Credicorp Ltd. (BAP) Q4 2023 Earnings Report, Transcript and Summary

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.

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.

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.

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.

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.

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.

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

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.

Excellent. Thank you very much, Cesar.

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

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.

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.

Okay. Thank you very much again.

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

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.

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

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.

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?

Yes, 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.

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?

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.

Okay, well, I'll check the math and come back to you on that.

Okay.

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?

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.

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.

Exactly. Exactly.

Okay.

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.

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

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

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

Yes, good morning, Carlos. I'll take the second question and then I really don't have the figures for Tenpo top of mind. Maybe Cesar can help me here. Regarding dividends, obviously, we cannot provide a figure now since the dividend has to be approved by the Board in April, what it is, but what is relevant – what I would say is relevant is the logic behind paying dividends. Along the history of Credicorp what we've done is that the subsidiaries pay whatever is in excess of what they need for growth in terms of capitalization, and they pay dividends to Credicorp and then obviously Credicorp if it doesn't have any transformational investment or something like that, it pays dividends. Last year in 2023 we decided to withhold some dividends, specifically at Mibanco and at BCP, because of the social unrest and the projections of a strong El Nino we had at the time. That's the reason why as you correctly mentioned, BCP is today the common equity Tier 1 of BCP is much higher than what we normally have, which is 11.5% or 11%, which is...

11%.

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

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

That's the correct math.

Okay.

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

No, I understand, but obviously the board is going to what management...

Totally valid logic, yes. Regarding Tenpo, Cesar, can you help me with that?

We have providing a general figure but I would say Tenpo can be around 170 million and 180 million around of cash costs.

As of today?

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

Okay, but it's fair to say that and then you have highlighted Tenpo indeed as something which is working. So one would expect that you will invest more in this particular venture because you are far from breakeven as well, right?

Yes, and far not only in terms of money, but also in terms of time. Yes, that's correct. We cannot provide exact figure as of today, but let us revise it and we will be more specific maybe next quarter.

Thank you so much.

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

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

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

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

Maybe just to complement Reynaldo, what we look at is a risk adjusted name. So that's what Reynaldo just mentioned is totally correct. But the retail portfolio has higher names. Therefore they can bear higher cost of risk, while what matters is risk adjustment NIM.

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

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

Perfect very clear. Thank you.

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

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

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

Yes, please. I would like to invite you to revise the basic of the year. We have the year 15.8%. If we consider that next year we are considered an increase in average daily balances and an improve in NIM. We are going to have a relevant increase in net interest margins and a controlled cost of risk that shouldn't increase in developing absolute returns over the last year. Adding to that we are going to have an acceleration in fee income driven by the underlying businesses and also for the disruptive initiatives, mainly Yape. This is going to provide, and I will say pre-expenses significant improve in income. And as we adapt to these figures, cost that increases more or less in line with previous year with the change in the composition, as Gianfranco has explained for the relative weight of the new initiative, we can have a higher profitability this year than the 2023 with the addition that we are not considering one-time events like the provision of El Nino and the impairments that impacted 2023.

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

Perfect, guys. And now it makes sense and good luck with that. If I may, just a second one and kind of a follow-up on Yape. And congrats on the numbers for Yape like impressive. Again, I just noticed an increase on the cost serve. Like, you provide this chart in the presentation and our pack is almost crossing the cost to serve. But the cost to serve was up, I don't know, like some 20%, quarter-over-quarter in the 4Q. So just asking if the cost to serve is seasonal. If you like, when you say breakeven of Yape, is this cost to serve getting a little bit more normalized and returning to, I don't know, like the previous levels of four soles per active user, or is this their pack? Crossing the cost to serve. So just checking the cost to serve on the appetite.

Yes. Definitely. You're right on your assessment. As – Cesar mentioned it during the speech, the last quarter we have some, well, first of all, the seasonality, because of the number of transactions, there's a spike in the last quarter, especially in December. Plus there were some costs related to performance. But we expect that cost to serve to go back to similar to previous levels. Therefore, Cesar said we're going to reach breakeven this year. I would say we're going to reach breakeven the first half of the year. So we're on the right track.

Super clear. Gianfranco, thank you. Congrats on the results and the guidance. Thank you.

[Operator Instructions] Our next question comes from Andres Soto [Santander]. Please go ahead with your question.

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

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

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

Yes.

You don't have variable rate. It's a matter of how long are you around your assets versus your liability. Can you help us a sense of what is the gap at this point?

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

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

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

Perfect. Thank you so much. My second question is regarding the loan growth guidance. The tone that you are setting for the country sounds quite optimistic. However, when I see the multiplier that you are assuming for loan growth is just a multiplier of one to nominal GDP, what are the factors preventing you to have a more bullish, best of loan growth?

I mean, again I think it's a very valuable question because if you think in an inflation of 2.53%, and GDP grow 2.5%, you can think in a nominal GDP of around 5.5% or something about that. And the usual multiplier has been around 1.5%. But this 1.5% is not a clock that is perfect every year. But we have now. And another factor that is relevant is that when we provide guidance, we are talking about average daily balances and we have a decrease in the balances through the year during 2023. So we have at the beginning of the year have a lower amounts, sorry, higher amounts at the end of the year and we need to rebuild the portfolio is starting in a lower base. And another factor that was mentioned probably very briefly during my presentation is that we are still going to have some impact of Reactiva. We are not longer providing the guidance based on a structured portfolio, but in total portfolio. But we are going to still have an impact that is slightly less than 2% due to the payment of the remaining Reactiva loans that we already have on books.

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

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

Thanks to everyone for joining us today and for your questions. The journey we've undertaken over the past year has been both challenging and transformative. Our resilient full year results underscore the strengths of our organization and our ability to adapt to an evolving landscape. This outcome is grounded in a solid foundation, including a diverse portfolio, integrated digital capabilities and a prudent approach to risk management. Our success span various lines of businesses, including universal banking and insurance, as well as asset and wealth management, where our turnaround plan is delivering expected results. While acknowledging the process, we are aware of the work needed to strengthen and revitalize our microfinance business for sustainable growth. Looking forward to 2024, we anticipate an improvement in macroeconomic conditions with anticipating an El Nino phenomenon, a more favorable GDP outlook, a reduced local reference rate and controlled inflation. We are more optimistic than three months ago about the opportunities that lie ahead. Cesar shared with you our detailed 2024 guidance, which reflects a year in transition. For the medium term, we expect to maintain a resilient NIM as the sensitivity of our margins to decrease in interest rates has diminished year-over-year and we continue to shift our loan portfolio towards retail. Our cost of risk should maintain a downward trend as we finalize digesting the current credit cycle. We also see some room for efficiency optimization as our disruptive initiatives mature. Taken together, we should be back on track to deliver our sustainable ROE of around 18% as we move forward, our commitment to talent, innovation, sustainability and shareholder value creation remains unwavering. The investments we're making today are paving the way for a more resilient and sustainable future for Credicorp. Before closing, I want to comment on some management changes announced at the end of the year. We bid farewell to Reynaldo Llosa, who will retire from his roles as the Corporate and BCP CRO after an impeccable 30 year career. I extend my personal gratitude to Reynaldo for leaving us in a stronger position. Cesar Rios will be transitioning into the CRO role for Credicorp and BCP. With more than 30 years of diverse organizational experience and exceptional capabilities, I am confident that he will guide us into a new era of risk management. This would empower us to adaptive leverage, developing technologies to expand our reach into new segments and markets. Finally, I look forward to collaborating closely with Alejandro Perez-Reyes who steps into the role of Chief Financial Officer at both Credicorp and BCP, leveraging his 25 years of diverse experience within the company. Thank you to all of you for participating in the call and see you or talk to you in next quarter. Have a nice weekend.

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