Q4 2022 Credicorp Ltd Earnings Call
Good morning, everyone I would like to welcome you all here.
The credit Corp Limited fourth quarter 2022 conference call.
Slide presentation will accompany today's webcast, which is available in the investors section of credit clubs website.
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Now it is my pleasure to turn the conference over to your credit Corp.
Uh Huh, Keith one Todd you may begin.
Thank you and good morning.
On today's call with me I've got that.
Our chief Executive.
Does that mean.
Our Chief Financial Officer.
Participating in the Q&A session, we'll also be <unk>.
Okay.
Yeah got it okay looking at ourselves.
And second that the Chief Innovation Officer.
That's the only data.
And tablets that they don't meet our Chief financial Officer.
Before we proceed I would like to make the following safe Harbor.
The next call.
Forward looking statements, which are based monitoring.
And are subject to a number of.
Uncertainties.
We refer you to the forward looking statements section of our earnings release, our recent finding.
Yes.
We assume no obligation to update or revise any forward looking statements to reflect new or changed events.
Yes, that's right.
Well I will comment on the key milestones achieved.
Thank you Peggy followed by San Antonio.
From an environment, where our financial performance provide our guidance for <unk>.
Please go ahead.
Thank you good morning, everyone. Thank you for joining us while we reported a solid quarter I would like to reflect on some of the key accomplishments of the year first of all I am pushing my first year of C O Great Corp. As you.
You know when they came into a role earlier is there anything you're doing I have already spent many years with the group and in particular at BCP.
Workers as part of their prior leadership to establish the foundation of what are the key study strategic initiatives that Guy yesterday.
I am very proud of the important work we've done in advancing our governance and operating structures over the last three years aimed at ensuring that sustainability will remain unimportant.
Part of how we get there.
Today sustainability is being integrated into our strategy for bringing our ability to become the J&J.
But we aspire to be and driving policy debate back in their countries in which we operate.
We need to become more inclined to do the core of our business strategy.
How we think and act everyday.
We have shifted the way we operate in record time, because our purpose and commitment have been embraced from top down bottom up.
Bridging our competitive advantages to be a key enabler of financial inclusion and financial litigation in the Andean region.
We've launched multiple initiatives across all subsidiaries.
I'd like to highlight that in 'twenty to 'twenty two.
Nationally included more than one 1 million people, who yuppie I don't know where financial question on work serious ambition.
47 medium views.
This year has also been a year of learning for me I know.
And the opportunity to flex my stretch I reinforced my knowledge of all of our businesses, including insurance and wealth management.
We're newer to me.
Moreover, I lend a hand to our overall digital transformation strategy based on my experience at BCP, we are more advanced in this area.
Mentally our digital strategy is aimed at facilitating our ability to live our purpose and achieve our sustainability sustainable growth objective for expanding our total addressable market and strengthening our operational drivers.
We have no no no no digital day in March of last year. The innovation initiatives that are taking place through innovation labs, where we're disrupting ourselves.
London or pick up abilities and data driven approach at each of our subsidiaries.
Our more mature disruptive initiatives, such as yuppies keep growing exponentially and are positively impacting society.
End of the year, yet they had over 11 million users in Peru unusual daily part of your payrolls lives solving their financial needs.
Give you a sense of how prevalent pedros are you brew approximately half of yellow populations through you'll see up and we are on the drug to be the payment networks for Bruce.
Now, let's turn to slide one.
Overall, we have had a very positive year not only based on our solid financial results, but most importantly, I would.
I will say that as a holding we have already absorbed the negative impact due to call them.
On a full year basis, our net income grew almost 30%.
ROE was 16 seven.
We maintained our booth and managing risk in our Gulf coast, if he's on the road to normalization.
We go into 2023 with a very strong balance sheet.
To support our initiatives as well as navigate any near term volatility volatility in front of us.
It is important to highlight that despite continuous continued political instability.
Mental shampoo remains strong.
The relatively low levels.
Debt to GDP important levels of international have yourself reserve and independent Central banks led by a technique and experienced board.
Having said that there are some important highlights of the year that I would like to point out.
First the very strong performance of disappearing you should be Sterling and euro.
22% for the year.
Zircon and basketball is on track to deliver our Oes, we expect for that business and finally, pacifico a business where you have to express reservations in the bus has now reached an ROE of 19 point to.
We are optimistic about our ability to keep increasing the levels of penetration of this vision.
On the other hand, we still face a challenging environment for investment banking and wealth management, requiring us to really find out what strategy going forward to reach the rovs, we aspire to be.
Yes.
I expect that we will be able to share more details in this regard during our next call.
Before I pass the word to Fisher I do want to acknowledge how concerned we are but again the continued political turmoil on the social unrest, we're experiencing in Peru. After the failed school.
Number seven has resulted in near term headwinds not only to our businesses, but most importantly to baidu and these changes as well.
We had very good remains focused on fulfilling our burgers and take very seriously our sponsor.
Will it be an obligation.
Hey, Bob speak out and more proactively work to solve the fundamental structural issues in the countries we operate.
We are accelerating our agenda of inclusion on financial obligation he factors related to poverty alleviation.
Great very inclusion we aim to offer.
Do those most vulnerable regular levels of security savings income generation and economic independence.
Please go ahead.
Thanks, Ken Frankel and good morning, everyone.
We are closing a very good year, where the fourth quarter reflects less favorable macroeconomic perspective in Peru, which translated into higher provision.
Each one of the seasonality explains this at year end.
Want to start by highlighting some key quarter over quarter dynamic is structurally loans you need 0.8% may shooting average daily balances driven primarily by retail banking at BCP on me there.
Walsh's contracted 3% due to a drop in demand deposits in a context marked by lower liquidity across the financial system low cost deposits, which have fallen in recent quarters. After having increased significantly in 2020 due to the pandemic relief measures is still represent a significant proportion of our funding base way.
Teaming with 50.7% share of core opinion compared to 49% of pre pandemic levels.
In terms of asset quality, the structural NPL ratio H hop to 495% as of refinancing grossing wholesale banking, particularly in real estate and tourism sector. As we expected yeah formation and was partially offset by the improvement on the Vancouver and consumer NPL portfolio.
<unk> is structurally cost of risk increased by 85 basis points to withstand and two.
0.16%.
Growth in <unk>, driven by an update to our estimates for key macroeconomic variables such as inflation interest rate and GDP World and also reflects the negative impact that rising inflation.
And payment behavior in the consumer segment.
Alicia suddenly bank also increased materially this quarter due to unusually low comparative base.
So an increase in the loan portfolio. The full ratio. This evolution was reading by maturities with a specific piece that will lead to a change our credit policy in the second quarter 2022.
On a year over year perspective.
Net interest income reduced at a very strong role of 30.9% drilling by pinpoint for birthday and expansion in our structural belongs measured in average daily balances ongoing repricing of our portfolio in a context of how you're right in a very competitive funding base gains.
On FX transactions increased due to improvements in problems in China being Couldnt decrease due to our drug could you sort of investment banking wealth management, which was partially offset by growth at BCP stand alone.
Provision expenses increased materially over an atypically low base last year asset quality remains adequate and we continue to maintain a strong allowances for loan losses, which are equivalent to five 6% of our structural along our label for restructured it nonperforming loans renew.
Substantial and 11 on <unk>.
112, 2% in the Assurant business, the low ratio fell significantly to 65, 4%, which although close to pre pandemic levels is still reflects the impact of COVID-19, India formation in context credit card reduce it and what their I'll eat well he's seen.
3% and continue to maintain both a sound capital base and a diversified business portfolio next slide please.
At the beginning of 2023 condition for emerging markets improve due to two main drivers first inflation in the U S to the surprise of many is trending downward and you snow far from its peak in June . This has raised expectations that they felt really slow down the pace of rate increases even for their in.
What is already is most aggressive rate hike cycle in four decades cycling the Chinese government shifted year and he said, it's highly restrictive COVID-19 has done a move to shore up the real estate sector seeking to propel economic roles. Both of these factors have had a policy if you could take on metal.
Prices prices for poker, Peru, and Chile main extra probably reached the highest level in seven months of around 4.2 dollars per pound ball. Another of their primary exports sheets, a nine months high inflation Decelerates U S. Treasury yield has dropped we generally.
As a more favorable environment for emerging markets as a whole next slide please.
They lose GDP is expected to grow around 2%. This year. These social unrest pieces. These Florida, we believe that GDP in Colombia, we decelerate to one 3% after posting one of the highest growth rates in the world in 2020 to Chile in term is expected to contract.
0.5%.
Latam central banks have been decisive and preventing the oncor eagle's inflation expectations in the context of a slowing inflation, Chile Central Bank maintained the same monetary policy rate in four consecutive sessions Columbia Central Bank on the other hand instituted rate hikes.
Trunk base, given the inflation and shows no signs of peaking in Peru.
<unk> reached inflation, how can manage recently in a context of social unrest are such central bank decisions in the immediate future I likely to be influenced by the impact of the Covid scenario, which made me that record high interest rates continue longer than previously expected.
Next slide please.
Despite the challenging context BCP continues to deliver strong profitability regarding key quarter over quarter dynamics, where soldiers were driven by an increase of eight 4% in coring. This evolution was fueled by 12, 2% growth in net interest income, which rose these pipe.
The fact that the average daily balances of a structurally loans reduced the lithium valuation.
Our disciplined approach to pass through in a context of rising interest rates, coupled with our ability to leverage a transactional funding base to mitigate the impact of rising funding cost has bolstered our Brussels.
These Florida gain senior fish transaction growth as we leverage intelligence capabilities in a volatile FX market. Nonetheless fee income fell this quarter fees were eliminated for transfers between different cities in September 2022, Accordingly, transactional fees paid to third parties.
Were up due to higher volumes.
The aforementioned grow west hosted by an increase in provisioning mainly in retail banking due to new macroeconomic perspective for inflation reference rates and GDP. Additionally payment behavior in the consumer segment was impacted by racing inflation finally, provisional expenses increase in wholesale banking over a low bar.
Last quarter operating expenses were also up due to seasonality in this context of return or better shape with D is 224%.
On a full year basis rules, a knit team was fueled by a 28, 5% increase in niche into receivables, which was bolstered by raising interest rate and a 12, 2% increasing a structurally long measuring of our daily balances wholesale banking grew 12.3 per se.
While retail banking expanded 12%. Additionally fee income increased 11, 3% fueled by enough teaching transaction, our leverage particularly through digital channels.
And ROE of 12, 4% in the next game English transactions, we manage FX volatility and roll out improvements in pro and channel offerings.
Loan loss provisions increased 55, 6% driven by the consumer and SME segments in the consumer segment payment behavior was affected by higher of 30 inflation and now you're neutrally low base in 2021 in SME teammate higher provisions respond to growth in higher <unk>.
<unk>, particularly through the new digital offense, which correlates with higher interest rates.
Operating expenses grew 13, 4% driven by growth in body will compensation, which was in line with hiring enough teeth in it expenses to bolster our transactions capabilities and an increasing investments in disruptive initiatives in this context bcp's efficiency ratio is too.
A 47% and it's R. O E R. 22%. These indicators reflect improvements of 270 and 230 basis points respectively.
Now please turn to the next as life.
Yeah.
More than 11 million users on eight 1 million active users. If we can see that uses to make at least one transaction per month yuppies closer to reaching its 2026 target of 10 million active users currently 42% of yuppies active user generated revenue.
And this number is on the rise.
We continue to see positive trends across most of our metrics, including the measurement of our transactional volume, which grew more than two six times. This year to reach $66 2 billion in 2022 with $19 five monthly transactions per active users jaap at the pumps are trending.
<unk> and reached $9 8 million in December this translated into market share of 25% of total pops in the Peruvian market.
That's one of the rules most important distribution channel yuppie is creating new sources of Ingalls for critical through Yelp, It promos and Yadkin micro loans by 2026, we expect 5 million affiliates will have access as if your national Pro three up.
Next slide please.
Me Banco reduced or a drop in profitability this quarter, which was primarily driven by growth in provisions I would like to look at the key quarter over to flatten dynamics. The company hit a record high for the Sportsman's and a peak in the sportsman yields helped us mitigate rules in the cost of funds, Nonetheless, where social impacted by.
The higher provision due to two factors first as anticipated with reduce it Ah you're unusually low base last quarter thereafter methodology improvements wedding related to the mall and second is specific vintages mature, which increase the portfolio the four ratio.
The higher risk reflect on these beans that is what's expected and drove our decision to review our risk appetite in the second quarter of 2022, melancon structural NPL ratio dropped due to an uptick in write offs and Institute a 5% was sold me Bancorp quarterly earnings dropped 68 bps linked quarter.
But from a full year perspective, net interest income grew 15% in 2022, driven by an increasingly structurally loans and in the sports win rates.
Provision expenses rose, 15% in 2022, which was attributable to loan growth and evaluation of our risk appetite.
Operating expenses grew 7% year over year, driven mainly by marketing and <unk>.
Expenses and by variable compensation, which reflected growth in earnings and fulfillment of commercial targets in this context, the efficiency ratio dropped to 51, 3% in 2022 right ROE year stood at 16, 5% on the Banco Columbia pricing strategies and significant longer.
Were challenged by a quick rise in the cost of funds, which reflected the evolution with market rates provisional expenses were well controlled and operating expenses grew in line with portfolio expansion initiative to develop new capabilities.
Next slide please.
Yeah.
Grupo Pacifico net income decreased 25, 4% quarter over quarter in the life business net earning premiums decreased over a particularly high base due to seasonal effects. This dynamic was partially offset by a drop in net claims of COVID-19 in the PC business net earning premiums increased.
In commercial lines due to an uptick in renewals. This evolution was partially offset by higher claims in commercial lines from a full year perspective beautiful Pacific close knit team rebounded driven by both the life and Pcbs.
In the life business net earned premiums increased driven primarily by group life through price adjustments and an increasing <unk> of the complementary insurance vertical based on our restaurants and secondarily by an increase in the affiliate base in disability and survivorship.
Positive dynamic was accompanied by a drop in COVID-19 claims which were substantial in 2021.
In the property and casualty business net premiums increased primarily in personal lines due to growth in sales of current protection pros through bancassurance and oncologic problems.
Medical assistance claim growth, particularly in the commercial line after economic activities normalize. These dynamics led to total loss ratio to stand at 67%, which is close to pre pandemic levels. In this context Grupo <unk> return on equity stood at 19, 2% this year.
Next slide please.
The investment banking and wealth management business wireless still challenged by market conditions have reduced a slight recovery in recent quarters on a quarter over quarter basis earnings rose driven primarily by capital markets would against who have reduced their inappropriate total fixed income portfolio.
And secondarily by corporate finance, where a number of deals were closed at year end asset management wealth management remained flat.
From a full year perspective assets under management dropped 18, 7% driven by fund outflows in Peru, and Chile, and decreasing market value of funds. In this context income fell 13, 1% primarily in asset management. This redemption will cure or at a high base last year, when we would do.
Is that a strong gains from anticipated redemptions and third parties upfront piece due to migration to offshore products in a context marked by political risk the change in the market environment led us to initiate a strategic review for this business, which is close to completion, we have to densify key levers to achieve long term profit.
The ability and are determining which business represent the greatest opportunity for ROE on which can be used as a platform to capture efficiencies next slide please.
Now we will talk about credit Corp, consolidated dynamics on a quarter over quarter basis, our interest, earning assets fell three 1% due to a drop in available funds investments and reactivity laws is structurally launch.
0.8% driven by retail segments in Nevada.
Patients in wholesale banking clients, partially offset this rule our funding base.
Four 7% is pure mainly by a decrease in demand deposits the positive impact of assets with pricing and higher yield assets.
Structurally help offset the increase in the funding cost in this context the yield on our interest earning assets rose 65 basis points versus an expansion of 29 basis points in the funding cost on a full year basis interest, earning assets and funding follow trends similar to those seen this quarter.
On the asset side, there was a shift in the mix, where higher yield is structurally loans, namely microfinance and consumer loan reduce or a higher roe than that seen in all of our segments in terms of our deposit base the mix tilt it to higher cost problems, where time deposits were up 23% leased.
Dynamics and the fact that we maintain a large share of the market transactional deposits less increasing our asset yields drove pace growth in the puzzle finally.
Next slide please.
Now I will discuss the evolution of scoring well on a quarter over quarter basis core income grew five 6% driven primarily by an increasing net interest income when sequent Lee the net interest margin was 42 basis points to withstand a 473% while the structural anemia stood.
$5 95 per cent Risa Justice NIM fell six basis points to withstand a 444%. Moreover, the named game and fish transaction also increased nevertheless, seeking gold fell four 2%.
Really primarily by the elimination of fees for intercity transfer and the decrease in free space for third parties, mainly to the higher transactional volumes.
On a full year basis core income grew 17, 9% fueled by growth in niche into receivable, which rose 23, 1% in line with an uptick in loan volumes and interest rates NIM grew 97 basis points and reached five point <unk>, 7% in 2022.
Risk adjusted NIM is stood a 427% net gains on FX transactions grew 17, 5% and also boosted the Koreans and resolve finkel rose four 2% driven by an uptick in P. O S transactions higher fees for personal loans disbursements and an increasing.
Bank to bank transfer the nine 4% increase in banking services fees was partially offset by your dropping people from mutual funds.
Next slide please.
I will now move to creating Florida structurally loan quality dynamics on a quarter over quarter basis, our structural NPL volumes increased slightly NPL volumes increase mainly in wholesale banking offer some clients in the retail wholesale sectors abated or refinancing after having been read.
Program during the pandemic on SME <unk> due to overdue loans with clients in a segment, which higher risk profiles, but also higher margins asset quality in each segment remains within our expectations and provision levels remain adequate the aforementioned increases were partially offset by a reduction in.
NPL volumes.
<unk> consumer loans due to write offs year over year similar to quarter over quarter. The increase in NPL volumes was driven primarily by wholesale.
SME <unk> and SME <unk> and the bank are expected.
To continue given that regulatory restrictions or charge off of loans to clients that processes bulk of destructive relative alone has been lifted.
Forbes just structural NPL ratio was basically flat at four 995% after decreasing NPL volumes wise was offset by higher loans balances next slide please.
Now, let me explain a structurally loan loss provisions dynamics on a quarter over quarter basis rolled in the struggle at provisionals, whilst delivering mainly by BCP on Mueller.
Main drivers had BCP, where updates to macroeconomic projections for inflation interest rates and GDP, which impacted retail banking in particular, the impact of high inflation and payment behavior in the consumer segment.
The main drivers were our new unusually low base last quarter and the maturity of a specific vintages, which led to the full ratios for the portfolio to rise.
On a full year basis structurally provision expenses increased 38% over an exceptionally low base and are moving towards normalized levels.
In this context, the strong total cost of risk stood.
Two point over 6% this quarter and 126% this year the structural coverage ratio stood at $112, 2% next slide please.
I mentioned last quarter, a significant portion of our annual expenses are reduced citizen the last quarter of every year.
To base, our analysis of comparable figures, we explain the evolution of efficiency in accumulated terms operating expenses grew 11, 5% in a full year basis, which reflected an increasing administrative expenses and in salaries and employee benefits.
Growth in administrative expenses was driven by an uptick in expenses related to cyber security new functionalities are significant higher DSL transactional volumes.
And an increase in expenses for fees, which reflect growth in transactions.
Finally, the acceleration and disruptive initiatives salaries and employee benefits grew 10, 5% driven by growth in variable compensation of Diana, peaking heightening of the specialist for disruptive projects.
In this context credit cost efficiency ratio improved 150 basis points on a full year basis, driven by higher chlorine cone at BCP stand alone and mobile if.
If we exclude investments in disruptive initiatives, such as <unk> the efficiency ratio for the year. It stands at 41, 6%, which represents a difference of 290 basis points from the reported figure.
BCP only bundle, which accounts for a significant part of operating expenses operating income grew faster than operating expenses in 2022 and in this context BCP efficiency ratio fell to 170 basis points and the balance was 410 basis points next slide please.
Okay reported full year profitability was fueled by better for solar cells, Universal banking and Microfinance and a solid recovery on the insurance front. In addition profitability was impacted by lower results at the holding level, mainly due to a decrease in net financial results and higher expenses for withholding taxes.
Net financial results at the holding were impacted by an increase in the negative carry of the senior bonds in line with the devaluation of the investments made with the use of these proceeds regarding taxes expenses at the holding in 2020 to the provision for withholding tax increase reflecting higher expectations of dividend.
As a result, our ROE for the full year. It stood at 16, 7%. This year 276 basis points for the level of 2012.
Finally note that Roe's for the first and second semester were somewhat higher than the full year figure.
And the equity balance at the end of June was lower this reflected dividend payments and the accumulation of unrealized losses at the end of the first half of the year now I will move onto the outlook.
Despite current political volatility and social unrest the roof microphone the maintenance remains solid and we expect Peru GDP to grow between one eight and two 2% in 2023 in terms of our loan portfolio, we expect our structurally loan portfolio measured in average daily bar.
That is to grow between 6% and 10% driven mainly by retail bank. The evolution of total launch will depend on the pace at which reactive or balances or amortize it high.
High levels of interest rates the shift our loan books to want a higher yield myths and our competitive funding base, we positively impact NIM. Accordingly, we expect NIM to stand between five 8% and six 2% the cost of risk guidance is between one 5% and 2%.
This range reflects higher uncertainty.
Im going trend back to pre pandemic figures at the segment levels.
The shift of our loan portfolio mix towards retail in 2023, we will continue to invest significantly in these of transformation is the growth initiatives to bolster our long term competitive position in this scenario the efficiency ratio is expected to situate between 44 and 40.
6%, India formation in context, we expect our ROE to situate our 175%. Finally, please consider that this guidance is based on the application of the <unk> poor accounting is Thunder. This may lead us to adjust these numbers he may.
As we implement <unk> 17 in the insurance business with these comments I would like to start the Q&A session.
Thank you we will now begin the Q&A session. Thank you.
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<unk>.
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A question.
We also ask that you. Please only ask one question at a time. After each question has been addressed higher coupon <unk> or money follow up with that.
But again, please only ask one question at a time.
Yes.
Our first question comes from Roberto.
Your honor.
It's bank of America. Please go ahead.
Hi, good morning.
From Bank of America.
How do you tackle that.
Thank you for the opportunity.
Bob.
That's my first question is on operating expenses.
Residents.
We have seen that trend in the region.
What gives you mean profitability merchant client growth.
I'm also looking for an accelerated pathway to monetize the clients.
Experience as the region has been to have you talk as well.
Loans to monetize with clients.
I imagine you would have been coming from both and Thats done.
Oh I'm sorry.
Although we have seen that stop bringing them more management marketplace.
On a more complementary products.
Not enough subordinate bonds.
Yes.
We have seen has been investing.
Thanks.
Those payments.
Exploring two lounge, unlike in place houses President index.
Among other EHR to each of you.
However, considering that they do.
So you are seeing there.
Competition online universities in Mexico, and Colombia.
What would it be with some level of reform.
Did you tell the strategy on that.
<unk>.
And then maybe you build the basket.
All the initiatives.
I would like to hear your thoughts.
And how should we expect in terms of operating expenses.
Thank you.
Hi, good morning, Robert.
Thank you for your question. So we mentioned I remember Paul if you close the previous call or two calls ago, we do see the new competitive environment as positive probably the exact same reasons you mentioned has positive for incumbents like us.
Because what.
What I call it hot money.
Somehow dried up for new ventures regarding our strategy. We do believe that the current strategy. We have is the right one.
A special mention I believe 280 basis points out of our cost to income of Oh, Great Corp was expense.
In north spend sorry in digital initiatives are that's within the range, we provided which is up to 300 basis points of cost to income on the up to 150 basis points of our OE. So we're on track we don't believe that we need to change our our commitment.
Regarding digital ventures, having said that what we're seeing is because there is no more.
Less new.
More money coming into these ventures that the path to monetization is gonna be faster Oh, the more mature the most mature venture we have which is <unk> is right on track and that says we're very positive positive.
What we're seeing we shared with you the number of active users was keep increasing the number of usage for the number of transactions, but are you Sir.
And also the number of users already generating income. So we're just either at a faster pace that we originally planned. So we're on track obviously is some of these ventures diverge, we will make the right there right.
Erection.
Thank you then my second question is on asset quality.
I don't know you can give us how much of the provision charges of the quarter.
Related to the assumption of glass backs on when looking to you cut your guidance.
Seems wider when compared to the ones you got it.
So you see.
I'll leave the question would be around one 7% and then the guidance is concerned about this.
Okay.
Question on rent increases.
Just wanted to hear your thoughts on that.
Yes Hello.
Yes, Robert.
Yes, I mean, our sensor has explained during his presentation. There are several reasons that are impacting the customer mix in the guidance for this year basically a return to normal levels.
In previous calls also the fact that the macroeconomic environment is challenging due to what we've been.
We're watching in their country in the previous number was massive actually.
And also.
Or the fact that we are.
In phosphate in the retail market in the.
Wholesale market.
Having said that I mean, there's still a lot of uncertainty for the following month.
Months. So that's why we have provided a guidance I was hoping between one five and two we.
The reason one of them would be some point in the middle of it.
I would say, it's a little too soon to have a precise number or the final number for the year.
Thank you very much.
Our next question comes from Tito <unk> Goldman Sachs. Please go ahead.
Okay.
Hi, Good morning, Thank you for the call and taking my question I guess my question is on your guidance I guess, particularly the ROE guidance.
Try to understand how do we get to that 17, 5% that you're expecting.
For this year I mean, I know margin is looking better than expected, but you know that cost of risk seems to be increasing and you know just taking though the <unk> number at one 9% and given the uncertain macro and political outlook and it does seem like you would be closer to that higher end of the cost of risk.
If not even above that so.
Just to try to see what youre thinking and get you to that 17, 5%.
Maybe if you can provide some what do you think that like on fee income growth or expense growth that will maybe help you achieve that thank you.
Hi, Tito thank.
Thank you for the question I think.
The numbers that we provided.
In the previous guidance work or hearing as a whole, but as you can see we had at the end a little bit more.
Cost of risk that in the middle of the range. So that explains the $16 seven per same basically and for the 2023 I would argue that we are.
Modeling something similar in the sense that the combination of the different factors lead us to have and around $17 five and I would like to Australia slightly previews calls that CSI is on that wound is not exact figure with the decimal points.
Regarding the specific question regarding race.
As Reynaldo already mentioned.
We have during the year that was expected to come back to more pre pandemic levels and at the same time to shift a more retail portfolio. If you see as a whole is nothing looks that the shift is radical between wholesale and retail but within retail we have been growing significantly faster than consumer.
That being hold a mortgages for example, so.
The risk profile has changed we expect the same behavior. During 2023, so if we take out the specific events that impacted the fourth quarter, we consider that the range of cost of risk between one 5% and 2% is reasonable according to and I go into review the general trend and.
I come back to the risk profile on a segment level.
<unk>.
Worth a more retail portfolio the specific short turning fast off day, a political races that are going to impact the last quarter of year last year in the first quarter and this year and.
<unk>.
I will say if you put all of this in a package led us to believe that this range is reasonable.
Don't know that this helps you.
Yeah, no that's very helpful.
Maybe just to try to triangulate everything and any color you can provide on the fee income growth and also expenses I know you gave the guidance for efficiency.
Just any color just on the specific growth in El Salvador, and particularly I guess Im expenses, because you know just given all the investments that youre doing.
And any color you can give on the growth that you expect in those lines.
Yes, probably.
Additional comments in terms of fees.
We mentioned at the beginning of last year that we have experienced a significant rebound in specific lines of fees.
Later for example in the Banco do they come back off the sportsman that are aligned with the specific commissions in the case of DCP transactional activity doesn't rebound very significantly on well above pre pandemic levels propelled by our digital capabilities, but this significant rebound hustle radio appeal and now.
What we are going to have a sudden increase more aligned with business volumes in the asset side and increased digitalization and transactional.
Transactional capabilities in the deposit side, but not at the same pace that at the beginning of 2022 for this recent as a whole the fee income is going to grow less than the net interest margin and in terms of expenses.
I think the general trends are going to be similar but with different rates with us in 2022.
A slight increase in variable compensation.
And a significant increase in two or three accounts.
Expenses to increase product offering transactional activity volumes that are growing significantly.
Yes.
Market associated expenses and.
And lastly.
This disruptive initiatives that aren't growing income faster than expenses, but as a whole is still impacts decor.
The efficiency ratio being more significantly in relative terms.
Okay.
Okay, great. Thank you Seth.
Our next question comes from Charles.
Elliot with autonomous please go ahead.
Oh Hello, Thank you very much for taking the question.
I wanted to dig in a little bit more detail into the Mi Banco vintages that you mentioned can you give us a little bit more detail on those on those loans when they.
Originated what the characteristics of the customers want and also help US understand why are we seeing the increased provisions now if it seems like this has been a known issue for a couple of quarters and you adjusted underwriting I think you set back in the second quarter. Thank you.
Hello.
In the terms of the specific vintages, we got you.
You have seen in the in the first semester quite important in growing the Alco portfolio.
We are quite optimistic on the evolution or the performance of those co segment the market.
We said that we identified by by the end of the first semester.
Some specifics.
Increase in the quality.
Those segments, So we decided.
Put a hold on our strategy on the second semester, our rough expectation for that.
Portfolio, where called best buy but right that event.
And that's basically what has happened.
If you haven't been maturing.
We are.
Ending up the process.
Identifying the losses associated with those segments.
That's basically what that is.
Great. Thanks very much.
Yeah.
Our next question comes from Gary Fernandez with J P. Morgan. Please go ahead.
Thank you.
I have a question regarding just hung up on People's on efficiency, when we look to our guidance. The margins are very strong right like you.
For loans growing six Japan, Naeem explained the points of 90 bps.
Well my only blocked due to your NII. It does imply I didn't know like Martin, 20% NII growth you can assume interest, earning assets will grow and I think they sense right. So it's a very solid pop.
Bottom line, but looking at your own efficiency guidance.
Versus this year right and this year I guess, you had the bulk of lab and 12%.
<unk> growth.
The median and it's totally clear the digital information that's towards me a good job, but given your main revenue line NII should grow above 20%.
Our calculation is correct, what's going to happen with expenses like that are you calling for a search engine.
Like should we see.
<unk> expenses are approaching those 20% levels or no. It's a combination of fees as we were discussing previously.
It's a little bit here when they see these expenses you know because I get it you have a decent investment plan, but given the revenue that should be so strong I'm not getting more like if we should consider G&A I've seen or AP as much. Thank you.
Yeah, Judy I think is huh.
Are there any sensible question I think is very reasonable one I just tried to explain this way.
Thinking of P&L, we have the net interest margin as you mentioned driven by the NIM and the volumes is going to have.
An important increase the combination with volume and higher Nims.
<unk> through the year.
The second source of income is fees for the reason that I explained previously the fee income is going to rule and then a slower phase than before more attached to the volume of a number of specific clients that the significant rebound at the experience at the beginning of last year.
And also in FX, although we continue to deploy significant capabilities last year, we have a number of very specific volatility events that we capitalize on that we cannot project that are going to cure again so.
Summarizing the income part very solid in terms of margins and slower growth in terms of okay. This is part of the explanation. The second part relates to expenses as you point out we plan to continue investing heavily in developing capabilities.
Inside the business units and in the disruptive once inside the business units the growth is going to be.
In line with the expansion of client transactional activity and so on and in terms of the disruptive initiatives. What is going to happen is that although the income of these initiatives are going to grow at a faster pace.
Then the previous year and is starting to be significant a contribution.
<unk> cost base are also going to increase and the relative weight of the disruptive initiatives are going to be bigger than.
The previous year led has a very simple example, and the figures have not excited at all if I. If I have an efficiency ratio of the disruptive initiative of 150% to say something because we are still lose money, but the total size is 100 <unk>.
<unk> done when we have a 110% efficiency ratio that is a significant improvement, but the relative size have been doable.
I am unclear.
So the combination of almost NIS four o'clock.
Explains why we having a significant increase in net interest margin, we still expect to have an efficiency ratio that if you see the margins are not very different from the 2020, you're accurate figures.
No that's super clear and thank you for all the color and explanation and just the final.
Efficiency like.
And I guess you already discussed this in previous calls, but what should be the target for let's say two years from now like you do see these efficiencies going to 40 like because as I said there are some components here. They are they are kind of maybe it takes hold expense right.
Some kind of Capex developed from abroad. So at some point.
We should see G&A coming down tomorrow inflation like levels right. So when that happened what is the level of attrition.
We should expect for our core credit Corp.
Yes, I am going to provide you a figure that reflects that we have already communicated to the market in the digital day and these are not round.
143% that reflects a number of changes in our composition, including the relative weight of the disruptive initiatives in our P&L that continues to have the factor that I mentioned, a more efficient by itself, but bigger in relative terms to the whole portfolio.
Perfect. Thank you.
Okay.
Our next question comes from one call day with Scotiabank. Please go ahead.
Okay.
Hi, Good morning. Thank you for taking my question. My question is related to deposits and funding.
<unk> deposits have been relatively flat year on year in 2022.
At the same time, we saw no cost deposits decreasing as a percentage of total funding.
Interest bearing deposits increasing.
So how should we think about deposit growth and the funding breakdown evolution for 2023.
And what role do you think Zap income.
In deposits growth on breakdown.
Thank you okay.
I seem to understand in the short term dynamics, we need to come back to the pandemic period because.
So the pandemic, we have a certain structure and the funding based on the relative sizes of the low cost deposits in the financial system and during the pandemic that was a significant infuse or low cost deposits. If he if I can remember.
In relative terms, we have the impact of reactive us as you'll remember, we're almost $60 billion of reactive us with 50 something billion funds of the Central Bank that received late in the economy.
Being very much transactional deposits significant short term and pulls for that another.
Source what the.
Impact of the releases of the paywall pension funds five releases a lot of these funds temporarily went to short term deposits I'm. Finally during some period of time that people, who had income you didn't have the opportunity to spend so much money due to the restrictions in the economy. The combination of these three factors in.
Increase the float in the transactional deposits in the economy and at record high levels, and we capitalize that using our transactional capabilities. So we are not.
Not only capture our share, but we increase our market share when we start to normalize economy. All of these factors is starting to dilute or reverse for example that people start to start spending money again.
There were not a significant disbursement from the pension funds and more importantly, the reactive out were paid so at this point around 60% of the initial reactive or fund, 55% royalty off and has already been paid that is liquidity that you would take out of.
The market.
In addition to that we have a significant increasing interest rates. So the opportunity cost for the people who have excess deposits increases from zero point, 25% to almost 8% sort of the composition is and given that our tenants explained for that what we expect is that the field.
To come back not to pre pandemic levels, but something between the very highest importantly levels than pre pandemic levels promoted for digitalization, our transactional capabilities what role plays Jaap being all of these we have measured and when you utilize money in.
Going to the bank and take all the bills you, let the money in the bank and you may youll payments only with electronic transfers and the avalanche figure that we have identified is that our round, we can maintain 25% or 20% of the average restaurant volume of a client.
As an additional transactional deposit so it's a significant and valuable contribution measure that to measure the performance of the IP as a whole.
That's very helpful. Thank you for the comment.
Okay.
Our next question comes from Sarah Gubbins with Harvey Wagner.
Go ahead.
Yes, good morning, gentlemen, I have three questions are just going to go one by one.
The first one regarding loan growth. So you said <unk>.
<unk> for Sox, how loan growth of 6% to 10%.
Of course that you know.
What I'm understanding is total loan growth.
I would I would.
I would guess it would be around zero or 1% because.
Steve.
And now 7% I think of your total loans. So implicitly you believe that we have.
Steve our loans would be fully repaid.
So let's talk for all six to 10, let's call it seven and a half.
Once <unk> is repaid.
Alright.
Correct assumption no.
Yes, that's a reasonable assumption, but as we stated the.
The impact of reality like the P&L is very marginal.
Moody's jumped around Gulf. So your assumption is correct.
So basically will be very flattish in terms of total loans.
So if I didn't mention reactive out loans have basically no margin so.
So the impact on margin is completely different.
Okay. Good.
Thanks. So my next question regarding the margin so.
If I look at you know again, no guidance youre, assuming a pretty significant NIM expansion.
Said that.
Right.
Impact of that as it is.
The thing at all.
It's margin accretive because these are very.
But I guess, how much of that NIM expansion that you are assuming its coming from that mix shift to retail and you spoke about within retail you go onto.
Higher <unk> and things like that.
How much of that is structural.
I mean by mix shift and how much of that is still from the interest rate delay them back of interest rate increases.
I see.
I think the direct answer is that the rates are a significant contribution because the average rates of 2023, we expect are going to be higher than the average rate of 2022, even though the trend is different.
During 'twenty two with an upward trend in 2023 is going to be at some point a downward trend, but the average of the year is going to be higher. So this is going to be a key component of the expansion of the NIM and the second factor.
Less significant because it's more gradual is the shift in the portfolio composition as you mentioned.
Okay.
Okay. Okay got it and then the final question.
With regards to this new bond call.
So here's what I'm not understanding.
And you have a slide in your presentation that.
Mature vintages.
<unk> led to the default ratio in this portfolio at Verizon.
<unk> you too on the cost of risk.
So in your slides, but then when I look at your presentation. When your earnings release. There is a chart that shows I think it's on page 19 that shows them.
Cost of risk total NPL, sorry, structural NPL ratio for the various businesses in that one shows that new bond girl has actually declined in December 2022% to 496%. So it's anywhere from 7% in 'twenty one.
And it's been a gradual decline and it's already like under 5%. So my question is that.
How can I how long.
Should I think about the disconnect between your NPL ratio trajectory in your cost of risk trajectory with respect to me Banca.
Well.
Yes, basically I mean that the improvement in the NPL ratio basically response too.
The aggressive write off our strategy, we have implemented in Iran and.
And that basically reflects grades alone is already.
100% for emissions.
I remember that besides of the specific things or the specific case of the vintages I'd mentioned before it also reflects that.
The challenging macro environment that we are facing in 2023 that is incorporated in our projections or of the expected low.
That is loss calculations for the year ended 222, so they are on that.
True mix factors.
Okay.
I just wanted to be very clear, so you're saying that.
The reason your NPL ratio has declined is because youll written off some loans, which are nonperforming right. So you accelerated your write off policy with respect to those loans correct.
Correct.
And an important percentage of those write offs, where we're basically.
Due to the fact that we have.
Also reading all the reactive of loans and we write off the whole positions reactive.
Cloud Depositional Bay directly with me.
Banco funds not guaranteed by the.
Governments.
Okay, Okay, and then regarding.
The cost of risk, you're saying, because this higher inflation and higher.
Potentially like higher defaults or anything you can speak people maybe are squeezed in terms of income.
Now I would think that your models or your cost or whatever you are.
<unk> model is telling you that the cost of risk for these loans should be higher right. That's like an assumption like why don't you sit into the model and it spits out higher cost of risk because that's all that right.
The fact that that's real.
Depending on the on the $5 nine across a range of.
Last quarter of 2022.
Okay, and then and then the very final question I heard something very brief mention about.
Yes.
Thing about 17 implementing in your insurance business.
First of all what that's all about and second is our big impact is that.
And when material or not.
Hi, Thank you for the question no we believe that the initial impact of the.
78 will not have an important or material impact in credit cards.
Our in Pacific ores equity only as a reference and.
<unk> equity represent 8% of equity.
On our first estimates.
Sure.
Around.
We will need an increase in.
Around 2% of their reserves are 8% of all the total equity in.
In empathy because equity so the impact at the end won't be material costs.
Cost of labor.
Okay. Okay understood Alright, that's helpful. Thank you very much.
Okay.
Yes.
Our next question comes from Andres Soto Santander. Please go ahead.
Good morning to all and thank you for the presentation. My question is.
Regarding your asset quality outlook vis vis produce current oh.
Political and social environment.
Which areas are you concerned about or you before mentioned tourism as an area that means how far in the current context, so I would like to understand better.
What we're doing.
Are you concerned about if this situation prolongs beyond the first quarter that you mentioned.
Which which pockets of your business may start to suffer without this exposure to the tourism industry or how concerned are you also on your microfinance exposure. Thank you.
Yes.
Digging into the wholesale market.
We are we have we are.
Wow.
Somewhat concerned.
Might happen in tourism industry is growing at our commercial real estate.
Having said that those those portfolios are local otherwise we have a real estate behind it so.
A matter of patients and providing.
Providing those black with unnecessary helps to go through this crisis.
We hopefully will see better times.
In the following Nevada with months, that's basically on the wholesale markets in terms of retail.
Of course, the specific low.
Low segments of both consumers and SME portfolios or are the most affected.
But.
We did in the pandemic, Kentucky.
Conducting them very aggressively to provide them that doesn't necessarily help.
And in different ways.
The experience on that probably drives us a lot in there.
Are you finding some different alternatives.
At the end.
We saw that in.
A much lower default rate than we initially expected so.
These are the segment that probably are going to be most exposed to this reduced scarring through this current crisis.
But I remember.
So as I mentioned those are.
Loans that generate better margins.
<unk> done that regional.
Segments on both consumer and SME portfolios.
Thank you very much on that but remained strong at Brisbane on commercial real estate how much of your loan book is exposed to these segments.
It's not I don't have a precise number but it is not that big.
There are specific.
Specific cases.
And we have basically the hotels are all over the country, but basically concentrated in Lima, So I mean, we.
Yeah.
The effective.
It's quite manageable.
For the industry as a whole.
We have seen before is basically a monitor uptime and providing them the necessary time to go through the Novartis.
Understood. Thank you very much.
Yeah.
Our next question comes from Karen <unk>, My my Gosh with <unk> capital. Please go ahead.
Hi, Thank you for the opportunity.
I have two questions. The first is a bit of understanding of the provision flows. So we have around.
750 million provisions in them.
In your terms this quarter, which is higher than last quarter, but just that and for $16 million, but the overall stock of allowance for loan losses on the balance sheet has gone down to 787 billion from 8.0 today.
And the write offs also.
On a consolidated basis is lower than last quarter by some 54.
It sounds like 12 million, so be higher provisions, but lower write offs and lowered our allowance for loan losses. So could you. Please help me understand that.
The extra provisions have gone that's my first question I'll come back with music and thank you.
I don't know if I got your.
Your question correctly basically.
We've grown with the provisions because of the reasons we'd have explained.
Remember that some of the provisions that are there.
Our required for specifically the wholesale segment.
It's well below ly.
We have granted coverage ratio.
Requires less permissions then.
On the retail sector, and so I agree with your sentiment.
Usually a written off a lot faster than that.
The other portfolio.
I'd rather behind.
So that's basically the general macro foundation or local restaurants.
Got it alright.
Understood and can you comment on the recoveries and upgrade issue from the stressed loans and how the cost write offs recoveries have been this quarter compared to the last one.
Okay.
I mean basically we've seen.
Like a stable level.
Recoveries of written off loans.
Loans on it.
So basically we are we haven't seen an important change in that number and in the last few quarters.
Thank you and my last question is on <unk>.
This 11, specifically in the SME loans.
It has gone up to 36% from 36%.
Is that just.
They intend.
Do you think that's because of the current.
The macro political environment and is that any John .
Yeah.
Position.
Below the portfolio assessment.
So maybe I can take that one.
Regarding that.
Our funding sources.
No limits whatsoever because of their current political.
Iterations.
If I got it right you said, 36% of the SME portfolio.
That number.
Sorry, I'm checking the numbers.
Semi is SME business, thus the mid market companies.
Well that's up quite.
Right.
It's going from 36 to 36 over the last year, that's basically because those are.
The companies that have dollar exposure are related to dollar generating businesses, either they export directly or their suppliers to exporters. So we have no concerns regarding that.
Foreign exchange exposure in that segment.
Understood. Thank you.
Does that mean.
Yes.
Our next question comes from Carlos Gomez with HSBC. Please go ahead.
Hello, and thank you for taking my question.
It's more of the economy political site.
How concerned are you.
Okay and what impact.
The currency surfaces Hot.
<unk> operations on a day to day basis.
And.
Do you see the situation better or worse today than you did six or 12 months ago.
Hello, Carlos this is gianfranco.
We're going to offer you.
How much more concerned or less concern in my mouth today as compared to yesterday.
Hum.
[laughter] really difficult question.
There's a lot of volatility in terms of political noise some turmoil in his heart.
This is a very.
Personal opinion and I'm not sure I'm sure all of the people that are sitting at this table because they may not have the same opinion, but I do see light at the end of the tunnel.
Unfortunately, the prior government.
<unk>.
There's a lot of this is based on public information there are lot of judicial.
Judiciary processes to the prescient.
Ministers, and the executive power and so on because of corruption on top of that the lack of capacity of execution.
Very high.
So I would say we are more positive.
And what we see going forward, obviously, there is a lot of political turmoil and social unrest today, we can generate in the problems we've been talking about over the last few minutes, but overall, we are more positive today compared to I don't know six months ago or three months.
Ago.
Thank you and in terms of the impact on your operations.
In terms of it.
Operations, we have had some two answers there.
We have had some operating issues at BCP, which with my list.
Correctly.
Basically we have to.
Shut down some branches.
Even though none are already basis.
Daily basis.
But that hasn't had a major impact whatsoever.
Encore has been seen sleeve uncle operating much more rural areas.
Because of a dull, but the micro finance business.
To me Banko branches, where burn those branches are closed today.
Luckily no first of all.
In terms of our employees.
Nothing happened in terms of a personal impact.
What we're concerned there is a tiny small portfolio around 80 million and saw this as well.
Somehow concern because.
Of the lack of capacity for our clients of word logistics.
Problems will work to pay on all our sites on how to collect so those are I would say on the operational side the majority of markets.
Thank you very much.
And it appears there are no further questions at this time I will now turn the call back over to Mr. Gian Franco Ferrari Chief Executive Officer for closing remarks.
Thank you all for your questions.
Right the near term outlook, which involves more of uncertainty we will keep delivering based on our brokers executing on our strategy and advancing the many initiatives we have underway throughout 2023.
Wherever we've proven as we have always been in managing risk given the current local environment.
Although it's still early to accurately estimate the potential impact of current social unrest in our economy and our businesses our guidance of maintaining our ROE in the high teens in 2023 includes our best estimates based on information we have today we're in.
NIM will continue to increase as the period of high levels of interest rates could be prolonged and our loan portfolio continues to shift towards retail.
Cost of risk will continue to normalize towards pre pandemic levels.
Finally, we expect to reduce their high single digit growth in the loan.
To make this possible we will continue investing in digital is in our traditional businesses and disruptive ventures.
I am hopeful that the next general election brings the stability needed to rebuild the country in an environment of bis democracy and inclusion bedroom.
Pedro still maintains the institutional framework and macroeconomic fundamentals, which led the country to 14 consecutive years of poverty reduction prior to the pandemic. We hope that those that are elected protect those fundamentals embraer by solving the structural problems in Peru.
Widespread poverty and equal access to health and education.
We are committed to contributing to achieve the goal of poverty alleviation, which is closely tied to increasing financial education and inclusion.
Coronary hitting our financial inclusion agenda, we can support the efforts of those that are the list include women the elderly people living in rural area as well as those of lower social economic and educational levels to achieve greater levels of security through savings rates of income generation.
And economic independence.
We also believe that they will have an important opportunity for advancement in the context of the global energy transition process.
The prior government of wasted opportunity of positioning our country as a leading participants in this process.
The energy matrix will change fundamentally in the next five to 10 years due to environmental and resulting policy changes with investments shifting away from fossil fuels to renewables.
Global demand for metals is growing exponentially as government's committed to advancing energy technologies capable of addressing the climate change and the ASEAN region should be a key supplier of these required metals.
If only our governments can focus on stability of strengthening our fundamental infrastructure needs. Then we can realize a rich more quickly there's tremendous potential in front of us.
Therefore, having a positive impact on poverty reduction and improvement in education and health services.
Thank you all and look forward to speaking with you on our next call.
Thank you ladies and gentlemen, this concludes today's.
Presentation, you may now disconnect.