Credicorp Ltd (BAP) 2007 Q3 法說會逐字稿

Good day everyone, welcome to the Credicorp Ltd. Third Quarter 2007 Earnings Release Conference Call. As a reminder, today's conference is being recorded.

At this time I would like to turn the conference over to Walter Bayly, Chief Financial Officer. Please go ahead, Mr. Bayly.

Thank you very much, Cynthia. Good morning and welcome to Credicorp's conference call for the third quarter of the year 2007. Short from year-end results confirm once again a more vigorous economic and business growth than expected originally with pure expansion and good fundamentals that is driving the excellent performance of the whole financial system of our country.

It is therefore a pleasure for us to discuss Credicorp's results which are a reflection of this economic environment and of our growth strategy. The numbers on the Peruvian economy in the financial system are available to you in our press release and we will therefore not spend time on them. Next page please.

Credicorp's quarterly net income surpassed for the first time in its history the $90 million reaching $90.3 million this third quarter '07 reflecting a 3% growth and a 76% yearly growth. To reach such a record earnings level is even more remarkable when considering the devastating impact for the country, its businesses and population of the August 15th strong earthquake. This meant a hard test on Credicorp on its ability to restore its operational capabilities in the devastated region and absorb the financial impact especially in the insurance business. Despite this setback Credicorp was able to achieve this result given the robust expansion of economic activity, which led to strong growth numbers in all business segments but most importantly at BCP.

Thus in the chart of earnings contributions of the different subsidiaries we observe again the strong quarterly growth of 11% of BCP's earnings contribution reaching a solid $88.2 million contribution. BCP Bolivia is also experiencing important growth and business expansion as its contribution to BCP results keep consistently growing and recorded an astonishing quarterly growth of 22%.

This robust economic activity leads to wealth generation which is again reflected in the growth of Atlantic Security, our offshore banking operation, which increased its contribution by 42% quarter over quarter supported also by strong foreign exchange gains resulting from U.S. dollar volatility.

The serious earthquake, however, did leave its mark on our corporation through Pacifico Peruano Suiza's results leading to a negative contribution close to $3 million which will be explained in more detail later on. Our pension fund company PRIMA has in the meantime been able to reduce significantly its operating cost and it contributed $1.8 million this quarter which added to other investment contributions booked as well at Grupo-Credite led to another $3.8 million in favor of credit cards bottom line results. All this is clearly reflected in the return on average equity which reached this quarter 23%. This is very satisfying for us. Next page please.

Looking at BCP net earnings reached a total of $90 million, $90.7 million, 11% higher from the previous quarter reflecting the continuing extraordinary strong expansion of our loan portfolio and our fee business. BCP's total loan growth of 7% for the quarter is a clear reflection of a strong dynamics in all banking segments that reveals in turn an overall business growth for BCP at a rhythm of over 30% for the year, a remarkable rate.

Loan growth resulted in increased interest income which was up 11.6% quarter over quarter. However, a change in our funding structure left a net interest income growth of only 1% for the quarter. Non-interest income also hides a strong fee income growth of 12.2%. However, the effects of the market gains on securities left a more moderate overall 4% quarterly growth on non-interest income.

Portfolio quality deserves again a special mention since despite the strong growth it kept improving as BCP's passthrough loan-to-loan ratio dropped further to 0.9%. Nevertheless provisions grow in line with our loan book and portfolio quality. Expenses also expanded in line with all our businesses but at a lower rate than income growth leading to a further improvement of our efficiency ratio.

The also significant growth achieved this quarter in our deposit base of 8.5% hides, however, the increased external funding, which given its structure is booked as a deposit in an offshore subsidiary of BCP. Thus real deposit growth of around 3.4% for the quarter reflects the need of such additional external funding to support the strong loan growth and resulted in increased funding costs. In fact, this led to a drop of our net interest margin to 5.2%.

The final bottom line results of BCP are certainly a reflection of this excellent business evolution but also benefited strongly this quarter of a translation gain resulting from the significant strong revaluation of the sol against the weak U.S. dollar, which resulted in a significant $12 million addition to our bottom line.

The following charts will help us explain these developments a bit further. Page 5, loan growth measured by average monthly balances of 9.7% for the quarter reflects the very still high growth of 8.9% of the corporate, 10.3% of the middle market sectors during this quarter. This response is to a continuing investment activity in expanding production capacity of the corporate and middle market industries.

The retail business continued growing at an accelerated pace reaching to 12.3% for the quarter and revealing an outstanding 42% yearly growth. Furthermore, growth of the individual retail products reflect as well such retail activity being the best performance, consumer loans with a 28% quarterly growth followed by lending to micro businesses with 60.5% quarterly growth. Total loan growth based on quarter-end book balances is however lower reaching 6.6 for the quarter. Next page please.

Following such robust loan growth interest income on loans also grows 11.6% quarter over quarter revealing already here some improvement of loan mix. However, lower growth of interest income on investments brought total interest income growth to 9.1%, still very strong for the quarter. Interest expense, however, was affected by a change in our funding structure, which led to a $500 million of external financing. Given the structure of this financing, which was a securitized sale of future U.S. dollar receivables, it was done through a vehicle and booked as a deposit at BCP.

Therefore the quarterly increase of 19.5% of interest paid on deposit is in part explained by the cost of this external financing. This change in our funding structure resulted ultimately in a drop of our net interest margin, 5.5% for the second quarter to 5.2% this quarter. Despite this evolution core earnings reveal a solid 4.8% growth with fee income showing an excellent performance with a strong 12.2% quarterly growth as transaction volumes increased and foreign exchange gains reported an equally strong expansion of 6% in line with this robust business growth. Next page please.

To support the growth of our businesses and especially the strong growth of the volume of transactions processed and as already announced, BCP continues expanding significantly its distribution network opening new branches, installing new ATMs and introducing in a massive way its cost efficient distribution channel the Agentes BCP.

The chart above shows the balances up to now. The chart clearly reflects the dominant position of our network, which is close to a total 2,000 network points throughout the country by September 2007 and keeps growing. Noteworthy is also the percentage of electronic transactions, which now already reach 71% of total construction volume. However, most of the network growth we have been talking about will only be evident and operationally effective in 2008.

Page 8 please. As mentioned in our introduction we are certainly experiencing a period of real expansion with good fundamentals, which is evident also in all indicators of the financial system. The continuing economic expansion and increased consumer confidence is behind the continuous improvement in portfolio quality and further recoveries of charged off loans. Thus we are experiencing unprecedented low levels of delinquencies which has further dropped to 0.9% of past due loans of our total loan portfolio. The obvious effect of such high portfolio quality is the low level of provisioning required, which despite the strong loan growth amounts to 0.97% of loan portfolio. The coverage ratio increased to a very high 300% surpassing by far the system's average.

Page 9 please, looking at the cost side, cost at BCP increased at a much slower pace than loan book and income growth reaching only around 2.8% cost expansion for the quarter mostly driven by a 4.9% increase in personnel expenses. Though we have been cautioning the market about an expected deterioration of our efficiency ratio because of the expected investment in our aggressive expansion plans, this has not materialized since income growth has been stronger than expected. Nevertheless, the costs related to this network expansion will be more significant in the last quarter and next year and we maintain our advice to expect this cost increases in the near future.

All of this developments led to a new record high return on average equity for BCP this third quarter '07 of 36.1%. Next page please.

We do not always explain BCP Bolivia since its numbers are consolidated within BCP Peru. However, given its remarkable evolution we would like to briefly point out to the excellent performance Bolivia is having despite the political environment in which it operates. As shown in the charts, BCP Bolivia's net results had an impressive growth in the last years. This way Bolivia has become a significant contributor to BCP's results, adding total net earnings for the year that will surpass the $20 million per annum, and which in turn reflects a return on equity of over 30%.

Portfolio quality has at the same time improved significantly and is with 2.5% passthrough loan at perfectly normal and acceptable levels, which is in addition significantly better than the average of the Bolivian banking system. Finally, BCP Boliva's market share puts it as the third largest bank. Furthermore, it enjoys today an excellent standing in the Bolivian market. Next page please.

Moving on to the other Credicorp subsidiaries, let's take a brief look at Atlantic. Credicorp's offshore banking business had its contribution for the third quarter growing significantly by 42% this quarter. This result responds to a 20% increase in core earnings, which in turn is explained mainly by foreign exchange gains. Atlantic's asset management business, which includes customer deposits, mutual funds and securities, also continues being a strong fee generator though it reveals a drop this quarter as some large deposits that came in during the second quarter had a transitional nature and left in the third quarter.

On a yearly basis, however, its growth rate of 30% is still a reflection of the increasing wealth in our market reaching $3.27 billion administered funds. Altogether consistent results and further business expansion.

Page 12, results of PPS for the third quarter having been negatively affected by the strong earthquake that struck the southern area of our country. As of September, the property and casualty company, Pacifico Peruano Suiza, has received claims related to the earthquake for a total amount close to $44 million. PPS had a catastrophe reinsurance policy that covered risk of this nature leaving an exposure of only US$6 million. In addition, PPS has paid premiums for the reinstatement of its catastrophic policy for about $1.8 million leading to a total earthquake-related cost of approximately $8 million for the third quarter.

Thus PPS contribution to Credicorp is negative this quarter reaching a loss of almost $3 million. Nevertheless, the accumulated underwriting results of the consolidated company as of September 2007 reached $14.9 million one of the highest in the insurance industry in the country. In the property and casualty business, total premiums dropped 16% quarter over quarter because of the strong seasonality in PRIMA's collections in this segment. Furthermore, underwriting results were severely affected by the earthquake mentioned before leading to a total loss for this segment of $6.6 million.

In the life insurance segment, total premiums grew 22% quarter over quarter as the pension fund business continues expanding. However, an inflation effect on the reserves and a solid revaluation effect on income tax provisions led to an increased cost and to a 44% lower quarterly income reaching $2.1 million.

In the health segment, the production increased 6.8 quarter over quarter. Underwriting performance was flat leading to an almost unchanged net result of $0.6 million for the third quarter.

On the other hand, it is important to mention that PPS continues recovering its market share throughout this current year. The total market for property and casualty and life insurance grew 7.3% in terms of accumulated premiums for the first nine months of the year. During this period, PPS and Pacifico [Vita] grew altogether at 19.9%. And the market share for both in terms of total premium reached 30.5%, a 3.2 percent point increase from the previous year. Next page please.

On Page 13, reaching a profitable operation performance proved to need more time than expected at PRIMA but has finally been achieved. PRIMA's third quarter results reached US$1.8 million for the third quarter after the efforts made in the year to reduce operating costs by cutting the size of the sales force what was finally reflected in the results.

PRIMA has gradually reduced its sales force from over 2,400 by the beginning of the year to around 600 by September 2007, an important achievement to improve profitability. Nevertheless, PRIMA will continue to carry some merger-related costs such as amortization of goodwill that extend into the next years and some acquisition financing costs, which are a heavy weight to carry for this young business.

Commercial results, however, continue their excellent path. PRIMA has positioned itself with the best offer in the market. Its funds have all reached the first place in profitability and it offers the lowest cost to investors. This positioning resulted in the increase of attractiveness of PRIMA's offer as reflected by the market share of contributions, which are new contributions into the system. Though the better results are tangible, a further reduction of the high operating costs related to salaries and commissions paid to the sales force and an improvement of its fee structure continue being the main objectives. Next page please.

We are certainly particularly pleased with the performance of Credicorp as reflected by these ratios given that we certainly had an important hurdle to overcome with the August 15th earthquake. And more importantly as a result of the described achievements, we continue generating greater shareholder value as can be seen on the Page 15. This chart reflects the improved performance of Credicorp. Thank you very much and we are now ready to go into the question-and-answer portion of this call.

Thank you, Mr. Bayly. (OPERATOR INSTRUCTIONS). We will take our first question from Paul Tucker with Egerton Capital. Please go ahead.

Yes, thank you very much and good day, Walter. Thank you for the call. I just wanted to ask you about the insurance business whether you could give us a little bit more specifically about what you're able -- what do you think you can do in your business plan to improve returns there? I guess it would be interesting if you could separate that into things that you think are internal problems, so whether it's about your business mix, your cost structure, your risk management or items that you think are more about the market and the level of competition and pricing in the market.

Sure, I have with me David Saettoneis, who is the CEO of our Insurance Group and I think he will be much better -- he will be able to give you a better feel on the questions you just mentioned, Paul. David?

Thank you.

Good morning, Paul. Definitely Peru has a very liberal insurance market in the sense that Peruvian companies can buy their insurance anywhere in the world and there are no restrictions in terms of -- or penalties in terms of faxes and that sort of thing. So what that means is that we are exposed to the international market in insurance terms and as you know, since 2003, insurance premiums have been decreasing an on average of about 15% per year.

Our portfolio traditionally has been very, very geared towards commercial lines. About 80% of our business is in commercial lines. And as you know, that is the segment of the business that is most subject to this international competition. So what we are planning to do looking forward is to change the composition of our portfolio developing our business more towards personal lines where we have better pricing advantages and also we have better distribution advantages with Banco de Credite. So what we've done during the last year or so is to develop this line of business and we've been growing in personal lines at a rate of about 40%.

We are currently working on an information technology project in order to prepare Pacifico to sell these personal lines products, the small premium massive insurance product, with very competitive administrative costs. And so we think that that will help improve our performance in the medium term.

But obviously, in the short term, we'll be subject to the competition and as we are able to switch our portfolio and weigh it more towards personal lines, we'll be improving ourselves. On the investment side, fortunately, the market has been helping and we'll also be working in that sense in order to improve our returns.

And just to follow up on that do you have a sense in your business plan for when you expect the business to generate an acceptable return on capital?

Definitely, we have to look at it in terms of the different lines of business. For example, the life insurance business is doing really well. And we are getting adequate returns on capital on that line of business. And also the health, even though the actual net income that we are getting from that business is around $2 million, the returns on equity are in the order of 40%. So the deal really is with the property and casualty business, and we feel confident that within the next two or three years we'll be getting rates of return above or in the order of around 15%.

Thank you, David.

Thank you very much. But maybe if I may as I'm on the line if I could ask one other question just PRIMA would you mind just to clarify how your revenues are booked? Is it true to say that the revenues relate to new flows into the pension funds, and are not based on the assets that you have under management, and if that's correct or partially correct, is there any possibility that as we've seen in some other countries in South America, we may see a change in the pricing regime so you can get -- I guess you'd better exploit the fact that you now have quite a large base of assets under management by taking a regular fee on that?

You're absolutely right. The dynamics of the fee, the way it works, it is a percentage of the contributions into the fund. And that is a percentage of the assets under management. Changing the fee structure from a percentage of contributions to a percentage of assets under management is not a simple task. It requires a law and it has not been -- the Chilean models have not been able to make that switch. It is under discussion though at this stage we do not anticipate that that is something that will happen in the short run.

We do have, anticipate, however, that we will be charging -- we're not in the business exclusively of pension-related funds but also in the business of receiving non-related contributions to the fund that is voluntary contributions, if you will. And as of mid December we will start charging for those. That service was provided for free and we will start charging on December. We're the first private pension fund company that will start doing that so we will be breaking some ground there. But we think that that is something that is appropriate and that our customers are because of our offer in terms of pricing and the backup of our group and the good results of our investments will be adequately -- will be appropriate and we basically think not a problem.

And of the $6.3 billion that you reported under management at the end of September, do you have the numbers in terms of the split of voluntary and involuntary fund?

380 is the voluntary side.

380 and what would you charge on that? Is it like 1% or something?

About 1.3, sorry 3%, 3%.

3%. Nice business, okay. That's great. Thank you very much.

You're welcome.

(OPERATOR INSTRUCTIONS). We will take our next question from Daniel Abut with Citi. Please go ahead.

Good morning. Walter. first of all, congratulations on your promotion to the top post and best wishes to Raimundo on his retirement. You certainly have big shoes to fill.

My question is really related to margin, Walter, could you discuss a bit more not only what happened there in terms of the contraction, but how do we think about the future evolution? Because if I think about it there's some forces that should continue to pull towards stability or even improvement there. You've got stable interest rates in Peru and you also have improvement in the loan mix. You continue to grow faster in the segment that are still having better spreads, consumer in general, middle market, et cetera. But you have this funding issue that you explain that this quarter just to keep up with the significant asset growth you have to incur funding of higher cost. Is that a one-time, one-off thing or should that continue to affect the interest margin going forward. Do you see any room for recovering what was lost in the interest margin this quarter, in future quarters or we should think from the current 5.2% level further pressures going forward?

Okay. Thank you, Daniel. First of all, thank you very much for your kind words. More and more running a company of the size of BCP is more about teams than individuals. So I think I've got a very strong team behind me and they will be able, more than able to help me run this institution.

On your specific question, yes, there are pressure on margins in all and each of the different business segments. Competition is fierce. Obviously, the margins on the top corporates have very little room to go down. But the margins on the retail side undoubtedly are under pressure particularly on the lending to micro businesses, not so much on the mortgage side.

But the funding transaction that we had to do relates to the fact that we are having a [devalorization] which is faster on my liability side than on my asset side. Some of the corporates, particularly the exporters, continuing borrowing in dollars and my dollar funding base is not growing at the same pace. And furthermore, the domestic private pension funds are less and less interested in having dollar assets.

So, yes, we have done some funding offshore that relates to not only getting the amount of funds but match funding. We run a very conservative gapping scenario in our books. And, yes, we think that this will continue at least for the next six to nine months.

In terms of the overall margins, they are under pressure undoubtedly because of the competition. There will be two palliative effects, the fact that as you mentioned our product mix is changing and the fact that more and more it is becoming a local currency book and less dollars. So I do not expect the margins to come back and they will be under pressure. I think the challenge is to keep them above 5% though I don't know for how long that will be possible.

Thank you, Walter.

You're very welcome. Though nevertheless, let me add that volumes are -- will continue to increase. We're confident that that will go on so yes we'll have a percentage margin but net interest income overall is clearly going to grow.

We'll take our next question from Alonso Aramburu with Santander. Please go ahead.

Yes. Thank you. Good morning, Walter, and also congratulations on your new appointment. Let me ask you first a question on the bank. For the past couple of quarters, it looks like you're releasing a little market share on the corporate side and gaining market share on the retail side. Do you think this is a trend that will continue or do you expect this to continue in the coming quarters?

Thank you, Alonso, and thank you for your words again. I think the trend that we are gaining market share on the retail side is certainly one that we want to pursue and we are confident that in the different subsegments in the retail the strategies that we have in place will allow us to keep that trend.

On the wholesale side, it's a bit more difficult to predict. We don't expect to lose market share but on the corporate side you've got the large disbursement of corporate loans and you fluctuate around a certain number. We don't think it's a trend that we will lose. We can lose some, gain some. Again, those are impacted by sudden large disbursements of corporate loans.

The impact on the margin is not that wide and thus we're not too worried about it. And again, you have to look at the overall market share including BCP and its subsidiaries. We do book a substantial portion of our loans in our Panama branch and when you look at the numbers make sure that you focus on BCP consolidated, not BCP as a whole, which are published domestically.

Yes, great. Where are you seeing most of the competition coming from some of the new players? It is more on the corporate side or it's the retail side?

From the new players on the corporate side but regardless of that there is intense competition in each of the different market segments. These are credit cards, consumer finance, mortgages, middle market. We have very solid, consistent competitors and each one of our competitors including ourselves we have well-defined strategies and are aggressively pursuing them. So, yes, we have new entrants, which are a bit more niche, focused on a particular niche but the competition continues to be very intense. I mean this is a very attractive banking market and the good side of it is that it's an attractive market. It attracts competition.

Yes, of course. One last question, Walter, about PRIMA. Do you think you're at the level of a sales force that you want or do you expect this to continue coming down now? When do you expect to get to the optimum size as far as the sales force?

Our numbers are probably that around January we will be on a more stable number which would be around 300. And that should probably be the rather stable number as we see it right now. Now we do have in the horizon apparently a new competitor coming to the market. And we'll have to see how that plays out.

Great, thank you.

You're welcome.

(OPERATOR INSTRUCTIONS). We will take our next question from Juan Partida with JP Morgan. Please go ahead.

Hi, good morning. I have a couple of questions. The first one is related to asset quality. We have seen continued improvement in the metrics there and the question is do you expect that to continue or at what point does the increase in mix on the retail side will begin to affect that? And related to that what is the expectation that you have for next year in terms of the ratio of net provisions to average loans?

Okay. Clearly, the credit quality on the retail side has a very, very strong correlation with the economic activity in the country. To the extent that we continue growing at the rate at which we are growing or something similar around that, we do not expect any deterioration in the quality of the retail loan portfolio which is where all our eyes are clearly focused.

We feel relatively -- no, a lot more comfortable in the portion of our retail portfolio that relates to credit scoring. We have gone through full economic cycles lending to mortgages, credit cards, consumer finance, and we think that our models which reflect the full economic cycle are very robust and well-tested.

Thus and furthermore, we have a very strong policy established by the superintendency of aligning the classification. Let me explain that. If an individual, which borrows from several financial institutions does not have a good credit behavior in any one financial institution he is classified as substandard. All of other financial institutions, whether he's a customer or not, can only have one level of discrepancy in the rating assigned to that individual. The effect of this is that it is a very strong inducement of good credit behavior to the extent that practically the system shuts down for you. And the system clearly includes the retail houses [Falavela and Replay] which are very, very important credit providers in the country.

So again going back, we feel very strongly comfortable with our credit systems as they relate to individuals, consumer finance, mortgages, et cetera. The truth is that on the lending to micro businesses we have a lot less track record and history. We have not gone through a full economic cycle lending so much money to that sector. And the alignment it's not clear that it works here to the extent that the temptation if the business go wrong is just to shut down the business and start a new one.

Thus, we have all our eyes are looking into the business. We are aware that growth can hide some mistakes so we will be increasing our prudency, our provisions, in the quarter going forward not because we see that there is any significant deterioration, just because we are aware that growth has risk and that sooner or later there is the potential that growth will be accelerated. Did I answer your question?

Yes, thank you very much. If I could follow up just going back to PRIMA and the size of the voluntary market there, do you have any estimations as to growth in the involuntary contributions versus mandatory contributions and as well as the potential market size that this could have? I understand that with higher GDP growth there should be higher savings so I don't know if you've done any work on that.

Okay. First of all, our market share of the voluntary contributions as they relate to the private pension funds themselves is about 48% roughly. Nevertheless, if you think about it, this is a product that is in direct competition with the funds -- the mutual funds, the bank itself offers. So we think that there is an important growth there. I would say a number around 20,% 25% growth for next year should be achievable. But again, suddenly your competitors have not exclusively the other private pension funds but all the mutual fund system. But partly that is the dynamics.

Are there -- I suppose there are tax benefits to going through the pension system rather than a mutual fund?

Yes, but those are not necessarily going to over time. The end of 2009 there's some changes in the tax laws that do have some impact. All of us as an industry are in conversation with the regulators as to how that will affect, so we at this stage it's not clear. But that will remain for the full 2008 as it is today. But the same as today, yes.

Okay thank you very much.

Okay, Juan, thank you.

(OPERATOR INSTRUCTIONS). We'll take a follow-up question from Paul Tucker with Egerton Capital. Please go ahead.

Yes, thank you very much. Just coming back to your funding, I guess it's a topical question for pretty much any financial institution around the world right now. And it has become to a greater or lesser extent more difficult to get market-based funding. And my sense is Peru is a million miles away from London or Frankfurt or New York but at the same time some of these influences are likely to affect you and we've even seen that so far with you having to go into the market and get more expensive funding.

But could you give us some idea of how you see things now going forward? If you need to go and do more securitization, issue more covered bonds or take other sorts of funding, either in local or foreign currency, do you think the markets are fully open to you? Do you have a sense that it is becoming more expensive still and is there any way we could see a negative surprise you either on your margin or on your asset growth because you can't fund it?

Sure. Actually, last week I was in New York meeting with all our friends, bankers and investment bankers and reviewing this issue precisely. And clearly, the good news is that we have several options upon which we can use to obtain additional funding that being continue with securitizing. We can do the -- finally do the senior unsecured BCP bonds or we can do syndicated loans.

At this stage we have -- so the good news is that the funding is available and it will not slow growth. We are in the process of evaluating the different options and the mix which will allow us to optimize our future funding sources and the selection of the future funding sources because of the volatility is not exclusively in my mind going to be dictated by which of the basis points that gives me the best option. There are a couple of strategic issues here should we save those securitized flows for a potential rainy day?

Do we want to do this a senior unsecured bond to provide the benchmark for BCP and a couple of other issues, do I want to use up my lines with my current correspondent banks in a medium term facility or have those available? So there are a couple of issues. So going back again the good side of it is that, yes, the funds are available. Peru, as you mentioned, is an interesting exposure to have in most institutional portfolios today. Will the fund, have the costs funds changed before the crisis started?

Yes, it has, though I don't think it will have any material impact on our business. We have had some help from our regulators to the extent that they have freed up some withholding taxes and reserve requirements. And we do have some liquidity. So I don't think overall it will become a major factor going forward.

Thank you very much.

You're welcome, Paul.

We will take a follow-up question from Daniel Abut with Citi. Please go ahead.

Walter, quickly, yesterday we finally got the good news of the approval of the free trade agreement with the U.S. Unfortunately, it was [tiered] with the decline in Peruvian equities in sympathy with what happened in the U.S. market. I still believe it's good news but I would like you to elaborate what impact do you think it will have particularly in investment which had already been accelerated in preparation for this. Does this change anything, really boost plans for private sector investment or not because it was already kind of discounted? What is your view?

It's not good news. It's extraordinary news. The business community domestically is extremely motivated and encouraged by this. It has been widely reported as a major success for the country and this administration and the preceding administrations as well. The business community, as I mentioned, is just going to accelerate the rate of investment. This is particularly relevant on the investment side on, I would say, textiles and agriculture, which are two sectors that though do not generate huge amount of investments, do generate a substantial portion or a lot of employment. So it will have a very positive impact in the economy.

And the benefits are not exclusively related to the fact that the tariffs have come down. There's also an institutional framework around the free trade agreement which gives the country much more stability on the framework upon which we will operate. That treaty includes issues like how to resolve disputes, and protection of intellectual property, et cetera, et cetera. So there's a whole framework around the free trade agreement, which provides stability.

The tariff arrangement in itself we already had in the tariff arrangement but it was rolling on a yearly or bi-yearly basis with the ATPDEA. So this provides a lot of stability going forward which again give business individuals a much longer horizon to plan and to make investments. So it is extremely good news and we are confident that this will further boost economic activity domestically.

Thank you, Walter.

You're welcome.

At this time there are no further questions. Mr. Bayly I will turn the conference back over to you for closing comments.

Okay, thank you all for joining us in this third quarter conference call. As we have mentioned repeatedly I think this is one of the best banking markets in Latin America, very robust economic growth, very healthy system and our corporation is extremely well-positioned to take advantage of this growth and we are certainly focused on that. Thank you very much again and look forward to seeing you and hearing from you in the next conference call. Thank you and good-bye.

Ladies and gentlemen this will conclude today's conference call. We thank you for your participation and you may disconnect at this time.