Q3 2022 Credicorp Ltd Earnings Call
Good morning, everyone I would like to welcome all of you to the credit Corp Limited third quarter 2022 conference call. A slide presentation will accompany today's webcast, which is available in the investor section of website.
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Now it is my pleasure to turn the conference over to credit Corp.
You all glass.
Yes.
Yeah.
Thank you and then morning, everyone speaking on today's call would be down cycles that Ronny, our chief Executive Officer.
I just got my phone Chief Innovation Officer, and say somebody else, our Chief Financial Officer.
Participating in the Q&A session. We'll also be marine I know Youll Sun Chief risk Officer.
Got it all kind of universal banking and say somebody made outside of insurance and benches.
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 reasons kind of incentive.
And I refer you to the forward looking statements sections of our earnings release and recent filings with the U S E C.
We assume no obligation to update or revise any forward looking statements to reflect new or changed events.
Yes.
Yeah, and frankly, Faddy will start the call discussing our strategic initiatives, followed by a vantage God awful.
And finally, it to somebody else, who will comment on the macro environment in which we work our financial performance and provide an update on our outlook for 2020.
Yeah and Frank. Please go ahead. Thank you 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 continued to benefit from loan growth with disciplined pass through of interest rate hikes are differentiated funding structure in which strong structural deposits represent 56% of total funding.
Hydrofracturing will level off.
As a result, we saw strong growth again in Puerto Rico, which includes net interest income fees and gains on FX transactions.
With improving results our growth all four of our business lines were reduced hurt on our OE of 19, 6% this quarter on the strength of our solid balance sheet and prudent risk management.
While there are still downside risk to overall growth in the region. The fundamentals of Peru remained strong and our estimates of GDP growth is now two 8% for this year.
Unfortunately, the continued political noise is having a clear negative impact on sales growth opportunity and deteriorating public and private investment. This is also detracting from what we should be focusing on with respect to financial inclusion on poverty reduction.
Despite the environment in which we work.
<unk> Corp remains committed to being an agent of change in our communities and our digital transformation plays a fundamental role in alignment with our sustainability based responsibilities of financial inclusion financial implication.
Developing the workforce of the future among others.
So our strategic initiatives, we're 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. These customers represented 63% of total customers well over 250000 individuals we're financially good for anybody.
<unk>.
Today, we'd like to highlight the progress we are achieving our Chilean in the transformation of our DCP for.
For this purpose, we have invited Francesca level, Debbie ratio of BCP, and Chief Innovation Officer upgrades.
I've been reading this airport she is there.
Very beginning to provide an update on progress to date Francesca.
Thank you, yes, thank God morning, I am pleased to share the progress we have made on the transformation journey at BCP subsidiaries that began this process first and its not mature as mentioned during the digital day, our customers are more demanding one greater speed simplicity and want to be delighted.
We are accelerating our investments to become the most efficient bank in the region well not to mention the customer experience.
Investments are very skewed towards core enablers data analytics, and cyber security, which in turn is driven by the best as he touched on it.
So right today around 50% of our staff functions already has a detailed profile.
No on the next slide let me share more of our progress around our key enablers.
We are customer centric, we are customer centric data driven organization that is creating solutions through capturing data the obligation of analytics and the development of technology within our cyber security framework, starting with or without it.
<unk> technology has enabled us to increase uptime to world class standards, we strive to maintain these levels improving our capability to bring value to the market by increasing the amount quality and speed integrity.
Over the last four years, we have gone from 4500 to 28000 releases yearly and increased the average speed from 28 to six days.
The flexible and efficient infrastructure, we are developing through api's positions us to.
Well to continue advancing on our journey towards becoming a more digital and open bank.
We leverage our data analytics capabilities to increase revenue reduce risk and improve operational efficiency. Our data lake has more than 28000 variables, which are or the nice structured and can be safely deploy to build analytical and risk models or to develop customized probes.
Service offering.
Predictive models have at naval projects within the organization to realize more than $400 million holidays in additional gross margin in the last four years with our API and data we have deployed price discrimination strategies and have generated more than 500 meter unfairly a preapproved loans for.
Awesome.
Finally, we are moving to empower our business units to a much more decentralized model.
Improvements are required for the cyber security 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 multi factor authentication for digital jobs. Moreover, we continuously use advertising to educate and raise customers' awareness of risk.
And constantly invest in people and employee training.
Finally, we have deployed technology for in depth protection against Phishing malware and data lakes distributed denial of service among others.
We are attracting upskilling and retaining diverse take time.
We recruit throughout.
In America and hold our talent hub in Spain than where we are hiring special specialized data analytics and 90 profession.
And this just mindful that we not we practice, what we preach and offer our tech talent the opportunity to develop leading edge capabilities in our environment fully committed to leading in technology.
Please move to slide six.
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 program and channel usage and preferences.
With a deep understanding of our customer behavior inside the bank.
We adapt our digital strategy and develop specific value proposition by type and level of engagement for each segment.
Goal is to broaden and strengthen our current relationship with each customer becoming the principal back.
We have been obsessed with a digital sales and transactions models and now will offer a more comprehensive value proposition integrating saver type 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.
D C bish individual customers reached approximately 6 million accounting for 63% of the total in the video customers.
The relationship with his group is more active in terms of number of digital transactions and digital.
<unk>.
Growth in digital customers is enabling us to improve our cost to serve to income ratio for these two items discussed this quarter, we are introducing a more demanding methodology to calculate digital customers going forward.
We'll refer to customers, making at least 70% of their transactions through digital channels on a rolling six month basis.
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 significantly better than the 36% of non digital customers.
Reaching 70% of digital customers under this methodology would mean, a huge strides towards our overarching Northstar goes to England.
Now to slide eight.
We are deploying a similar approach to what does it mean 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 feedback.
The next step is to continue digital servicing while deepening our relationships.
With our core analytic capabilities in risk management, we are expanding our SME client base and penetrating deeper into the segment. This is particularly the case for it and meet with no to very low indebtedness in the financial system and little to no credit history limiting access to financing.
On top of the new client financing in this segment.
Now 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.
And it is a strong compliment we offer these small intimate personalized products distributed through a digital channel 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 nine for an update on our most mature disruptive initiatives we didn't BGP.
Today, almost one in three peruvians over 18 years of age.
Yeah paid 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 larger customer base than to increase engagement on monthly transaction and now we are focused on generating income we're seeing seeing some.
That's a sustained positive trends across most of our metrics, including the volume transacted, which grew more than 30 times since 2019 to more than 40 billion solid year to date. We are now tracking to our initial 2026 goal of reaching 150 billion solid.
In transactions by 2024.
The number of active users and activity per user continues to grow well, 30% are generating revenue.
As one of the world's most important distribution channel yuppies, creating new sources of income truck report to our marketplace strategy, while also allowing us to distribute financial services products and drive fee growth last August we launched yep it problems with 22 centers.
10% of your betas 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 micro entrepreneur segment for example, taxi driver transact through yesterday.
On average once every two dale needs, while the top 5% heavy users transact almost five times a day.
In summary, we are a more digitally and take mindful organization, we are attracting and retaining the best talent, while investing in the key enablers everyday wear the belo developing deeper relationships with our customers and becoming a more relevant part of their daily lives and their primary banking relationship.
And yet we are still at the initial stage stages of this journey digital journey.
Look forward to providing additional updates on our progress across our different businesses in upcoming calls now let me turn the call over to Seth.
Thanks, Francesca and good morning, everyone I'm Frankel will mention we delivered solid operating and financial results I want to start by highlighting some key quarter over quarter and dynamics as structural loans getting five 2% measuring average daily balances driven primarily by.
Wholesale banking consumer and SME business segments within BCP, the policies resumed growth, particularly in time deposits as clients sought to take advantage of high rates low cost deposits, which have decreased in recent quarters is still represent a significant proportion of our funding base.
Wait you mean.
55, 9% sure.
And in terms of asset quality, the structural NPL ratio dropped to four 9% as newly poor npls were offset by write offs the structural cost of risk rose to 144%, reflecting our decision to grow in higher yield yet riskier SME <unk> segment.
From a year over year perspective is structurally loans grew 10, 8% outpacing 2% growth in transactional transacted deposits. In this scenario of core income includes net interest income fees and gains on FX transactions registered a strong growth of $22 five six.
6% and six 3% respectively.
Provision expenses increased materially given debt levels were atypically low last year asset quality remains adequate.
We continue to maintain a strong allowance for loan losses, which are equivalent to five 6% OXXO structural loans.
Our coverage level for the struggle of nonperforming loans remained substantial 113, 3%, which is close to pre pandemic levels in the insurance business the loss ratio fell quarter over quarter to 63, 6% similar to pre pandemic levels in summary.
Great quarter of paying a high ROE of 19, 6%, while maintaining a solid capital base on the bank.
Gains in profitability across businesses makes it slightly.
Yeah.
GDP growth projections for 2020 to see trade, Peru at two 8%, Chile at two 4% in Colombia, which is expected to be the fastest growing economy in the region. This year at seven 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 all of the policy measures have had a significant impact on liquidity, notably excess liquidity held by local banks or the central Bank rose sharply during the pandemic to more than 37 billion solid in January 2021.
Contra cyclical policies fell to an average of $5 1 billion solid October is still slightly above pre pandemic levels.
It will totally a <unk> feature ratings visited revisit Peru outlook to negative from its payload and affirm that the rating of Triple B.
Just five days later on October 25th at standard <unk> Poor's affirmed their roof triple B rating with a stable outlook.
Bruce economic fundamentals remain as 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 as students are fine 0.4% of GDP Ingalls fiscal deficits.
It was just 1% of GDP, a soft September while niche international reserves stood close to 30% of GDP, which was the highest screened in the region.
Next slide please.
The Nations General prosecutor file a constitutional complaint against precedent Pedro Castillo before the Congress of the Republic for a leach crimes of criminal organization influence peddling in collusion.
Government housing book the organization of American States towards debate, the inter American chartered in the sense of democracy. The organization will send the 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 markets, primarily digital payment plateau from European <unk> are expected to be interoperable by March 24th.
2023. Additionally, the constitutional court to declare that the suit challenging the constitutionality of withdrawals from private pension accounts was unfunded.
In Colombia, the new government's policy proposals out and driving.
Colombian peso exchange rate on the sovereign bond raise to historical highs the tax reform on the table proposed increasing the income tax rate for financial institutions from 38% to 40% until 2027 and the withholding tax on dividends for nonresident will rise from 10% to 20 <unk>.
Is that in Chile.
62% of voters in the referendum passed in September rejected the new Constitution. 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 mix.
Next slide please.
Yeah.
BCP continues to reduce at a strong profitability regarding key quarter over quarter and dynamics net interest income growth was driven by an uptick in our structural loans, which was mainly attributable to wholesale banking and to consumer and SME business segments within retail banking.
<unk> 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, Boeing 4% with a very low base, reflecting an uptick in loan origination.
In higher yield segments, particularly in SME.
On a year over year basis growth in net income was fueled by 31, 6% increase in net interest income, which was bolstered by rising interest rates and a 10, 6% increasing our structural loans measured in average daily balance expansion was driven.
Primarily by retail banking, we should reduce the growth of 14, 2% year over year led by consumer and SME, where we were penetrating new lower ticket sub segments by leveraging data analytics and digital channels and secondarily by wholesale banking, which reported ROE of seven four per.
Additionally fee income increased 17, 8% fueled by an uptick in transactional levels, particularly through digital channels.
By year, four 7% increase in net gains in the first transactions in a context of lower volatility and improvements in product and channel offerings.
Loan provisions increased almost tenfold over at a very low base last year. These levels remained low and are expected to stand at three pandemic levels by the end of 2023.
Operating expenses grew 7% driven by higher expenses for personnel.
Transactional costs and more investments in disruptive initiatives in this context bcp's efficiency ratio stood at 38, 8% on our ROE was 24, 3% this quarter next slide please.
[noise] me Banco <unk> earnings grew 14, 9% quarter over quarter.
The record high disbursements in the second quarter of this year already nation has slowed this quarter, which reflect a more prudent approach to lending.
Me Banco disciplined pricing approach boosted isn't.
Net interest income, which grew two 4% provision expenses decreased 19, 5% the low level reduce their this quarter reflects methodology Cali 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 five 6% operating expenses were flat this quarter.
From a year over year perspective, net interest income produced a solid growth driven by growth in our structural relaunched and effective pricing strategies in a scenario of rising market rates. These dynamics were partially offset by an uptick in the cost of funds or their income grew 38, 9%.
In line with an uptick in total bank assurance fees, which was fueled by a strong origination higher gains in FX transactions and the ability to use a third party trucks.
Provision expenses fell 38% due to the aforementioned quarter over quarter and dynamic and then.
An environment post colleagues.
Operating expenses grew 12% year over year, driven mainly 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 in 22, 6% improving.
Our loan officer productivity by 12, 6% year over year rule in operating England top the expansion reported for expenses, which led to efficiency ratio to drop to 49, 6% in this context me Banco return on average equity increased significantly.
222, 1% higher than expected run rate.
Banco Columbia, 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 repricing of speed with a lot of limited by the regulatory interest rate caps in a context of rising rates.
Additionally, the Colombian Central Bank has decreased the rate card level, which will affect interest income in the coming quarters mixes libraries.
Grupo Pacifico and <unk> net income rose five.
But at 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 reduced the highest <unk> and Banco de la and assume Additionally, net claims in the life business decreased this quarter.
Due to drop in COVID-19 related claims from a year over year perspective in the life business net earning premiums increase driven by credit life, which reduced the growth in sales to the Bancassurance Channel group life also evolve favorably due to price adjustments and an increase in sales in the complete.
Mental reinsurance for occupational risk problem.
These positive dynamics was further enhanced by a drop in claims due to a drop in COVID-19 claims and reversal, so honored to reserve, which reflect adjustments and mortality rates.
In the property and casualty business net earning premiums increased primarily in medical assistance, which was attributable to growth in cell phone call logical pros and two personal lines due to an uptick in sales of hung mortgage and card protection problems claims fell year over year fueled by the commercial line, which reported at <unk>.
Greece in claims frequency. These dynamics led to total loss ratio Preston, a 63, 6%, which mark a return to pre pandemic levels.
Grupo Pacific was return on equity stood at 31%. This is important to mention that this particularly high annualized figure was the result of a combination of higher net premiums and seasonal effects.
Lower loss ratio and reserve and then the slight reduction in Natick with you reflect the unrealized losses in the investment portfolio.
Next slide please.
The investment banking and wealth management business reduced at an antique in quarterly earnings but continues to be challenged by the current environment, where geopolitical issues and the macroeconomic environment impacted asset prices market volatility and investment level on a quarter over quarter basis assets.
Under management decreased despite this effect earnings from lineup business rose boosted by earnings in the capital markets business, where gains were reduced in the appropriate out of fixed income portfolio in Colombia.
In the year over year analysis assets under management dropped 18, 1% driven primarily by a decreasing fund volumes in Peru. In this context income fell 17% due to withdrawals of decrease in the market value funds and the base comparison, given that in the third quarter of 2000.
One is strong gains were reported for anticipated redemptions and third party upfront piece through offshore platforms.
We are conducting a thorough analysis of our business in a context that points toward a more challenging market makes us slide please.
Now, we will talk about credit called consolidator in dynamics on a quarter over quarter basis structurally long dynamics remained strong and grew five 2% driven by wholesale banking and the consumer and SME business segments within retail banking at BCP the impact of asset repricing continued to Atwood.
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 costs.
On a year over year basis, the structurally loan portfolio grew 10, 3% driven primarily by consumer wholesale SME.
Nevada.
Within the deposit base time deposits grew 24, 6%, reflecting the immigration to higher yield pros are the quarter in around 56% or funding base was comprised of transactional deposits. It is important to note that despite this reduction we continued to gain market share.
In this source of funding in terms of yields or effective asset repricing of strategies led the interest earning asset yields to increase 180 basis points, which was part of the increase of ADC 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.
Net interest income grew 22, 5% year over year in line with the evolution of the balance sheet and the yield dynamics explained earlier credit Corp's net interest margin grew 108 basis points year over year, Tristan a five 3% this quarter wireless truck total knee.
I stood up five 6% risk adjusted NIM grew 56 basis points to withstand a four 5%.
Ongoing improvement in <unk> was partially offset by an increase in the cost of risk.
Fee income increased six 6% driven by point of sale and interbank transfer, which grew 40 point 46, 9% or 53, 4%, respectively cashless transactions represent 45% of the total transaction amount of sub September 11.
One 7% increase embarking serving fees was partially offset by a drop in fee income from mutual funds net gains on FX transactions increased six 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.
We now move to credit Corp, structurally long quality dynamics on a quarter over quarter basis, our structurally NPL volumes decreased slightly given that the volume of new entrants to the NPL portfolio was offset by an uptick in the volume or write offs, which was.
Driven primarily by SME PMA I, indeed, with new entrants to the NPL portfolio were concentrated in SME clients, who took short term working capital facilities consumer loans on wholesale banking related to a specific client in the retail and hotel sector that receive refinancing.
Note that the asset quality in each segment remains within our expectations and adequately provision.
Year over year higher NPL volumes were mainly driven by SME <unk> on wholesale banking at BCP for the same reasons described in the quarter over quarter basis. The increase in NPL volumes in BCP was offset by a decrease in volumes have me Banco do to a base effect in the third quarter of 2000.
21, which was impacted by the expiration of Grace periods for reprogram rules.
NPL ratios dropped across segments with the exception of wholesale banking in this context.
Of course, a structural MPL ratio has stood.
For 92%.
Next slide please.
Structurally loan loss provisions increased materially over unusually low basis provisions are expected to rise this quarter, particularly on me Banco following the expected trajectory.
On a quarter over quarter basis grow in a structurally provision was mainly driven by the growth and penetration of higher yield the riskier SME PMA segments on a low base effect, particularly within the SME.
Segment in a year over year basis is structurally provision expenses increased 197, 5% over an exceptionally low base in this context, the structure and cost of risk stood at 144% year over year, and one 1.14% year to date.
The structure is covenant ratio continues to trend back to pre pandemic levels and astute.
113, 3% next slide please.
Operating expenses grew eight 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 a chief commercial goals.
Growth in administrative expenses reflects an increase in truck sectional costs in line with higher transactional levels and <unk>.
Teaching it expenses related to cyber security new functionality is a significantly higher digital transactional volumes.
And an acceleration in disruptive initiatives in this context credit cost efficiency ratio improved 68 basis points in the first nine months of the year driven by higher core income.
Thanks to its hybrid model me Banco <unk> operating expenses were control.
And not only 9% during the first nine months of the year operating income was 19% over the same period Mi band cost efficiency ratio improved 450 basis points in the first nine months of the year, if we exclude opex for investment in disruptive initiatives such as European Carrillo.
The efficiency ratio for the first nine months of stance or 41, 3%, which represents a difference of 258 basis points from the reported figures.
Next slide please.
It stood at 19, 6% this quarter driven by increased results across our four business lines over the course of the last five quarters our Roe.
So David in the high teens now I will move on to the outlook next slide please.
These high current political volatility the roof macro fundamentals remain solid and we expect GDP growth to stand at two 9%, which is above our initial guidance loan growth in the Banco SME premium consumer loans is expected to continued decelerating as such we expect a structurally.
Loans grew 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.
<unk> continued to ball within our expectations, but nonetheless, we are carefully monitoring the impact of higher inflation and interest rates.
Our clients' payment performance and their risk profiles.
As transactional levels rise, our it and digital investment increase given that expenses for these companies and concentrated in the last quarter every year the efficiency ratio will move upward, but close to year end within guidance. Finally, we expect our or the lower ROE for 2022.
To remain around our guidance around 17, 5% with these comments I would like to start the Q&A session.
Okay.
Yes.
Thank you we will now begin the Q&A session. If you would like to ask a question. Please signal by pressing star one on your telephone keypad.
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Just a moment to allow everyone the opportunity for a question.
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He will then be allowed to ask as many follow ups as needed but again. Please only ask one question at a time. Thank you.
Okay.
The first question comes from Jason Mullen with Scotia.
Please go ahead.
Hello, everyone. Thank you Gianfranco Francesca say, sorry, with Iris for the detailed presentation.
Congrats on Eap's profitability and from my perspective, the improvement in the Kpis across.
Digital base.
So my question. My main question is on <unk>.
Regulatory changes.
Sure.
You referred to it slightly how the cap on interest rate I'm understand 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 Jaap N V. A P M.
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. Thank you.
Good morning, Jason there were like four questions into one but we're not.
I'm trying to get it in other one theme, but yes.
So feel free celebration.
The address one issue.
No problem no problem whatsoever, let.
Let me take a couple of them I don't know, possibly other was the most difficult wants to professional regarding Gaba.
Daryl Byrd, our ability our vision since the very beginning and this was I don't know four or five years ago was that the main comparator for digital wallets is not the other banks.
Digital wallets, but gosh, so what we do see is that they think the inter operability is gonna be.
It is the right move forward.
From the Central Bank.
I was just going to benefit the country, but also the digital wallets and Cynthia behalf. There are no public figures, but roughly 70% 75% of the in terms of number of transactions, but we do see is maybe a bit we reduce its market share.
Sure, but the market is going up.
Ah grow by on X factor. The X factor is I don't know two X three eggs whatever so we're very positive on the regulation.
On the top of that.
Sure.
Moving forward in our study from a basically a bit what started off a bit to be application on our Francesca mentioned moving forward to becoming Peru's Subaru.
That's the other one.
Regarding Japan, I will take the other one regarding pension funds.
It depends on the fifth system actually.
In Peru.
I know you mentioned it in our previous call I don't remember.
Remember it was the previous one or a couple of quarters ago.
We strongly believe that the pension system in Peru has been torn down over the last I don't know two or three years.
Currently we're not worried at all what's going to happen to prima to our pension funds, but what what how how the whole pension system should be.
Redesign and up.
I have a reform should be put in place. It's a matter of fact, both the executive power the legislative ASP.
Power.
Supposedly working on something in that sense.
Ourselves we're working in a proposal that we went public in there I don't know maybe next 30 45 days so that in order to contribute the whole personal system again, not focusing specifically on our business.
First like we think they are coupled with yes, I'm trying to go thank you.
Probably first address regarding to the <unk>.
Interest rate caps indicate the explicit mention west in Colombia in Colombia, we have.
His thunder.
That is one five times, the average rate and due to the profile of our portfolio me Banco Columbia part of the portfolio is this was close to this limit and so a slight modification in the regulation is going to play a part of this portfolio in the.
Case of Peru, our main market. We also have an interest rate cap that is two times the average rate due to the portfolio that we have.
Equally or in BCP, but all showing me Banco we operate at rates that are substantially below the cup. So in the short term and in accordance of ore stacked that we don't have any particular worries beyond that we use play explicitly mentioned in the case of Colombia that we also need to.
And in the case of Colombia.
Environment of interest rates is more acute that in Peru. The reference rate is 11% in Peru is seven so different different environment.
And in terms of income taxes, the regulation E specific to Columbia and as part of these broad very ambitious agenda of precedent petrol who wants to collect significant taxes.
<unk>.
Particularly.
Oil mining and financial sectors, but I think again is on a country specific effects.
So no expectation of changes in the tax.
Six system, our structure for Peru at this point.
No.
Thank you very much the comments.
Our next question comes from Ernesto.
But Alonso with Bank of America. Please go ahead.
Hi, good morning, Frank.
Scott.
Good morning, everyone.
Thank you very much for your presentation.
Ratzinger Paragon expected net income and your ROE above 19% in the quarter.
My question will be on asset quality.
We have seen a cluster risk is just starting to normalize.
You were mentioning that we should expect the cost of risk in the upper guidance. So roughly at one 1% for this year.
However, when looking to next year.
How should we think about cost of risk.
In a context of high inflation.
Lightly softer economic growth.
Thank you.
With more of a F. L O O provides a brother.
Brother brother.
Right now, though to go into it.
A detailed but.
As we've mentioned before our expectations going forward is that right.
Risk adjusted NIM should should go back to pre pandemic levels.
That doesn't that doesn't those have been our comments in previous calls.
If you worked with me today, maybe the risk adjusted NIM for next year, it's going to be slightly higher than that because of their current interest rates environment.
Obviously inflation may sheets somehow.
The quality affordable over the portfolio, but.
Specifically in Peru, there are no.
Payable rates are low.
And Oh no.
Inflation adjusted rates low so basically the bulk of our portfolio is.
Fixed rates, so our clients portfolio should get affected by inflation directly obviously, they've got a repayment capacity.
Because of inflation, because I don't know if you want to complement that.
Yeah, I'd like to add two things.
First of all.
As we have mentioned, we expect in 2023 to get back to normal in terms of cost of risk I.
I mean, we will provide further details in our guidance for 2023, but on a general number that's our expectations.
The other thing regarding.
Veterinary context, we're leaving.
Remember that.
Ars nine we incorporate the macroeconomic outlook. So we are starting to see those numbers in a ridiculous and incorporate some.
Provision levels.
So we are very active in following the macro environment.
In our models for mortgage originations augur, well for our underwriting policies.
That's it thank you very much and Franco Antonella.
So think about Costa Rica pre pandemic levels.
Would that number be around 151, 6%.
Yes.
Perfect.
And then just let me make a second question.
Related to the Rovs are the subsidiaries.
We have seen BCP stand alone the Banco Grupo Pacifico Prima all of them.
Of them already without always above the 22%.
However, when looking to BCP, Bolivia, you Banco in Colombia.
Bank.
You need to see a single digit Roe so.
What will be the strategy to improve the arrow each of those subsidiaries.
That I think at the end will help also.
Credit cards are Oh, yeah that consolidated levels.
Yeah, Great question three different also structurally.
Maybe Banco Columbia is seen.
Actually in our growth.
Our moat actually got.
I totally agree with you are always are still low but there.
Totally in line to our projections when we decided to.
Step up the business.
Colombia, where really.
Positive on what we can do it what's being on the call.
We didn't dawn in Colombia and in the future for me Banco in Colombia, that's the first one the first one preferred Bolivia is a complete different story. Unfortunately believe yep.
There are the right jobs there are break ups, both on the deposit side or on the lending side. There are the taxes are quite high I'm. Unfortunately, the whole system.
Our OE 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 in the in the short term.
And finally, the investment banking and wealth management business or Greg or capital sorry.
As I mentioned before.
Going forward, what we see is that the.
Latam markets are going to be smaller than.
What we expected. So we're currently in the process of making decisions actually in our Brooklyn of a project so as to define our strategy going forward.
Okay.
Okay. No. That's very helpful. Thank you very much and plentiful.
Okay.
Yeah.
Our next question comes from Thiago Batista with UBS. Please go ahead.
Hi, guys.
Results.
<unk> lives in picking up the slides you showed some information about with digital and location.
Are you guys look for the Bancorp.
I do believe it's only a question of time to see this evolution of.
Digitization process or do you believe it's more difficult to really implement digital innovations on Banco <unk> operation and a follow up on these are the banks or corporate expense ratio ease or the way they are.
Low forty's.
Which is not so different from the pre COVID-19 level.
Your guidance for this year is mid Forty's, but wanted to look for the medium term what is the target for exploration for <unk> Corp.
<unk> D is increasing.
That's probably a 10 to improve your efficiency ratio.
Yes, Francesco I'll take that one.
One on the Banco digital strategy.
Hey.
Part of part of the conversation will be hanging around the aggregate Arps innovation strategy in the domains that we shared in the digital day.
November has been.
Working hard towards digitizing their current process and gaining greater efficiencies and seeing opportunities for growth moving forward. What we see is a definite opportunity for a neo bank.
Owned.
The Dol.
Because.
Looking at getting it group's entire strategy, we have yesterday, which is entering the micro.
The micro entrepreneur segment as well, we still have a ways to understand the approach we're going to see if it's going to be something build on decide if its something more of an ecosystem view looking at Grey court. So this is what we're working on and we're going to be addressing during 2023 for sure.
Maybe just to complement Francesca Oh.
The main lever for efficiency asked me Banco is.
Workforce transfer authority.
Oh actually what wasn't Ivanka is currently doing is what they call the hybrid model under which the core the core more hasnt change, but we've added efficiency to those rins through digital tools.
What Francesco measure and that's the reason why you'll see the cost to income.
Banco has decreased substantially over the last quarters.
Going forward the regarding your question on credit card cost the cost to income.
It's a tricky question really.
Uh huh.
And the reason is obviously the digital investments, we're doing are helping our cost our holding.
And reducing our cost to income having said that we.
We really don't know whenever we're going to stop investing in digital transformation and digital I won't call. It transformation on anymore in digital investments so as to become more efficient and provide a much better customer experience going forward as I mentioned on the previous call we are not going to be.
Hum.
Shy in terms of investing investing in order to provide.
Providing the best customer satisfaction in Peru in the countries in which we operate.
Okay. Thanks for the answers.
Your next question comes from Tito <unk> with Goldman Sachs. Please go ahead.
Hi, Good morning, everyone and thank you for the call and taking my questions. A couple of questions first just on your guidance.
I'm looking at the year to date results in the third quarter results yeah. It looks like there could be some upside to NIM right and so it's running above like around five three guidance year to date four eight is there some potential upside or do you expect any pressure in <unk>.
Kind of similar for the ROE right, our guidance around 17, and a half you're already above that.
Through September and if our OE stays around this 20%.
Could be some upside to that so just how should we think about the guidance and then I have a second question afterwards.
Sure good oriented or are you're right.
Obviously, we're in November we're not going to change the guidance.
Next I don't know 45 days, but yes, we will.
We expect to be in the upper in the upper side of the.
Of the guidance we've provided.
Specifically on ROE, that's what we are what our vision was.
Around $17 five we're currently above that but still around.
No.
Your comments are right, we may end up in.
Slightly higher Roes going forward.
Okay, great. Thanks, Jon Parker, that's clear my second question I guess it was on the insurance.
You mentioned that you know, it's 30% of our early this quarter.
You mentioned there were some.
Write offs that went directly to equity, which impacted that could you quantify how much was that and how should we think about the normalized level of ROE for insurance.
Yeah, let.
Let me answer the broad question.
First of all to cause her rivera to complement me.
If you recall a couple of all if I go a goal.
What we said was that our vision and expectations on the insurer on the insurance business should be that.
Should navigate in the medium term around 18% to 20%. That's what we do believe it's a sustainable ROA going forward a perfect complement me in on the specifics on the quarter alone.
For this quarter.
Well. Thank you. Thank you very much for the question and maybe it's important to remember that you read and you read the last year basically up there they're there.
And they make they made pandemic impact we strengthened our underwriting policies to reduce our exposure to not back the nature vaccinated candidates, we increased rates and we increased premiums mainly in the group life insurance corporate insurance great life.
On mandatory roads on the disability survival cheap insurance, we have with the.
ASP.
Base.
We enforce our a L M.
Contrary to manage the impact in insulation and did it change.
In interest rates during this quarter, we have an important impact.
It sounds like your ability and your premiums.
Premiums are related with group life insurance Dod.
A group of salt water and during this quarter, we have had.
Low loss ratios.
Actually in their life.
And it means that we have part B is a good result for these for this quarter.
Because this impact because actually.
Actually we took during the last year and be during these this year and for them for the future.
Franco said, we expect to be around these it when people say Oh all equity.
Of course, we need to continue our investment in the capabilities and the technical.
Our teams are of course and maintain our discipline underwriting on.
So we expect we'll be allowances when people assembled all.
Oh, 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 a sorry. This is says it was not a write off.
Mention Wes to unrealized losses in the long term investment portfolio was a minor effect, but it's not a write off if suddenly the reflection of higher interest rates and the price of the assets that we have on books.
Okay perfect. Thanks for clarifying.
Yeah.
Our next question comes from.
That's with Jpmorgan. Please go ahead.
Hi, guys. Good morning jumped uncle says some system along with everybody.
Question regarding margins here are these five points three is very close to the previous price point for a $5. Five in 2018 19. So my question is how much more and expand next year, because we still see.
Active amortization you have been repressor of assets and again the concern here is regarding funding costs right because funding costs should they they are running at 2.1. The rates are at seven. So this is about 30.
30% of the rates I know like in Peru, most of the time deposits. They are fixed at rates right, but you reprice. Your your time deposits right and they see here.
<unk> been around six and a half some banks being 90%. So my question is can you keep funding costs, so low like considering the level of interest rates and again, how news will behave right.
In 2000, and 'twenty three 'twenty four like can you expand above the levels you had each doesn't 18 anything thank you very much.
Okay.
Thank you I will.
My question is probably a couple of chapters.
First I will say that we have some short term effects on older that are more structural ones.
Under the foundation that we are not going to provide now.
Specific guidance, we are going to provide specific guidance next quarter, but I can give you a general answer but I hope is helpful. In the short term, we expect expansion in nims because the repricing process is still continues in dollars is still accelerating or we expect higher rates in dollars is very real.
For us 50% of our portfolio and in the case of solid we expect to have.
A prevailing higher rates for next year. So the rate should be for these reasons higher next year.
The years 'twenty four 'twenty five it truly starting to come down as the reference rate decreases but there are older that automotive structural reasons that will propel our NIM is higher and is one the change in the structural and cultural funds.
During the pandemic as you remember we increased our share of transactional deposits and while these deposits will decrease slightly in the short term in comparison with previous year are at the highest levels. At this point is 56% that is substantial and we expect that is going to be more structural.
And the other a change is the composition of the portfolio, we have become more and more.
Our retail group and insight of the retailer the consumer and <unk> segments are growing faster than mortgage for example, so these are going to be more of a structural changes summarizing everything we are going to have higher nims due to a reference rates next year.
And after that we expect to have ASP.
Higher than pre pandemic levels needs, but for the structural reasons that you just described.
Just let me complement a fifth.
Arthur.
Okay.
From a more strategic vision of.
At DCP, we've been working on a sectional value overall from such a value proposition for years now I don't I don't have the exact figure about anything between 40% to 45% of total transactions done in the Peruvian financial system are done through BCP.
Obviously, obviously the past years that strategy Hasnt paid off because rates were quite low, whereas nowadays, we get a very relevant.
Benefit because of that strategy and that's the reason why we launched Yahoo.
One of the reasons why we launched <unk> a.
A few years ago, and that's a reason why.
The answer to Jason My previous answer to Jason Watson deadline, we strongly believe that there is still a huge opportunity to enlarge the.
Penetration of noncash payments in Peru.
Because of the benefits of a population, but also because of a bit of a benefit for us in terms of low cost <unk> pardon me.
No guys know makes it makes a lot of sense basically it's a competitive advantage right like you'll have any structural change on your transactions of Jaap as I said and like all of those initiatives and now youre seeing the benefits on the funding costs and this should should really if I may just a second one a follow up from peoples on insurers.
We were checking here they are way off of the insurance business and it was like 13 or 14% in 2018, 19 or and I guess, you said 18 to 20 now like closer to 20% are we.
What has changed since 2018 and Eaton defensive business is just the rates that are higher and you'll have higher financial income or is the mix of products structural lower loss ratio. What explained these higher iron ore for insurance and Albertsons.
Pre COVID-19 levels. Thank you.
On the computer screen.
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 bank assurance in our current and expected portfolio through BCP through me Banco and these pros has better margins and another reason is that.
Overall, we have improved the efficiency of the business. So when you combine these.
Is there a income generating capacity on a structural efficiency in the business. We can land up in a higher is structurally early.
Thanks.
Perfect guys, thanks, very much and congrats on the results.
Question comes from Oswald.
Please go ahead.
Good morning to all thank you for the presentation and congratulations on the results. My question is regarding the digital strategy we have seen.
Impressive was halted here I'm not sure. If those are just in line with your expectations or where you are a bit ahead of what you are expecting to see when you get per center.
Blind, but what's in March this year and in that sense. When you presented this plan you say that.
We expect that the income coming from the monetization of these initiatives to offset the cost.
By 2020 for 2025, I would like to walk understanding if there is any change in that expectation are you you are expecting to see a faster than expected monetization of your digital strategy.
Active if a credit card kind of spike to exceed 18% I E.
And we've got the unexpected.
Thank you Jessica who can take that one.
And we do expect to see some.
Lines of business or new fees are no and no new lines of business is doing better and we're seeing that with the FDA in terms of for example financial products being distributed because of the potency of the distribution channel on.
On the other times, we are very aggressive and we're challenging ourselves to create new businesses such as marketplace that we talked about in the digital data and that is very difficult.
Especially difficult also in the environment, where we operate where nothings change fast.
So I don't see any overall.
The expectancy too.
The positive by 2024, and 2025 changing very much but these are plans that constantly are being evaluated Darwin.
A new a new process is initiated because a they are plan, they're not no. We don't execute exactly on what we think because we are very mindful of what was in the market and where customers.
And until the market really thing.
Oh I know what are your expectations of it all I would like to hear your thoughts you know we are in the higher than expected freight environment and that has definitely helped the margins you mentioned you'll have benefit on the funding side.
We expect higher quite caught up with worrying about 18% AOI in the next few years.
Our expectation during the detailed day was around 80% we maintain that.
Achievable.
A 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 bump in a specific quarter.
That's very clear thank you Paul.
Okay.
Oh the question comes from Jackie <unk>.
H L. Please go ahead.
Yes.
Yes.
Yes, good afternoon gentlemen.
Thanks for the presentation. 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 in the vaccine alone. So you showed that your raptiva loans have come down from 15% in Q3.
<unk> 21 to eight 8% in Q3 'twenty two but then when I look at your.
Npls these npls and eventually.
Went up.
We have kiva npls have gone up from 726 to 1200.
So that's.
How old are intuitive to me.
Maybe you can explain the trend.
And that and then the second question, which is related is.
I felt that we activate its actually government sponsored program, where you should have zero npls and very low npls, because it's basically back by the government. The government should pay you at the bottom of it doesn't pay you so like I don't understand why.
That issue isn't coming up so if you can address it in totality that would be helpful. Thanks.
Good morning.
Yeah.
Those are the right thing.
Our portfolio is a government cover their life program roughly 90% are collateralized.
It's a matter of our processes are is not at the moment the loan becomes.
But do you get a that you expect the collateral it takes time roughly.
Right now, though to go into the specifics, but that's the main reason.
Regarding your first question, it's not kind of counter intuitive is completely intuitive.
The one deal that portfolio.
So let me put it the other way around if those loans were in Colorado, a life at that moment by the government. We would have given the volt for the asset quality expected.
Expected asset quality was lower that what the global portfolio.
In normal in a normal situation.
Having said that they would be the behavior of the overall fever program has been much better of what everyone, including the government and the Central Bank and obviously.
I expect that.
Moment, so I don't know if you want to complement me.
Yeah, John Brown.
Yes.
Franco was mentioning this is a process.
You have to collect the loan from your clients at least for 90 days and from from that after that period.
Started got brokers are claiming the guarantee to the government and that would probably take 30 to 45 fixed rates. So we keep on the portfolio are part of the direct you are known for almost five months. We finally finally called the guard.
From from the government on.
And in terms of that performance with our portfolio.
Bronco was mentioning at the beginning of the government and as predicted at least 20% default rate on those loans.
It's closer to 10% so the performance even.
I mean, it's worse than our regular traditional clients. It is still below our expectations. So we are.
And it has a lot of clients who will go through that.
And they make them.
And be able to be there all year long, we've already and financial institutions.
With things there has been a very good program.
Okay. Okay. So.
Maybe.
That makes sense, but then my question I guess, just the just to carry that thought so what you're saying.
What what what follows from what you're saying is that effectively all of our let's say I don't know two or three years. So you may see these divergent trend right ahead of you.
Work your portal you'll react.
While loans down.
As a percent of the total portfolio NPL may still or people related Npls may still go up for a bit but in the end of the day and let's say two or three years both of those.
Yes, Steve alone should converge to close to zero and your Npls would actually converge to zero from vaccines, because they will be.
You know you would have the time to collect the collateral Raul in just.
No.
No more anything else correct.
That's correct Jose maybe should be sooner than that.
Rather than two or three years, which should be one two years actually.
Okay, Okay got it.
Okay. That's helpful. Thank you.
Thank you.
Our next question comes from Carlos Gomez with HSBC. Please go ahead.
Okay.
Pardon me Mr comments is your phone on mute perhaps.
Okay.
Hi, My apologies I think I was Smith.
[laughter].
Hello, Yes, sorry for that.
Yeah, Yeah. So that's all I had.
The first one is on loan growth.
I know that you already touched on our loan portfolio has grown in double digits. However, overall growing three 4%.
It would seem like the 20th he said slowing down what do you expect in terms of loan growth for the next one or two years and for the next five or six 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 another great mentioned, but it has been going down is now around 100%. So.
Okay.
The buildup of reserves after the pandemic seems to be exhausted. So should we expect the first time normalization of credit costs in the coming years. Thank you.
Yes.
The first one on another federal workers, Okay, our expectation is around.
Around high single digits, but with different competition growing faster in retail loans.
Lower pacing 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 1415 nominal GDP. If you take a site. This is specific moment in which we have an especially high level of inflation.
Right now though.
Yes in terms of your second question Carlos.
Yes.
Congratulations.
And then on our structural debates 113. So we are almost there and you have to bear in mind that.
But N P at all today.
Refinance loans basically on the wholesale market.
Important collateral behind so I mean, we cannot have a better comparison in terms of that coverage ratio before the pandemic.
Do you have today, because those loans have already been or what provision and we don't expect any any political reasons have no specific refinance loans they might they might grow.
The future, but we feel that those are.
Still performing loans, even though we classify them in these regions.
Oh.
Okay.
This year, I mean, you're pointing to something like one 2% cost of risk maybe we shouldn't expect that again to go back to the one five.
By one 7% that you had in the past is that correct.
Yeah.
You had mentioned I thought it.
It would be perhaps jasmine.
So everything that you produce.
Thank you so much.
Okay.
Well go next I'd like to ask a question. Please press Star then one.
Question is up all that from Jason <unk> with Scotiabank. Please go ahead.
Hi, Thanks, Thanks, again, yes, I reenter the queue to ask another question mine is on client engagements.
On slide seven you shared products for clients under our new methodology for digital and non digital clients do you have targets for engagement under this new methodology that you can share with us. Thanks.
It seems in beginning of the transformation and our target is to multiply by two.
The level of engagement and that's why we.
That's still what we're striving for we began.
Non digital customers for the consumer segment.
At 1.2.
And now we're at 1.8 till our target continues to be around 2.5 to bring for us.
Okay.
Our customers have.
<unk> said that.
We are also looking not only at cross sell but the level of engagement the number of services.
On the day to day usage that we're seeing now we shared with a yuppie examples a number of activities.
Customers have per month.
And we have a lot of activity to our mobile banking app.
Phase two top ups for payments and how you turn off and on your credit card accounts and so forth. So this is where we're looking at engagement now on a more broader view than just cross sale.
Okay.
Thank you Francesca very helpful.
Sure.
It appears there are no further questions at this time I will now turn the call back over to Mr. John Frank I'm, Sorry, 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 remained strong although our expectation for GDP growth is now above our initial guidance.
Despite the political noise.
Latin America also continues to be an attractive alternative in terms of global capital inflows based on supported commodity prices on the steps our economist talk to increase rates early on.
If it weren't for the political noise I'm of course changes of governments, 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.
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 in developing new fee and income generating opportunities while deepening our connections with our customers with the aim of being the primary banking relationship.
Scaling 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 analytics and.
On cyber security.
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 enable us to be a powerful agent of change we take these workforce stability 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 on our strategy to drive sustainable profitable growth advance on our digitalization initiatives.
Truck and retain the best talent.
Thank you all for joining us and have a great weekend.
Yes.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.