Credicorp Ltd (BAP) 2005 Q4 法說會逐字稿

Good day everyone, and welcome to the Credicorp Fourth Quarter Earnings Conference Call. As a reminder, this call is being recorded. At this time I would like to turn the call over Maria Barona. Please go ahead.

Thank you Mark [ph], and good morning everyone. Welcome to Credicorp Fourth Quarter 2005 Earnings Conference Call on this the 14th of February, 2006. I'm Maria Barona with i-advize Corporate Communications. Joining us today is Mr. Walter Bayly Chief Financial Officer, and Ms. Aida Kleffmann, Investor Relations Officer. If you would like a copy of this report please contact us at (212)406-3691 so we may send you one immediately. Any comments made today by Credicorp may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995 and reflects expectations of the bank's management based on data that is currently available. However, actual performance may differ materially due to various factors. And, with that, I will turn the call over to Mr. Bayly for his opening remarks. Mr. Bayly please begin.

Thank you very much, Maria. Good morning to everyone and welcome to Credicorp Fourth Quarter 2005 Earnings Conference Call. We're especially pleased to be able to report fourth quarter year-end results that confirm a remarkable performance already reflected by the trends thru out the year2005. We are very satisfied with this result which will fulfill our expectations. The fourth quarter '05 has continued the improvement of Credicorp income generation capacity and makes clear the potential for continued growth. Our 2005 earnings results are at an all-time high and we continue to feel confident these results are sustainable impact. We will spend some time looking at the numbers and the Peruvian financial system, and afterwards, I will focus on Credicorp numbers and those of its main operating subsidiaries.

Next page please. The Peruvian economy continued showing a healthy performance during the fourth quarter of '05. The official growth estimate for 2005 was 6.3% which implies growth of 7.4% for the fourth quarter '05. In this quarter, as has been the trend in recent quarters, the most outstanding performance corresponded to construction, which once again showed growth of over 10%.

Domestic demand continues to strengthen awhile investment establishes itself as one of the highest growth sectors along with exports. And imports showed significant increase also reflected the expansion of domestic demand. Inflation at the close of the fourth quarter of '05 reached 1.5% within the lower limit of the range expected by the Central Bank. Regarding exchange rate with the U.S. dollar there has been a gradual increase in the exchange rate in response to two factors. One, in the first stage, August - November, to the increasing differentials between referential rates in dollars and local currency which made savings in foreign currency more attractive, stimulating the demand for dollars, and in the second phase (November-December) due to increasing uncertainty with respect to the upcoming elections. Thus, the exchange rate at the year end reached 3.42 cents per dollar, a devaluation of 4.2% compared to the close of 2004. During '05, the fiscal deficit was 0.6% of GDP for the full year, i.e. better than the government's annual goal of a deficit for the year. Part of this was the favorable performance of the central government's tax revenue. In addition, the central government spending in the same period was reduced from 16.5% to 16.4% of GDP, with reductions in both current expenses and capital expenses, thus, the central government deficit neared 0.6% of GDP as opposed to 1.4% in the prior year.

The trade balance continued showing higher surpluses, and is estimated to have reached $5.2 billion at the close of fourth quarter '05. This is 2.3 billion higher than that posted in the close of 2004. However recent months have seen a more moderate rate of growth exports. The 2006 trade surplus could be lower with respect to 2005. The performance of imports responds to the greater dynamism in domestic demand, showing growth rates of 25%, driven mainly by the acquisition of supplies and capital goods. International reserves rose by 402 million for the quarter, reaching $14 billion.

We will now move on to the Peruvian financial system on the next page. During the fourth quarter '05 banking system loans reached $12.7 billion representing an increase of 5.7% with respect to the third quarter '05, explained by increases in all loan categories. Commercial loans and SME loans grew 6.1%, Mortgage loans 4.7%, the latter due to continued dynamism observed within the framework of housing construction progress. Consumer loans grew 4.8% associated with expansion in individual consumption and heavy penetration through credit cards, which are always very active towards the holiday season. This represents loan growth for the system of 17.6% for the year. Loans in dollars grew 4% with respect to the third quarter '05, while local currency loans rose by 10.6% which allowed the continuation of a process of loan de-dollarization. This de-dollarization was driven by a drop in local currency loan interest rates due to heavy competition among financial institutions and by the preference of corporate, or solid, debt due to the local currency this last quarter.

Deposits reached $16 billion, representing a 3.9% growth rate with respect to the third quarter '05 and 12% for the year. During the fourth quarter the de-dollarization of deposits increased due to depositors' preference to protect themselves from a possible devaluation of local currency versus the dollar. The loan portfolio quality of the banking system improved again in the quarter. As of December of 2005, total past due loans decreased 22% quarter over quarter and 45% versus the previous year. Total past due loans represented only 2.1% of total loans. They [INAUDIBLE] improved to 235% in the fourth quarter compared to 205% in the third quarter. Thus the financial system continues to strengthen the trend of growing with healthy loan portfolios. Next page please,

The results achieved this fourth quarter have confirmed the trend set forth in the previous quarters by reaching a net income of close to 50 million, similar to the previous quarter and 30% higher than in the fourth quarter '04. Those results also consolidated the improved earnings for the year which reached an unprecedented $195 million for the Corporation on a consolidated basis, 38% higher than the previous year. Excluding minority interest, Credicorp reports a net income of 182 million, that is 39% higher than the last year, an unprecedented number indeed. This improvement is reflected in the return on equity, which moved from 13.5% for 2004, to 16.4% for 2005.

Credicorp's results were clearly lead by banking operations, mainly, Banco Accredito, in -- Bolivia. As we can see, PCP Consolidated represents 90% the income contributed to Credicorp and reports a very high earnings growth for the year of 58.4%. Thus, PCP's contribution n to Credicorp's results reached 46 million this fourth quarter and 136 million for the year, also it's consolidated operations in Bolivia has had an important improvement this year with a contribution to PCP's earnings of double its results a year ago, reaching more than 10 million in 2005.

Atlantic Security Holdings was also a stable contributor to Credicorp's complementing the financial services offered by the Corporation with its private banking activities and investment portfolio management business. Its conservative investment strategy makes it a low risk operation with a steady contribution which reached this year, again, the 13 million mark. Credicorp's insurance business, as I said, confirmed this quarter the continued problems in the businesses and the operating results for the year. EPS reported a 0.9 million contribution for the fourth quarter and 5.6 million for the year.

Pacifico has a fierce competition in the market. It has lost somewhat in terms of market share and income generation. It's main problems have been the high casualties in claims reporting in two of its three business sectors. medical and property casualty. The problems have been identified and the first steps to remedy them have been taken. We do not expect a sudden turn around but rather results for 2006 in line of those for 2005. Our franchise remains strong and Pacifico is very well positioned in the market. We need to upgrade our underwriting capabilities before we can assume growth in this segment.

The losses reported in Credicorp and Grupo Credito, include the start up operation of AFA PRIMA , our newly-established pension fund business. These losses are less than projected and are perfectly in line with our expectations. In fact we're very optimistic regarding the future of this business, given the excellent starting results in terms of portfolio of approximately 250 million, in number of clients 50,000 captured in this initial period. The level of reductions in Credicorp are mostly related to taxes on dividends received by Credicorp from its Peruvian operating subsidiaries. Given these contributions' breakdown we would like to give you some detail on the main earnings contributors. Next page please.

PCP's net income for the fourth quarter of '05 continued its growth trend and reached 47.8 million, 2.4% higher than the previous quarter, 74.5% higher than the same quarter a year ago. Thus PCP closes the year 2005 with 184.4 million in net earnings, 59% higher than its net earnings in 2004. This last quarter numbers benefited from a very strong loan growth this last month. Not only in the retail and SME segment, observed throughout the year, but also in the middle market and corporate segment.

However, the generalized expansion of PCP's business is reflected in all of its numbers showing very high growth numbers in net interest income of 22.3% for the year and non-interest income, mainly fee business, of 18.4% for the year. Total asset expansion of 27.4% for the year is led by loan growth with total net loans up 20% for the year and the expansion of its investment portfolio by almost 50% for the year mostly composed of local currency CDs issued by the Central Bank. On the deposit side this also grows in line with its loan portfolio up almost 20% for the year.

Looking more closely at the total income numbers you can see the net interest income reaching 102 million this fourth quarter, and 385 million for the year, growing 2.2% quarter-over-quarter and 22% year-over-year. This net interest income growth was a result of loan volume growth of 20%m investment portfolio growth of 45% and net interest margin improvement up 7%. The improvement in net interest margin is a result in three factors: Currency mix, the local currency portfolio grew at a faster place than the U.S. dollar portion. Loan mix, the retail portion grew faster than the wholesale, and lastly while most of our loan portfolio is priced out of U.S. dollar [INAUDIBLE which has increased during 2005, our deposit rates have not increased at the same pace due to the liquidity available.

Non-interest income, which includes commission from banking services, foreign exchange transaction, total securities and other income, reached 68.4 million for the fourth quarter '05 reflecting a drop compared to the previous quarter's 70.6 million explained by the absence of gain in the sale of security. In fact, fee income and income from foreign exchange transactions continued growing this year leading to the overall non-interest figure of 259.6 million for the year, 18% higher than the previous year.

Our fee generation service takes advantage of the growth in improvement of our distribution channels, branches, ATM, and Internet, and our strategic focus to continuing to improve our fee income. This significant improvement in PCP's earnings generation is the result of our corporate strategy focusing our efforts on the retail, SME, and transaction businesses where interest and growth could still be achieved with cost controls. Thus, operating expenses, despite all of this growth, could be kept to a very strict cost control program and grow only 1.3%. The following charts will help us explain this development a bit further.

On page 7, in terms of loan growth this has been mainly achieved in the retail and SME segment which is at the same time the more profitable one. Throughout the year, the retail and SME segment has led the growth in the loan portfolio but it has been in this last quarter that our interest and rationalization in loan demand across the board has been observed, especially in the middle market, leading to the growth numbers reported in the year: 27% for the retail and SME market; 13% for the middle market, and 10% for the corporate.

Within the retail and SME segment all different products grew at comparable rates ranging from 22% credit cards, 29% consumer loans, and 28% mortgages. Altogether net loan growth achieved for the year is 20%, a very good number in light of the high liquidity in the market and growth of the Peruvian capital market. This development sets forth the recomposition experience of our loan portfolio, where the trend in the retail and SME segment can be clearly observed, as a percentage of total loan portfolio grew from 32% to 36% from 2004 to 2005.

Next page please. On PCP;s income side, the distribution according to the source of net interest income and non-interest income, grew 22% and 80% respectively in 2005, is clearly reflected in this chart . Again, the importance of potential of the retail and SME market is obvious. Not only growth is mainly driven by this segment, but also profitability given the larger net interest that can be achieved in this segment.

Furthermore, the improvement by 7% is a result of not only a widening of our spread given interest rate growth in U.S. dollar lending rates while PCP's [INAUDIBLE] process remains stable but also the stronger concentration of growth in the more profitable retail and SME sector. This dynamic development in the retail and SME sector contributed to the widening our earnings generation capacity. The higher loan growth achieved in this segment, and that is leading to a recomposition of our loan portfolio increasing the portion allocated to the segment with the highest net interest margin, is resulting in this segment becoming the main income contributor within PCP. In fact, total income generated by this segment in a loan portfolio which is 36% of the total, almost doubles the sum contributed by the remaining 64% of the portfolio allocated to the corporate and middle markets, a development which is likely to continue.

Next page please. Portfolio quality has also continued improving this fouth quarter '05 leading to a past due loan to total loan ratio. including the Bolivian portfolio, of 1.94%, below the level of the Peruvian banking system. Likewise, the coverage ratio reached an all time high of 208% a very comfortable position. We're especially satisfied with this loan portfolio quality indicators, given the good loan growth rates achieved which confirm a healthy growth of PCP's business. The level of provisions reflect as well, this improvement in loan quality, with total provisions as percentage of net interest income dropping from 11.5% to 7.4% and total provisions for the year reaching 28.7 million versus the 38 million of the previous year.

This lower provisioning was possible given the healthy financial environment in which we're currently operating and despite the loan growth achieved and a higher proportion of more risky portfolios being allocated to retail and SME. Another contribution to the high earnings reported by PCP has also been the fact that we're still benefiting from our previous conservative provision and write off policy. The good economic environment has led to the the recovery of loans previously written off for 28.5 million, a similar figure to our coverage last year, which led the net provisioning for 2005 close to zero. In short, a very healthy growth with low provisional requirements for conservative coverage provisions. Please proceed to the next page.

On the expense side we also feel satisfied with reporting an important reduction to our costs for our fourth quarter '05 from 99 million in the third quarter '05, to 88 million in the fourth quarter '05. The latter, however, was mainly due to a reversal of provisions related to the value of our stock in the stock opportunity rights program for senior executives. More importantly is, therefore, the overall resource of our cost control program for the year based on which we manage to keep cost growth minimal given the significant growth achieved in the businesses in general.

Cost growth in personnel costs of 10% from 190 for the year '04 to 210 for the year of '05 was compensated by reductions in general and administrative costs reaching an overall cost increase of only 1.2% for the year '05. Thus allocation of personnel cost within total costs expanded to 44% while others diminished, leading to this reduced overall cost expansion. The positive effect of this cost control added to the increase of earnings have resulted in a very satisfactory reduction of our cost to income ratio from 59.9% to a 51.9%, a remarkable 13.4% drop. This improvement in the overall performance of PCP's business is better reflected in the positive ratios. Return on average assets reached 2.3% while return on average equity increased to a very healthy 23%. Next page please.

Given the visibility of Bolivia to the Latin American scenario and to the political developments in this country, we thought we should show a few figures of our Bolivian bank. PCP has had a good year and we're very pleased with its results. We have learned to transfer our experience and developed expertise in Peru to manage similar problems in other operations such as Bolivia. Thus we have managed to reduce our problem loans reaching today a past due loan ratio of 5.8% which compared favorably with the 11.% of the Bolivian financial system. Our ratio is also far better than the system which is 130% versus 81% for the system.

These numbers have put our Bolivian bank in a very good position to capitalize on its image today as the the most solid bank in the system which is allowing it to grow its market share. This past quarter, loan growth peaked, reaching 3.6% quarter over quarter or 13% on an annualized basis, leading to an overall 8% loan volume growth for the year. This growth however, is even better when comparing only performing loan numbers 285.4 million as of December '04 versus 356 million in December '05 reflecting a 14.4% performing loan growth for the year.

Net income has doubled this year as a result of a much better focus on lower cost control in the development of PCP's retail business. Net income for the year reached 10.2 million reflecting 112.5% growth from its 4.8 million of profits last year. This led to an improvement return on equity to 16.7% versus 8.4% last year. The result exceed the expected recovery for the Bolivian operation, and confirm the strategy being applied today.

We will now move on to the the next page to comment on the Atlantic Securities performance. Atlantic Security is a stable contributor to Credicorp's results. Atlantic reported earnings for this fourth quarter of 3.5 million and accumulated for the year 13.6 million, while net interest income recovers slightly in the fourth quarter for full-year it reflects a drop of 7% as a result of lower rates achieved by a low risk investment portfolio. An increase in deposit rates in line with U.S. dollar interest rate hikes.

This leads to a drop of net interest margin to 1.5% for this year compared to 1.9% last year. The drop in interest income could be partially compensated by gains in the sales security which was up 10% for the year following the recovering in the financial market Fee income also reflects business expansion showing 13% growth for the year reaching 4.9 million. On the cost side, Atlantic, in line with PCP Corporation, has also achieved a 7% cut in costs contributing to overall results.

Thus, and given that the provision requirements reflect a conservative portfolio and remain at stable loan levels, net income as reported for the fourth quarter, and for the year remains in line with its business development, and represents growth of 2%. Though this earnings growth number is not impressive, Atlantic's profitability ratio does reflect and improved business return on equity growth from 14.5 to 15.9% year-over-year. Funds under management ,which surpassed the 1 billion mark for the first time at the end of this year, are also a good reflection of improved business. This fund reports an important expansion and reflects Atlantic's ability to capture this business growing 43% from 709 in 2004 to 1.16 billion in 2005, an important component of Atlantic's business which contributes through fee income to Atlantic Security's results. Next page please.

Results from the insurance business for the fourth quarter, as compared to the full-year 2005, have been below our expectations. The insurance business shows a significant drop in profitability which is reflected in high claims and a concentrated drop in the underwriting results. Total premiums for the fourth quarter report an increase of close to 10% related to insurance contracts which are to be renewed towards the end of the year in the property casualty business.

On annual basis total premiums growth is 4.2%. However a better indicator of business expansion is the growth of 8.5% for the year of net premiums earned which are net of technical reserves mainly for life insurance and reinsurance costs. Despite this growth in premiums earned, an increase in claims, mainly in property, casualty, life, health, business, and sickness, has led to poor underwriting results for the Company. Furthermore this growth has also been weak compared to insurance market shown by the drop in the market share from 30.4% in 2004 to 28% by the year 2005.

These poor results are mainly concentrated in the property casualty and health segments. Property casualty, which represents an important 48% of PPS's business reported operating losses of 1 million for the year, given the high casualties in the marine haul business. Health insurance also reflects a drop in profitability because of high-cost of services provided. However, a one time correction in the calculations, applied to reserves related to claims incurred but not reported, of close to 5 million for the year for PPS as a whole, resulted in a negative bottom line number of close to 2 million.

Life insurance, which represents 31% of total premiums is operating positively with an earnings contribution of close to 10 million. Nonetheless, it continues facing a problem of competitiveness of its life annuity as we reported before because we utilize a more conservative mortality rate of payments. Thus, underwriting results show the problems of this business reporting a drop of 37% for the year leading to a reduction of net income at PPS of 47% down 7 million. That is almost half the half the earnings from 2004. This is also confirmed by the increase in its net loss ratio from 72.4% to 78.9% within the year.

The combined ratio which measures the insurance business before any financial income, and is, in PPS's calculating, excluding the life insurance business from financial income, is an integral part of the business. It also shows the ratio increasing to 103% and thus reflecting the losses generated by this business. This has led to a decision to implement changes in PPS, including commercial strategies, in our review of our risk management and reinsurance policy as well as our cost management, to become more competitive and recover market share and profitability. The insurance business can be very profitable and offers a great growth potential given the [INAUDIBLE]. PPS has a very solid franchise and we believe the necessary changes are being implemented. Thus, we feel the insurance business at Credicorp is now a challenge and a opportunity to improve the profitability of the Corporation.

Next page please. On the overall, in summing up the results, we feel very pleased. PCP has shown solid growth reaching net loan growth of 20% with special dynamics in the most profitable business segments, retail and SME, shifting its portfolio towards this high margin high growth business. Income generation was up 59% fueled by this loan growth, shifting business focus and increased fee income. This business expansion was achieved while loan quality continued improving and to actually very comfortable levels, and without any significant increasing costs. Thus, all ratios show significant improvement.

Atlantic continues expanding its business and represents a stable and low risk income generator. PPS posed a problem, which we see today as a challenge and, actually, as an opportunity to grow and improve Credicorp's return -- giving it room to return this business to a very profitable level. PPS is well positioned to recover its leaders.

Not forgetting our new venture, our newly created fund Prima, We see a excellent opportunity for further growth in our corporation. Prima started in August and its results to date are exceeding our projections from the start up. Prima has already accumulated close to 250 million in pension funds and affiliated around 50,000 customers. Losses during its first month are lower than projected. Altogether, Credicorp has benefited from the strong economic recovery and is well positioned to continue doing so.

Last page please. The market numbers reflect this performance which you all must have been following. Our stock was trading around 28% during November. Starting in December, several electoral polls were published which raised uncertainty and concern among investors related to the continuity of the current economic model. This uncertainty lowered the price of our stock which closed the year at $23 per share. Since then recent polls have lowered this concern and the price of our shares have recovered, and now trade at over $29 per share which has taken Credicorp's market capitalization close to 2.4 billion. With these comments, I conclude the presentation and, Mark, we can now start the question and answer portion of the call. Thank you, very much.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question of the day will come from Carlos Gomez.

Hi, good morning. I have two questions. The first one refers to your local currency loans from 17% to 23% of the total and I would like to know where you expect that to go? Second, for many years we have been waiting for the recovery of loan growth in Peru, is it finally happening? Do you think it's the beginning of a strong side or just a cyclical peak? And third, I would like to know your plans for additional investments in Bolivia.

Okay. Thank you, Carlos. Solid loan growth, I think that this was a very sudden one time shift, from very large corporations, when they saw the weakness of the local currency towards the end of the year, shifted a portion of their borrowings to local currency. Once this movement of weakness in the local currency is no longer in the market, and people feel that the fundamental of us having a very strong export capacity have taken over, we do not expect this very strong expansion in local currency loans, which again, was focused on the corporate side. What we are seeing, on the other half, still small numbers but growing at high rate, the growth in mortgages in local currencies.

We're very encouraged by this. We're trying to be aggressive in pricing our local currency mortgages for our fixed rate local currency, and we expect some growth there as well. Regarding loan growth, this growth in the first quarter of 7.2%, also surprised us, to be very frank. This is very, very, high, and there is an element of cyclicality which relates to consumer spending towards the holiday season and the beginning of the fishing season which improved dramatically the volumes in the middle market.

All in all, we feel that there will be loan growth this year. And, to be very frank, we had a budget, we have a budget, but we're seeing that that budget of loan growth is probably going to be exceeded. We would be very happy if we achieved loan growth this year similar to last year year-over-year, but our bet would probably be somewhat lower than that. The third question was additional investments in Bolivia. At this stage we have nothing contemplated. We have paid dividend dollars from our Bolivian operation. We are over capitalized and we will be growing organically and at this stage we have absolutely no planned expansions or acquisitions in Bolivia, or anywhere else outside Peru, to be very frank.

Thank you.

[OPERATOR INSTRUCTIONS] Next we'll hear from Rafael Bello with Citigroup.

Yes good morning. A couple of questions, could you share with us with your T1 capital as well as your total capital ratio? And also my second question regarding your return on equity for the whole company. You show 16% for your organization. I understand that PCP has above 22%, slightly above the market, but, clearly, you know their businesses are hurting. So, what is your plan, what do you plan to do in order to, I assume you want to get above the market. What would be your plan and what is your target ROE over what period of time?

We have, in the past years, have several of our businesses which have been under performing. We have also had excess capital. We are now seeing that excess capital is being more adequately utilized and we have investments in Prima which have still not provided the returns to our corporation because it's in a start up mode but we assume in the long run --it will take at least three or four years -- we will be able to generate important return on equities for our corporation via Prima As I mentioned, the insurance company has also had the prior year substandard return on equities. There are things that we have to address and, we have had a profitable insurance company in the past. We expect to do so in the near future. I would bet for the year 2007 we could be achieving ROE, for the Corporation, growth of 20%.

Regarding tier 1, tier 2. The bank is basically on tier 1. Total capitalization is about 9.1 times. Let me see if I have the numbers here, 9.1 times, which is below the regulatory capital required. But relatively close where we want to be and we have relatively very little tier two capital. That is one of the efficiencies, if you will, of our conservative management in terms of having high capitalization regarding tier 1. I don't have the numbers in front of me but I will send them over to you.

Okay. Thanks. So, just to clarify this, this 9.1, you said times. Is this 9.1%?

No. Times.

Times what?

Hold on. I have that here. The ratios are on -- risk weighted average assets divided by capital is 9.1%.

Okay, 9.1%. And then you said that is below regulatory, that is above regulatory right?

Right.

Okay. All right.

Within the regulatory.

Within the regulatory. What is the regulation what does your regulators tell you you should have?

11.

11. Okay so you are below the regulatory level of 11?

We are yes. And so, are you planning to do something to come up to -- at least par with regulation? No, we're, --11 times. We are 9.1 times and we can go up to 11.

Okay, all right. I see what you're saying. Okay. All right. Thanks.

No problem.

Next we hear from Valerie Fry with Banco Santander.

Thank you my questions have already been answered.

Thank you very much. [OPERATOR INSTRUCTIONS] The our next question will come from Richard Shopick-Post [ph] with Lucite Research.

Hi there. I just want to confirm your loan growth total rose 6. I know you said that loan growth is going to be in general similar to '05. Maybe slightly less. Are we going to see the same loan growth on a divisional basis, like as in corporate, middle market, and retail growth? Are they going to be similar or do you still expect retail to grow faster than the other two? Are we going to see the similar in growth rates?

Clearly the growth is going to be much more aggressive in the small business, where we expect loan, growth, you know, around the 20% mark. On the middle market, traditionally what we have seen is loan growth between 1 and 1.5 times growth of GDP. And on the corporate, probably, a lot less, probably, volume similar to GDP growth or less, because of the high level of this intermediation. All in all, in weighted average we probably would see loan growth between 10% and 15% for the year.

And with an increasing exposure to retail loans and everything, the provisioning expenses, will that continue in the same trend as what we have been seeing there 2004 to 2005?

Correct.

Thank you. Our next question will come from Jorge Luis Rodriguez with Centura.

Thanks. Good morning. My question refers your transactional business. I would like to know exactly, if you have any insights on how the [INAUDIBLE ] strategies coming out as to right now and, if you have any strategy regarding remittances from the exterior, those remittances that are continuously growing in Peru

Sure regarding the [INAUDIBLE ] we have now left the start up mode if you will. We are aggressively deploying these modules. As of this date, I think we have over 70% of these modules and our target is to reach year end with approximately 300. We are learning how to better utilize them.

The truth is, we don't have a lot of experience and nobody has a lot of experience domestically about this distribution channel. We're learning which types of retail units it is becoming more in use than in others, and in what products, but overall, we're very satisfied but I think it's a bit early to try to gain some insights as to how can this be better done in its final results. We're very enthusiastic about it and think it will be an important contributor in increasing the level of [INAUDIBLE] in our population but at this stage, it's hard to predict.

And in regard to our remittances, yes, we have a focused strategy. We have signed alliances with most of the relevant remittances houses from abroad, from about 13 different countries. The market share for remittances is growing aggressively and most likely today we're either number one, or very close number two, in terms of the volumes of remittances captured in Peru.

Thank you.

Carlos Gomez with Legg Mason has a follow-up.

Hi, a couple more questions about you Prima, your pension fund. First,, I would like to know what type of fees you offer to your customers to be able to break into the market and gain the market share you are obtaining? Second do the latest legislative changes that would allow pensions from the capital system to move back to the public system strengthen your model and what do you think the outcome of these changes will be? Thank you.

When we started the operation we were very aggressive in terms of the fee. Our fee is 1.5% which is by far the most aggressive. At the time where we launched the average of the fees was 33% higher than ours. Since then, some banks have some other competitors have lowered their fees but we continue to have the lowest fee. Some competitors have fees similar or lower but the customer has to commit to staying with that for a period of two or three years. Our fee offers no retention -- or requires no retention. So, we continue to have the lowest fees. That coupled with our image and our presence in the market has allowed us to obtain the very positive results, so far. So we're very enthusiastic and ahead of our expectations of our budget and we think that this business is going to be very interesting for us going forward.

The recent changes in the legislation to respond to a relatively small distortion in terms of number of people, which in the private sector pension funds scheme will receive a pension lower than that of the minimum paid by the government. And these are cases like individuals that were in relatively -- joined the private sector system at 60-years-old, and are only for a small period of time, and thus, have not had a chance to accumulate a lot of funds. Or people that transfer to the private sector fund were unable to demonstrate they have been contributor to the public sector system and thus did not receive the [INDECIPHERABLE] which is the recognition that they have contributed to the public sector system.

So, there is a couple of specific instances in which individuals were not getting a benefit from being in the private sector, so something had to be addressed. Unfortunately, the result is, and this is a small amount of population I think, the number is 15,000 people out of a system that has over 3 million, so, the legislation unfortunately, was not extremely enlightened drafting, and does not address all of these problems, and it creates a possibility of certain movements but we are not concerned about this at all.

I don't think it will impact any substantial portion of the business. If some individuals want to move from a private sector system, to a public sector system that require as higher contribution and thus people have to take money out of their pockets or take a loan in a system that is clearly not very healthy -- if somebody wanted to do that -- I don't think many people will want to -- but if they want to they should go ahead and do it. So, it poses no concern to the running of our business.

Thank you.

You're welcome.

At this time we have no further questions. I will now turn the conference back over to Walter Bayly.

Well, I think it's been a relatively long conference call. I think I went over our budgeted time. but, thank you very much for your attention and being with us in this conference call, and if any further questions, please do not hesitate to contact us for any further information. Thank you very much. Good bye.

That does conclude the conference call. Thank you for joining us today.