Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to Credit Corp Limited Fourth Quarter 2021 Conference Call. We now have all 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. If you would like to ask a question, please signal by pressing star then one on your telephone keypad. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. With us today is Gianfranco Ferrari, Chief Executive Officer, Cesar Rios, Chief Financial Officer, Francesco Raffo, Chief Innovation Officer, Rinaldo Llosa, Chief Risk Officer, Diego Cavero, Head of Universal Banking, Cesar Rivera, Head of Insurance and Pensions, and Milagros Siguenas, Investor Relations Officer. And now, it is my pleasure to turn the conference over to Credit Corp's Chief Financial Officer, Mr. Cesar Rios. Mr. Rios, you may begin. Thank you very much.

Good morning and welcome to Credit Corp's conference call on our earnings result for the fourth quarter of 2021. I hope you and your family are healthy. The latest available official data show that economic activity grew 3.5% year-over-year in November and 1.3% compared to the figure reported in November 2019. Our estimates indicate that in the fourth quarter of 21, the economy expanded around 3.3% year-over-year and 1.8% in the benchmark comparison with 2019. Consequently, Peru's real GDP rebounded around 13% in 2021, which was better than initially expected in a context marked by record highs for corporate prices, expansive monetary policy and fiscal policies, and high liquidity, both internationally and locally. Regarding the sanitary situation, Omicron daily infections have increased rapidly and are currently at levels of four times higher than in the peak of the previous wave. Mortality rates, however, are significantly lower. In fact, daily deaths in Peru represent just two-tenths of those registered at the previous wave peak. This evolution reflects the progress of the Peru vaccination program, through which 84% of the population 12 and older has received at least two doses. If mortality rates stay low, the economic impact of new COVID-19 wave should be limited to an uptick in employee absenteeism and supply chain delays. More sweeping impacts such as lockdowns are not expected. Next slide, please. Inflation has reared its head across the globe. Driven by shortages of inputs, problems with supply chain, and increases in international prices for oil, metals and grain commodities. This inflationary environment puts pressure on central banks around the world. With regards to Peru, consumer inflation is expected to stand at 3% at the end of 2022 versus 6.4% at the end of 2021. In this context, Peru will capitalize on the designation of a team of highly regarded professionals as central bank governors. This new board, led by Julio Velarde, is expected to effectively steer the central bank's policies to control inflation. Accordingly, the central bank has raised its policy rate by 275 basis points if follows. This rate currently stands at 3% and we expect additional increases. Other measures adopted include increasing bank reserve requirements. Regarding the exchange rate, its recent decline was driven by reduced perception of political uncertainty and a record trade surplus. This decline will also have an impact in slowing down inflation in 2022. Moreover, net international reserves stand at $78 billion at the beginning of February, which is close to its record high. The aforementioned factors, coupled with a fast decline in the fiscal deficit, which went from representing 8.9% of GDP in 2020 to 2.6% in 2021, has eased concerns and reflected in less volatility of Peru's sovereign long-term bond rates. Finally, on the political side, President Castillo has yet to appoint a new cabinet as the last prime minister who signed after just four days in office. Political instability lingers in Peru, but our economic fundamentals remain strong. Next slide, please. In Credit Corp, we continue to foster financial inclusion and business growth while we consolidate our return to profitability. In 2021, we included over one million individuals in the financial systems of Peru, Colombia, and Bolivia. Furthermore, Over 5 million individuals and micro-businesses have benefited from ABC, our financial education program at BCP and Pacifico. In the fourth quarter of 2021, our multi-channel distribution model continued to evolve. By year-end, digital transactions at BCP accounted for 51% of total transactions and 44% of disbursements at Nibanco were executed through alternative channels. Our anticipation of client needs and fast tracking of investments on the digital front have allowed us to enhance user experience in a context of heightened demand for digital transactions and services. Our quarter-over-quarter results show loan growth measured in quarter-end balances remain flat. If we isolate the negative exchange rate effect, a 4.2% uptick in structural loans were offset by an 11.2% drop in government programs portfolio. Core income, which is composed of net interest income, fee income, and FX transactions, expanded 2.9% due to growth in structural loans and a lower cost deposit mix due to seasonal transactional activity and higher FX volatility, respectively. Provision expenses dropped to an exceptionally low level this quarter, driven by improvements in payment behavior higher recoveries of written off loans, lower risk origination volumes, and improved GDP levels that are captured in expected loss models. This led the cost of risk to drop 2.34%. Insurance underwriting results returned to pre-pandemic levels this quarter, driven mainly by an increase in net earning premiums in both life and property and casualty businesses, and a decrease in property and casualty claims. expenses were higher this quarter, driven by an uptick in transformation expenses, variable compensation, and due to the usual four-quarter expense increase seasonality. In this context, Credit Corp's net income was $1,061 million, which represents an ROE of 16.4% at quarter end. In full-year terms, Core income expanded 13.8%, driven by higher net interest income, in line with an uptick in the structural portfolio, rising rates, and lower cost funding structure. Key income gains, which were triggered by higher volumes of transactional activity, but negatively impacted by regulatory restrictions for fees. And an increase in net gains on FH transactions due to better pricing capabilities and more volatility. The cost of risk dropped 8.82% in an environment characterized by higher than expected growth in economic activity, positive payment behavior, and a reduction in the volumes of riskier portfolios. The aforementioned factors were partially offset by the negative insurance underwriting results due to higher COVID-related gains and an increase in transformation expenses. As a result, Credit Corp's net income was 3,585 million solids in 2021, which reflects an ROE of 13.9%. Finally, our balance sheet remains strong with ample liquidity and adequate capital ratios. Next slide, please. We continue to advance in our sustainability journey. This quarter, MSCI informed us that our ESG rating has been elevated to the leader's category with a score of AA. This new score recognizes credit card leadership in managing the most significant ESG risks and opportunities in the industry. Additionally, credit card was selected to form part of the S&P BBL through General ESG Index, a representative ESG benchmark of the Peruvian equity market. In the environmental front, we developed a sustainability financial framework that is aligned with international standards and became the first Latin bank to obtain a strong S&P rating for this kind of framework. Additionally, our subsidiaries continue to adhere to commitments to combat climate change. In this regard, it is worth noting that Credit Corp Capital Asset Management became a TCFD supporter. In the social front, we have been recognized by prestigious institutions for our efforts on the financial inclusion, education, and gender equity fronts. Regarding governance, we continue to develop policies, codes, and structures that are aligned with international best practices. In the past few years, we have focused on improving our ESG disclosure. We are pleased to report that we will be publishing our 2021 Annual and Sustainability Report, which is aligned with international sustainability reporting standards, such as SA, SB, and GRI. Next slide, please. Regarding universal banking, in the fourth quarter of 21, BCP consolidated its return to profitability. Quarter-over-quarter results were driven by an increase of 4.5% in core income. This was attributable to an uptick in structural loans, mainly through retail banking, and 7.5% growth in fee income, which was fueled by an increase in transaction volumes to new services and digital channels. This quarter, gains in FX transactions were unusually high, which reflects our ability to leverage intelligence capability in a volatile FX market. The aforementioned was offset by higher provisions, which are still at very low levels. Additionally, operating expenses increased due to seasonality. In this context, return on average equity stood at 20.7% this quarter. On a full year basis, a 9.9% growth in core income was fueled by growth in net interest income, which was driven by by a 16.1% uptick in structural loans measured in quarter-end balances. Our results improved by leveraging data analytics and fine-tuned risk models to help us penetrate new SMEs, subsegments, and drive sales to digital channels. In fact, by year-end, digital sales represented 34% of total sales, while 71% of unsecured consumer loans were disposed to digital channels. In addition, our efforts over the last few years to optimize our balance sheets have led to a reduction in our funding costs. Another aspect that drove two-year growth in core income was the 20% increase in free income, which occurred despite the challenging regulatory environment and was driven by expansion in transaction volumes. Finally, in a context marked by an exceptionally low cost of risk, BCPs registered an improved in profitability despite higher personal expenses that reflect the normalization of variable compensation reduced in 2020. Also, these better results were able to offset the higher investment in digital transformation. As a result, BCP registered a return of average equity of 19.7% in 2021. By year end, BCP's core equity tier one ratio stood at 11.8%, which is within internal limits. At BCP Bolivia, our risk appetite remains low in an uncertain macroeconomic environment. In this context, our delinquency rate was below 1%, one of the lowest in the market. Next slide, please. Over the last year, YAPI usage has grown exponentially. At the end of 2021, Total 8 million users, 54 of whom are active users that make at least one transaction per month. The YAPI card is an important lever for growth in financial inclusion and is used by 38% of YAPI affiliates. You can open a mobile wallet with a national identification number. Of total YAPI users, 19% are SME clients. Our focus moving forward will be in capturing new users in this segment where 90% of transactions are still made in cash. YAPI is a natural conduit for financial inclusion and also brings new clients into the DCP fold. YAPI's indicators for frequency of use and number of transactions continue to rise. Today, after users executed an average of 12.7 transactions a month compared to 8.2 in December last year, total monthly transactions reached 58 million with a transacted volume of 3.7 billion soles. Next slide, please. 2021 has been a year of recovery and growth for both Nibanco Peru and Colombia, and this trend accelerated in the last quarter. Regarding Nibanco Peru, the hybrid model showed signs of consolidation and it boosted commercial productivity and efficiencies. This model gave us a platform to further centralize assessment capabilities in 2021. Now we can efficiently process information on potential loan recipients from multiple sources and consequently improve the risk profile for the structural portfolio. In addition, Nivanco embraced digital channels as a conduit for cost-effective loan growth. This capability is coupled with economic recovery and year An end-of-year seasonality propelled structural disbursement levels to record highs last quarter. In this context, this quarter, Nibanco consolidated this recovery. The quarter-over-quarter analysis shows structural origination reached a record high and grew 5.0% in average daily balances, alongside yields on loans rose triggered by enhanced pricing capabilities. positive dynamics were partially offset by an increase in cost of funds in the context of recent interest rate hikes. As a result, our net interest income grew by 2.5%. Despite mandatory fee restrictions, other income also improved in line with an uptick in bank assurance commissions, which was driven by growth in origination levels and a decrease in commissions paid to commercial firms. In this context, core income grew 4.4% quarter over quarter. Lastly, Nibanco's loan provision significantly dropped this quarter due to model adjustments, lower risk of alienation, and improvements in collections, which reflect the more favorable economic environment after COVID-19 restrictions ceased. At Nibanco Colombia, results were driven by higher alienation volumes and lower provisions. In 2021, we increased our commercial muscle and maintained productivity, thus boosting our presence in the Colombian microfinance market. Next slide, please. The insurance business has consolidated its recovery from quarter-over-quarter perspective. Grupo Pacifico's insurance and the writing results returned to pre-pandemic levels this quarter, These results were driven by solid growth in net earning premiums in both life and property and casualty businesses and by a decrease in property and casualty claims. The aforementioned dynamics were partially offset by an increase in the net claims in the life business driven by an increase in ID&R reserves. Our corporate health insurance and medical service businesses registered lower earnings attributable to growth in ID&R claims in corporate health insurance. This factor was partially offset by solid results in medical services, in line with increased revenues from outpatient services. All in all, Grupo Pacifico's return on equity stood at 11.8%. Finally, Prima posted a 12% net income growth quarter-over-quarter, driven by a recovery in the investment performance of its reserve fund. On a full year basis, Grupo Pacifico's insurance and their writing results ended up in negative territory after light claims rose considerably during the second wave of COVID-19. This impact was partially offset by solid earning premium growth in both life and property and casual businesses associated mostly with increasing premium levels from disability and survivorship insurance and the positive evolution of our digital channel. The strong performance of medical services also helped boost the consolidated results. Finally, Prima's 2021 earnings fell 1.4%, which was spewed by higher expenses to strengthen the company IT infrastructure. This investment positioned the company to handle an unprecedented level of service requests to alternative channels. Next slide, please. In 2021, Regional consolidation of our investment banking and wealth management business continued to gain traction. On a quarterly basis, results were driven by 0.5% growth in assets under management measured in U.S. dollars. This evolution was triggered by 2.6% growth in wealth management, which was fueled by an active brokerage fund volumes. Regarding income contribution, positive results in assets and wealth management business were offset by a contraction in capital markets. after negative results were reported for a fixed income proprietary portfolio due to lower gains from market operation. This led to contribution of investment banking and wealth management line of business to fall, minus 5.6% quarter over quarter. In full year figures, assets under management registered at minus 7.2% construction, mainly due to significant Peruvian mutual funds outflows, which were partially affected redirected to our offshore platform at lower fees, affecting long-term income generation. The expansion in income, mainly driven by asset management and wealth management, was partially attenuated by a contraction in capital markets, which led to investment banking and wealth management line of business to reduce their growth of 8.4%. Regarding our transformation process, in 2021, we achieved significant milestones that will allow us to optimize operating processes and lay the foundation for scalability. Among these, ASB Bank core absorbed ASB, changing its domicile from Panama and degrading its core banking systems to the cloud. Finally, we implemented a shared service center in Colombia where we have successfully degraded over 70% of our target processes in one year. Next slide, please. Now, I will discuss credit core consolidated performance. From the asset side, from a quarter-over-quarter perspective, the asset mix became more profitable in line with a 2.7% expansion in structural loans, which was driven by retail banking and the bank. Year-over-year, the structural loans grew 14.1%. This result was fueled mainly by wholesale banking, which registered growth, economic reactivation, and strong campaigns in the agricultural and fishing sectors. On the liability side, from a quarter-over-quarter perspective, growth in low-cost deposits remained flat, while all other funding sources fell by 4.9%. This allowed us to maintain a low funding cost. Year-over-year, it is important to highlight the low-cost deposit grew by 10.5%, while severance in daily deposits dropped 48.1% in line with an economic relief policy that freed up this fund for withdrawal. All this led to a decrease in our funding costs, which stood at 1.24% this quarter. On a full-year basis, the funding costs decreased by 49 basis points to stand at 1.29%. This was driven by the aforementioned growth in low-cost deposits and by the optimization of the wholesale funding costs at BCP in a context of low interest rates. Next slide, please. This quarter, both the structural loan portfolio and payment behavior continued to evolve favorably at the credit card level. Consequently, both the structural NPL ratio and the structural cost of risk improved. Loan volumes and on-time payments remain strong in our banking businesses. This positive evolution was attributable to economic reactivation, growth in individual liquidity due to government release, and an increased transactional activity. Additionally, MPLs balance were favored by higher write-offs, mainly from the bank. The aforementioned was partially offset by higher delinquencies in SME team segment, which was attributable to clients who also hold government programs loans. In this context, credit cards' structural NPL stood at 4.9%, which represented a quarter-over-quarter reduction of 30 basis points. Provisions continue to follow a downward trend across our banking businesses, reaching record lows each quarter. This improvement was driven by positive payment behaviors, lower risk levels, and higher write-offs, mainly in the S&P segment and above. The aforementioned was partially offset by an increase in provisions of wholesale banking after a limited number of corporate clients advanced to higher space of the linkbox. In this scenario, Credit Corp. structured a cost of rates constructed for 0.54% to 0.22% quarter over quarter. On a full year basis, we have registered significant lower provision expenses in a context of better than expected economic activity, deposit payment behaviors, which reflect an uptick in clients' liquidity, a decrease in risk and the loan obligation level, as loan expanded mainly to lower-risk retail products. In this context, structural cost of risk dropped from 5.12% to 0.89%. The level of structural allowances for loan losses at year-end was equivalent to 6.4% of Credit Corp's loan portfolio. In our government program portfolio, grace periods expire and reprogramming facilities conclude. We have a healthy client base and delinquency is concentrated in early stages. Nevertheless, overdue loans in later stages of arrears are being recovered through state warranties. Next slide, please. Credit cards mean continue an upward trend to stand at 4.25% this quarter, in line with a more profitable asset mix. Risk-adjusted mean increase 9 basis points quarter-over-quarter to stand at 4.04%. On a full-year term, net interest income expanded 9.2% fuel by the structural loan growth, an uptick in low-cost deposits, and an optimization of wholesale funding. Core income increased 2.9% quarter over quarter, which was primarily driven by 8.1% growth in free income. Free income was bolstered by an uptick in consumption through POS transactions with debit cards at the establishment. It is known that growth in consumption was driven by the small establishment, which generates higher fees. Finally, net gains in FX transactions increased significantly. 12.8% quarter over quarter in a context of high FX volatility, improved pricing and distribution capabilities. On a full year basis, core income expanded 13.8%, which was primarily attributable to growth in net interest income and secondarily to an increasing think on due to higher transactional activity. Think on close the year above the pandemic level despite recent regulatory restrictions. Next slide, please. On a full-year basis, credit cards efficiency rates improved fully basis point year-over-year. Improvements were mainly driven by the positive evolution of operating income in the microfinance and insurance pension line of businesses. This evolution offset higher expenses at BCP stand-alone related to digital transformation. At the bank, operating income grew 19% in 2021, while operating expenses grew 5%. Expenses remain under control, which reflects, in large part, the inroads that Nibanco has made in consolidating hybrid business model. Pacificos income registered growth this year after it won two additional tranches of the Cisco 5 tender for AFP-related corridors. The premium rate for this tender was higher than the rate under Cisco 4, the previous January program. If we exclude our investments in disruptive initiatives, such as YAPE and the portfolio of CREADO, from the calculation base, the efficiency ratio stands at 44.3%, which is 160 basis points below the reported ratio. Next slide, please. Our ROE stood at pre-pandemic levels at semester end. We are at the tough end of a challenging two-year period, which was marked by a sanitary crisis and episodes of potential instability. We managed the risk and arose by leveraging our strong balance sheet and took advantage of opportunities to emerge to strengthen competitive position. First, we decided to accelerate digital investments through the crisis and have leverage capabilities to penetrate new segments as we consolidate our market leadership. Over the past two years, our structured loan portfolio grew 11.5%. During the same period, we reported northward expansion of 66.6% in our low-cost deposit base. This, coupled with adequate management of wholesale funding in a context of favorable interest rate, will provide a funding cost advantage as we move into a cycle of interest rate hikes. Secondly, We steer our loan portfolio towards a better risk profile by enhancing our underwriting models and shifting some products from revolving to non-revolving facilities in both the SME and consumer segments. Third, we optimize fee income by leveraging price intelligence and focusing in building transaction capabilities. Through YAPI alone, the number of months transactions rose by 24 in the last two years. Although our insurance business was severely hit, we laid the foundations to increase profitability by strengthening our digital and bank assurance channel, developing business at the base of the pyramid, and refining our pricing and risk models. Finally, we accelerated investment and revisited our operating models to improve efficiency. Nivanco's consolidation of its hybrid model is already showing tangible results in this front. We will capitalize on our 45 competitive positions to 2022 and beyond. Next slide, please. Against this backdrop, we share the following expectation for 2022. Assuming that the current COVID-19 wave will have a limited and transitory impact on economic activity, we expect the GDP to grow around 2.5%. In terms of our loan portfolio, we expect lending activity to follow dynamics similar to those in currency. In this context, we expect our structured loan portfolio, which excludes reactiva loans, to grow between 8% and 10% in average daily balances. The evolution in total loans will depend on the pace at which reactiva balances are amortized. Regarding NIN, we expect interest rates to continue their upward trajectory as our loan books shift more towards retail. Accordingly, we expect NIM to situate between 4.3 and 4.6%. We anticipate that the cost of risk will fluctuate between 0.8% and 1.1% as positive payment trends continue and we leverage our enhanced intelligence capabilities. In 2022, we will continue to invest heavily in our disruptive ecosystem. As such, we expect our efficiency ratio to stand between 45 and 48%. It is important to note that we estimate that disruptive expenses will impact the efficiency ratio by around 300 basis points. We expect our insurance underwriting results to end the year slightly above pre-pandemic levels, provided that no additional material impacts from the sanitary situation arise. As a result, we expect our ROE to be situated between 15.5 and 17.5%. This improved prospects for profitability will allow us to continue to double down on transformational investments and increase dividend payouts. With this comment, I would like to start the Q&A session.

Thank you very much. We will now begin the question and answer session. If you would like to ask a question, please signal by pressing star then 1 on your telephone keypad. If you have connected to the call using the HD web phone on your computer, please use the keypad on your computer screen. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. We will pause for just a moment to allow everyone the opportunity for questions. We also ask that you please only ask one question at a time. After each question has been addressed by our speakers, you will then be allowed to ask as many follow-ups as needed. But again, please only ask one question at a time. Thank you. And the first question today will come from Ernesto Gabalondo with Bank of America. Please go ahead.