Credicorp Ltd

NYSE:BAP

Earnings Call Analysis

Company Delivers Robust Q4 and Optimistic 2024 Outlook

The company met market expectations for a strong Q4, with net income rising 53% thanks to solid performance across various businesses, particularly wealth management and treasury. Return on Equity (ROE) for investment advisory increased to 14%, capitalizing on robust capital markets and favorable business dynamics. The credit portfolio shifted favorably, increasing retail loans and decreasing wholesale. Net Interest Margin (NIM) improved, and costs of risk are expected to soften due to strategic shifts in loan portfolio mix. Efficiency initiatives led to a lower expense ratio, down by 142 basis points. Looking forward, 2024 is guided for continued loan growth and a targeted ROE of approximately 17%, reflecting a stronger economy and the positive impact of product and funding mix changes.

Performance Amid Headwinds

Despite an array of unfavorable events in 2022, BCP reported solid results, largely attributable to a deliberate improvement in their funding mix and an increase in demand and saving deposits by over 6%. A prominent feature of their lending strategy was the growth in SME Pyme working capital loans and mortgages by 13.7% and 5.9% respectively. Provisions for loan losses increased substantially by 113.3% in 2023 compared to the previous year, driven by worsened payment performance due to challenging macroeconomic conditions. Nevertheless, BCP's strategic business adaptations yielded an increase in operating income, enabling a contraction in the efficiency ratio by 190 basis points to 38.8% and maintaining a robust ROE contribution of 20.6%.

Operational Enhancements and Margin Dynamics

The company's dedication to optimizing insurance offerings and embracing investment management yielded notable outcomes. Insurance underwriting results in particular were propelled by a favorable market, paired with reductions in claims. On the investment side, robust capital market performance catalyzed a 53% jump in net income, thanks to effective cost controls and advantageous rate environments. Credit dynamics shifted, with an emphasis on retail over wholesale loans, which manifested in sustainable margin expansions, even amid rate decreases. The strategic reshaping of the asset and funding mix promises to buttress these margins going forward.

Provisioning Strategy and Non-Performing Loan Management

In 2023, BCP took a conservative stance on provisioning, with the cost of risk reaching 3.2% for Q4 and 2.5% for the year, influenced by provisions for El Nino. The strategy mirrored macroeconomic pressures and a rise in structural non-performing loans, underscored by SME Pyme and consumer credit card sectors. Despite these factors, the structural coverage ratio preserved its strength at 102%, denoting a balanced approach to risk management.

Digital Transformation and Efficiency Efforts

BCP's intent to invest in digital and disruptive initiatives is clear, with a 60.6% increase in expenses for such ventures, particularly emphasizing Yape and Tenpo. Operating expenses overall saw a 9.8% uptick. However, the company's efficient operational dynamic mitigated these increases, resulting in an improved efficiency ratio of 46.1%, down 142 basis points from the year before. The strategy indicates a tilt towards future-ready banking with a sustained emphasis on managing operating income and expenses.

Growth Prospects and Future Outlook

BCP's future looks cautiously optimistic with a GDP growth forecast of 2.5% for Peru in 2024. Anticipating a 3-5% growth in the loan book and a NIM between 6% to 6.4%, the company is betting on Retail Banking expansion and the reversal of provisions related to El Nino. Continued investments in digital transformation are expected, potentially diluting short-term earnings but strengthening the long-term competitive position with an anticipated efficiency ratio of 46-48%. Also, fee income is projected to rise towards high single digits, and insurance underwriting results may normalize at sustainable levels post exceptional gains in 2023. All these factors are expected to culminate in an ROE of approximately 17% for the full year.

Earnings Call Transcript 2023-Q4

[Operator]

Good morning, everyone. I would like to welcome all of you to the Credit Corp Limited Fourth Quarter 2023 Conference Call. A slide presentation will accompany today's webcast, which is available in the Investors section of Credicorp's website. Today's conference call is being recorded. [Operator Instructions] Now it is my pleasure to turn the conference call over to Credicorp's IRO, Milagros Ciguenas. You may begin.

[Milagros Cigüeñas, executive]

Thank you, and good morning, everyone. Speaking on today's call will be Gianfranco Ferrari, our Chief Executive Officer; and Cesar Rios, our Chief Financial Officer. Participating in the Q&A session will also be Francesca Raffo, Chief Innovation Officer; Leynaldo Llosa, Chief Risk Officer; Diogo Goncalves, Head of Universal Banking; Cesar Rivera, Head of Insurance and Pensions; and Carlos Hector, CFO, Mibanco. Before we proceed, I would like to make the following safe harbor statements. 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 statements section of our earnings release and recent filings with the SEC. We have seen no obligation to update or revise any forward-looking statements to reflect new changes, events, new or changed events or circumstances. Gianfranco Ferrari will start the call commenting on the highlights of our 2023 results and the milestones achieved by our main businesses, followed by Cesario, who will comment on the macro environment, our financial performance and provide our 2024 guidance. Gianfranco please go ahead.

[Gianfranco Piero Ferrari de Las Casas, executive]

Thank you, Milagros. Good morning, everyone. Thank you for joining us. We met market expectations for the fourth quarter and achieved resilient full year results in the face of one of the most challenging environments over the last 25 years, excluding the pandemic. Despite the challenge facing 2023, Peru's current prospects stand considerably stronger than they did just 12 months ago. At the start of 2023, we were navigating disruptive protests and enduring political stability. The first quarter also had an inflation rate of 8% and a higher reference rate of 7.75%. Additionally, the country faced [indiscernuble] embraced for the projected impact of a severe El Nino phenomenon for this summer. However, as the year ended, Peru demonstrated its inherent resilience by effectively managing inflation, maintaining low level of public debt and sustaining high levels of international results. The current stable, yet fragile political environment, improving macro with inflation down to 3.2% and a reference rate at 6.25% as well as lower probabilities for a severe El Nino is partly contrast with the conditions at the beginning of 2023. At Credicorp, we have strategically built a diverse portfolio of businesses characterized by a robust brand recognition and strong customer loyalty. Our strength is further bolstered by a solid capital base, and a prudently managed loan portfolio. Our digital capabilities have been key to enhancing our transactional and funding advantages, enabling us to respond swiftly in volatile environments. As an example, at the onset of the year, when we foresaw a challenging credit cycle in 2023, we quickly reassessed our risk appetite and adjusted the pricing of our portfolio accordingly. By providing payment facilities to our clients when they need it the most, we also qualify our client relationships. We delivered a full year ROE of 15.8%, which includes a substantial charge in the fourth quarter attributed to the expected losses linked to the El Nino phenomenon. This result was underpinned by the strength of our increase in NII. We maintain a resilient risk-adjusted NIM achieved through disciplined interest rate pass-throughs in the first half of the year. Additionally, we prepared our balance sheet for the decline in interest rate cycle by reducing the duration of our liabilities and increasing that of our investment portfolio. Having strengthened our transactional value proposition, we secured the sustainability of our funding advantage. Finally, we leveraged our cost-effective digital platforms to accelerate growth in the retail segment. We reinforced our diligent approach to risk management, while maintaining a close connection to customers. This strategic move not only allowed us to sustain adequate capital levels but also equip us to anticipate and minimize headwinds in loan quality throughout the year. We remain committed to advancing innovation and our digital capabilities, which strengthened our competitive position. This approach not only enhanced our existing client relationships, but also paved the way for greater financial inclusion. For 2024, we anticipate an improvement in macroeconomic conditions. Our GDP outlook is now 2.5% with a potential upside considering the lower risk of a strong annum. Moreover, the Central Bank's reduction of the rational rate lays the foundation for a gradual recovery in domestic demand and consumption. Additionally, we anticipate proactive government initiatives to facilitate unlocking of macro projects in both the public and private sectors, particularly in mining and infrastructure. Next slide, please. Our well balanced and diversified business portfolio reinforce our results. In Universal Banking, BCP solified local market leadership by expanding transactional levels and offering a seamless multichannel experience. Mobile banking NPS improved with a growing digital client base. Enhanced IT and digital capabilities supported a low cost of funds, risk management and digital sales. These factors collectively contributed to optimizing efficiency. In Microfinance, Mibanco Peru has been negatively influenced by the challenging macro I already described. While we adjusted our risk appetite and implemented stricter origination guidelines in mid-2022, we acknowledge that these efforts were not sufficient. It took us time to fully grasp the impact of this concurrent event on our clients, but we have now made heightened adjustments. The legacy portfolio continues to impact our performance, yet our most recent vintages demonstrate improvement. We continue to assess our risk management capabilities, confident in our tools for further refinement. In the medium term, we aim to diversify our business through increased transactional and fee-based activities. Given the structural challenges in Colombia, we are evaluating the business there and will adjust our strategy to mitigate short-term risks while maintaining focus on its long-term potential. In insurance, our accelerated digital strategy has led to an improved client NPS, increased sales of digital policies and self-service customer transactions. We optimize distribution channels, notably in retail segments, resulting in the best year in its history. We leverage bancassurance and Yape to strengthen our presence and expect to deliver a long-term sustainable ROE of 20-plus percent. In Wealth Management and advisory, we've completed the first phase of the restructuring plan, strengthening the business and meeting our 2023 targets. We are on track to achieving our objective of a sustainable ROE in the high teens. At Credicorp, sustainability is integrated in our strategy, driving us to act a catalyst for positive change in the operating countries. In addition to our achievement in financial inclusion in 2023, we launched our new corporate environmental strategy communicating it in our first TCFD report in December. We're investing in our innovation portfolio to complement our lines of business, aiming for disruptive initiatives to contribute 10% of Credicorp's risk-adjusted income by 2025. Now let's have a look at how we are progressing in our most mature initiatives. Next slide, please. Our approach to disruptive initiatives involves a nuance perspective, an early stage plus DC view that the guides inform gradation decisions within our portfolio. A mature example is Tenpo in Chile, which entering scaling stage this year with a dedicated focus on revenue growth and monetization. Additionally, Yape intensified focus on revenue growth and is on track to break even towards in 2024. Cesar will provide a more detailed update on Yape, but I would like to shift our attention to the rapidly growing Tenpo. We started with a prepaid payment business, achieving exponential growth in monthly active users and engagement. Currently, we're in the second stage, leveraging our recently obtained license to issue credit cards, positioning Tenpo as the first fully digital credit card issuer in Chile. We've also filed for a full banking license with early indicators from Stage 1 and Stage 2 surpassing our expectations, we're optimistic about the strong potential of this new initiative. As we look ahead, our innovation approach will increasingly encompass the area of cognitive AI, where we are already making progress. We are targeting high-impact transformations across internal processes, external engagement and most notably in customer experience through unique tailored interactions. Focusing first on productivity and customer experience, we're implementing short-term value generation opportunities throughout specific use cases. We're also initiating the development of transformative use cases, envisioning innovation that propels us into sustained progress and evolution. This holistic approach is supported by a comprehensive framework, which ensures the responsible and secure implementation of AI. Cesar, please go ahead.

[César Ríos, executive]

Thank you, Gianfranco, and good morning, everyone. In addition to the usual seasonality expenses, this fourth quarter was impacted by provisions set aside for El Nino based on the best information more available at the closing of the books and by a goodwill impairment for Mibanco Colombia mainly. I will share now the key financial highlights for the quarter, focusing primarily on quarter-over-quarter evolutions. Favorable balance sheet dynamics allow us to deliver an increase in NIM despite sequential reference rate reductions over the last 4 months of the year. Extractor loans grew 0.4% measuring average daily balances, driven by retail banking at BCP. In addition, the share of low-cost deposits in our funding base rose to 54.5%, which represents an increase of 360 basis points versus the figure at the end of September. Other core income also all favorable as BCP took advantage of an uptick in demand for foreign exchange operations at the end of the year. Credit cord capital registered a solid increase in fee income. In contracts, insurance underwriting results dropped 13.2%, reflecting higher claims expenses in our P&C and life insurance businesses, which affected profitability this quarter. It is worth noting that we reported unusually high insurance underwriting results through the year. On the credit risk front, we significantly increased provisions by including an expense of approximately 250 million to cover year-end expectations for El Nino. In this context, the cost of risk increased 71 basis points to 3.2%, while our structural NPA ratio rose 7 basis points to stand at 5.6%. Finally, a structural NPL coverage increased 101 basis points to stand at 102%. All in all, we delivered resilient results in a context mark by a larger than expected contraction in GDP, and we have maintained sound capital levels of our Peruvian banking businesses as a matter of products. Now as the risk of a severe El nino has faded, it is our intention, subject to board approval to deliver a higher dividend payout through the year to move towards our long-term target levels. Next slide, please. For the year 2024, the out for emerging markets look more positive, bolstered by expectations of lower policy rates and high commodity prices. In the United States, the slowdown in inflation and labor market rebalancing led financial markets to be rate cuts in the second quarter. The price of copper is expected to remain at high levels supported by the global transition towards green technology and despite the moderation of China's economic growth. Peru GDP is expected to grow around 2.5% this year with risk is to the upside. This estimate assumes El nino continues to dissipate no new negative shocks of cure and less restricted monetary policies in place and progress is made on key infrastructure and mining projects. The country Central Bank has cut the policy rate by 150 basis points since its peak in response to a sustained deep inflation and lower inflation expectations. Additionally, we expect the government to accelerate advances on key infrastructure projects such as Cavimotectord, and the mining front progress is expected on the Safran all copper project and the government is likely to approve an extension to [indiscernible] of mines. Regarding Colombia, we believe that GDP growth will accelerate slightly to 1.7% in 2024, inflation in turn continues to be persistent and stood at 8.4% as of January. The Country Central Bank delivered its first interest rate cut in December, a movement is repeated in January. Finally, in Chile, GDP is expected to reduce the 2.1% growth in 2024 after stagnating in 2023. Meanwhile, inflation situated at 3.8% as of January. In this context, the country's central bank reduced its policy rate by 400 basis points since peak. Next slide, please. The probability of a strong El Nino over the summer has faded to the background over the last weeks and think the multi-sectoral committee that the study's El Nino phenomenon in Peru has made downward revisions to the probability assigned to this event. Currently a weak intensity is expected in February and from March onwards and paying assigns a higher probability to El Nino. This is undoubtedly a favorable development and contract significantly with the scenario inflate for our last call when the expectations of a moderate strong magnitude El Nino was above 90%. We continue to monitor the probabilities assigned to El Nino, the high volatility. In the current scenario, the economic is expected to edge up gradually. Next slide, please. BCP's 2022 results were solid despite unfavorable events this year analyzing this quarter-over-quarter dynamics. The 5.1% increase in NII was driven primarily by improvement in the funding mix. demand and saving deposits grew more than 6%, which allowed us to optimize the funding base. Additionally, SME Pyme, SME business disbursement roles will change the portfolio mix. This quarter, 1.8% growth in BCP's other core income was mainly fueled by 11.6% in FX transactions. In line with our previous explanation, provisions at BCP increased 28.9%, mainly due to a specific provision for El Nino-related expected losses for approximately PEN 200 million, is we exclude this effect, provisions remained at high levels and decreased slightly by 1%. The marginal increase in wholesale banking provision was attributable to a base effect, while growth in SME Pyme provisions were triggered by a negative payment performance. Both of the aforementioned increases were offset by reversal of specific mortgage subproducts. In this context, the cost of risk stood at 2.91%. Provisions for El Nino accounted for approximately 68 basis points of this figure. On a full year basis, NII was bolstered by high interest rate and by a 3.8% increase in structural loans measured in average daily balances. This growth was led by SME Pyme working capital loans and mortgages, which grew 13.7% and 5.9%, respectively. Despite elimination of intercity fees, fee income remained stable this year. Loan loss provisions increased 113.3% in 2023, driven mainly by a deterioration in the payment performance of clients that were negatively impacted by concurrent macro climate and social events. Operating expenses grew 10% driven by our business IT expenses to support a strong growing transactions and the development of digital capabilities and investment in disruptive initiatives. Growth in operating income outpaced the expansion in expenses this quarter, which led BCP efficiency ratio to contract 190 basis points and stand at 38.8%. In this context, BCP's full year ROE contribution stood at 20.6%. Next slide, please. As Gianfranco commented, Yape continues to scale its pace of revenue generation is steadily climbing and on track to hit breakeven this year. At the close of the fourth quarter, Yape has almost 11 million monthly active users who conducted an average of 35 transactions per month, up 20% quarter-over-quarter. Nearly 74% of these active users already generate fee income. For the more, NPS increased 9 basis points -- percentage points, sorry, year-over-year to stand at 80%. Growth in engagement in fee income and NPL was attributable to new user fled features in Yape 3 business lines at the end of the fourth quarter, Yape had 12 functionalities. The payment business feature are the most used and mature, where top-ups and bill payments were the highest contributors to growth in fee income, monthly revenue generated in the payment business more than doubled year-over-year. In the financial service business, 2 features, one for insurance and another for multi-installment loans were added to the initial offering of mono installment products, monthly revenue generated by Financial Services grew more than porfol year-over-year. Finally, we see high potential in the marketplace where 2 new functionalities has been added to our discount and ticketing features, gaming and electronic sales. Yape increased its income for active use of 35% quarter-over-quarter and is on track to reach a breakeven despite a seasonal increase in the expenses for monthly average users, which was attributable to an uptick in transactions, the development of IT capabilities and expenses triggered after achieving specific milestones. Next slide, please. In 2023, Mibanco's results were negatively impacted by macro conditions, social complex and climbing anomalies, which generated higher-than-expected impacts on our clients. As Gianfranco commented, new portfolio being a just demonstrated improvement, and we continue to assess our risk management capabilities. We are very confident that we possess the tools needed to improve and resume growth. On a quarter-over-quarter basis, NII fell 3.9%, which was primarily attributable to a drop in loan balances. After we further adjust our appetite and riskier segments to focus on lending to better risk profiles. In this context, NIM decreased 30 basis points and so at 13.35%. Provisions were already elevated gross further this quarter after registering a provision of approximately PEN 50 million for expected losses for El Nino Phenomenon. If we exclude this effect, provisions failed due to loan contraction from a full year perspective, NII increased 1% in 2023. This growth albeit slide reflects the fact that the impact of high interest rates on loans successfully offset the effect of rapidly rising funding costs. Our disciplined interest rate management was key to maintain NII in 2023. Provision expense increased significantly this year. Operating expenses increased 4.3% in 2023 and remain under control. Nonetheless, a near flat evolution in operating income led the efficiency ratio to rise to 52.7% in 2023. Mibanco Colombia has been challenged by a deterioration in economic conditions, ongoing high inflation, very high funding rates and a reduction in the interest rate filing. Due to this context and the consequent deterioration in business performance, we are recognizing a contraction in this company value and have registered a goodwill impairment of PEN 64 million at the credit card level. Additionally, as Gianfranco mentioned, we are currently reassessing the business and redefining our strategy to better adapt to current market conditions. We remain committed to the long-term potential of this best. Next slide, please. Profitability at Grupo Pacifico contracted this quarter with ROE standing at 17.9%. On quarter-over-quarter trends, net income decreased 45%, impacted by a 23% drop in insurance underwriting results and by nonrecurring items. The contraction in insurance underwriter results was primarily driven by higher claims expenses in P&C and light businesses. From a full year perspective, Grupo Pacifico's net income rose 74% primarily driven by positive dynamics in insurance and the writer results in the life business, mainly in disability and survivorship, profitability in disability and [indiscernble] was boosted by favorable pricing and volume terms secured under the Cisco 6 auction, all of life products such as credit life and RudLife also reported higher insurance underwriting results driven by higher income and an important reduction in claims in comparison to 2022, still affected by COVID 19. Finally, net financial income posted a 14% increase driven by both our investment optimization strategy and an increasing interest rate through the year. All in all, these extraordinary results were driven by both the disciplined development of internal capabilities and transitory. Next slide, please. ROE for the investment management advisory line of business increased this quarter and stood at 14%, driven by quarter-over-quarter income growth at our more volatile businesses. In particular, robust capital markets performance at year-end boosted our capital markets business and our treasury result by 26% and 90% quarter-over-quarter, respectively. In addition, income from our asset management business edge-up 8% and assets under management rose 6% in U.S. dollars on a full year basis. Net income rose 53% as we benefited from market performance favorable business dynamics in our wealth management business and a rigorous cost control program, notably treasury results for bars 2022 losses and wealth management income increased 11% as we took advantage of the rate environment to improve our intermediation margins. We managed to increase assets under measuring U.S. dollars by 9% and 11% in Wealth and Asset Management, prospectively. Next slide, please. Now we will look at credit or consolidated dynamics. On a quarter-over-quarter basis, our interest serving asset mix shifted marking an uptick in retail loans and the investment portfolio and a contraction in wholesale loans. In the funding mix, there was an uptick in low-cost deposits and a contraction in more expensive funding sources such as term deposits. These dynamics, which unfolded in a context mark by decreasing interest rates allow the yield on interesting assets to remain flat, while the funding cost decreased 12 basis points on a year-over-year basis. Interest earning assets follow the same mix dynamics on the funding side, the increase in term deposits and to a lesser extent in YouTube banks was driven by a construction in low-cost deposits and secondarily by a reduction in bonds. These dynamics, coupled with the rerating of our asset portfolio led to an increase of 99 basis points in the yield of inter earning assets compared to 68 basis points increase in the funding cost. Going forward, we expect our balance sheet structure to support resilient margins in a decreasing interest rate environment. On the asset side, we increased the duration of our investment portfolio, we will take longer to rerate. Additionally, our loan book is growing at a faster pace in retail loans, which offer higher yields and are less sensitive to interest rate movements. These dynamics will provide the stability to our asset yields. On the funding side, the recent uptick in low-cost deposits would help sustain our funding strength. In addition, the balance of term deposits, which are more concentrated in wholesale clients will quickly reprice downward, which will help lower our funding cost. Next slide, please. recent balance sheet and interest rate dynamics led NIM and NII to increase quarter-over-quarter and on a full year basis, boosting core income growth. On a quarter-over-quarter basis, NIM increased 10 basis points and stand at 6.21% Risk-adjusted NIM fell 35 basis points to 4.1%. Provisions for the El Nino phenomenon generated a negative impact of 45 basis points. Core income was boosted mainly by NII, which increased 2.9% quarter-over-quarter. We're analyzing the results for fee income and FX transactions, it is important to note that gold line has been affected by our operation in BCP Bolivia, where we charge fees to FX clients to offset losses in buy-sell FX transactions. Excluding BCP Bolivia operations, other core income grew 2.1% quarter-over-quarter, driven by an uptick in FX volumes where BCP leveraged higher end volumes and higher fee income and credit card capital. On a full year basis, NIM registered a 92 basis point NAFTand stand at 6.01%. This improvement more than offset the impact of higher provisioning this year. In this context, risk-adjusted net rose 9 basis points to end at 4.38%. Core income increased 11.4% on the back of NII, which grew 16.6%. Next slide, please. Let's look at the dynamic of structural nonperforming loans. As Beament in 2023, a weak economic performance continued to impact client payment performance, albeit to a lesser extent than in previous quarter. On a quarter-over-quarter basis, growth in BCP's structural and nonperforming loans was driven by SME Pyme consumer and credit cards. In SME Pyme, delinquency was concentrated in all vintages while every delinquency indicators of new binashow improvement. In consumer, our credit cards increasing NPL volume was concentrated in loans overdue more than 120 days. Mibanco's delinquency was concentrated in higher ticket loans, where we have recently implemented tougher credit policies. This increase was partially offset by a payment of an overdue loan and an additional loan recovery, both associated with the specific corporate clients. On a year-over-year basis, structural nonperforming loan volumes increased mainly through SME Pyme, consumer, redicards and Mibanco, driven by the same factors are those seen quarter-over-quarter. Wholesale Banking NPL was impacted by an uptick in overdue loans into a lesser extent in refinanced loans from the tourism and real estate sectors. In this context, the structural coverage ratio stood at 102%. Next slide, please. Moving on to provisions. The cost of risk has risen and stood at 3.2% for fourth quarter and 2.5% for the full year. The structural cost of risk stood at 3.3% for the fourth quarter and 2.5% for the full year. The quarterly figures reflect the fact that we included a specific provision of approximately PEN 250 million for the NEO phenomenon based on the best information available at the closing of the group. Let me go through quarter-over-quarter dynamics for provision expenses, excluding the charge related to expectation for El Nino impact. Provisions grew 3% driven by a base effect in Wholesale Banking by a drop in client payment performance in SME Pyme due to adverse macro conditions. These movements were partially offset by reversals for specific sub products and mortgages and Mibanco due to a contraction in loans. On a full year basis, provisions rose 105%, driven by Retail Banking and BCP which rose across consumer credit cards and SME Pyme to an uptick in deterioration of older vintages. Provisions at Mibanco were also up, driven by a door in the payment performance of clients. The formation was partially offset by reversals in wholesale banking through the year. Next slide, please. We will review the evolution of efficiency on a cumulated basis to isolate the impact of seasonal effects. Expenses for disruptive initiatives at the Credicorp level increased 60.6% where the most relevant initiatives were Yape and Tenpo, which accounted for approximately 2/3 of this year expenses. Operating expenses grew 9.8% in 2023, driven primarily by disruptive initiatives at Credicor and within core businesses at BCP. At BCP core businesses fueled growth in expect an uptick in IT expenses related to increased use of the cloud as clients become more digital and transactional levels increase, 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. Operating leverage remains strong at BCP and Mibanco operating expenses remain under control, but operating income is still challenged. In this context, our efficiency ratio stood at 46.1% in 2023, down 142 basis points year-over-year driven by positive operating leverage. Next slide, please. Credicorp's full year profitability was sustained by solid results at our Universal Banking and Insurance businesses, which mitigated weak performance at our macro finance units. On top of the recurring dynamics, it is important to note that Creditcorp's results were influenced by the goodwill impairment related to Mibanco Colombia, by an increase in the withholding tax provisions and the holding level, which were set aside to cover the impact of an expected increase in dividends. In this context, ROE for the full year stood at 15.8%. Credicorp's net equity in 2023 was bolstered by an uptick of $730.6 million in other comprehensive income, which was mainly attributable to a reduction in unrealized losses for the available-for-sale portfolio. Now I will move on to the outlook. As previously mentioned, we expect Peru GDP to grow around 2.5% in 2024. Regarding loan growth, we are changing our guidance indicator as reactive and no longer constitute a significant share of our portfolio. We expect our total loan book measured in average daily balances to grow between 3% and 5%, driven mainly by Retail Banking and BCP and a slight drag down by reactive amortizations. So ongoing shift on our loan book towards higher yielding mix coupled with favorable dynamics in our funding structure should positively impact mean accordingly, we expect NIM to stand between 6% to 6.4%. The the cost of risk guidance is between 2% and 2.5%. This range reflects the shift of our loan portfolio mix towards retail and a partial reversal of El Nino related provisions. In 2024, we will continue to invest significantly in digital transformation and directive initiatives to bolster our long-term competitive position. Those we expect the efficiency ratio to situate between 46% and 48% and will reflect an increase in the weight of expenses for dilutive initiatives. At this point, we consider it is appropriate to provide you with some qualitative guidance on 2 key income strengths. Net fees and insurance underwriting results. Regarding the former, we expect fee growth to pick up towards high single digits in 2024 as activity accelerates and our efforts to further increase our transaction capabilities gain traction. Additionally, insurance underwriting results will contract after reaching unusually high levels in 2023 as profitability in the life insurance business converges to very good sustainable levels. Given the four mentioned dynamics, we expect our ROE increase stand at around 17% for the full year. With these comments, I would like to start the Q&A session.

[Operator]

Ladies and gentlemen, we'll now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Ernesto Gabilondo from Bank of America.

[Ernesto María Gabilondo Márquez, analyst]

My question will be on your expectations for OpEx growth this year. Just wondering if it should similar to the pace of growth observed in 2023 or a little bit lower, especially after removing the goodwill impairment in Colombia. How much do you expect OpEx to be related to the recurring business? And how much do you expect it to be related to the digital transformation? And also related to this question, when do you see Yape becoming profitable? And in which lines of the P&L should we start to see higher revenues from this business?

[Gianfranco Piero Ferrari de Las Casas, executive]

Thank you Gion the... Actually both questions.

[César Ríos, executive]

Yes. I think there are very relevant questions. I am going to address one by one. In terms of growth, I would like to emphasize that the impairment is not considering operating expenses goes in another line, so we shouldn't take into consideration to explain the dynamics of the business. In general terms, we expect to have similar dynamics in growth in expenses, but mention that the relative weight of the new initiative is growing significantly. So as you can see in the report, over the last year to 2023, the relative weight has increased, and we expect this relative weight of the new initiatives continue to increase significantly, and they are not going to increase 66% as was in the year of 2023, but being more significantly changing from around 10% to around 15% of the expenses, the relative weight of these new expenses are going to be more relevant in the whole. This is one of the questions. In terms of Yape profitability, we expect to have breakeven during this year with a very significant dynamic in which we are going to start having more fee income strength, not only related to the transactional activity, but gradually a more relevant contribution from the financial services and Yape market.

[Operator]

Our next question comes from Olavo Arthuzo from UBS.

[Olavo Arthuzo, analyst]

Just a broader question here. With this guidance for 2024 of an ROE of 17%. I just wanted to confirm the indications of an ROE around 18% in 2025 that you guys provided during the Investor Day last year. So should we continue thinking about this 18% or after the operational performance after last year, there should be some change in debt? And also, if you could include your thoughts on the sustainable ROE of the consolidated bank, I would also appreciate.

[Gianfranco Piero Ferrari de Las Casas, executive]

Thank you, Olavo. And the answer is yes. I believe we mentioned it and I don't know if last call or a couple of calls ago. We see 2024 as a transition year. That's the reason why the expected ROE in the guidance is around 17%. We expect that by 2025, the expected ROE should be 18% and then onwards. So we expect a sustainable ROE in the medium term to be 18%. Bear in mind that we've also stated that we expect that by 2025, the digital initiatives overall as a portfolio should be cash flow neutral. So yes, the answer is yes.

[Operator]

Our next question comes from Sergey Dubin from HL.

[Sergey Dubin, analyst]

Three questions, but I'll start one by one. On net interest margin guidance. I guess you guys are guiding to improving net interest margin for 2024, even though Central Bank of Peru is obviously cutting rates. Could you go over one more time in kind of like more detail exactly why -- what's going to drive the NIM improvement and you can discuss both posit yields and funding costs in that context.

[Gianfranco Piero Ferrari de Las Casas, executive]

Francesca can take the question.

[Francesca Raffo, executive]

I think the question is significantly derived from a balance sheet perspective, the mix, we have positioned the book trying consciously and purposely to lend the duration of the asset side and shorten the duration of the viability side. This strategy through this 2023 year has positioned our balance sheet in order to benefit from the reduction of the interest rate in the following month. In the asset side, we have increased the duration of the investment portfolio, and we consider that we can change the mix of the loan growth tilted toward more retail loans. This is going to increase the yield of the part of the portfolio. And in some cases, we think that these yields are going to be not only more contributor because of the underlying yield, but they are also less volatile and less connected to the underlying reference rate. Of course, the wholesale loans are going to reprice according to the market in a timely fashion. In the liability side, we have going to have 2 factors that are going to increase our funding structure and one is going to be probably in the other direction. In the positive side, we have ended up the year with a better funding mix. In the last quarter, the proportion of low-cost deposits increased 360 basis points, and we are considering a positive dynamic to continue. So maintain a significant proportion of low-cost funds and reflecting the funding strategy that I described at the beginning, we have increased the percentage of term deposits, very short-term deposits that are going to reprice accordingly with the decrease in the reference rate. These are going to be positive contribution to the margin. On the flip side, we are refinancing medium-term loans bonds, sorry. And they are going to increase the marginal costs. All in all, the result is the guidance that we have just provided.

[Sergey Dubin, analyst]

Okay. That's helpful. Okay. So my second question is regarding cost of risk. So I understand that there's a bunch of provisions taken for El Nino, which is fine. But then when I back that out, actually, even it just looked like line by line, I see that BCP had a significant increase in cost of risk almost doubled from last year. I'm talking about year-over-year here, not quarter-to-quarter. Mibanco was actually a very modest increase. And then other was also very significant in percentage terms. So can you comment on what drove increase in BCP cost of risk specifically?

[Gianfranco Piero Ferrari de Las Casas, executive]

Yes, Reynaldo?

[Reynaldo Llosa Benavides, executive]

Yes. 2023 has been all a very challenging year for us as a whole. Besides specific events in terms of what we had at the beginning of the year. As you know, the economy had shrunk during this year. And as such, I mean, we have much more provision than expected and much more provision than in 2022. This explains basically the difference between both years and specifically related as we have explained in 2 portfolios, the SME Pyme as well as the consumer and credit card portfolio soon.

[Sergey Dubin, analyst]

Yes. So my question is really why because you have Mibanco, which is lending to these less affluent less credit quality customers, their provisions have only increased 16% year-on-year, but your DCP provisions have doubled. So are you feeling -- why is there a disconnect? Like why are you not increasing provisions in the most vulnerable segment of the population. And it seems like -- is that because you took the pay early in the bank. What's driving that disconnect and provision increase between the Banco and BCP.

[Reynaldo Llosa Benavides, executive]

You have to check the base here in BCP, we had an average cost of risk of around 1.5%. And with that , as you mentioned, in Banco in last year, we were around 6%. So it has grown marginally only 10%, but taking into consideration the base of both portfolios. That's the basic explanation. It's the base of last year as compared to this year. In absolute terms, BCP is less than half of what Mibanco has provisioned in this year.

[Sergey Dubin, analyst]

Okay. Well, I'll check the math and come back to you on that. And then my last question was also addressed partially but not really fully. So can you -- like when you're talking about your cost of -- cost-to-income ratio, efficiency ratio, right? So I think you mentioned that this year, you're going to have 10% to 15% of expenses from disruptive initiatives. But then you also said that in -- by 2025, you would expect 10% of revenue coming from disrupted initiatives as well. But presumably, in 2024, there will be also some portion that comes in revenue coming from that. So why are you still having efficiency ratio deteriorating as opposed to improving, especially in the context of Yape breaking even this year?

[Reynaldo Llosa Benavides, executive]

Yes. It's because the -- as an example, Yape is going to become -- it's got a rich breakeven this year, but the cost to income of Yape is 100%. Let's assume if it gets breakeven. The cost to income of Yape is going to be 100% this year. And Yape relative to the overall portfolio, it's going to be larger this year than the previous year. And that's something is exactly the same to the other initiatives. So the other initiatives are disruptive initiatives. So the disruptive initiatives keep improving their cost to income, but they're not -- obviously, they're way higher than 45%. And as they become larger, they have a negative impact on the cost-to-income ratio.

[Sergey Dubin, analyst]

Okay. I see. I see. So basically, until your disruptive initiative cost-to-income ratio reached your average, whatever 46% or 47%, they're going to still weigh down on the consolidated...

[Reynaldo Llosa Benavides, executive]

Exactly. So what we're -- as a management team, what we're trying to do is with the, let's say, traditional business, how to make it much more efficient so that as to -- as creditors on overall portfolio, we're balancing that cost-to-income ratio and not deteriorating the cost to income further.

[Operator]

Our next question comes from Carlos Gomez from HSBC.

[Carlos Gomez-Lopez, analyst]

Congratulations on the results. I wanted to know if you can give us an idea about how much you have invested in Tenpo in Chile? And what your expectation is for future investments until it reaches profitability? And second, I don't know if you have mentioned this already, but what do you expect for dividend this year? And what will your target CET1? I think you are at 13.2%, that's probably a bit higher than what you normally operates. So that would be capital dividend and Tenpo.

[Gianfranco Piero Ferrari de Las Casas, executive]

Yes. Carlos, I'll take the second question, and then I really don't have the figures for 10 bottom of mine, maybe Cesar help me here. Regarding dividends, obviously, we cannot provide a figure now since the dividend has to be approved by the Board in April of [indiscernible]. But what is -- what I would say is relevant is the logic behind paying dividends. Over -- along the history of Credicorp, what we've done is that the subsidiaries paid whatever is in excess of what they need for growth in terms of capitalization, and they pay dividends to Credicorp. And then obviously, Credicorp, if it doesn't have any transformational investment or something like that, it pays dividends. last year in 2023, we decided to withhold some dividends at the -- specifically at Mibanco and BCP because of the social arrest and the projections of a strong El Nino we had at the time. That's the reason why, as you correctly mentioned, BCP is today the common equity Tier 1 of BCP is much higher than what we normally have, which is 11.5% Which is 11%, as you mentioned, it's above 13%. So yes, that's the answer regarding the dividends. I don't know if that's enough for you.

[Carlos Gomez-Lopez, analyst]

Well, I mean -- so we should expect therefore, more distribution from the subsidiaries to be holding and therefore, perhaps more general distribution this year than in previous years. has the logic, right?

[Gianfranco Piero Ferrari de Las Casas, executive]

That's the correct math. Sorry, I cannot be more specific, but the Board has to approve that.

[Carlos Gomez-Lopez, analyst]

No, I understand. I understand. But obviously, the Board is going to...

[Gianfranco Piero Ferrari de Las Casas, executive]

Totally valid logic... Yes. Regarding tempo, Cesar, can you come with that.

[César Ríos, executive]

We have grown in a general figure, but I will say Tenpo can be around PEN 100 million million, PEN 10 million around of cash costs.

[Gianfranco Piero Ferrari de Las Casas, executive]

As of today. As of today. Yes. And maybe what is more relevant, Carlos, is that how we manage the disruptive initiatives it's not that we are fully committed for the next, I don't know, 5 years. It's each of the initiatives that we set indicators, what we call early or operating indicators depending on the stage. And if they hit -- if they achieve those indicators, we -- the capital costs are met. We are constantly supervising and Francesca's team is constantly looking at the performance of the initiative, and that's the way we manage them.

[Carlos Rivera Zermeno, analyst]

Okay. But it's fair to say that -- and you have highlighted Tenpo, indeed, that's something which is working. So one would expect that you will invest more in this particular venture because you are far from breakeven as well, right?

[Gianfranco Piero Ferrari de Las Casas, executive]

Yes, yes. And for not only in terms of money, but also in terms of time. Yes, that's correct. We cannot provide an exact figure as of today. But let me -- let us revise it, and we will be more specific maybe next call.

[Operator]

Our next question comes from [indiscernible] Raju from Goldman Sachs.

[Unknown Analyst]

I have a question on provisions. Do you expect any additional provisions related to El Nino at all in the coming quarters? And is there any risk of El Nino becoming more severe in the next couple of quarters maybe and you having to make additional provisions related to that? And then going forward, what would be a more normalized cost of risk that we should consider? And how should we think about the evolution of cost of risk throughout the year also?

[Gianfranco Piero Ferrari de Las Casas, executive]

I think Reynaldo could you take that one, please?

[Reynaldo Llosa Benavides, executive]

Yes, with the latest information we have, we don't expect at all any extra provisions for the El Nino effect. As mentioned, we are considering as of today, a reversal of provision we made in the last quarter of 2023. And in terms of the normalized guidance, it will depend how successful are we in terms of the projected growth in the retail portfolio, which as you can understand, we would require a higher cost of risk than than the whole of the portfolio. So basically, it will be around the current number, but it could grow a little bit if we are successful in the growth in the retail market.

[César Ríos, executive]

Maybe just to complement, Reynaldo. What we look at is a risk-adjusted NIM. So that's what Reynaldo just mentioned is totally correct, but the retail portfolio has higher NIMs. Therefore, they can bear higher cost of risk. What matters is risk-adjusted NIM.

[Unknown Analyst]

Just to make sure I understand. So in case retail loan portfolio growth does turn out to be better this year, then cost of risk should be closer to the top end of the guidance? Is that what you mean to that?

[Reynaldo Llosa Benavides, executive]

Yes, that will be the case, but with a higher NIM as well. So overall, it will be better for the bank to be in that case.

[Operator]

Our next question comes from Yuri Fernandes from JPMorgan.

[Yuri Fernandes, analyst]

I have -- I joined the call a little bit late, so I'm not sure if this was explored or not, but I'm having a hard time to consolidate your '17 ROE with your expenses growing somewhat in line with 2023. So if you can bid a little bit more color, I know you discussed that NIM should remain resilient, loan growth accelerate and cost of risk. But it still -- it seems too positive, and I would like to understand a little bit the bridge. Perhaps this is the Yape getting to breakeven. But if you can help us understand the ROE path to the 17%, that would be great.

[Gianfranco Piero Ferrari de Las Casas, executive]

Sure. Cesar could you answer that?

[César Ríos, executive]

Yes, please. I would like to invite you to revise the basic of the year. We have the year 15.8%. If we consider that next year, we are considering an increase in average daily balances and an improve in NIM, we are going to have a relevant increase in net interest margin and a controlled cost of risk that should increase in relative absolute terms over the last year. Adding to that, we are going to have an acceleration in fee income, driven by the underlying businesses and also for the disruptive initiatives mainly Yape. This is going to provide an -- I will say, pre-expenses significant improved gain in income. And as we adapt to these figures, costs that increases more or less in line with previous year with the change in the composition as Gianfranco has explained for the relative weight of the new initiative, we can have a higher profitability this year than the 2023 with the addition that we are not considering onetime events like the provision of El Nino and the impairments that impacted 2023.

[Gianfranco Piero Ferrari de Las Casas, executive]

Maybe, Yuri, just to complement Cesar. Let me go back to my original comments regarding the overall situation of Peru. It's not only the macroeconomics but also the the social situation, the political situation and so on. So we see a much better -- we feel that we're in a much better position as a content today than what we were exactly 12 months ago.

[Yuri Fernandes, analyst]

Perfect guys. Now -- and it makes sense and would like with that. If I may, just a second one, and I kind of have a follow-up on Yapei, and congrats on the numbers for Yape like impressive again. I just not an increase on the cost to serve, like you provide this chart in the presentation. And our park is almost crossing the cost to serve, but the cost to serve was up, I don't know, like some 20% quarter-over-quarter in the fourth Q. So just asking if the cost to service seasonal, if you -- like when you say breakeven of Yape is this cost to serve getting a little bit more normalized and returning to, I don't know, like the previous levels of for solid per active user? Or is this the pack crossing the cost to serve? So just checking the cost to serve on Yape.

[Gianfranco Piero Ferrari de Las Casas, executive]

Yuri, you're right on your assessment that I mean Cesar mentioned during the page. The last quarter, we have some -- well, first of all seasonality because of the number of transactions, there's a spike in the last quarter, especially in December. Lastly, were some costs related to performance, but we expect that cost to serve to go back to similar to previous levels. Therefore, Cesar said, we're going to reach breakeven this year. I would say we're going to reach breakeven the first half of the year. So we're on the write back.

[Yuri Fernandes, analyst]

Congrats on the results and the guidance.

[Operator]

[Operator Instructions] Our next question comes from Andres Soto.

[Andres Soto, analyst]

I have a couple of questions. The first one is a follow-up on your NIM. I would like to understand, if you can remind us what is the percentage of your loan book that is variable rate and how that compares with your -- on your liability side on your deposits, how much of that is the variable rate.

[César Ríos, executive]

Okay. First, as we have commented previously, we have no variable rates, so no relevant variable rate proportion of our portfolio. The explanation of the NIM performance is the composition of the balance sheet that is going to change and the positioning that we have engineered during 2023 to shorten the duration of the liability side that is going to benefit the cost of funds through 2024 as the reference rate decreases.

[Andres Soto, analyst]

Thank you, Cesar. So it's a area of also duration, I imagine, right? You don't have variable rate is a matter of how long are you on your assets versus your liability. Can you understand what is the gap at this point?

[César Ríos, executive]

Yes, exactly. It's a matter of durations. And I will say, pass-through sensibility of different kind of instruments.

[Andres Soto, analyst]

Right. And can you give us some numbers in terms of what is the duration on your assets versus liabilities.

[César Ríos, executive]

At this point, the duration of the assets is a little bit more than 2 years and the liability is slightly shorter.

[Andres Soto, analyst]

Perfect. My second question is regarding the loan growth guidance. The call that you are selling for the country sounds quite optimistic. However, when I see the multiplier that you are assuming for loan growth is just a multiplier of one to nominal GDP. What are the factors preventing you to have a more GDP in terms of loan growth?

[César Ríos, executive]

I think it's a very valuable question because if you think an inflation of 2.5%, 3% and GDP grow 2.5%, you can think in nominal GDP of around 5.5% or something about that. and the usual multiplier has been around 1.5%. But this 1.5% is not a clock that is perfect every year. But we have now and another factor that is relevant is that when we provide guidance, we are talking about average daily balances. And we have a decrease in the balances through the year during 2023. So we have, at the beginning of the year, have a lower amount -- sorry, higher amounts at the end of the year, and we need to rebuild the portfolio starting in a lower base -- and another factor that was mentioned probably very briefly during my presentation is that we are still going to have some impact of Reactiva. We are no longer providing the guidance based on a structural portfolio but in total portfolio, but we are going to still have an impact that is slightly less than 2% due to the payment of the remaining reactivants that we already have on books.

[Operator]

And ladies and gentlemen, it appears there are no further questions at this time. Now I'd like to turn the floor back over to Mr. Gianfranco Ferrari, Chief Executive Officer, for closing remarks.

[Gianfranco Piero Ferrari de Las Casas, executive]

Thanks to everyone for joining us today and for your questions. The journey we've undertaken over the past year has been both challenging and transformative. Our resilient full year results underscore the strength of our organization and our ability to adapt to an evolving landscape. This outcome is grounded in a solid foundation, including a diverse portfolio, integrated digital capabilities and a prudent approach to risk management. Our success span various lines of businesses, including Universal Banking and insurance as well as asset and wealth management, where our turnaround plan is delivering expected results. While acknowledging the process, we are aware of the work needed to strengthen and revitalize our microfinance business for sustainable growth. Looking forward to 2024, we anticipate an improvement in macroeconomic conditions. With anticipated El Nino phenomenon, a more favorable GDP outlook, a reduced local reference rate and control inflation, we are more optimistic than 3 months ago about the opportunities that lie ahead. Cesar share with you our detailed 2024 guidance, which reflects a year in transition. For the medium term, we expect to maintain a resilient NIM as the sensitivity of our margins to decreasing interest rates have diminished year-over-year, and we continue to shift our loan portfolio towards retail. Our cost of risk should maintain a downward trend as we finalize digesting the current credit cycle. We also see some room for efficiency optimization as our disruptive initiatives mature. Taken together, we should be back on track to deliver our sustainable ROE of around 18%. As we move forward, our commitment to talent, innovation, sustainability and shareholder value creation remains unwavering. The investments we're making today are paving the way for a more resilient and sustainable future for Credicorp. Before closing, I want to comment on some management changes announced at the end of the year. We bid farewell to Reynaldo Llosa, who will retire from his role as a corporate and BCP CRO after an impeccable 30-year career. I extend my personal ratio to Reynaldo for leaving us in a stronger position. Cesar Rios will be transitioning into the CRO role for Credicorp and BCP -- with more than 30 years of diverse organization experience and exceptional capabilities, I am confident that he will guide us into a new era of risk management. This would empower us to adaptive leverage developing technologies to expand our reach into new segments and markets. Finally, I look forward to collaborating closely with Alejandro Pererees, who steps into the role of Chief Financial Officer at both Credicorp and BCP leveraging his 25 years of diverse experience within the company. Thank you to all of you for our participating team in the call and see you or talk to you in next quarter. Have a nice weekend.

[Operator]

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