Credicorp Ltd.

Good morning, everyone. I would like to welcome all of you to the Credit Court Limited third quarter 2023 conference call. A slide presentation will accompany today's webcast, which is available in the investor section of Credit Corp's website. Today's conference call is being recorded. As a reminder, all participants will be in a listen-only mode. There will be an opportunity for you to ask questions at the end of today's presentation. If you would like to ask a question, please signal by pressing star 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 are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment. Now, it is my pleasure to turn the conference over to Credit Corp's IRO, Milagros Siguenas. You may begin.

Thank you and good morning everyone. For today's call, our Chief Financial Officer, Cesar Rios, will be providing the introductory comments in addition to his usual discussion of the macro environment and financial performance, as our CEO Gianfranco Ferrari could not be with us today. In addition, speaking on today's call will be Raimundo Morales, CEO of IAPE, who will give us an update on IAPE's progress. Finally, participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer, Reynaldo Llosa, Chief Risk Officer, Cesar Rivera, Head of Insurance and Pensions, and Carlos Sotelo, CFO at MiBanco. 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. Cesar, please go ahead.

Thank you, Milagros. Good morning, everyone. Thank you for joining us in our third quarter 2023 conference call. While the macro environment has been more challenging than expected, Credit Corp. has continued to demonstrate its distinctive resilience in Peru, thanks primarily to our diversified and prudently managed loan portfolio and funding advantage. Strong NNI is complemented with an increasing share of the core non-interest income streams, including those from insurance and YAPI, which are partially mitigating the impact of the loan portfolio deterioration. While there is still work to be done, we are pleased with the progress in increasing core non-interest income, which is a key part of our strategy of the copying from the macro. Our strong track record demonstrate our ability to successfully navigate complex environments. We have built a diverse portfolio of businesses, most of them benefiting from robust brand recognition and a strong customer loyalty. This privileged position further solidifies our leadership, especially in challenging conditions. We are registering healthy margins even after high provisions, supported by long mix shifts, a stricter rejuvenation in vulnerable segments, dynamic pass-throughs, and our funding advantage. Our solid capital base represents a strength, particularly within a challenging credit cycle, where the impact of soft macro conditions on payment performance in specific segments is evident. As we have already stated, we believe strongly in the importance of continuing to invest in both the technological transformation of our core businesses and in disruptive initiatives to maintain and enhance our strong competitive modes and future sustainability. Please, next slide. By embracing our agile and self-disruptive mindset, we are building a diverse business capturing synergies. maximizing our main profit pools, targeting new client segments, and developing our own disruptors as we seek to retain a healthy and sustainable ROE. Our focus on gaining a deep understanding of both present and upcoming market trends allow us to meet our customers' changing needs, solidify our leadership, and increase penetration in new markets. Raimundo will now provide an update on the sustained progress at IAPE, which in just over seven years has become the main payment network in Peru and is the most mature example of our disciplined approach to disruption and innovation as we advance towards our goal of decoupling from the macro. Raimundo, please go ahead.

Thanks, Cesar, and good morning, everyone. IAPE is an example of our rigorous approach to innovation and our commitment to meeting current and future market needs. Hitting the 10 million mark for Yaperos over a year ago was a turning point for us. We initiated our monetization plan by rapidly launching new business lines and functionalities, driving both scale and engagement. At the close of Q3, YAPE had over 9 million monthly active users, conducting an average of 29 transactions per month, up over 160% year-on-year. Making interoperability a reality, YAPE continues growing at an exponential rate, a clear sign of the benefits of this service offers to both clients and the ecosystem in general. YAPE is not only the primary payment network in Peru, it is also the digital brand that boasts the highest awareness level in the country. Please turn to the next slide. As the number of active YAPEROS continues to grow with each new feature added, the use of individual features also increases, driving gains in market share, attracting even more YAPEROS and partners while operating more and more efficiently reinforces our flywheel effect. Top-ups are a clear example of how YAPE is helping us decouple our growth from the macro. BCP's top-up market share used to be around 10%, but after launching this functionality through YAPE, our market share rose to 46%, which represents 5x growth in just 18 months. Last January, we enabled bill payments through YAPE and have seen an upward trend for monthly growth with over 20% of YAPEROS now using the service. We are currently at just 5% of our expected time for bill payments, so still have an immense opportunity for continuous growth. Similarly, the use of our features in each business line, including POS, QR codes in payments, microloans in financial service, and promos within marketplace is still incipient but quickly growing each month. Rapid adoption of these products is allowing our revenue-generating TPV to grow at a 3x the pace of our total TPV. which has grown from nonexistent in early 2022 to around 5% at the end of Q3. Our long-term aspiration is above 20%. Please turn to the next slide. Unitary economics continue to move towards an expected break-even in 2024. Revenues are growing and moving closer to cash costs as we incorporate new features. Monthly revenue per active user stands at 2.9 soles in the quarter, compared to a cash cost per active user of 4.3 soles. Q4 will be key in Yap's evolution toward a super app, with multiple product launches. In Marketplace, Yap Etienda will initially focus on electronics, which typically represents 50% of e-commerce sales. We are also launching other high-engagement products, such as ticketing through our acquisition join us, gaming, and gift cards. In financial, we are introducing small multi-installment loans with longer tenures through 100,000 pre-approved leads. In payments, we're completing our portfolio of solutions with FX transactions and remittances, among others. We are also providing collection services for CPG companies. On the functionalities front, we're enhancing our UX to include the critical capabilities of a super app. So, as you can see, we're going to remain very busy. JAPI continues to continues to progress towards monetization by pursuing its medium-term target of being the main payments network in Peru, being an integral part of Yapero's daily life, and addressing their financial requirements. We look forward to updating you again in the future on our continuous progress. I'll turn the call back over to Cesar.

Thank you, Raimundo. I will share now the key financial highlights of the quarter, focusing primarily quarter-over-quarter evolution to emphasize the recent shifting trends. Both structural loans and low-cost deposits evolved positively quarter over quarter. Growth in structural loans measuring average daily balances stood at 1%, fueled primarily by retail banking at BCP. Meanwhile, low-cost deposits grew 1.2% and accounted for 50.9% of our funding base at quarter end. Similarly, most of our income streams registered relevant sequential increases. NII grew 1.6%. driven by asset mix dynamics, which were partially offset by a higher cost of funding for bank deposits. Fees also grew 1.6% off the back of positive dynamics and revenues from debit cards, collection services, and bill payments. Insurance and the right-hand results rose 11.6% as earnings in the live business continued to trend upwards. We navigated asset quality headwinds as Peru's credit cycle continued to deteriorate. As such, The cost of REITs edged up to 2.5%. A structural MPL ratio stood at 5.6%, given that weak economic performance took a toll on payment performance in specific segments. All in all, we delivered resilient results despite negative GDP growth and have maintained solid capital levels at our subsidiaries. Having said that, a note of caution is in order, as we'll elaborate later the recent change in macro and climate perspectives will more than likely weigh significantly in our profitability for the rest of the year. Next slide, please. In the third quarter, the Peruvian economy is expected to have registered its third consecutive quarter decline year over year. Accordingly, annual GDP growth will be lower than expected and stand around zero or slightly below. Several factors both expected and unexpected have driven weak performance. The social protests at the beginning of the year, which were prolonged in the country's health. Second, climatic events, namely Cyclone Yaku and El Niño Costero, which heavily impacted the agricultural, fishing, and manufacturing sectors. I will go into more detail on El Niño topic on the next slide. Third, very weak private investment and sluggish consumption led to non-primary sectors to contract. Fourth, the government's efforts to stimulate the economy have been insufficient. It's important to note that growth in the mining sector, mainly through increased copper production at Cayabeco, has remained a bright spot. The confluence of these factors has led the country to register its lowest print for economic performance in 25 years, excluding the pandemic. Despite this disappointing performance, Peru's macroeconomic fundamentals remain robust, with low levels of public debt and high international reserves. Additionally, There is a significant package of public and private projects that impact by political intent and deploy quickly could generate growth down the road. Regarding inflation, price pressures have eased in Peru and inflation expectation has fallen. Additionally, the policy rate has been cut by 50 basis points. Next slide, please. The El Niño-Postero weather phenomenon that has directly affected Peru This year is associated with a sustained rise in sea surface temperature aboard certain threshold along the northern central coast of Peru. El Nino Costero has battered the fishing, agriculture, and textile sectors in particular in the first eight months of the year. The fishing sector is set to record its worst anchovy catch in 25 years after the first fishing season was canceled. Agricultural production, in turn, is expected to register its worst performance in 31 years, while textile production has record its most marked decline in 28 years, excluding the pandemic and the global financial crisis. Given that, there was no winter season this year in the coastal region. Weak performance in these key sectors of the economy has exercised a multiplier effect and exacerbated contraction in the non-primary sectors. Given this context, we continue to closely monitor the evolution of El Niño and its impact in our businesses. I will look at the expected evolution of El Niño through the summer of 2024 and its potential impacts later. Next slide, please. BCP results were impacted by economic downturn described earlier. This has pressured provisions outward and impacted long road. Analyzing key quarter over quarter dynamics. The 1.5% increase in NII was driven by several dynamics. On the mixed side, wholesale loans registered a contraction due to low private investments, while SME PMA loans reported an upswing in disbursements that entailed less risk. These dynamics helped mitigate an increase in the funding cost, which was pressured by a more expensive deposit mix. It is important to note that migration from low-cost time deposits has decelerated in recent months. This quarter, BCP's fee income was bolstered by an uptick in fees from debit cards, collection services of business clients, and bill payment services provided through YAPI. Provisions remain high in a prolonged recessive high inflation environment that has affected payment capacity of vulnerable segments in individuals and higher risk segments in SME payment. In individuals, Growth was driven mainly by consumer loans and credit cards, followed by mortgages. This uptick was partially offset by an reversal of provisions in wholesale banking. On a year-over-year basis, a 16% increase in NII was driven by raising interest rates and by a 1.2% increase in structural loans, which was primarily attributable to an 8.1% uptick in retail banking loans. Long-lost provisions increased 87.6% due to the same quarter-over-quarter dynamics. On a year-to-day basis, operating expenses grew 6.1%, which primarily reflects growth in core business IT expenses due to an increase in digital transactions and to significant investment in new capabilities and investment in disruptive initiatives. In this context, BCP's efficiency ratio stood at 37.8%. Finally, ROE stood at 20% in this quarter and 22.2% on a year-to-date basis. Next slide, please. After a difficult first semester where social and climate events as well as ongoing deceleration have hit clients hard, MiBanco registered a decrease in loan origination in risk assessments and higher provisions on a quarter-over-quarter basis. Net interest income rose 3.2% despite lower loan growth. These favorable results reflect disciplined interest rate management, which helped offset the uptick in the funding cost. In this context, NIM increased 80 basis points and stood at 13.5%. Provisions remain high this quarter, given that social protests and weather anomalies continue to impact our customers' payment capacities. Other income fell 3.5%, fueled by a drop in bank assurance fees following a reduction in disbursements. From year-over-year perspective, NII rose 1.9%, spewed by an increase in structural loans and interest rate pass-throughs, which mitigated the impact of rising funding costs. MiBank's provision froze due to the same dynamics mentioned earlier. On a year-to-date basis, Operating expenses rose 5.8%, reflecting an increase in IT-related costs. Income, in turn, grew at a slower pace, which led to efficiency ratio to rise to 52.6%. Finally, ROE stood at 8.3% this quarter and 7% on a year-to-date basis. MiBanco Colombia is facing high inflation, high funding costs, lower interest rate ceilings, and a deterioration in economic expectations, we have adapted our strategy to record profitability. Next slide, please. ROE as Grupo Pacifico was high this quarter and stood at 34.7% as we continue to capitalize in transitory tailwinds in the life insurance business on top of a strong underlying business. On quarter-over-quarter trends, net income rose 19%. Growth was primarily boosted by an uptick in insurance underwriting results in the live business after claims fell, primarily by credit life and individual life products. An increase in the net gain from exchange difference also contributed to the positive evolution this quarter. These developments were partially offset by a decrease in net financial income. Year-over-year profitability was up 37%, primarily driven by positive dynamics for insurance and the right of results in the life business. Pension products reported an uptick in income, which was attributable to better prices and more favorable volume dynamics, while credit life and personal accident products registered a decrease in service expenses. Next slide, please. ROE, for the investment banking and wealth management line of business stood at 8.2%, impacted by a drop in income generation at our more volatile businesses. Income from our capital market business decreased 5.9% quarter over quarter, pressured by market dynamics that negatively impacted our proprietary fixed income portfolios. Market volatility also impacted our asset management business, where income decreased by 0.8%, impacted by losses in the market value of seed capital in the funds we manage. Despite market headwinds, our assets under managed remain relatively flat, growing by 2.4% quarter over quarter in the asset management unit and contracted by 1% quarter over quarter in the wealth management unit. As we shared with you on our investor day, we took the strategic decision to reduce exposure to the most volatile business of this line of business. We have made progress in this front, but it's important to emphasize that the process is gradual. Next slide, please. Now we will look at credit cards consolidating dynamics. On a quarter-over-quarter basis, our structurally long measure in average daily balances grew 1%, or 0.3% with FX neutral. Growth in BCP retail banking, which has shifted away from the most vulnerable segment, was offset by a contraction in wholesale banking at BCP and MiBank. Our deposit base expanded 3.5%, or 1.3% with FX neutral. This evolution was driven by an uptick in time deposits and demand deposits, which was partially offset by a drop in saving deposits. Additionally, the migration of funding and solids from low-cost to time deposits decelerated. On a year-over-year basis, structural loans increased 1.2% measured in average daily balances, fueled primarily by retail banking at BCP and MiBanco. Deposit balance dropped 2.8% or 0.5% with FX Neutrals. Low-cost deposits have fallen system-wide and currently represent 63.7% of our total deposits. Our market share in low-cost deposits by the end of August stands at 40.3%. Next slide, please. Now, let me explain core income dynamics. On a quarter-over-quarter basis, core income rose 1.4% on the back of NRAI. which rose 1.6%, growth was attributable to a more favorable interest-earning asset mix and to our interest rate management. When analyzing the results for fee income and FX transactions, it is important to note that both lines have been affected by our operation in BCP Bolivia, where we charge fees to FX clients to offset losses on buy-sell FX transactions. Excluding BCP Bolivia, fee income rose 2.9% quarter-over-quarter driven by an uptick in transactional levels from debit cards, collection services, and bid payments at BCP. And, gains in FX operations diminished 2.6% quarter-over-quarter due to a drop in FX transaction volumes at BCP. On a year-over-year basis, core income increased 8.8% on the back of NII transactions. which rose 12.9% due to an uptick in structural loan volumes and our active interest rate management. Excluding BCP Bolivia, fee income diminished by 1.9% on the back of lower fees. At Prima FAP, due to an adjustment in the fee framework applicable to a significant share of affiliates, at Credit Corp Capital, primarily due to lower assets and debt management in the third-party fund distribution business. These dynamics were partially offset by gains in FF transactions, which grew 1.4%. In terms of margins, net interest margin rose nine basis points quarter over quarter to stand at 6.11%. Risk-adjusted NIN failed marginally over the same period due to an increase in provisions and stood at 4.45%. Next slide, please. Let's look at the dynamics of structurally non-performing loans. As indicated earlier, adverse events in 2023 and weak economic performance continue to impact client payment performance and consequently portfolio quality. In this scenario, on a quarter-over-quarter basis, growth in structural and non-performing loans was driven by wholesale banking, where specific clients in the hospitality and commercial real estate sectors became delinquent. Individuals where the debt service capacity of clients continued to face challenges and due to over-indebtedness and unsustainable employment. SME-PIME, where low-ticket subsegments had poor payment performance. ACMI-BANCO, where the increase in delinquency was concentrated in over-indebted clients, clients impacted by social conflicts at the beginning of the year or those affected by climatic anomalies. On a year-over-year basis, structurally non-performing loan volumes increased due to an uptick in refinanced loans on wholesale banking. The evolution of non-performing loans in retail banking and bibanco was driven by the same factors as in the quarterly analysis. In this context, the structural coverage ratio stood at 101.4%. The NPL coverage ratio fell quarter over quarter and year over year, driven by wholesale banking clients, which represented deterioration that has been previously provisioned and have high levels of collateral. Please refer to Appendix 2 for more details. Next slide, please. Moving on to provisions. The cost of risk has risen once again and stands at 2.5%, while the structural cost of risk stands at 2.6%. This reflects the fact that client payment capacity has deteriorated alongside ongoing macroeconomic contraction. Provisions for the individual segment at BCP have risen since As I just explained, payment performance has been impacted mainly through consumer and credit cards. Additionally, in individuals, provision for mortgages increases to reflect increased expected losses on lending to clients who have reported an uptick in delinquencies in consumer products or in other entities. Provisions at SMEP, BCP, and Nibanco are also updriven by the downturn in payment performance that I just described. The aforementioned was partially opted by Reversus and wholesale banking after some clients in the corporate segment registered improvements in the credit ratings or canceled obligations. Next slide, please. We will review the evolution of efficiency on an accumulated basis to isolate the impact of seasonal effects. Operational expenses grew 11% in the first nine months of the year. driven primarily by core business at BCP and disruptive initiatives at the credit card level. At BCP, core business fuel grow in expenses through enacting in IT expenses related to increased use of cloud as clients become more digital, investments to enhance digital capabilities and improve cybersecurity, and moves to attract more specialized digital talent. Marketing expenses mainly driven by advertising to boost deposits and digital sales. Expenses for disruptive initiatives at credit card level increased 64.3%, and some of these initiatives have scaled up. Operating leverage remains strong at BCP. At MiBanco, operating expenses remain under control, but operating income is still challenged. In this context, our efficiency ratio stood at 45.1% for the first nine months of the year, down 2%. 160 basis points year over year driven by positive operating leverage at BCP and Pacifico. Next slide, please. This quarter, profitability was sustained by solid results in our universal banking and insurance business. ROE this quarter decreased to a stand at 16.2%. Meanwhile, ROE for the first nine months of the year was 17.8%. All in all, these results are a testament to our resilience and ability to adapt to challenging circumstances. To exercise caution, we have decided that no additional dividends will be distributed this year. Now, before commenting on our perspective for the rest of the year, I would like to briefly discuss current expectations on the magnitude for El Niño phenomenon for coming months. Next slide, please. At the time of our last conference call, Our outlook contemplated an El Niño phenomenon that was either weak or moderate in intensity. The combined probability of these two scenarios was 75%. Currently, projections from expected experts indicate that the two most likely scenarios entail an El Niño that is either moderate or strong in intensity. The combined probability of these two scenarios stands at 96%. Furthermore, The probability of a strong El Nino over the summer has grown by more than four-fold and currently stands at 49%. It is important to consider that the levels of risk and exposure associated with this phenomenon vary by region, but are concentrated in specific areas that experience heavy rains and flooding. The share of Credit Corp's loan portfolio located In impacted geographies, areas stand at 6.2%, which is comprised of 10% of retail banking portfolio at BCP and 18% of MiBanco's portfolio. The levels of impact will vary across areas and clients. We have rolled out multiple measures to mitigate the adverse effects of El Niño on our clients, businesses, and the country in general. In a coordinated effort with Pacifico, BCP, and MiBanco, we have proactively developed a communication plan to educate our clients and the population about taking specific creative measures to mitigate potential damage to homes or businesses. Additionally, we have adjusted our underwriting policies for the most exposed clients in retail banking at BCP and MiBanco. We have also leveraged our extensive network of relationship managers who are working with clients in advance to survey potential financial needs and help them to be better prepared. Del Niño and their way is expected to generate impact that are strong, not catastrophic, such as that seen in 1982, for example. We are rolling out preventions and response plan with anticipation to reduce impact and support clients. Next slide, please. Significantly weaker than expected economic performance for Peru, coupled with a material change in the outlook for El Niño over the coming summer, has triggered changes in the perspective for our business, particularly for cost of risk and consequently ROE. Our new estimates are in line with the scenario of a moderate to a strong El Niño. As previously mentioned, our updated macro scenario for 2023 now reflects a GDP growth estimate close to 0% with a downward risk. Structurally long growth measured in average daily balances remain in line with guidance. NIM in turn remains resilient and such is expected to sit within guidance. We now expect the full-year cost of risk to stand between 2.6% and 2.9%, impacted substantially by provisions related to expected losses caused by El Niño. We still expect a consolidated efficiency ratio between 45% and 47%, as BCP and MiBanco continue to demonstrate positive operating leverage. Given the aforementioned dynamics, ROE is not likely to stand at around 15.5% for the full year. With these comments, I would like to start the Q&A session.

Thank you. We will now begin the Q&A session. If you would like to ask a question, please signal by pressing star 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 are 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. Our first question comes from Tito Labarta with Goldman Sachs. Please go ahead.

Hi, good morning. Thank you for the call and taking my question. I guess my question, if I look at the revised guidance of 15.5% ROE, or roughly, for the full year, just given where you're coming from, rough math here, that would imply about $700 million in earnings in 4Q, which would be around a 9% ROE. And I assume that's all because of much higher provisions. Just to, I guess, one, if you can, does that math sound correct? Is that what we should expect, more or less, for 4Q?

Hi, Tito. Thank you for the question. I will say that roughly you are more or less in line. When we talk about 15.5 around is specifically this is around. But you are correct that the main driver for the decreased profitability of the quarter is the increased provisions due to expected losses by El Nino. And if you compare the fourth quarter with the third quarter, the other thing relevant is the seasonal increase in expenses at BCP that happens all four quarters.

Okay, no, that's very clear. Thanks for clarifying. So I guess my follow-up question would be on the provisioning. How much of this is, you know, you mentioned due to expected losses, but you think a lot of it will be in anticipation. Does that mean cost of risk should normalize next year? If so, what would be a normalized level of cost of risk for 2024? And if there's further impacts from El Nino, could there be additional provisions in 2021? in next year as well?

Yes, Tito. That will depend on the severity of the Niño. Today we have estimated an impact on the fourth quarter that is very relevant and explains the increase in the cost of risk projected for the whole year. Having said that, if we have a strong Niño, we will probably see an impact in provisions during the first semester of next year. And then we, based on all what we've done in managing the portfolios, both in the ESME and consumer market, we should expect a much more stable cost of risk during the second semester of 2024. So we see this as a peak that will depend on the impact of El Nino that, as you know, carries a lot of uncertainty for the degree of the impact that this could have on on the economic side of the country in general, and specifically in the northern side of Peru.

Okay, no, that's helpful. And one, I guess, more weather-related, I guess. But how long could El Niño go on for? Is there a time frame where you would then feel comfortable that, okay, you're past the worst? Any thoughts on that? Yeah, usually El Niño occurs during...

December, January, and February can extend a little bit more or less than that. Okay, perfect. Great.

Thank you so much.

Thank you. The next question is from Ernesto Gabalondo with Bank of America. Please go ahead.

Thank you. Hi, good morning, Gianfranco, Cesar, Francesca, and good morning, all your team. Thanks for taking my call. My question would be on your ROE expectations for next year. I understand you're still running numbers, but considering that you will create an important number of provisions anticipating to this medium to strong El Nino, how should we think about the ROE for next year? Can we expect it to be higher when compared to 2023 levels? Hi, Ernesto.

As you know, we are going to provide a guidance for 2024 in the next call. But directionally, I would say that 2024, if the impact of El Niño is according to our current expectation, should be relative better than this one. Even say that, as Reynaldo has explained previously, we need to really assess the impact at the beginning of the year. So we should expect a probably more cautious credit loan origination at the beginning of 2024.

Okay, no, excellent. So just for my second question, you have said in the past that management has been doing a lot of important efforts to invest in technology and in the digital transformation. However, if at some point we get it into a medium to strong El Nino, probably you will be thinking maybe to relay some of these investments to protect the profitability and maybe to return to those investments after getting away from El Nino. Are you still thinking about this or you will continue the investment phase?

I would say that what we did in the past probably is a good reflection of our general strategy. At the beginning of the year, the expectations of the GDP growth were starting to deteriorate. We adjust the general expenses trend to better adjust to the income generation capacity without forgetting investment in the transformation of the business. So we are going to manage prudently. but we are committed to long-term profitability to build capabilities for the future. So we are going to manage prudently, but we are not contemplating stopping developing new capabilities, investing in initiatives that are creating a new business for the future. Perfect.

Thank you very much. Yes. Thank you very much, Cesar.

The next question comes from Jeffrey Elliott with Autonomous. Please go ahead.

Oh, hello, thanks very much for taking the question. It's another one on the cost of risk outlook. Could you just quantify for us how much of the additional provisioning that you're expecting in Q4 relates to El Nino looking like it's going to be worse than you were expecting back in August. Just trying to isolate that impact from the impact of the broader macro weakness. Thank you.

Yes. It explains almost all of that change between our guidance on the previous quarter. And basically, it has two impacts. It has an impact in a specific region, which could be severe if we have a strong NINO. And it also has an impact on the overall economy of the country because there is an important level of sales that are channeled through the northern businesses. So it has a double impact, as I explained. So I would say I cannot give you a specific number of the amount of the difference between both numbers, but it's basically explained by those two effects.

Thank you. And if I could just squeeze another one in, more a clarification that nothing's changed, but on the sensitivity to lower rates, if you could just quickly give US dollar rates and peso rate sensitivity to 100 basis point cut. Yes.

This topic has been reviewed carefully internally, and now we think it's below than we previously communicated. below 20 basis points for 100 basis points for instantaneous adjustment. So the composition of our portfolio is flexible enough to allow us to converge to a sustainable NIEM, assuming that we can counter the effect of reducing rates with a shift in the portfolio mix. Okay.

Thanks very much.

The next question is from Tiago Batista with UBS. Please go ahead.

Hi, guys. Good morning. My question is about YAPI. When you look in a couple of years for YAPI, what do you believe will be the main source of revenues of YAPI? And among the 10 million monthly active users of YAPI, How much of those values were already DCT or credit card funds?

Excuse me, could you repeat the first part of your question? Because I had some interference.

Yes. Not sure if the line is better now. Yes. But when you look in a couple of years, what do you believe will be the main source of revenues of YAPI?

OK.

Great.

Very clear.

And among the 10 million clients of YAPI, how much of those guys were already BGP or credit card clients?

Okay. So in your first question, we currently expect payments to continue growing as our number one line of revenue, but definitely we expect in two or three years lending to become much more relevant. So I would say that around 40 to 50% will continue to be payments revenue, then a third around the lending, and the rest will come from the retail or marketplace. That's more or less where we're aiming to and what we expect. Of course, that might change a bit. Regarding the second part of the 10 million clients, it's a tough question because there were A lot of, so there's like two, two and a half million of those clients that are JAPE with the NAE that they open exclusively an account without being BCP clients. But of the ones that were BCP clients, there's a big group that opened the BCP account to have JAPE in the history. So really it's a mixed number. Definitely a lot of those clients are much more active in YAPE than at BCP. So I don't know if it's half and half of the 10 million, I would say, that you could attribute to YAPE.

No, very clear. Thanks.

The next question comes from Yuri Fernandez with JP Morgan. Please go ahead.

Hello, everyone. I have a question on revenues. So far, so good, right? You have margin expanding, so your NII is still pretty healthy. But what is the outlook for 2024? Because you already mentioned that credit origination should be, you know, like luster, given like a more cautious outlook and makes total sense. You have lower rates, right? That should be bad for your sensitivity on margins. And on the fee side, I guess, it's a weaker economy, right? So my question is, what should we expect for revenues and AI for the next year? Should we be a little bit more cautious on these also? I know you don't have a guidance, but just on a trend, what should be the outlook here for revenues? Thank you.

Thank you, Yuri. I think if we have the impact of El Nino as we expect, we should expect a slight increase in revenues. That is the combination of a managed NII and increasing volumes starting probably in the second quarter of the year. In terms of fees, we still expect an increase in fees driven by the transactional activity that we are developing and increasing through our traditional channels and YAPE in particular.

But you think like low should accelerate in 2024 versus 2023 or should remain at those low single digits just as a more... I will think in single digits.

We still expect next year GDP to be around 2%, no booming year.

No, perfect. Super clear. And if I may, just asset quality, just to see if I got correctly. this quarter the third queue uh you had a very high new npl formation higher charge jobs so this was basically the client's payment behavior we're seeing right the provisions everything we saw now and for the fourth queue the increase you should see on the guidance this is the el nino this is more more or less the delta should be mostly down in right so this quarter basically bad macro, and for the next quarter, a little bit of bad macro, but also the El Nino, right? Is this correct, like this understanding on asset quality?

Totally correct. Yes, that's 100% correct. We are ending up the digestion of the bad portfolios we had during the year, but the most impact is explained by El Nino, as you have mentioned.

Perfect. Thank you very much, guys.

The next question is from Sergei Dubin with HL. Please go ahead.

Yes, hello. All of my questions would be on asset quality and cost of risk. I'm very surprised to see this significant jump in Q3, especially on wholesale loans, or wholesale NPLs, I should say. Could you comment what do you mean by 22% of Credit Corp NPL volumes, which were refinanced loans. What are these loans?

Well, basically what we have done is there have been two specific cases in the tourism sector and then real estate, commercial real estate, which have fallen in default, which are recognized in the NPLs. But also, now that the activity is starting to recover on those businesses, and we are able to project a cash flow for those businesses, we are refinancing those loans. And that portfolio is included on the NPL ratio. So that's basically why this number has been growing during the year.

So are you saying that these, you know, loans, or these borrowers had hit problems and you basically refinance the loans so that they're going to be performing again. I don't quite understand, are these borrowers in trouble or is that just an issue of having you extended and maybe soften some terms so they can pay on a different schedule? How should I think about the underlying credit quality of these borrowers?

Yes. Two things about your comment. Those were loans that we were managing in the short term because we were unable to project a cash flow in the long term. Once we extend structurally the final term of the loans, we mark them as refinanced loans, and then we include them in the NPL ratio. And having said that, these are loans that have significant collateral, mostly over 150%, because they are basically hotels and real estate projects, which have guarantees that support extensively the amount of our exposition with those clients.

okay so these at the moment these borrowers are paying right then they're not in default they're paying on the uh what you know as you refinance if they continue to pay interest and principal is that is that correct yes basically they were before they were paying on the interest now they are starting to pay principal as well okay uh all right and then Also on a consumer book, my impression, my very distinct impression from the last call was that you guys, which you communicated actually, was that you tightened the credit standards in consumer book. You obviously foresaw this macro, you know, macro pain, so to speak. So you tightened the credit standards. I was under the impression that that should help in terms of, you know, effort quality, but it doesn't look like that was really what transpires. So can you explain why your reduced risk appetite didn't translate into better credit quality on the consumer book side?

What we're doing is refocusing on our appetite on those clients that we know better. And that's basically what explains why we are growing in the consumer portfolios. Basically, in times like this when we don't have GDP growth, we obviously become more conservative in our approach to those plans that we know We know better. We still do some pilots with the specific segments, but relatively with a much less proportion than what we have done in the previous years. That's basically what explains our strategy today.

Probably may I add something? I think I understand what you are hearing, too. Of course, we adjust our craving origination policy, and the new vintages are being originated and actually are coming with lower risk profiles. But the already booked loans have soured, as is expected. So we have a combination of old books that are already deteriorating and higher rates, and new vintages that are smaller in size, higher quality. And the result that you are going to see during the next quarter is a combination of these two dynamics.

Okay. And then is there any way to, so I'm going to put El Nino aside because that's completely unpredictable phenomenon that depends on nature. It's not up to you. I understand all that. But if you looked at your underlying borrower health, so to speak, and kind of a cost of risk trends and NPL trends, again, putting El Nino aside for a moment, I use seeing that we're sort of at the bottom of this cycle, or there's more pain, and if it's later, how much more pain are we gonna see in here?

Yes, our expectations, putting Danilo aside, as you mentioned, is that we would reach the higher cost of risk of those portfolios during this year, and during 2024, we would have seen a decline. Having said that, the NINIO is around the corner, so we have to consider that on our projections.

Okay. So XL NINIO, you should see decline in cost of risk in 24 relative to 23.

For the specific portfolios, I also want to emphasize that we are shifting gradually the portfolio towards a more retail. Okay. the cost of risk for specific portfolios are going to decline. But the long-term trend is to shift the portfolio towards a more retail one that entails higher cost of risk. That's important to consider.

Yeah, yeah. No, that's a longer trend. But, like, in the shorter term, you're going to – like, maybe that's a question, actually. Like, in the shorter term, are you going to maybe pull back on retail a little bit and really, you know – manage risk? Because I think that's where a lot of pain has been felt, right?

No, there is no change in the strategy. What is an adjustment to react to the current macroeconomic conditions? It's an adjustment in a specific sector that are more vulnerable, but the long-term strategy remains the same, I would say, in general terms.

Okay. And that last question, because it's also related. So as of I believe as of Q3, right, you had 3.1% of your loan portfolio, which is these REACTIVA loans, right? So they are very, they're only, you know, they're very thinly covered, right? It's only 17%, I think, NPL coverage on that specific segment because obviously they're government backed. So if you, you know, let's assume you're going to, all of that will be paid down by the end of the year. When you grow your retail book, you know, from year on year, that you originated loans in retail, that would have to be covered, you know, up from 17% to probably, I don't know, 100%. So wouldn't that, how much, if that's the, if I'm describing this dynamic correctly, what would be the incremental delta in the cost of risk that you would see from that specific point?

I will give you some general comments and after Reynaldo can compliment me. First, the reactiva loan at this point is around 4 billion soles only. It's not going to be entirely paid down at the end of the year. The leverage of coverage is significant The wholesale part is 84%, 91% in retail BCP, and 97% in Nibanco. So the risk associated with this is substantially covered by the government. And this portfolio is going to be paid down substantially over the next year, but not at the end of this year. The payment of this year will be around $900 million out of the $4 billion.

Having said that, I mean, your assumption that it will require higher provisions is true, but also we will provide a much higher margin. Because remember that in the reactiva loans, there were very low government-funded interest rates that almost only covered operating costs. Back to normal, they will provide a much higher yield on those loans as well. That will compensate the higher provisions you mentioned.

Okay. Okay. So by the end of the year, only $100 million will be paid down, and they will be paid down gradually over the next 13 or 16 months or whatever. And I guess I know that your strategy is grow retail book longer term, but again, given the – in macroeconomic pain, and then this El Nino coming up, do you think it would be prudent to perhaps emphasize wholesale book more in this next 12 to 16 months? Or are you still going to emphasize retail as well? I'm just trying to see how you think about growth in this challenged environment.

Well, we review this permanently. Today, we see it proper to adjust our underwriting policies on the specific segments that could be affected in the northern side of Peru and those specific industries like fish meal and agriculture that could be affected, but that's in permanent revisions. I mean, we will see how the NINO evolves, and then we will adjust either further or or relax a little bit our underwriting policies as well. It's a permanent process, as you know. Today we are providing with the best information we have at hand.

Yes. I think it's worthwhile to remember that this is a cyclical event. We have experienced different levels of etnino. Each five, seven years has been several events severe niños in the past, and we have developed the capacity to manage that. The whole country is not paralyzed, but el niño, during the presentation, we shared some figures relating to the level of direct exposure for our credit card portfolio in the northern part is around 6% directly exposed. And so the rest of the country has spillover effects, but it's still working, and we expect a modest but a rebounding economic growth next year.

Okay. All right. That's fine. Thank you.

The next question comes from Carlos Gomez with HSBC. Please go ahead.

Hello. Good morning. Thank you for the call. I want to ask you again about expenses. At the beginning of the year, you mentioned that your budget for transformation was equivalent to 1.5% of ROE, which we calculated to around $175 million. Has that changed? and what is your expectation going into next year?

I think this is more than a budget. This is an appetite and a boundary. And we adjust that according to the dynamics of the underlying business and the specific disruption initiatives. So I will say that this is a rough number that is a guide for us. It's a boundary, but I wouldn't qualify that as a budget.

Okay, but should we understand that you have been adjusting it during the year, and should we expect more or less in 2024?

As I mentioned, this is, I would say, an upper limit, and we are going to be operating under this upper limit. Okay, thank you.

The next question is from Andres Soto with Santander. Please go ahead.

Good morning, and thank you for the presentation and the opportunity to ask questions. My question is regarding your macro assumptions for 2024. I believe, as you mentioned, you have in your numbers 2% GDP growth. Is that what you have, you know, the implicit for the cost of risk that you are guiding to this year? It already incorporates this assumption for 2% growth next year. And when I look at the weather pattern that you show in your presentation on slide number 10, which is quite interesting, it looks like it's turning increasingly similar to the 1997 event. And based on that experience, is that the type of growth that you may expect? I remember back then the economy was growing the year before El Nino, the economy was growing 7% and it came to a decrease of 1%, so a dramatic slowdown. Are you still expecting, it makes sense to expect a recovery next year considering that this sort of El Nino can materialize?

I think it's a very relevant question. We still have an expectation of a 2% GDP growth for 2024 that it considers an impact of El Niño. The El Niño considered in this GDP growth is moderately strong, already considered, and still we are considering that the year of reference as El Niño is 2017. It's also good to remember that at the end of the century, in 1998, we have a combination of El Niño and the debt crisis, an international debt crisis. So this significant drop in GDP that we mentioned is a combination of probably a stronger El Niño that is now expected and an international monetary crisis.

That's very helpful, Cesar. And regarding monetary policy, now that Peru is officially in a recession, do you see additional space for this? And actually inflation is printing pretty well. Do you see additional space for the central bank to cut rate more aggressively than it has done? Or do you believe that the carry trade will prevent a more aggressive move?

I think the carry trade is a factor, but another very important one is the Fed funds. Looking only to internal factors, probably the central bank will be more aggressive cutting rates, but a combination of El Nino that usually have inflationary effects in the short term and the higher for longer guidance from the Fed suggests that the central bank has only limited room to decrease rates until middle of next year.

Perfect. That's very clear. Thank you so much.

It appears there are no further questions at this time. I will now turn the call back over to Chief Financial Officer Mr. Cesar Rios for his closing remarks.

Thank you all for your questions. As discussed, challenging circumstances persist in Peru. Given weak economic performance and higher probability of El Niño, a scenario worsening to moderate strong in the upcoming 2024 summer season, nevertheless, we are confident that the preventive measures that we are taking together with our flexibility to adapt to changing conditions rapidly will allow us to effectively navigate these near-term challenges. It's important to keep in mind that El Niño is a transitory shock, and historically we have seen the economy rebound after prior El Niño events. We expect to see the same trend again. Prior to closing today's call, I would like to leave you with these four key messages. First, Credit Corp is resilient and has the ability to adapt to challenging circumstances. We delivered healthy risk-adjusted margins this quarter, Even as we increase provisions for specific customer segments, we weaken payment capacity, giving a prolonged, regressive, and inflationary environment in Peru. Second, we have increased our efforts across different fronts to mitigate the negative impacts of El Niño on the population, our customers, and our businesses. Pacifico, BCP, and Mi Banco are promoting preemptive actions to limit damage to homes and businesses through various educational programs. In addition, we have modified our underwriting policies for the most exposed retail segments at BCP and Mibanco. Only about 6% of our portfolio is in the areas expected to be directly impacted. Our teams are working closely with clients in these areas to anticipate the likely financial requirements. Beyond the private sector, the government's capacity to unlock and execute projects will be key to jumpstart growth. There is a significant package of projects that will be key to jumpstart growth. There are a lot of projects in the pipeline. The global long-term trend to transition to a green economy favors copper consumption. As a leading global copper producer with the lowest production costs and the highest copper reserves, Peru stands to benefit from this trend. It is imperative to accelerate the execution of mining projects. Third, the strength of our balance sheet, prudent management, and leading franchise built upon top-notch transactional capabilities provide solid foundation for us to weather short-term challenges. Lastly, we continue investing into the future. We remain focused on executing our mid-term strategy, the goal of decoupling from the macro and securing a healthy long-term ROE. We are committed to continue to develop our disruptors to strengthen our competitive modes while further enhancing the efficiency of our core businesses through technological transformation. In closing, we thank you for your continued support and are committed to delivering on our value creation strategy. Thank you for joining us in this call. Goodbye.

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