Credicorp Ltd.
Q4 2020 Earnings Call Transcript

Published: 9 Feb 2021

[Operator:]

Good morning, everyone. I would like to welcome you all to the Credicorp Ltd Fourth Quarter 2020 Conference Call. We now have all of our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation we will open the floor for questions and at that time instructions will be given as to the procedure to follow if you would like to ask a question.

[Cesar Rios:]

Thank you. Good morning and welcome to Credicorp's conference call on our revenue results for the fourth quarter of 2020. Since our previous conference call, economic reactivation in Peru has continued at a very unexpected pace. In seasonally adjusted terms, GDP in the last quarter of 2020 is stands around 3% below the pre-pandemic levels. Our estimates suggest GDP decline around 11.3% in 2020 due to the COVID-19 pandemic, which is better than initially forecast. The job market has also continued to recover as indicated by data on payrolls, managed through the banking sector. The external sector has also provided favorably, as copper prices has reached levels not seen in almost eight years. We expect the GDP to rebound between and 8% and 10% in 2021, underpinned by high copper prices, capital inflows to emerging markets and expansive monetary or fiscal policies in the local front. Next slide please. Two significant factors are driving uncertainty in the core economics. First, the sanitary situation generated by COVID-19 has deteriorated in developed and emerging countries over the last few weeks. The Peru's data on excess mortality reflects this reality. The government has established restriction measures based on the severity of COVID-19 indicators, which include a high, very high, and extremely risk levels. On January 28, the government ordered a new focalized lockdown from January 31 to February 14 in regions that registered extreme risk levels of COVID-19 indicators, including Metropolitan Lima. The effect of these restrictions will slow down the recovery in the government and service sectors, but other sectors including mining, fishing, manufacturing and construction will continue to produce. Downside risk to our current GDP growth forecast of 8% to 10% might revise if the sanitary situation deteriorates further and more restrictive lockdown are mandated. However, vaccine doses will arrive in Peru in February and the vaccination process will be begin immediately. Second, Peru will hold general elections from April 11, 2021. The latest survey shows candidate George Forsyth, leading voters' preferences with 17 of total votes, followed by Keiko Fujimori, Julio Guzman, Verónika Mendoza and Yhony Lescano who are neck and neck for second place as on the date of the poll. It is still early to predict outcomes. The political landscape continues to be marked by the uncertainty that we play out in coming months. It is important to note that according to the latest surveys 25% of voters are undecided, intend to leave their vote blanks or will initiate ballots. The second round of presidential election is said to be held on June 6, 2021.

[Operator:]

Thank you, sir. Thank you. Our first question comes from Ernesto Gabilondo with Bank of America.

[Ernesto Gabilondo:]

Hi, good morning, Walter, Alvaro, Gianfranco, Reynaldo and Cesar. Franco, my first question is from the regulatory outlook. So the observation of President, I ask you the government is a potential deal of interest rate cuts and also any observations containing too much on alliance private pension funds. However, we have seen that Congress is expected to continue and pressure on both deals in the next couple of days. So what is the probability that you're seeing on the back and can you share with us which percentage of your loan portfolio if your interest rates above 80%? Thank you.

[Gianfranco Ferrari:]

Ernesto, thank you for your questions, I'll try to tackle some of the questions that you posted. I think certainly we have some recent horizon. The law that put comps on commissions and interest rates is still going to be - to I would say probably a lengthy period of discussion. It's probably too early to have an exact assessment. But if this law rolls and passes all the process and debate probably is going to impact probably more severely institutions that operate in the very high interest rate segments that are the specialized institutions, and probably are going to be less severe impact in the universal banking institutions in the country. Nevertheless, it's going to damage the access to credit and reduce the access to credit for a significant number of Peruvians.

[Ernesto Gabilondo:]

So you can share with us what percentage of your loan portfolio is going to reap above 50% if you haven't -

[Gianfranco Ferrari:]

Excuse me I couldn't understand the question very well.

[Ernesto Gabilondo:]

Yes. Can you share what is your percentage of your loan portfolio with interest rates above 50%?

[Gianfranco Ferrari:]

I don't have the figures on hand. We can come back with some general guidance further on.

[Reynaldo Llosa:]

Ernesto, this is Reynaldo. Good morning. What is the question? How come - how did you come up with a 50% threshold?

[Ernesto Gabilondo:]

Yeah, I believe that. Yeah. So I believe that it is a percentage of the loan portfolio. So if you have interest rate above 50%.

[Reynaldo Llosa:]

So yeah, I understand the question. But my question is why 50%, not 40 or 75.

[Ernesto Gabilondo:]

I was thinking that high interest rates we've seen in other countries just gives you that number.

[Reynaldo Llosa:]

But I'm trying to make a point because unfortunately, if this law is passed, what is going to happen is it will have a huge impact on financial inclusion and we will actually generate a lot of financial exclusion. And if you understand the dynamics of how the financial inclusion on the asset side works in Peru, it is basically very, very, very tiny loans of less than $100 and at high rates that are mostly driven by , obviously, Mibanco and institutions like that, and those guys move forward and we're going for the rate - the amount of loans are larger and very smaller 20 million. I'm afraid you made a point of 50%. That is if there is a 50% gap, the whole microfinance industry maybe something that microfinance industry is very healthy.

[Ernesto Gabilondo:]

Okay, thank you. Thank you for addressing this. Then just my second question is from the political front. We have seen that Verónika Mendoza appears in the second position in recent polls. Also, we saw that unfortunately, the potential successor of the President of the Central Bank passed away, so this is creating uncertainty on who will be his successor. So I wanted to read all your thoughts from these events.

[Gianfranco Ferrari:]

Yeah, go ahead Cesar if you want.

[Cesar Rios:]

I think, Ferrari, my first reaction is that we are in Peru and it's very early to tell. We have several surveys, several polls, some of them - actually Verónika Mendoza are in the top of position cycle five, depending on the polls, but I will say that is very early to tell at this point. Probably we need to have to clear the proposals, to go down the road and see how the proposals and the mash of the candidates consolidate in the next month.

[Gianfranco Ferrari:]

Just to add on that the temperature on the election is very cold. The focus on the population, I would say was more on the pandemic rather than on elections. And statistically they're like seven number two , all of them are seeing the margin of error. So as Cesar mentioned, it's really too soon to tell and I do believe that we'll have to wait at least one more month to have more clarity on possible outcomes of the election.

[Ernesto Gabilondo:]

Right. Thank you very much for your thoughts.

[Operator:]

Thank you. Our next question comes from James Mollin with Scotiabank.

[Jason Mollin:]

Hi, this is Jason Mollin. On the question of medium- and longer-term asset and earnings growth versus capital optimization and dividend, Walter, you had provided some thoughts at the end of the third quarter call where you spoke about the potential that shareholder returns going forward could shift more to dividends with slower earnings growth versus what - in the future versus what we've seen in the past. Have recent trends given you more conviction that this is what will drive future shareholder returns?

[Walter Bayly:]

Yes, good morning, Jason. This is Walter. Yes, we have to take out of the equation this year. This year is somewhat an unusual year. We are rebuilding our profitability. And we do not expect - we haven't made a final decision of the board. But this is not a year in which I would have people waiting for a lot of dividends. We want to rebuild a little bit our capital base. But going forward, yes, the dynamic - the long-term dynamic is that the country will grow less, whilst Credicorp continues to generate around 17% return on equity, which will be a low - a higher rate than what our risk assets will grow. But we will be spinning off excess capital regularly to our shareholders. That is the dynamic that I think should come back next year, not this year.

[Jason Mollin:]

Thank you very much.

[Walter Bayly:]

You're welcome.

[Operator:]

Thank you. Our next question comes from Tito Labarta with Goldman Sachs.

[Tito Labarta:]

Hi, good morning, everyone. Thank you for the call and taking my question. My question also I guess on the longer term, yeah, just looking at your credit guidance for this year and eventually getting back to 16%, 17% as you mentioned Walter, I think we saw a nice improvement in the cost of risk, but net interest margin continues to be under pressure. I mean, I guess partly due to Reactiva loans. I think previously, you've guided for maybe second half of 2022. Is that how long you think it will take and is it mostly a function of getting your margin back to where it was before? And for the margins to get back to where it was before is it just the Reactiva loans coming off the loan book? Do you need interest rates to go up back to normalized levels to get to that 17% ROE? Just to try to get a sense of the drivers to be able to get back to that long-term ROE. Thank you.

[Cesar Rios:]

Probably if we consider that the asset base growth at high single digits we can obtain as mentioned before ROEs of high double digit. This growth is going to be driven by a country that is going to grow, let's say three plus percent. And the financial sector usually grows 1.5 times the nominal figure. In terms of margins, what we should expect is that we are going to have at least a couple of years of very low interest rate that affects our overall profitability. And at the same time, we are going to come down with a relative rate of Reactiva loans that are scheduled to have 2.5 years more standing if there is not any additional changes. So we are going to have I will say a couple of years in which we are going to have still very low interest rates and the presence of the Reactiva loans on the book. At the same time we expect during this period to have a higher proportion of retail loans in our book that carries higher margins with some more risk also. The risk should come down at segment level to pre-pandemic levels, adjusted by the change in compensation because more retail loans than wholesale loans down the road. And the fee income probably is going to grow less BSP than the assets due to the digitalization that is going to put some pressures in fees. At the same time, we are going to start gaining efficiency within the benefits of the vehicle transformation that we have embarked in all the companies of the group, the combination of these factors to lay down a sustainable ROE in the high double digit as mentioned, Walter mentioned previously, this is the basic dynamic. I don't know if you want some clarification on this specific topic.

[Tito Labarta:]

Yeah, thank you Cesar, that's helpful. I guess, maybe just a follow up on the margin side, given just the impact of Reactiva, do you know, if you guide - with the guidance you've provided 3.9 to 4.4. Do you know what that will look like if you exclude the Reactiva loans, just trying to get a sense of I guess the normalized margin excluding that? And then - and it sounds like you would need for interest rates to get back to maybe more normalized levels to get that margin up higher, and to get that ROE up higher, is that correct?

[Cesar Rios:]

Yes, but I would say Reactiva post probably 80 basis points of the margin that is - the slowdown is going to be progressive. And the interest rates also impact because we have a very low funding base that is less valuable in relative terms now. This process I mentioned is going to last at least two or three years, when every - when all these - these two factors dissipate what we are going to have probably is higher margins driven by these factors, but no more competition. We wouldn't expect to reap the full benefits of these two factors due to the competition, but we are going to still remain profitable and with stronger NIMs than now.

[Walter Bayly:]

But let me add something, this is Walter, just to be very concrete. We do not need interest rates to go up to achieve the return on equity that we have been accustomed to. We can achieve without an increase, a general increase in interest rates. This is the year in which we will be rebuilding our profitability. And we should see the results quarter after quarter until reaching this last quarter, which will give us good results still below, but close to sustainable levels.

[Tito Labarta:]

Okay, that's very helpful. Thank you, Walker and Cesar. And just one final question just to confirm, the 17% I think you had previously mentioned you could probably get there second half of 2022. Is that the correct timing? How do we think about just the timing to get back in?

[Walter Bayly:]

Definitely not this year, as I said last quarter this year, we'll be close to those levels, but still below.

[Tito Labarta:]

Okay, so sometime next year, fair. Thank you, Walter.

[Walter Bayly:]

Yeah.

[Operator:]

Thank you. Our next question comes from Jorg Friedemann with the Citibank.

[Jorg Friedemann:]

Thank you very much for the opportunity to make questions. Good morning, everyone. My question is regarding asset quality. If you could give us some thoughts about when you think that NPLs will peak, we have started seeing the deterioration due to the expiration of grace periods. But I was even more interested in reconciling this with your cost of risk guidance, which is still above 2019 levels. So just wondering if you think this is a new normal or just the cumulative effects of the pandemic and we should have some normalization in 2022 afterwards. Thank you.

[Reynaldo Llosa:]

Yes, there are two questions. In terms of the expectations on the increase on the NPL loans we expect them to peak as Cesar mentioned by the end of the first semester - by the end of the second quarter, basically because we'll see a low performance on the SME and consumer markets where all the grace periods expire. In terms of the projections, I mean, there's still some uncertainty in the market. The health issues not over in Peru. We have elections. So we provide, I would say - truly forecasted what we feel the range would be. That's why you have a range in between 1.8 and 2.3 because there are still some clouds in the sky. And we are not sure what will happen during the next year - during this year, especially during the first two quarters.

[Jorg Friedemann:]

Perfect. And if allow me just to follow up there, because now you have more than 10% of your portfolio in government programs that have lower risk and those according to what I understood in the call are still expected to last for 2.5 years. So would it be reasonable to expect the cost of risk evolve in 2020 to levels below those observed in 2019? Thank you.

[Reynaldo Llosa:]

I wouldn't expect them to go below what we had in 2019. Probably - remember there is that changing mix, and more important growth in the retail market, I mean, the wholesale market. So we'll probably see numbers somewhere below what our guidance for 2021 has been.

[Jorg Friedemann:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Geoffrey Elliott with Autonomous.

[Geoffrey Elliott:]

Hello, good morning. Thank you for taking the question. Can you help us a little bit on the net interest income? I guess you've given the guide on net interest margin, but the balance sheet size has clearly been pretty volatile during 2020 due to the pandemic and due to Reactiva Peru. So can you help us either on the net interest income or on the size of interest earning assets how that's going to evolve, so we can get a clearer idea of what you're expecting on NII?

[Cesar Rios:]

We have been explaining the basic dynamic. Could you clarify your question, please?

[Geoffrey Elliott:]

Yeah, so you've given us an outlook on net interest margin. But the balance sheet size, the interest earning asset base that you're calculating that on, has been very volatile because of the pandemic because of Reactive Peru. So I'm trying to get a clearer idea of how you're expecting that to evolve, so we can get a better picture of what you're expecting on net interest income from here? I mean, maybe a better way of putting it is, how do you expect net interest income to evolve off the 4Q '20 base once we've adjusted for the one off that you had in Bolivia this quarter?

[Cesar Rios:]

The NIM this year has been affected. I am going to summarize by the reduce in interest rate that impacts our liquidity and investment income. We have managed the portfolio to increase the long-term income. There was also a reduce in the mix due to Reactiva. As I mentioned previously, these factors are going to wind down. And the other factor is going to be the change in the composition of the portfolio towards retail. In terms of the cost of funds, we have already made a significant liability management and the costs are not going to be reduced significantly. So the improvement is going to come from the relative less weight of Reactiva and the higher proportion of retail loans in our book and after some time the increase in general interest rate in the market. But this is going to take a while.

[Geoffrey Elliott:]

Okay, thank you.

[Cesar Rios:]

The size of the book has increased - the size of the book has grown significantly this year due to I will say three factors. Reactive loans, a significant influence of deposit that we have invested in liquidity and in medium and long-term bonds, but these stunning increase is not going to repeat in 2021.

[Geoffrey Elliott:]

Understood just a follow up on that, in 2020, you had really huge growth in deposits, up 27% year-on-year. How do you think deposit balances are going to evolve in '21?

[Cesar Rios:]

They are going to come down to more historical level close to the growth of the loans. The significant increase in deposit this year - in the year 2020 was due to the liquidity provided by Reactiva and the withdrawals from the pension funds. This is one or a couple of one-off events. In 2021, the trend is going to be similar to the growth of loans with probably an upward lease due to additional liquidity measures provided by the Central Bank, but probably not the same magnitude than 2020.

[Geoffrey Elliott:]

Okay, that's great. That really helps. Thanks very much.

[Operator:]

Thank you. Our next question comes from Andres Soto with Santander Bank.

[Andres Soto:]

Good morning. Thank you for the presentation. Maybe a follow up on interest of earnings, I would like to - based on your guidance, I understand that you are expecting NIM for 2021 to be at the same level as your structural or total NIM before adjustments in the fourth quarter of 2020. So I would like to understand in terms of the new originations that you are seeing, especially in the SME portfolio. What are the trends that you are seeing? It is being difficult to get rates a bit close to historical levels given the potential anchoring effect of the Reactiva loans.

[Cesar Rios:]

My initial response is that no. The clients understand the difference and the volumes was driven more by capacity to pay and need. Probably Gianfranco will give better color, but was not an anchoring effect of Reactiva. The clients understand that this is a different program.

[Gianfranco Ferrari:]

Yes, thank you, Cesar. Exactly and we already have a lot of clients where clients ask for and gone. Reactiva loans during May to September of last year have already driven new loans with normal conditions. They completely understand the difference between normal rates and market competitive rate and the subsidized rates given by Reactiva. So that's not an issue for us today. Going forward, what happens and we have a lot of conversations right now. There are some specific sectors of the economy that have been hit very hard. An example is tourism. So the Reactiva program, may - got extended for some specific segments. There's nothing concrete right now. But something like that may come in the next couple of months.

[Andres Soto:]

Perfect. Thank you, Gianfranco. And previously you guys mentioned competition as another source of pressure to your margins. Which specific segments are you seeing the strongest competitive environment in revenue base?

[Gianfranco Ferrari:]

Well, there's a lot of competition. So let me go a step back. There are some sectors in which - some parts in which we are back on track to pre-COVID level and those are the sectors where there's very harsh competition. Strategically, mortgages is very competitive now and the other sectors the whole corporate, I mean, the midsize companies or the large midsize companies, there's not much - not too much activity and/or investments where the usual suspects providing or offering financing facilities to the same clients. And there's also a very strong competition from the top corporate and the large market companies and specifically. Then the only business competition across all of the segments or the entire culture is among those two segments.

[Andres Soto:]

Perfect. Thank you, Gianfranco and Cesar.

[Operator:]

Thank you. Our next question comes from Alonso Garcia with Credit Suisse.

[Alonso García:]

Good morning, everyone. And thank you for taking my question. So let's touch base again, on the regulatory front. I mean, you already provided some color on the internet caps bill, but could you please share your thoughts on the pension systems reform? I mean, what probably do you see of it being approved in Congress? The current government supports this bill or not? The timing and also AFPs as we know them right now would play a role under this new model or not at all? Any color would be appreciated. Thank you.

[Alvaro Correa:]

Okay. Hi, this is Alvaro Correa. The question is difficult to answer. There's a lot of uncertainty to date. There is a new law that is being drafted as we speak and there is a proposal from a specific commission, a special commission that was created last year. That specific new regulation is a real transformation of the pension system. However, it is difficult to say that it has a strong support from all parties. There's still discussions in Congress about that and the time - the timeframe for that is also uncertain. Some people say it's going to come with a final decision in the next, let's say 30 to 60 days; other people talk about leaving this to the next government and the next Congress. That means that should be discussed in about six to eight months from now. So a lot of uncertainty and it goes through. It's definitely - it has an impact on Prima AFP for sure because the model changes. The funds will be auctioned to - in an international auction and we can participate. But it's not for sure that everything will stay as it is today. I mean, it's surely not going to stay as it is today, so a lot of uncertainty. We should have more color on that in the next call for sure. Thank you.

[Alonso García:]

Thank you. And lastly on the expense side, could you please discuss regarding the allocation of OpEx, CapEx this year related to your transformation strategy, I mean, by subsidiary or which specific initiatives you are currently working on? Thank you.

[Cesar Rios:]

All the companies in Credicorp are undergoing a transformation process in relative terms or the BCP share is bigger due to the relative size and the evolution of the company. I would say in terms of transformation probably a two thirds are OpEx. A little bit more of that one third is CapEx and the increase from 2020 to 2021 is going to be significant, probably more than 20%, 30%. And out of this total BCP is going to be more than 50% of the total of the entire corporation. But I would like to emphasize that all the companies, subject to the reality of each one are undergoing a significant process of investment and digital transformation suited to the specific needs of the specific segment that they choose - they serve.

[Alonso García:]

Understood. Thank you very much.

[Operator:]

Thank you. Our next question comes from Piedad Alessandri with Credicorp Capital.

[Piedad Alessandri:]

Hi, thank you very much for allowing questions. I had a question regarding the other expenses. In the MD&A you mentioned all the salaries, the administrative expenses, but other expenses that it's a significant point of the increase in total expenses year-over-year, it's not detailed. If you could give us a bit more view regarding the other expenses within 2020 and its development for 2021. I would be really grateful.

[Cesar Rios:]

Yes, usually in other expenses, we record special taxes that are not income taxes that can be contributions to several institutions operational with related expenses. In the year 2020 we have significant operating expenses relating to two items. One was donations, BCP made a PEN100 million donation at the beginning of the crisis. Mibanco also made a significant donation. Credicorp Capital