Yahoo Finance Credicorp Ltd. (NYSE:BAP) Q1 2024 Earnings Call Transcript
Credicorp Ltd. (NYSE:BAP) Q1 2024 Earnings Call Transcript May 10, 2024
Credicorp Ltd. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, everyone. I would like to welcome all of you to the Credicorp Limited First Quarter 2024 Conference Call. A slide presentation will accompany today's webcast, which is available in the investor section of Credicorp's Web site. Today's conference call is being recorded. As a reminder, all participants will be in listen only mode [Operator Instructions]. Now it is my pleasure to turn the conference over to Credicorp's IRO, Milagros Ciguenas. You may begin.
Milagros Ciguenas: Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Alejandro Perez-Reyes, Chief Operating Officer; Francesca Raffo, Chief Innovation Officer; Reynaldo Llosa, Chief Risk Officer; Cesar Rivera, Head of Insurance and Pension; Carlos Otello, Mibanco, Chief Financial Officer; and Diego Cavero, a Head of Universal Banking. Before we proceed, I would like to make the following safe harbor statement. Today's call will contain forward looking statements, which are based on management’s current expectations and beliefs, and are subject to a number of risks and uncertainties, and I refer you to the forward-looking statement section of our earnings release and recent filings with the SEC.
We assume no obligation to update or revise any forward-looking statements to reflect new or changed events or circumstances. Gianfranco Ferrari will start a call with opening remarks about our improved microenvironment and brief comments on our strategic initiatives. Followed by Cesar Rios, who will present in more detail the evolution of key macro figures, our financial performance and revise outlook for 2024. Gianfranco, please go ahead.
Gianfranco Ferrari: Thank you, Milagros. Good morning, everyone. Thank you for joining us. Despite our strong structural microeconomic figures, the persistent fragility of the government and its limited capacity to implement timely policies aimed at stimulating investment and economic growth has prompted S&P to downgrade our sovereign grade rating to BBB minus. This downgrade is expected to affect the investor appetite for our countries. In our view, however, we do not expect the economic growth agenda that has been put in place this year by the executive branch to change prior to the 2026 general elections. The overall economic outlook remains positive with expected GDP growth revised upward to 3% in March from the previous projection of 2.5% committed in our last call.
Beyond better weather conditions benefiting the fishing, agriculture and textile sectors as El Nino has ended, several factors support a gradual recovery of economic activity during the upcoming quarters. Copper and gold prices have increased significantly and are expected to remain high, a lower inflation rate, which will benefit consumers. And lastly, the stimulative effect of counter cyclical economic policies, such as a lower central bank policy rate and higher dynamism of public investment, which will start to feed in to the economy. Despite its challenges, the Peruvian government has placed explicit focus on promoting investments to contribute to business confidence recovery. In the first quarter alone, awarded infrastructure investments reached $3 billion.
Additionally, the government's plan to establish a unified office for infrastructure investments marks a significant step forward. Economic expectations indicators have trended up upward since the end of last year. Anticipated loan growth is on the horizon as private sector confidence strengthens. Additionally, inflation stands low compared to other Latin American countries and formal sector wages have experienced recent growth. The Congress’ recent approval of the seventh withdrawal of pension funds underscores again the need to reform the current private pension model in Peru. Turning to our first quarter results. We delivered a strong ROE of 18.2%, including the impact from the reversal of provisions at BCP and Ivan. This was achieved in the context of weak loan growth and an economy that is slowly starting to recover.
Risk adjusted NIM remain resilient, reflecting our disciplined interest rate management strategy, further supported by lower provisions and our leading low cost funding position. Additionally, our strong solvency has allowed us to increase our dividend to 35 soles per share, while also contemplating our plans for continued sustainable growth. Our resolute focus on advancing innovation and strengthening our digital capabilities has fortified our competitive moats. This has not only elevated our relationships with current clients but has also contributed to expanding financial inclusion. With respect to the macro backdrop, as I just mentioned, we anticipate a sustained economic improvement during the year, and Cesar will discuss this in more detail shortly.
Now moving on strategic developments. We remain focused on strengthening our core businesses, while also complementing them with disruptive initiatives. As one of the few banks to embrace self disruption to remain ahead of the competition, anchored in allowing clients to decide where and how they bank has been evident since Credicorp's inceptions. These strategic initiatives position Credicorp for continued digital advancement and customer centric growth. At Mibanco, which mainly provides financing to micro businesses, we are reaffirming our hybrid model strategy. This strategy leverages high touch and personal visits from relationship managers and digital tools, including centralized risk assessment. After making significant adjustments in terms of pricing and origination guidelines over the past six months, we're observing improved payment performance in new vintages.
Additionally, we're now selectively growing within the lower ticket, higher yielding segments that have relatively better risk profiles. Our planned advancements are on track and we expect a rebound in profitability at Mibanco this year. I want to take a moment to address a question we have been hearing from you on the road. Related to the contentional overlap of Mibanco and Yape clients. Yape prioritizes consumers at its lending business and Mibanco provides financing mainly to micro businesses. While we acknowledge that there is little distinction between the pocket of the individuals and the micro entrepreneurs, the lending business at Yape is at a very early stage and we're a long way away from seeing an overlap. Now let me turn the call over to Cesar who will discuss in more detail the microenvironment and the operational and financial performance of our business units.
Cesar Rios: Thank you, Gianfranco. And good morning everyone. As Gianfranco mentioned, we deliver a strong overall operating and financial results. As I discuss the highlights of the quarter, I will focus on the year over year results, which are not impacted by seasonality. Our loan mix shift towards retail, coupled with the repricing of our dollar book allow us to deliver higher NIM despite a reduction in interest rates in soles. Total loans dropped 3.1% measuring average daily balances, driven primarily by lower volumes in wholesale banking, amortization of government program loans. The share of low cost deposits in our funding base stood at 53.7%. NII grew 9.4% boosted by the aforementioned dynamics. Other core income, which is the sum of fee income and gains in FX operations also evolved favorably, boosted by BCP and to lesser extent by Credicorp Capital.
Core income at BCP benefited from monetization initiatives at Yape and solid transactional activity through credit and debit cards. Lastly, insurance underwriting results dropped 5.8%, which reflected a reduction in income from disability and survivorship products in the life business. The cost of risk increased to 2.3%, which incorporates a 250 million re-leasing provisions associated with El Nino. Throughout this presentation, our analysis of provision expenses at cost of risk will isolate the impact of El Nino provision registered in the fourth quarter of ‘23 and reverse in the first quarter of ‘24. We will refer to these adjustments as isolating the impact of El Nino provisions. After adjustments, cost of risk increased to 3%. the devaluation was driven by a deterioration in payment capacity and SME payment and credit cards and by a downturn in payment performance in consumer loans.
The MPL ratio rose 77 basis points to 6.2% as delinquency increased across various segments and in older vintages in particular. As a result, MPL coverage stood at 93.5%. All in all, we delivered strong results on the back of solid growth in our margin and uptick in transactional activity and disciplined cost control. In addition, we recently announced a 35 soles dividend per share payout as we push capital levels closer to target across our subsidiaries. Next slide please. The Peruvian economy is gradually recovering from a very challenging 2023. Economic activity grew 2.8% year-over-year in February, its best print in almost two years. Furthermore, all the expectation indicator from the macro central bank survey stood in the optimistic range for the first time in five years and remained in that range in April.
Even though, we expect a slow down in economic activity in March, a rebound should follow in April. The global economic outlook has also improved. Recently, the IMF upgraded is 2024 World GDP forecast as positive indicators continue to point towards a soft landing. Importantly, commodity prices, particularly for copper and gold, which combined represents around 50% of our exports, have raised significantly and are expected to remain high. Peru has accelerated public investments, which increased 40% year-over-year in real terms in the first quarter, representing the highest such increase reported in 14 years excluding the pandemic. ProInversión announced that as of April, 2024, the government has already advanced 48% of its 2024 goal to award $8 billion in public private investment projects.
This goal is more than triple the amount awarded in 2023. This positive backdrop has been clouded somewhat by a Standard & Poor's downgrade of Peru's sovereign credit ranging to the lowest rank to qualify as an investment grade country. The agency indicated that this change was motivated by political uncertainty, the actions of a fragmented congress and a weak executive branch, which negatively impacted investment sentiment in the private sector and constitute an opportunity cost to growth in this context. Peru's capacity to rebuild fiscal space is challenged. Given the aforementioned and despite political noise, we forecast Peru GDP will grow around 3% after highly negative shocks last year due to poor weather conditions and heightened social turmoil.
Next slide please. In United States, a strong economy continues to surprise. In fact, due to better than expected economic data and hot inflation ratings, market participants have pushed back their fed rate cut expectations once again, hence higher for longer dollar rates will continue to pose a dilemma for emerging markets. In Peru, inflation has continued to slow and it stands within the Central Bank target range. Since September 2023, the country's Central Bank has put its policy rate 175 points. In Colombia, inflation remains among the highest of the region and stood at 7.2% as of April. Accordingly, the country's Central Bank has adopted a cautious stance and has lowered its policy rate by 150 points since December. Finally, in Chile, inflation is gradually converging towards target.
In response, the Central Bank has cut its rate by 475 basis points, since its peak. Next slide please. BCP delivered a strong result, which in part reflected a reversal of provision set aside last quarter for anticipated El Nino losses. Analyzing key quarter-over-quarter dynamics, total loans measured in average daily balances fell 1.4%, driven by a contraction in wholesale loans and repayments of government program loans in SME payment segments. NII rose 1.5%. This evolution was led by a drop in the funding cost after term deposits were renewed at lower rates. Interest income increased quarter-over-quarter as we profitably managed our liquidity balances in the context of lower loan growth. The provisions expenses after isolating the impact of El Nino provisions increased mainly mortgages due to a base effect and SME payment due to weaker payment capacity of clients in a context of gradual economic recovery.
Other income grew 3.1% fueled mainly by a strong volume of credit card transactions to higher fee channels and secondarily by fee income at Yape. On a year-over-year basis, NII grew 9.3%, driven by loan mix shift towards retail and pricing improvements. Loan loss provisions excluding the reversal of El Nino provisions increased 65.7%, driven by deterioration in payment capacities in SME payment and credit cards and by a downturn in payment performance for consumer loans. Other income was up 10.5% underpinned by solid growth in the fee income through Yape as well as credit and debit card transactions. Operating expenses increased 8.1%, driven by an uptick in expenses for specialized IT personnel and disruptive initiatives. In this context, BCP's contribution to ROE stood at 24.7%.
Next slide please. Yape continues to grow and in March registered more than 11.5 million monthly active users, who conducted an average of 36 transactions per month. 75% of these active users already generate fee income. Improvements in the lines of business and their functionalities is pure growth in engagement, fee income and NPLs. At the end of March, Yapero used an average of 2.2 functionalities a month. Fee income generated to Yape increased 24.1% quarter-over-quarter and the NPS reached 78. As a result, Yape obtained an income per active user of 3.7 soles while expenses per active users dropped to 3.9 soles due to seasonal factors. Yape is closest to reaching breakeven in coming months. Next slide please. To reach breakeven, Yape is accelerating income growth by diversifying its sources of revenue.
To achieve this, it has been adding functionality to three lines of businesses. Yape Payments business is the top revenue producer and has gone from offering P2P payments to processing a portfolio of fee generating functionalities, where mobile top up is the most mature and bill payments payment with POS and checkout functionalities are gaining traction. Within the financial business line, in addition to the margin received for floating base on deposit balances, we have two products that generate income lending and insurance. Within lending, disbursements of single installments and multi installments loans grew 2.24 year-over-year. In insurance, we currently provide a statutory accident insurance for vehicles and plan to extend our offerings in the short term.
The financial business line is still in the early stage. We are developing differentiated risk management capabilities based on the unique relationship and level of engagement that Yape has built with its users. Finally, within the marketplace business, we have new features such as Yape Promos and Yape Tienda. Yape Promos offers Yapero discounts for consumption and affiliated restaurants, cinema and other establishments. The gross merchant volume for Yape Promos grew threefold year-over-year. Yape Tienda was launched in September and offers appliances and electronics via e-commerce. Next slide please. Moving on to Mibanco. On a quarter-over-quarter basis, total loans measured in average daily balances fell 3.1%, driven by stricter origination policies as we continue to fine tune our risk models and processes.
Additionally, we are selectively starting to grow our small ticket higher yield loans. NII increased 1.4%, mainly due to a drop in the cost of funding, which was triggered repricing of the funding base. In this context, NIM increased 7 basis points and stood at 13.4%. Provisions, isolating the impact of El Nino provisions increased 29.2% due to higher delinquency related to all vintages. For year-over-year perspective, NII was up 5.3% due to an uptick in interest income as active loan pricing management mitigated the impact of our loan contraction. The swing in NII was offset by a rise in the funding cost. Provisions, excluding reversals for El Nino, provisions fell 10.8%, mainly due to a base effect given that the first quarter of ‘23 more provisions were required due to social and climate events.
Operating expenses rose 2% over the same period and remain under control as we continue to invest in digital capabilities. In this context, efficiency has stood at 53.3% year-over-year with ROE reached 13.2%. Mibanco Colombia has been challenged by a deterioration in economic conditions and ongoing high inflation, very high funding rates and a reduction in the interest rate ceiling. We have a profitable growth strategy where we have to slow down the growth rate of the portfolio by emphasizing risk control and efficiency. We remain committed to long term potential of this business. Next slide please. Profitability, Grupo Pacifico expanded this quarter with ROE standing at 28.9%. In quarter-over-quarter trends, insurance underwriting results remain relative flat as favourable dynamics in the property and casualty business were offset by lower results in the life business.
It is important to note that the disability and survivorship product continue to demonstrate sequential expansion as the anticipated decrease in revenue was offset by a reduction in claims. Despite flat underwriting results, net income grew 60%, bolstered by a base effect as non-recurring expenses were reported last quarter and an increase in non-financial income. From a year-over-year perspective, Grupo Pacifico net income dropped 2%. This decline was primarily attributable to a drop in life insurance and the write off results, which was driven by individual life and group life products, improved performance in the property and casualty business, notably within property and casualty risk coupled with increased net financial income partially offset these dynamics.
Next slide please. Profitability, in the investment management and advisory line of business increased this quartered with ROE remaining virtually flat at 14.1%. On a quarter-over-quarter basis, net income rose 9%. This evolution was driven primarily by a seasonal drop in operating expenses and growth in income from our wealth management business where assets under management in US dollars were up 9%. The impact of these variations were partially offset by the elimination of corporate finance business unit and less favorable [treasury] results. It is important to note that despite the uptick in net income, ROE remain unchanged. This was attributable to the average net equity balance, which was boosted by the revaluation of available for sale securities as ASP.
On a year-over-year basis, net income increased 8% bolstered by higher income from our capital market business with registered and an uptick in transactional activity among corporate and retail clients. Our wealth management business also contributed positively as assets under management rose 19% in US dollars. Next slide please. Now we will look at Creditcorp consolidating dynamics. On a quarter-over-quarter basis, interest earning assets posted a slight uptick as cash and due from banks offset the decline in loan balances, particularly for wholesale loans. The yield in interest earning assets increased 4 basis points, mainly due to a rerating of the loan portfolio. On the liability side, we maintain our funding advantage in low cost deposits.
Our time deposit volume, which has rising but has been repriced downwards, drove a 5 basis points decrease in our cost of funds. Additionally, BCP issued a senior bond as part of a strategy to manage long term debt. On a year-over-year basis, our interest earning assets mix shifted reflecting upticks in retail loans and investment balances as wholesale loans contracted somewhat in line with market dynamics. On the funding side, low cost deposits continue to be the main source of funding, a favorable funding structure and to a certain extent, a steepening yield curve lead the yield in our interest earning assets to rise 73 basis points and out pay the increase of 37 basis points registered for our funding costs. Next slide please. Recent balance sheet and interest rate dynamics led NIM and NII to increase boosting core income growth.
On a quarter-over-quarter basis, NIM increased 10 basis points and stood at 6.3%. Risk adjusted NIM grew 75 basis points to 4.85%. If we isolate the effect of provisions for expected losses for El Nino, risk adjusted NIM fell 16 basis points. Core income was boosted mainly by NII, which increased 2.3% quarter-over-quarter. When analyzing the result for fee income and FX transactions, it is important to note that both lines have been affected by our operations in Bolivia BCP, which has adopted its fee structure for foreign transfers to offset the losses reported for FX sale purchase transactions. Excluding BCP Bolivia's operations, other income grew 1.3% quarter-over-quarter, driven by an uptick of 3.1% in fee income at BCP, driven mainly via fees from credit card transactions with registered growth through the e-commerce channels and by an increase in transactions to Yape and Prima due to growth in the volume of payroll contributions.
On a year-over-year basis, NIM rose 46 basis points and risk adjusted NIM increased 31 basis points. If we exclude BCP Bolivia operations, core income increased 8.5% on the back of NII, which grew 9.2%, driven mainly by BCP via an uptick in transactions through Yape credit cards and debit cards. Next slide please. Let's look at the dynamics for non-performing loans. On a quarter-over-quarter basis, growing non-performing loans was led by BCP followed by Mibanco. Within BCP, NPL growth was driven by consumer, mortgages and wholesale and partially offset by SME-Pyme. In consumer, NPL growth was related to refinancing of vulnerable clients, while growth in mortgage NPL was fueled by clients that also registered delinquency in other products. The NPL volume in wholesale was impacted by refinancing for an specific corporate client.
This evolution was partially offset by a contraction in NPLs and SME-Pyme, which reflected the impact of loan collateral honoring process for government loans. At Mibanco, delinquency was concentrated in all vintages where clients were affected by macroeconomic, social, environmental impacts in 2023. On a year-over-year basis, NPLs increased mainly to BCP and Mibanco. Within BCP, NPLs grew mainly to consumer, which experienced an uptick in refinance loans and delinquency among all vintages, and through mortgages after the payment performance of our indebted clients deteriorated and refinancing growth. In Mibanco, the drivers of NPL growth year-over-year were the same as those seen in the quarterly analysis. In this context, the NPL coverage ratio stood at 93.5% while NPL coverage ratio isolating government programs stood at 97.2%.
Next slide please. Moving on to provisions. The cost of risk stood at 2.3%. Isolating the effect of El Nino provisions, the underlying cost of risk increased 45 basis points quarter-over-quarter to stand at 3%. Let's go through the dynamics for provision expenses, which isolate the aforementioned impact. Provisions grew 16% quarter-over-quarter, driven by a base effect in mortgage, which reflect reversal for the specific proposals last quarter and in SME-Pyme, which reported higher write-offs and a deterioration in payment capacity in the context of gradual economic recovery. At Mibanco, growth in provisions was due to higher delinquency related to all vintages. On a year-over-year basis, provisions rose 46.9%. Growth was fueled by a deterioration in payment capacity in SME-Pyme and credit cards and a downturn in payment performance in consumer loans.
The aforementioned was partially offset by a drop in provisions of Wholesale Banking and Mibanco. Next slide please. We will review the evolution of efficiency on a year-over-year basis to isolate the impact of seasonal effects. Operating expenses grew 6.9% year-over-year, driven primarily by disruptive initiatives at the Creditcorp level and within core businesses at BCP. Expenses for disruptive initiatives at Creditcorp level increased 31.8%. The most significant expenditures were in Yape and [Tienda], which together accounted for 60% of this quarter’s disruptive expenses. At BCP, core businesses will fuel growth in expenses through an uptick in IT expenses related to moves to attract more specialized digital talent and increased use of the cloud as clients become more digital and transactions level increase.
Operating leverage remain strong at BCP core businesses due to control expenses and Mibanco operating expenses remain under control and operating income is starting to turn around. In this context, our efficiency ratios stood at 43.6% in the first quarter of 2024, down 70 basis points year-over-year, driven mainly by positive operating leverage at BCP. Next slide please. First quarter profitability was sustained by solid results in our universal banking and insurance businesses and by a recovery in our microfinance business. In addition, we benefited from a considerable uptick in the performance of our investment portfolio at the holding level. In this context, ROE for the first quarter stood at 18.2%. Now I will move on to our updated guidance.
As previously explained, our GDP growth guidance improved to around 3%. Regarding our profitability drivers, first, given the low demand in wholesale banking and still cautious origination volumes in retail banking at BCP and Mibanco, we expect loan growth measured in average daily balances to be at the lower end of the guidance range. Second, we expect NIM, cost of risk and efficiency to stand within our guidance range. Finally, we are observing better than expected dynamics for fee income and insurance underwriting results. Given all of the above mentioned, we maintain our ROE guidance for 2024 of around 17%. With this, we can turn to the Q&A.
Operator: [Operator Instructions] Our first question today is from Ernesto Gabilondo with Bank of America.
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