple of chapters. First, I will say that we have some short-term effects and others that are more structural ones. Under the foundation that we are not going to provide now a specific guidance, we are going to provide a specific guidance next quarter, but I can give you a general answer that I hope is helpful. In the short term, we expect expansion in NIM because the repricing process still continues in dollars is still accelerating, and we expect higher rates in dollars is very relevant for us, 50% of our portfolio. And in the case of we expect to have providing higher rates for next year. So the rate should be, for these reasons, higher next year. over the year '24, '25, it solely starting to come down as the reference rate decreases. But there are others that are more structural reasons that will propel our NIMs higher and is one, the change in the structural cost of funds because during the pandemic, as you remember, we increased our share of transactional deposits. And while these deposits could decrease slightly in the short term in comparison with previous year are at a higher level. At this point, it's 56%, that is substantial. And this -- we expect that it's going to be more structural. And the other change is the composition of the portfolio, we have become more and more a retail group -- and inside of the retail, the consumer and Pyme segments are growing faster than mortgage, for example. So these are going to be more structural changes. Summarizing everything, we are going to have higher NIMs due to reference rates next year. And after that, we expect to have still higher than pre-pandemic levels NIM but for the structural reasons that I just described.

Just let me compliment Cesar's answer, Yuri. And from a more strategic vision, at BCP, we've been working on a transactional value, an overall transactional value proposition for years now. I don't have the exact figure, but anything between 40% to 45% of total transactions done in the Peruvian financial system are done through BCP. Obviously, in the past years, that strategy hasn't paid off because rates were quite low whereas in nowadays, we had a very relevant benefit because of that strategy. And that's the reason why we launched Yape -- one of the reasons why we launched Yape a few years ago. And that's the reason why the answer to Jason -- my previous answer to Jason was in that line. We strongly believe that there's still a huge opportunity to enlarge the penetration of noncash payments in Peru because of the benefits of our population, but also because of benefit for us in terms of low cost of funding.

No, it makes a lot of sense. Basically, it's a competitive advantage, right? Like you have a structural change on your transactions Yape, as you said, and like all those initiatives and now we are seeing the benefits on the funding costs, and this should remain. If I may, just a second one, a follow-up from [indiscernible] on insurance. We were checking here the ROE of the insurance business, and it was like 13%, 14% in 2018, '19. And I guess you said from '18 to '20 now, like closer to 20%, ROE what has changed since 2018, '18 in issuance business? Is it just the rates that are higher and you have higher financial income? Or is the mix of products, structural lower loss ratio? What explains this higher ROE foreign service now versus pre-COVID levels?

Cesar?

Okay. Yes. I think we have a combination of factors that has changed the portfolio. Again, we are a more retail bank, more digital one. We have a much higher composition of bancassurance in our current and expected portfolio through BCP, through Mibanco, and this product has better margins. And another reason is that overall, we have improved the efficiency of the business. So when you combine these better income generating capacity and structural efficiency in the business, we can land up in a higher structural ROE.

Congrats on the results.

Our next question comes from Andres Soto with Santander.

Congratulations on the results. My question is regarding the digital strategy. We have seen impressive results this year. I'm not sure if those are just in line with your expectations or you are a bit ahead of what you were expecting to see when you presented your digital plan that was in March this year. And in that sense, when you presented this plan, you said that you expected the income coming from the monetization of these initiatives to offset the cost by 2024, 2025. I would like to understand if there is any change in that expectation, and you are expecting now to see a faster-than-expected monetization of your digital strategy. And from that perspective, if Credicorp to exceed 18% ROE earlier than expected.

Thank you, Andres. Francesca, could you take that one?

Yes. We do expect to see some lines of business no fees or no lines of business doing better, and we're seeing that with Yape in terms of, for example, financial products being distributed because of the potency of the distribution channel. On the other hand, we are very aggressive and we're challenging ourselves to create new businesses such as marketplace that we talked about in the Digital Day. And that is very difficult, especially difficult also in the environment where we operate, where nothing's change fast. So I don't see the overall expectancy to be positive by 2024 or 2025, changing very much. But these are plants that constantly are being evaluated to governed stopped and new processes initiated because they are planned. They're not -- we don't execute exactly on what we think because we are very mindful of what works in the market and where customers and product market set really did.

Your ROE expectation overall, I would like to hear your thoughts. We are in a higher-than-expected interest rate environment and that has definitely helped the margins. You mentioned you have benefits on the funding side. Can you -- can we expect Credicorp running about 18% ROE in the next few years?

Our expectation during the Digital Day was around 80%. We maintained that as an achievable medium-term target. But as we have been discussing previously, at the same time that we are obtaining higher margins we are aggressively investing into the future to be more competitive down the road. So we are going to privilege long-term sustainability and profitability over a pump in a specific quarter.

Our next question comes from Sergey Dubin with HL.

Yes. My question is actually on asset quality. So when I look at your presentation, what I see is that your loans, right, when you break it out between structural loans and the Reactiva loans. So you show that your Reactiva loans have come down from 15% in Q3 '21 to 8.8% in Q3 '22. But then when I look at your NPLs, these NPLs have actually went up. I mean, Reactiva NPLs have gone up from 76 to 1,200. So that's counterintuitive to me. Maybe you can explain the trend behind that? And then the second question, which is related, is I thought that Reactiva is actually a government-sponsored program where you should have 0 NPLs or very low NPLs because it's basically backed by the government. The government should pay you if the borrower doesn't pay you. So like I don't understand why that issue is even coming up. So if you can address it in totality, that would be helpful.

Yes, you're totally right. Reactiva portfolio is a government collateralized program, roughly 90% collateralized, but it's a matter of processes. It's not that the moment the loan becomes past due, you get -- you execute the collateral. It takes time. Roughly, I will ask Reynaldo to go into the specifics. But that's the main reason. Regarding your first question, it's not counterintuitive. It's completely intuitive. The quality of that portfolio -- so let me put it the other way around. If those loans weren't collateralized at that moment by the government, we wouldn't have given those loans. So the asset quality, the expected asset quality was lower than what the normal portfolio would have had in a normal situation. Having said that, the behavior of the overall Reactiva program has been much better of what everyone, including the government and the Central Bank and obvious Bank expected at that moment. So Reynaldo, I don't know if you want to complement me.

Yes, Gianfranco was mentioning, this is a process you have to try to collect the loan from your clients at least for 90 days. And from -- after that period, we just started the process of claiming the guarantee to the government, and that will probably take 30 to 45 extra days. So we keep on the portfolio part of the Reactiva loans for almost 5 months, and we finally collect the guarantee from the government. And in terms of the performance of the portfolio, as Gianfranco was mentioning at the beginning, the government announced projected at least a 20% default rate on those loans and the number is closer to 10%. So the performance, even it's higher -- I mean it's worse than our regular traditional clients, it is still below our expectations. So we are -- and it has helped a lot of clients who go through the dynamics and be able to pay their other loans with a financial institution. So overall, we think it has been a very good program.

Okay. Okay. So maybe that makes sense. But then I guess just to carry that thought. So what you're saying I guess what follows from what you're saying is that effectively, over, let's say, I don't know, 2 or 3 years. So you may see this divergent trends, right, as you work your Reactiva loans down as a percent of your total portfolio, your NPLs may still -- Reactiva-related NPLs may still go up for a bit. But at the end of the day in, let's say, 2 or 3 years, both of those -- so in 2 or 3 years, your Reactiva loans should converge to close to 0 and your NPLs should actually converge to 0 from Reactiva because they would be -- you would have the time to collect the collateral and just if you know more entails, correct?

That's correct, Sergey. Maybe it should be sooner than that. Rather than 2, 3 years, it should be 1, 2 years, actually.

Our next question comes from Carlos Gomez with HSBC.

So I have two questions. The first one is on loan growth. I know that your structural loan portfolio is growing in double digits. However, overall, you are growing 3%, 4%. It would seem like the trend is slowing down. What do you expect in terms of loan growth for the next 1 or 2 years? And for the next 5 or 6 years? In the past, you have said that there's going to be less growth in Peru and you were pointing to something like 7%. Have you changed that view? And second, on asset quality, we see that your coverage is not a good measure, but it has been going down. It's now around 100%. So the buildup of reserves that you in the pandemic seems to be exhausted. So should we expect a faster normalization of credit costs in the coming years?

Yes, good. Cesar, answer the first one, and Reynaldo, the second one, please.

Okay. Our expectation is around high single digits, but with different composition going faster in retail loans and a lower pace in wholesale that are very linked to the investment climate that we have described. So I think this is a reasonable figure that is more or less in line with the long-term trend of 1.4, 1.5 nominal GDP. If you take aside this specific moment in which we have an especially high level of inflation.

Reynaldo?

Yes. In terms of the second question, Carlos, here, our iconic coverage ratio was around 100 and our structural today is 113. So we are almost there. And you have to bear in mind that NPL today has a lot of refinanced loans basically on the wholesale market, which have important collateral behind. So I mean we cannot have a fair comparison in terms of the coverage ratio before the pandemic to what we have today because those loans have already been well provisioned, and we don't expect any further provisions or no specific finance loans. They might grow in the future, but we feel that those are still performing loans even though we classify them in this ratio.

Okay. But still this year, I mean, you're pointing to something like 1.2% cost of risk. I mean we should expect again to go back to the 1.5%, 1.7% that you had in the past. Is that correct?

Yes. As we had mentioned, that would probably be a readjustment of our cost of risk in the future, yes.

[Operator Instructions]. Our next question is a follow-up from Jason Mollin with Scotiabank.

Yes, I reentered the queue to ask another question. Mine is on client engagement. On Slide 7, you shared products per client under a new methodology for digital and nondigital clients. Do you have targets for engagements under this new methodology that you can share with us?

Since the beginning of the transformation, our target is to multiply by 2 the level of engagement. And that's what we have seen. And that's still what we're striving for. We began in the nondigital customers for the consumer segment at 1.2, and now we're at 1.10. So our target continues to be around 2.5, 2.4 as a target for customers. Having said that, we are also looking not only at cross-sell, but the level of engagement, the number of services and the day-to-day usage that we're seeing. We shared with Yape example, the number of activities the customers have per month. We have a lot of activity to our mobile banking app services to -- for top-ups for payments how you turn off and on your credit card account and so forth. So this is -- we're looking at engagement now at a more broader view than just cross-sell.

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

Thank you all for joining us in this conference call. I'd like to highlight that the fundamentals of Peru remains strong, and our expectation for GDP growth is now above our initial guidance despite the continued political noise. Latin America also continues to be an attractive alternative in terms of global capital inflows based on supported commodity prices and the steps our economies took to increase rates early on. If it weren't for the political noise and course changes of government, we could be in a much better position to solve the long-term structural issues such as quality of health, education and basic services. In this context, we are confident that we will continue to generate robust results into the future as we continue to see loan growth with an ability to pass on rate hikes, a differentiated funding structure and increasing levels of transactions, all of which drive core income expansion. We're also focused on remaining competitive in the longer term, rapidly scaling and developing new fee and income-generating opportunities while deepening our connections with our customers, with the aim of being their primary banking relationship. We're upskilling our workforce as well as attracting and retaining the best talent while accelerating the development of core enablers of our digital transformation strategy, including data and analytics, IT and cybersecurity. We've made significant progress on all fronts but acknowledge that we are only at the beginning of this journey. Our strategy and position also enabled us to be a powerful agent of change. We take this responsibility very seriously and are committed to aligning our business objectives with our sustainability-based responsibilities of financial inclusion, financial education and developing the workforce of the future. We will continue to deliver our strategy to drive sustainable, profitable growth, advance on our digitalization initiatives and attract and retain the best talent. Thank you all for joining us, and have a great weekend.

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