Credicorp Ltd.
Q3 2019 Earnings Call Transcript

Published: 9 Nov 2019

[Operator:]

Good morning everyone, I would like to welcome all of you to the Credicorp Ltd. Third Quarter 2019 Conference Call. We now have 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 to questions. At that time, instructions will be given as to the procedure to follow, if you would like to ask a question.With us today is, Mr. Walter Bayly, Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Reynaldo Llosa, Chief Risk Officer; Mr. Cesar Rios, Chief Financial Officer; and Mr. Guillermo Garrido Lecca, CEO of Health Insurance and Business.Now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer Mr. Cesar Rios. Mr. Rios you may begin.

[Cesar Rios:]

Thank you, Good morning and welcome to Credicorp's conference call on our earnings results for the third quarter of 2019. Before we review Credicorp's performance I would like to highlight some important matters regarding recent events in the local environment.As you are aware President Vizcarra dissolved the Congress on September 30 and called for parliamentary elections which will be held on January 26 2020. It is important to note that the Constitutional Court of Peru will rule on the constitutionality of the dissolution of Congress. So far the financial indicators have registered little reaction to this event PEN actually appreciated and the yield on Peru's sovereign bonds decreased.Despite these events we believe that Peru will continue to report a strong macroeconomic fundamental. These fundamentals are

[Operator:]

Thank you, sir. [Operator Instructions] Our first question will come from Jorg Friedemann Citibank.

[Jorg Friedemann:]

So my question comes into the broad pictures that you are expecting for the coming year. I know that you still do not provide guidance but just wondering in terms of the macro lines how you see the different forces affecting the banking system in Peru driving your results next year. You have a convoluted political scenario. I'm not sure if you saw this affecting or not business and if you see room for acceleration in loan growth. You mentioned the actions that you are taking to fix asset quality issues for this year. Cost of risk is already close to the upper limit of the guidance. So just wondering if you see room for this to stabilize next year, and in terms of margins you have started an important monetary easing in Peru 50 basis points already if you see pressures coming from net interest margins next year on top of that.

[Gianfranco Ferrari:]

This is Gianfranco Ferrari. Maybe -- actually you made 3 questions in 1 so I'll answer the first one. Actually political noise I would say that as of today there's much less political noise than what we had maybe on the last conference call. As you may know the Congress has already been shut down. There's already a date which is January 26 I believe for elections of a new Congress. The parties have already prepared their list so everything is under way. What we see now is that actually the government is focusing on trying to speed up public spending.And work on a lot of public investment that was sold because of judiciary or arbitration problems with basically -- mostly with the Brazilian construction companies in Peru. We see that as positive and we -- what we expect is that the remaining couple of months of this year and most importantly the first semester of next year public spending should speed up, having said that, as of today we haven't seen any important pickup in corporate -- private corporate investments.On the retail side, we are quite comfortable with the level of growth we're having for the year. And maybe -- and I will ask Reynaldo here on cost of risk but we have been mentioning over the last couple of quarters that we actually didn't see the cost of risk at the levels that we reached basically because we're targeting new segments of the population. And the cost of risk should be higher at those segments. What is important though is that the risk-adjusted NIM which is the way we manage has lowered. And I would say that measures are being taken in order to solve that issue. Basically raising price where prices were appropriate and/or managing risk adequately. I don't know Reynaldo if you want to add something else?

[Reynaldo Llosa:]

I mean if you see the performance of our portfolio except the SME market I would say it's quite stable. But what Gianfranco was mentioning is correct. I mean we are underwriting clients with a higher risk profile than we used to underwrite before and that has an impact -- a direct impact in our provision level because the provisions are recognized the day of disbursement. On the other hand the margin that this client would provide comes over time.So that has an impact in the short term. Also don't forget about the anticipating nature of IFRS 9. I mean as long as we get that what are the -- in our consumer portfolio that will also have an impact in the overall provision level. And finally as long as we see I mean an expected GDP growth level decline that will also have an impact in the provisions level. So yes as you were mentioning we are on the higher side of the range. We expect to have a final -- I mean levels of this year around that number.

[Operator:]

Our next question will come from Jason Mollin Scotiabank.

[Jason Mollin:]

Everyone Thank you, my question is related to the overview of Credicorp's business lines that you show on slide four of your presentation. I think it's very helpful to understand the drivers for your main businesses. You show of course year-to-date BCP Stand-alone increasing its return on equity from 20% in 2018 to 21.5%. Mibanco on the other hand showed a material decline in the return on equity and you gave a good job of trying to give a snapshot on what's driving that. And Pacifico we had a decline in the ROE as that accounts for the majority of your earnings for the group. If we look forward I mean what are the dynamics here for -- especially I think with the decline in profitability of Mibanco and you talked about the impact of the new sales force and perhaps getting out of some of the riskier segments. How should we think about the big picture profitability for these 3 main subsidiaries of Credicorp going forward? Can we see the bank continue to increase or at least maintain the trend in the last year to increase? And can we see Mibanco turn it to ramp -- Mibanco and Pacifico turn the profitability levels around?

[Cesar Rios:]

Okay, Probably in terms of Universal Banking and mainly BCP the main drivers are going to be the significant -- the increase in the Retail Banking segment due to the trends but also the inclusion of new segments as we have already mentioned. We are positive that this is going to result in healthy net adjusted NIMs. And we are managing -- we are going to manage the efficiency ratio balancing the efficiency in the current business and investment for the transformation that we are embarked on.As I know we are in general terms positive in the trends. In the case of microfinance as we have been discussing previously 2019 was a year of adjustment that was mainly originated but credit issues in which we portion segments with the appropriate accuracy in our nation policy. And as a result of that we could play the growth of the portfolio and at the same time increase our sales force.The net result during this year is that you have lower margins higher provisions and higher cost. Going forward we expect that we are going to be able to manage better the net interest margin to reduce the risk profile and starting to gain efficiency where with the significant amount of new people that we have incorporated is starting to produce a full capacity. Give and say that this is a competitive market and we are positive but probably the final margins are not going to be as high as were two years before. In the case of insurance -- in the case of the insurance business probably you can expand.

[Alvaro Correa:]

Basically I think that we're working on different things in Pacifico through the -- for the insurance business as a whole. First of all I think something that has been more evident as quarter-by-quarter goes by is the increased profitability of the providers. As you know we bought a large number of providers some years ago and we've been working diligently to make them more profitable. And I believe that today most of them are at profitable levels. We do have some land banking there that kind of curtails profitability. But over the next few years we will build on this land and we will make it produce so that that will also contribute to the profitability.Additionally, we are as Pacifico insurance group as a whole -- of the companies we are working very aggressively on the efficiency ratios. Currently we've been reducing that significantly going down from levels of about 18% to 16%. And we'll continue to do that with a target of being below 14%. So right there we would generate additional efficiency that will also contribute to profitability and obviously to the ROE -- ROAE. We are also working -- one of the things that we've been working diligently also over the past years is in reducing our commissions in ourselves. And through that we are aggressively targeting e-channels or e-commerce. We are working that with the new platform.This year we've launched insurance or -- for -- or e-commerce for auto so what home insurance. And next year we will be rolling out also for health insurance and that not only brings new sales to us but it also reduces the cost of the sales less commissions and also more efficient sales. We're also working very close with the other companies of Credicorp to increase our sales in different products.A very good example of this is that we have worked closely with Mibanco for example to sell an indemnisatory oncological product which last year we had none in the market. And year-to-date or -- we've reached the sale of about 36000 products and we are working to increase that. And I think that the other thing is also we're working on increased sales and also better underwriting to reduce our loss ratios which I think has been evident in the auto and in the health insurance business.

[Jason Mollin:]

Thank you very much.

[Operator:]

[Operator Instructions] Our next question will come from Ernesto Gabilondo Bank of America.

[Ernesto Gabilondo:]

Hi good morning and thanks for the opportunity, my first question is also to know your point of view on the recent political noise. I want to know if this is affecting credit demand. Do you think that the delay on infrastructure projects has been -- is limiting wholesale loans road? And do you think this could have an impact in consumer loans at some point? As you mentioned the new Congress is going to be placed during -- or next year. What is the chance to think about presidential elections during the middle of next year? Or do you think this is already discarded? Do you think the new Congress in place could implement potential changes reforms that are needed in the country? Or do you think this is likely to happen after there is a new government in place that it could happen next year or in the next couple of years? And then my second question is a follow-up on the provision charges. So as you mentioned maybe the cost of risk for last quarter should be around 1.8%. But thinking about next year do you think we should think about this 1.8% as the new recurring level? Or what will be the elements to think that you can return to the year's guidance for this year of around 1.4% 1.6%.

[Walter Bayly:]

This is Walter Bayly. Let me tackle the kind of political environment and then I'll pass it back to Cesar on the specific numbers you mentioned. The scenario that we see going forward with this election for Congress in January is that we will have a Congress which will not have a majority from 1 party but rather will be a Congress in which several political forces will balance themselves out. So in reality we expect a lot less belligerent or aggressive Congress where there will be no majority.So from that standpoint we think it will be a quiet period where really the political focus will be more on presidential elections than what happens in Congress. We are not concerned because what I just mentioned that the incoming Congress will be able to articulate any dramatic changes to legislation or constitution or anything that relates -- that has serious impact on the model which the country operates, presidential elections very early to tell.We have an estimate of what are the different potential candidates. And it is very early to tell but there's nothing in the horizon that really makes us worry tremendously at this stage. And again it is very early to be very clear about what the future will bring regarding presidential elections. We're still almost two years ahead. Back to you Cesar on the specific questions or Reynaldo.

[Reynaldo Llosa:]

Yes. In terms of our expectations for provisions for next year it will depend on the portfolio mix. I mean if we see our corporate loans growing again it will probably help us reduce the cost of risk that we have today. But within the retail or the retail portfolio definitely the fact that we are underwriting as I mentioned in people with a higher risk profile that will have that impact in the retail portfolio.And if we are successful in underwriting those clients the -- all our cost of risk in the retail portfolio will increase marginally. But that should be more than compensated by the differences in pricing and also by the fact that we underwrite those clients through digital channels and thus a lot more efficient than traditional channels. So in terms of a number we don't have guidance today but it would probably be around what we have today around 1.6%.

[Cesar Rios:]

Yes, Currently -- sorry.

[Gianfranco Ferrari:]

I would like to add on -- this is Gianfranco what Reynaldo just mentioned two matters. One is that we don't manage the credit decisions like cost of risk solely. We manage by risk-adjusted NIM. So the cost of risk may go up but if the risk-adjusted NIM goes up it's a good decision. So it's not cost of risk by itself. That's one issue I would like to clarify. And the other one is that what Reynaldo just mentioned. If you go line-by-line on the P&L statement what we're seeing is that the further we're able to distribute through digital channels the cost of distribution reduces dramatically. So again we may end up with a higher cost of risk but a better bottom line because of this matter -- of this lever too.

[Operator:]

Our next question will come from Gabriel Nobrega, Citibank.

[Gabriel Nobrega:]

And another question here on our side we've seen that interest rate has been decreased from around 2.75% to 2.25%. So here I am just trying to understand what is your sensitivity to this decrease. Maybe if you can give a sensitivity of around 100 bps decrease. And also as we go into 2020 you have been saying that you were seeing an increased loan demand for retail. Do you believe that the improvement in your loan mix could offset the pressures from the coming down of the reference interest rate?

[Cesar Rios:]

Yes, probably we will address this question with 2 different approaches. First is the underlying assumption that we have is that we are going to change our mix in the portfolio from more wholesale to more retail and among retail to higher-margin higher-risk segments. And the other change is from more dollars to more soles as a result of the previous change. This will result as an average and an increase in margins. As a counterforce you have the general trends of the interest rates in the system in soles and in dollars.As a general rule you can see that the combination of the duration of the portfolio and the pass-through effect means that more or less 1/3 of the top line increase or decrease in interest rate I translated in the bottom line to the period. What is the result of a combination of almost immediately pass-through in the wholesale short-term operations has very mildly translated in the higher segment's revolving credit lines. I don't know if this answer helps to understand the process. The combination of everything is that we think with the -- is going to be a net positive.

[Operator:]

[Operator Instructions] Thank you. There are no additional questions at this time. I would now like to turn the conference back over to Mr. Walter Bayly Chief Executive Officer for closing remarks.

[Walter Bayly:]

Thank you. We continue to navigate in a macro environment both local and international with negative headwinds and increased uncertainty. Our 8.8% increase in accumulated net income is a very good result with the backdrop of this environment and the tremendous investments we are doing to better serve our customers incorporating technological innovation to ensure our long-term profitability.Our year-over-year improvement in efficiency added to the increase already mentioned in profitability is a very good indicator that we continue to successfully balance our short-term and long-term priorities. It is unavoidable that the slowdown in the Peruvian economy will impact short-term results but this should not distract us from our medium-term focus and view.There continues to be very interesting growth opportunities in the Peruvian market but it is also true that competition and technology will pressure margins and profitability. And it is with this view that we have to continue investing and preparing our different subsidiaries to be very well positioned to capture the growth in this challenging competitive environment. I would like to address the specific microfinance unit in which there were a couple of questions.Yes profitability is down. We had returns of equity of almost 56% last year that is clearly not sustainable in the long run. This year the results are closer to 20% but we think there continues to be upside as the return on equity we can obtain in the microfinance business should be at least equal to that that we obtained in the Universal Banking.So yes we are continuously investing in microfinance and continue to see potential for growth and increased profitability. We thank you for your continued support and interest and are confident that the positive results will continue to be delivered by us over time.With this, I conclude the presentation and thank you very much again. Good morning. Good day.

[Operator:]

Thank you, ladies and gentlemen. This now concludes today's presentation. You may now disconnect.