Credicorp Ltd (BAP) 2008 Q2 法說會逐字稿

Good day, everyone, and welcome to the Credicorp, Ltd. Second Quarter 2008 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, sir.

Okay. Good morning, and welcome to Credicorp's Second Quarter '08 Conference Call.

As you may recall, the first quarter of this year was characterized by a volatile local financial environment fueled by the weakness of the US currency, the turbulence in the international market, and growing domestic demand, which added to the international hike in food and oil prices, generated strong inflationary pressures.

The Peruvian Central Bank reacted to these pressures, increasing the reference rate for the soles to curb inflation, which, in turn, fueled a massive inflow of funds, to which the Central Bank reacted again with drastic measures, using an increase in reserve requirements as an instrument to control such inflow of capital.

During the second quarter, the further deterioration of international markets, worldwide inflation and additional restrictive measures of our Central Bank, through reference rates and reserve requirement increases, were behind the continuation of such volatility.

Thus, while in the first quarter, the US currency devalued more than 8% against the soles, dropping from $2.99 and closing at $2.77 for the quarter. In the second quarter, the exchange rate bounced back, and the US revalued to $2.96 by the end of June. This exchange rate volatility impacts significantly in our business.

As we point out last quarter, our business is run in both currencies, being a rough approximation 60% US dollars, 40% local currency. Since our reporting is done in IFRS accounting in US dollars, we translate such 40% to US dollars to do this, generating gains or losses depending on the net currency positions we hold.

It is therefore very important to understand that, given the dual currency financial market in which we operate, the calculated management of the currency positions is crucial for our business and is based on a consensus view of the currency exchange rate for the future. Therefore, given the volatile nature of this earnings, we would like you to focus your attention on the evolution of our core business and earnings.

Having said this, I would like now to explain our results. Next page, please.

At first glance, net earnings of Credicorp revealed a strong volatility we just talked about, having reported $178 million net earnings in the first quarter and only $73.7 million net earnings in the second quarter of this year.

However, these results do not reflect the real business evolution, and certain translation gains in the first quarter '08 reached a total of $68.7 million and boosted Credicorp's net income for the first quarter. And an equally strong translation loss of $61.5 million in the second quarter reduced net earnings significantly.

For this reason and for the analysis purposes, we have excluded translation results from net income to be able to compare and follow more accurately the business evolution.

Thus, net earnings before translation results revealed a continuing business growth and increased profitability, as this reached $135.2 million in the second quarter, after $109 million in the first quarter, and $85.7 million a year ago; this earnings growth of $23.7 million quarter-over-quarter and $57.8 million year-over.

Further adjusting return on average equity for this also reveals increasing profitability with return on equity gradually climbing from 23.2% last year to 29.7% the second quarter, whereas the reported return on average equity, including the translation effect, the volatility, that reflects the volatility, was 40.4% in the first quarter and 16% in the second quarter, and the chart on the following page should help us see this effect.

The chart on page four shows the earnings generation since last year. Discounting the translation effect, the results of Credicorp reveal a more stable performance reflected in the blue bars, consolidating its high-income generation during the second-- during 2007 and continuing with strong growth throughout both quarters of 2008. That is a continuation of its business expansion.

The impact of the currency translation is seen in the blue line which reveals the small impact we had usually reported in previous periods and its increasing importance as the local currency becomes more volatile. We will evaluate and see the volatility effect and real business growth in more details when looking at the subsidiaries report.

Page five, please.

From a contributors point of view-- contributions point of view, sorry, BCP shows a depressed second quarter contribution of $76 million. This includes a translation loss of $48 million. Nevertheless, behind this number, we will see continued business growth with average loan portfolio up by 4.1% for the quarter, good deposits and investment growth, very strong net interest income growth, and still-contained operating expenses.

BCP Bolivia reached, again, a strong $10 million contribution for the quarter. Atlantic Security has weathered very well, operating in a declining interest rate environment, is free of any translation effects, and has increased net interest margins, reaching a lower, but still strong income and contribution of $5.2 million for the quarter.

Pacifico continues confronting strong claims in the property casualty business, as a result of casualties originated by the weather and rain alterations, which are affecting the north of the country with torrential rains. Further increased provisioning in the health and life businesses, and an important translation loss led to the financial poor results for the second quarter of minus $7.2 million, still a troubled performance.

Prima, within Groupo Credito, had a very good operating result which was affected also by the currency translation losses, leading to its negative $1 million loss reported for the quarter. And Credicorp Limited, which provisions the withholding taxes that correspond to the dividends received by Credicorp from its Peruvian subsidiaries reported a stable $1.7 million provision.

All these performance results reflect the impact of the currency translation which in cumulative semester numbers are netted out given the contrary evolution of the exchange rate in the second quarter of the year, leaving only net business results.

Thus, the first half '08 results reflect the excellent business performance of almost all subsidiaries, with BCP reaching $237 million net earnings, or earning growth of 58% year-over-year,; Bolivia up 100%, up to $20.5 million; Atlantic growing its contribution 16%, $10.9 million; and Prima reporting $8 million versus a loss of $1 million for the same period last year. It is only Pacifico which remains troubled, reporting a loss for the first half of almost $5 million.

All together, Credicorp's first half of the year's net earnings, including the almost netted out translation results, reached $251.7 million, outperforming all expectations and reflecting a return on average equity for the period of $28.3 million.

Next page, please.

BCP's performance, excluding translation results, reveals also strong net earning growth from $108.5 million in the first quarter to $127.9 million the second quarter. The translation impact at BCP was high was given the positions held and FX view, generating again in the first quarter of $57 million, which boosted income to $165.8 million, and a loss in the second quarter of $50 million, reducing net income reported down to $78 million.

Therefore, as can be seen in the chart, underlying income generation continues expanding, and BCP's business performance, excluding such significant, extraordinary and non-recurring income, continues to improve. In fact, net interest income increased 9.1% quarter-over-quarter following a good loan book growth of 3.3%, when measured by average daily balances for each quarter.

As we will see later, when looking at our loan book by currency, excluding that way any devaluation/revaluation impact, the growth numbers reported are stronger in all business segments, expect for the top corporate sector.

Fee income also followed the trends of previous quarters, showing a 6.9% quarterly growth and FX gains boosted 57%, resulting in core earnings growth of 12%. However, gains of the sales securities dropped sharply the second quarter because the first quarter included $18 million income from the sale of the Visa shares, and also due to the poor performance on securities trading, offsetting all the income growth from fees and foreign exchange, and leading to non-interest income altogether dropping by 2%.

On the cost side, operating expenses increased only by 5% since network expansion plans concentrated towards the second half of '08.

Page seven, please.

The volatile market environment also led to some changes in BCP's asset structure. The initial inflow of funds into the soles market in the first quarter '08 resulted in significant growth in the investment portfolio. Such investments were channeled to Central Bank CDs, a very attractive investment alternative given the tax treatment.

In the second quarter '08, however, increased reserve requirements led to a shift from this profitable investment to less profitable deposits at the Central Bank which contributed to the overall increase of 17% in cash in banks and captured a portion of deposits growth.

Loans also grew 4% quarter-over-quarter, but was not enough to offset a further change in our interest-earning asset mix in favor of less profitable assets.

Page eight, please.

Loan growth measured by quarterly average balances continued solid, though these numbers experienced also some distortion due to the strong devaluation this time of our soles loan book, 32% of the portfolio, understating its growth.

But, looking at the growth numbers for each currency, as in the charts you are looking at right now, real growth in each currency remains strong. In fact, the soles loan book reaches the highest growth level in almost all products, except for the corporate sector which drops significantly its soles loans and shifted into US dollar loans.

The impact of this on the total soles loan book is a more moderate growth of 2.1% for the quarter, but still extremely strong, 43.3%, for the year. The US dollar loan book, instead, grows a stronger 4.2% quarter-over-quarter, and almost 30% year-over-year, with the corporate sector and the consumer and credit card sectors being the strongest.

The lower soles loan book growth reveals the interest rate evolution. Since given the reference rate hike increases and restrictions on liquidity, soles interest rates are increasing, slowing demand of this type of loan.

Seen by sector, the retail and the middle market sector become the leaders, growing 6.2% and 6.4% quarter-over-quarter, whereas the corporate sector was basically flat following a decision to privilege the transferring of higher funding costs and sacrificing some market share in the top corporate sector.

This evolution works in favor of better yielding assets and our strategy to protect our net interest margin. However, this better asset structure within the loan book was offset by the shift in interest-earning assets described before, with lower yield in deposits taking a more significant portion of total interest-earning assets as seen in the next page.

Page nine, please.

In the upper left-hand corner, the chart indicates loans accounting still for 55% of these interest-earning assets, while securities available for sale, which are mainly Central Bank CDs, reduce their proportion from 31% to 29% of interesting-earning assets, to give more space to reserve requirements, related bank deposits with little or no yields which account now for 16% of interest-earning assets.

As indicated before, such change in interest-earning asset structure in favor of lower yielding assets offsets the improvement in interest income generated by a high increase of loans with wider margins. In fact, net interest income had an important 9.1% quarterly increase, a result of the 7.7% interest income growth which surpassed the 5.7% higher funding cost following the reserve requirement increase by the Central Bank and higher spreads in the international markets.

This is, in itself, a welcome evolution that should favor net interest margins. However, the positive impact of net interest margin on such stronger growth of net interest income, as funding costs grow less than interest income and the improved loan mix through stronger growth of higher margin loan products, was almost fully neutralized by the change in interest-earning asset mix, with a proportionally stronger growth of the margin in the yielding bank deposits. Thus, net interest margin improved only marginally for BCP.

We would like to point out at this stage the methodology used for calculating net interest margin has restandardized according to market practice, resulting in different net interest margin numbers.

In the past, we used to calculate net interest margin including only a certain percentage of investments available for sale in the total interest-earning assets used for the calculation. However, given the market practice of using all interest-earning assets without any exclusion in the formula, we decided, for transparency reasons, to adjust our calculations and use the total interest-earning assets in the formula.

To make it easier and avoid misleading readings of our reported numbers, we have included both the net interest margin calculator under the old and under the new methodology in our reporting this quarter. As you can see, under the old methodology, net interest margin would have reported a recovery from 5.07% in the first quarter to 5.12% in the second quarter. Under the new methodology, these numbers are basically flat from first quarter versus the second quarter.

Page 10, please.

Portfolio quality remains solid with a significant improvement of ratios. Provisions, however, were lower following a further drop in absolute volume of past-due loans and strong portfolio quality indicators.

Despite the strength in portfolio quality, we are using a more sophisticated risk assessment methodology, revisiting our provisioning policies, becoming more conservative, and increasing our provisions for our fast-growing retail portfolio.

Nevertheless, reversion of some country risk provisions contributed to these lower provisioning numbers. Furthermore, we would like to mention that we have, to date, no signs at all of any reiteration in the near future.

Page 11, please.

As of August 1st, only 30 new branches were opened. The work towards the expansion of our network goes full speed ahead. Our projections, adjusted for the requirements of the process itself, show most of the branches opening in the second half of the year, maintaining a target of over 340 branches for year-end.

This has also had an impact on the costs reported since I spotted out last quarter such expenses are not linear as the original projections. Nevertheless, our overall expenses do increase 5.3%, reflecting already the increase hiring and administrative expenses in advance of such branch openings to support such network growth.

This evolution and the extraordinary high operating income reported for the quarter resulted in the unexpected strong improvement of our efficiency ratio to 43.7% versus 47.5% last quarter, as can be seen on page 12.

On page 12, we can see that strong earnings growth and controlled costs resulted in the efficiency ratio improving to 43.8% this quarter, coming down from 49.3% a year ago.

However, return on average equity and return on average assets reflect the volatile bottom-line earnings reported. Once again, I adjusted these ratios to exclude the volatile currency translation results. It's probably not accurate either, but certainly provides a better picture of the evolution of the real business profitability ratios which evolved from 35.2% a year ago to 37.2% in the first quarter and 41.8% in the second quarter '08.

Please turn to page 13.

Looking at Atlantic Security, Atlantic recorded this quarter. The dividend income was $22 million from Credicorp treasuries. So, this is netted out in the consolidation process and is, therefore, irrelevant in analyzing Atlantic's performance.

Thus, we feel very pleased with the $5.2 million income contribution, even though it's 8% down from $5.7 million the previous quarter, considering that $0.57 million extraordinary income from the sale of Visa shares were included in the first quarter results.

This result was achieved despite being exposed to declining interest rates. In fact, net interest income improved by 11% following the bank's active management of its cost of funds through periodical adjustments of interest paid on deposits and repricing of its assets. Therefore, net interest margin for Atlantic improved further during this period to 2% from 1.6% in the first quarter and 1.34% in the fourth quarter '07.

However, a drop in net gains and foreign exchange, because of soles trading position, and poor performance on securities offset the higher income and led to lower contribution results.

Asset quality remains strong, given the minimum of our secure lending activity and extremely conservative investment policies which have spared Atlantic the widespread losses in the international banking community.

The asset management business, on the other hand, executed a successful migration strategy from deposits to off balance sheet products which was fully captured by funds under managed. Thus, assets under management growth of 4.2% was achieved and contributed to higher commissions and fee income.

Page 14, please.

Even though the insurance business continues growing with total premiums up by 8.5% for the quarter and net premiums earned up also by 8.4% for the quarter, casualties were still very high across all insurance segments, as revealed by the net earned loss ratio of 99.2%, though mainly in the property casual wholesale business, leading to a poor overall result for the insurance group, reflected by the $7.2 million loss contribution to Credicorp for the quarter.

Such poor performance was mainly related to the property casualty business, specifically in segments affected by the strong rains affecting the north of Peru, originating casualties, and heavy transport in buses, the infrastructure, and agriculture.

Furthermore, within the property casualty business, the medical assistance sector also had a rising medical care cost due to inflationary pressures on the cost side leading to poor technical results.

In addition, the local currency depreciation resulted in a translation loss of $2 million, contributing to the net loss for the period of minus $7.7 million, as can be seen in the chart above.

The life insurance sector reported premium growth of only 1.8% for the quarter versus 12% for the previous quarter. However, inflation impacted Pacifico Vida's life business since it triggers an adjustment of its liabilities, creating additional technical reserves.

Claims were also 10% higher this quarter due to the high reserves related to the growth in premiums. Thus, technical results were lower than in the first quarter. Consequently, results of the financial income were lower, and that translation loss of minus $2 million further depressed final contribution of this business after minority interest to only $0.7 million.

In the health segment, business performance was almost flat, with production and claims at similar levels. Net earning loss ratio improved to 89.8% from 91% the previous quarter. The technical results improved, though they were not good enough to cover its operating expense.

Furthermore, translation results were $2.2 million and accounted for most of the net reported loss of this business in the second quarter of minus $2.8 million.

In brief, though the insurance business continues growing, it is also characterized by an important increase of casualties for the whole industry and throughout the different insurance sectors which led to the continuing weak results. This supports Pacifico's strategy to work towards a recomposition of its risk portfolio, favoring the retail segments of property casualty which offer more retention, diversification, and predictability of risks, and the reduction of the risk underwriting in the corporate and property casualty business.

Please turn to page 15.

Finally, Prima reported this quarter a small loss of $0.9 million, but reached $8 million earnings for the first half, exceeding expectations. Operating performance was, however, within expectations, since the number of affiliates increased in Prima's revenues in the second quarter totaled $15.9 million, above estimate.

It is important to remember that, contrary to the first quarter, in the second quarter, Prima does not have the double collections related to the extraordinary addition month salary paid in accordance to Peruvian law to prevent labor loss in July and December, equivalent to approximately $4 million in income.

Therefore, on a comparison with the previous quarter, an income drop is reflected. Furthermore, despite our reduction in the sales force, the productivity of the individual salespeople has increased as have, as well, the quality of its contributors.

The commercial positioning of Prima as the best offer in the market -- lowest fee, high-performing funds, best service -- is also of crucial importance. As a result of this, net earnings before currency translation impact reveal a business performance in line with expectations, reaching $1.5 million net earnings for the second quarter.

That compares better with the previous quarter, especially when considering that the first quarter results of $4.35 million includes the higher seasonal income and the $2.3 million extraordinary income recognition from previous periods reported in the first quarter.

We should also mention that the business strategy of Prima resulted in the increase attractiveness of Prima's offer, as reflected by the high 33.6% market share of collections which are new contributions into the system.

Looking to the future, Prima's positioning allows us to increase our fees which will rise 16.7% to 1.75% effective December 2008. This will have a direct impact on Prima's bottom-line next year.

Page 16, please.

As a result of this unusual evolution, profitability ratios for Credicorp reflect the high volatility in its reported net earnings. Adjusting for this volatility, return on average equity for Credicorp reveals a significant improvement, having raised its profitability from 23.2% a year ago to 29.7% this last quarter.

This improved profitability is more evident when looking at return on average equity for the first half of 2008, which raises 28.3%, certainly outperforming our own expectations.

All our performing ratios reveal also further improvements at the efficiency ratio of 37.3% and the net interest margin of 4.78%, or 5.37% with the old methodology. This net interest margin improvement of Credicorp comes from a net interest margin improvement at Atlantic and higher dividend income at Pacifico (inaudible).

And the market view of this evolution is also reflected in the charts in the next slide. We see the evolution of our stock performance, earnings per share, cash dividends and market capitalization.

Today, we have market cap of below $5.6 million. We believe that Credicorp does not fully reflect today the potential of the potential of the Peruvian market and the improved performance of Credicorp.

Thank you very much, and we are now ready to go into the question and answer period.

Thank you. (OPERATOR INSTRUCTIONS.) Jorge Kuri, Morgan Stanley.

Hi, good morning, everyone.

I have a question about credit growth. Can you just share with us your current expectations for loan growth this year and into 2009? There's certainly been a lot of movements on the macroeconomic front, particularly in the interest rates. So, I'm wondering how is that affecting your expectation for this and next year? That's the first question.

And the second question is can you just help us understand on a consolidated basis-- the consolidated credit growth, if you eliminate the effect of the currency, what was the quarter-on-quarter expansion of your total loan book? Thanks.

Sure. On credit growth, really both questions are related to that. It is very clear from public announcements and our own conversations with the Central Bank that they will be very firm in trying to slow down the economy.

They are absolutely convinced, and we tend to agree with them, that it is wise to slow down the Peruvian economy somewhat. The growth that we have been having has created some inflationary pressures. Domestic demand is creating inflationary pressures, which added to the obvious international inflation, has spiked up inflation domestically.

It is probably wise, though not good, for businesses in the short-term to slow down the economy, and we believe that the Central Bank will continue using all the different tools they have at hand to achieve that. In fact, they have moved reserve requirements almost four times this year already with different mechanisms and adjustments.

So, yes, if we had been growing, say, until the first quarter this year at an annual rate of about 30%, our expectation is that that is probably going to be 25% over that for the next 12 months. We think that that is a sustainable number.

And this 25% is the weighted average of probably slightly higher growth rates in the retail and slightly lower growth rates in the corporate sector. That is what we see the trend.

If you look at what we have grown in the first half of the year, we probably are around the rates-- in the first half of the year, sorry-- at rates of about 12% which, annualized, is roughly the 25% which we think is a sustainable rate.

In this second quarter, we have grown our loan portfolio. It depends how you measure it-- in local currency, in foreign currency-- but, net roughly around 4%. So, we think that the sustainable rate is around 25%, maybe slightly below that.

Does that answer your questions?

Yes, great. Thank you very much.

You're welcome.

And further, maybe a little bit more to that, it is-- we were-- due to the volatility in the funding costs, which was caused by movements in the domestic rate and the turbulence in the international markets where we obtained a portion of our funding, as I mentioned briefly in the presentation, we were fairly restrictive or, look at it this way, we privileged adequate pricing rather than market share in the top corporate sector.

We did lose some market share in the top corporate, but that was a conscious decision that we wanted to privilege returns and keeping good-- putting to good use the liquidity that we have, rather that going after market share in the top corporate sector.

Thus, our growth in the second quarter seems a little bit mild, but that reflects a very specific decision. The margins in the top corporate is not going to make the bottom-line at Credicorp move.

Okay, thank you.

You're welcome.

Saul Martinez, JP Morgan.

Hi, good morning, Walter. How are you?

I have a question. I want to understand your core profitability or your ROE a little bit better. And I'm looking at page three where you kind of break out your net income before translation and after, and you do the same for ROEs.

In the second quarter last year, your ROE, before translation or excluding the translation result, was about 23%. In the first quarter of this year, it was close to 25%, but you obviously had the gain on the sale of the Visa stake which helped your bottom line.

In this quarter, you jumped up to 30%. You had a low effective tax rate in the quarter. You did have some gains from investments at Credicorp. But, I want to get a sense from you as to kind of how to think about what kind of sustainable return on equity we should be thinking? Because it obviously looks like the second quarter was a pretty spectacular quarter from a profitability standpoint.

And I also have a follow-up after that as well.

Sure. And let me tackle, initially, the issue of the currency, and then specifically your question.

We had a view at the beginning of the year that the local currency was going to revalue throughout the year and, thus, we moved our balance sheet to capture that growth. And that movement in the currency, we did that very well in the first quarter.

In the second quarter, nevertheless, the government, the Central Bank came up with these very drastic measures to reduce the inflow of funds from currency and, furthermore, very aggressively pushed those funds out of the domestic financial system.

We took a view then that there was going to be some shorter turbulence in the foreign exchange market but, nevertheless, the fundamentals were there for the currency to continue having further revaluation throughout the year, though at a much lower pace than what had happened in the first quarter.

So, we took the decision not to try to follow the short-term movement of the currency, but take a more long-term view-- and again, long-term view being six to nine months-- of what was going to happen in the foreign exchange.

We probably did not fully catch, that I mentioned, of the movement that was going to happen, and our long-term or medium-term view was that the currency was going to revalue. And we did not move our procedures.

That produced the very negative results in the second quarter, but if you have followed the currency after the close of the first of the second quarter, you see that the currency is now back to 2.8%. So, our view has not been wrong though, again, as I mentioned, we did not fully anticipate the dimensions of the short-term swings that the Central Bank measures were going to have.

So, net/net, when you look at the full year, we will probably have a very strong gain for currency revaluation. And that will be a problem when you look at the earnings for next year because, this year, give or take, we will probably close with almost $35 million to $40 million for the full-year revenue from foreign exchange translation, and that will be difficult to have for the next year. So, that is one comment on currency procreations.

Now, looking at the core earnings, our objective for Credicorp is to have a minimum of 25% return on average equity. I think that anything above that is probably not sustainable in the long run.

We have had a very good quarter this year because-- second quarter because revenues have not-- sorry, expenses have not fully increased, and we expect that to come, and taxes will probably be a little bit higher going forward. But, our objective is 35% return on average equity for Credicorp.

Okay.

Did I tackle your question?

Yes. No, that was great.

And then, just on the expense front, I mean, you obviously have quite a bit of branch expansion planned in this second half. I think in the past you've talked about something like a 25% to 30% expense growth in 2008. Is that still the thinking for 2008, that more or less level of expense growth?

Yes.

Okay.

Yes.

All right, great. Thanks a lot.

Okay.

(OPERATOR INSTRUCTIONS.) Daniel Abut, Citi.

Good morning, Walter.

Just a follow-up to a prior question because I remember very clearly when you were talking about this 25% as sustainable, thinking that you could hit it, certainly, in 2009. And when you were indicating that, I remember that most of the hopes were in the regional restructuring and better contribution from the non-bank because the bank would not get any better.

And what we learned in this quarter is that the bank got even better, but the other numbers are still not contributing much. So, carrying into next year, I'm not sure that we are going to see that much of a compression when compared to what we've seen recently because you may lose some of the bank, but you still have the possibility of recovering some more of the non-bank and sub which, again, have not been contributing that much in recent times.

So, longer-term, I may share your view of the 25% but, short-term, we may stay at higher levels for a few more quarters. That's one question I would like you to comment on.

And second, on the names, in my opinion, it's been pretty surprising that you managed to keep the name as you had precisely because of the effect of the foreign reserve requirement movement. What should we expect in the second half? That, at some point, those will start to take a toll and we should factor in lower loans? Or the effect of higher rates and your continuing improving the loan should grow you stable margins?

Okay. The problem with you, Daniel, is that you remember what I say every time.

But, no. Yes, we tend to be conservative when talking to analysts. Our long-term objective is indeed to have a 25% return on equity. And yes, we have achieved that before, we thought because the growth at the bank has been more than what we had originally anticipated.

But, that doesn't change the fundamental fact that our long-term objective is 25%. Yes, we might, this year or probably some portions of next year, have better than 25% because there is, as you mentioned, good improvements that should come from Pacifico, at least not having a loss, and from the increase in the revenues in Prima, all else remaining flat.

But, so, yes, there is a potential that, for the next three or four quarters, we might have something above our long-term objective, yes. But, again, if that happens, good, but it is not our objective to pursue more than 25% in the long-run.

But, yes, in the short-run, we will take the swings as they come, no? If there is an opportunity, we will obviously capture it.

And the net interest margin, I think our long-term view remains the same. We see compression because of competition in most of the business segments, in most of the products. We see compression in lending to micro-businesses. We see pressures in the middle market. But, that has been compensated by the change in our product mix.

What we have be very rigorous is, I think, a good reflection of what we did in the first quarter, that in the less profitable segments, we have to have the will to sacrifice market share in the less profitable segments in order to maintain our net interest margin.

And that is psychologically very difficult at BCP because we value very highly our market share, and we do not want to lose a significant portion of that. So, there's a very tight balance there.

But, overall, I think that there will be continued pressure because of the competition in all the different product segments, and we will struggle to have a flat net interest margin going forward.

Thank you, Walter.

But, just to make sure I understand your response to the name question, it seemed as though-- that what you're saying is that there's more coming from competitive pressures, that you are trying as hard as you can to offset with improvement in the loan make, not so much the effect of monetary policy, that you have been succeeding in translating to pricing whatever effects you have had from the increase in the reserve requirements. Is that correct?

Yes, sir. That is correct.

Thank you.

You're welcome.

If we are unable to translate the costs of the increased funding costs, furthermore the Central Bank will continue putting pressures because what the Central Bank wants to do is precisely to increase the rates to slow down the economy. So, it doesn't make any business sense not to translate the costs because the Central Bank will keep on pushing.

Thank you, fair enough.

Juan Partida, UBS.

Hi, good morning.

I have two questions. The first is a follow-up on the margin question, in particular because we have seen your liquidity, the growth in your deposits, be faster than the growth in loans. Is it something that should normalize in the next few quarters where growth in deposits will be below that of loans and, therefore, it would help your margin going forward?

And the second question has to do with the insurance company, what the outlook is for the rest of the year and 2009, particularly, on the claims side?

Thank you.

Sure. On the deposit side, the big growth in deposits was-- a lot of it mostly-- not mostly, a significant portion of that, our expense in deposit. We have been successful arbitrating those deposits which are mostly institutional deposits, deposits that follow yield, by taking those deposits and putting them in the Central Bank and taking some gapping and some interest rate arbitrate.

So, they do not reflect the growth in the core deposits, core deposits measured as retail deposits, has not been as significant as the overall growth of deposits.

So, we do not expect the growth in deposits that we have seen in the last month to continue going forward. So, yes, we expect the slowdown in the growth of deposits.

As it relates to insurance, we will probably have a lousy year for the full-year. We are in the process of turning around our wholesale property casualty portfolio. I've seen some numbers for next year, some projections, and they seemed too good to be true, therefore I will not mention them. But, they are definitely an improvement from the very important loss that we have today.

So, another way to say this is we think that next year will be a lot better, but still below the return on equity that we want to have with the insurance company. But, we do not expect losses for next year.

What has the weather been like in this quarter so far?

Now, this quarter, we have not had significant losses related to weather conditions. The losses have been mostly on the insurance side, on the health side, and several losses related to the insurance and life as they relate to annuities because of the movement in the currencies and inflation, but nothing dramatic really, nothing dramatic.

Um-hmm, okay.

If I could just quickly follow-up with going back to the margins. So, the fact that those, say, corporate deposits are probably not going to grow as quickly should help you going forward in terms of the margin at least. And also, trying to understand if there was anything seasonal in the level of dividends that ASHC got this quarter that we should not expect next quarter?

Sure. Now, one of-- to understand the basis of taking the expensive deposits, if you will, and put it in with the Central Bank, is not-- has a lot to do with the tax effect. You have seen our net tax rate come down because of that strategy, because those deposits earned are tax exempt.

So, if we discontinue this business or it becomes tighter or it's not there, yes, you will see our net interest margin probably slightly improving, but the overall profits being hurt on an after-tax basis.

Did I explain that?

Yes, perfect.

Okay. On dividends, if you're looking at Atlantic, you really have to look at the consolidated side because those are the dividends. Atlantic holds treasury stock, and there's a payment of treasury stock. Was that the effect that you were mentioning, or there were other dividends at Atlantic? Now--.

--No, you mentioned-- if you look at the margins at the group, at the bank level, they were flat. But, if you look at the group, they are up quarter-over-quarter, and part of the reason is because of the increase in dividends or because of the impact of dividends including in Atlantic.

Yes. The only important piece of dividends that we have received is the yearly dividend from BCI. We do hold almost 3.2%, I believe, of BCI, Banco de Credito in Chile, and they made their honorable dividends payment. So, yes, there's an element of seasonality in that.

Thanks very much.

Okay, you're welcome.

(OPERATOR INSTRUCTIONS.) Alonso Aramburu, Santander.

Yes. Hey, good morning, Walter.

Just to follow-up a little bit more on the margin question, it seems that this quarter your margin was held a little bit by some hedging operations, as mentioned in the press released. And I was wondering if that something that was done as a one-off for this quarter, or is that something that we could expect for the coming quarters?

Yes, we do some hedging in terms of swaps and rates, but it's becoming more and more a portion of the tools we use in our asset liability management. So, you should expect those on a regular basis, huh?

Okay, great.

And then, just one final question, again on the insurance company. Given the poor performance of the insurance company has done over the last few quarters, would a sale of the company be considered by the group?

Definitely not. At this stage, we are committed to turning around this business. Pacifico has been a good contributor to the earnings of Credicorp in the past.

And for some of you that have some long memories or have been there for a while, in the first three or four years of this decade, when BCP was running into a lot of trouble, Pacifico was really a major contributor to Credicorp.

And we tend to take a longer view of our core holdings and, at this stage, we have consideration at all of selling Pacifico. We are committed to turning around the company, and we think that we will be successful at doing so.

Very well. Thank you so much.

You're welcome.

Gentlemen, at this time, there are no further questions. I'll turn the conference back over for-- I do apologize. We have a question from Betty Ng, Satellite Asset Management.

Hi, good morning. Congratulations on the good set of results.

My question relates the dedollarization that's going on in Peru. Given the volatility of the Nuevo Sol in the past quarter, do you expect the trend of dedollarization to stall going forward, to reverse, or to continue?

Sure, a good question. There are two elements that probably drive the dedollarization. The most important is the fundamental one. It is that domestic economic agents, be it individuals, companies or whatever, more and more are using local currency to do their transactions because there is more confidence in the domestic currency. There is more strength, and there is more economic stability.

So, there is a very important long-term trend to dedollarize. In the short-run for very specific periods, that trend could grow a little bit faster or slower depending on the movements of the currency.

The problem in the last quarter, the trend decelerated because there are some economic agents, mostly the top corporates, that are very short-term, more oriented and shrewd and will borrow this amount depending on the movement of the currency.

But, that is not the bulk of the economy. The bulk of the economy has a very strong trend to dedollarize. And we think, going forward in the next nine months, the currency will have a higher level of stability, and we think that that trend can probably accelerate even further.

Right. What's your own internal projection for the currency for the end of the year? What kind of rates are you expecting to--?

--Well, the consensus in the domestic economy, more than BCP, the consensus of the top four or five economies, is that we should close the year around 2.7%.

Right.

But, you know consensus. Don't quote me in the next quarter and say it didn't close there, right?

Okay.

And still on that issue-- and excuse my ignorance here. What percentage of your deposits are in the dollars? I guess I'm trying to understand how your dollar loan because you have some dollar bonds outstanding, and a number of them are churning, starting this December and next year.

Sure.

Given the dedollarization trend, are you going to not roll over these bonds and concentrate on just funding your loans with local currency deposits?

Okay, let me give a few for that. On the deposit side, our deposits are roughly 50/50.

Um-hmm.

50% local currency, 50% dollars, whereas on the loan side, it is not 50/50. We're about two-thirds dollars.

And why is that? Because a portion of our customers, mostly on the corporate side, are exporters of commodities, and those exporters of commodities want to be hedged to the extended-- revenues are dollar-denominated. They want to borrow in dollars. That's-- we will continue to have, for quite a while, a portfolio that is more dollarized that our deposits.

Having said that, there is-- we expect, as I just mentioned, a more dedollarization to happen on our deposits. So, the challenge is, then, how do we fund that dollar portfolio which will continue to grow? And that is what we go for in the international capital market.

Our top corporates want to borrow long-term because they are doing investments. These are hydro plants, mining companies, infrastructure-- oh, no, infrastructure, no. But, those are the exporters, gas, etc., that want long-term dollar funding. And to match fund those is what we go to the international capital markets.

We will probably continue doing that in the next-- for a limited or relatively mid-size operations regularly every quarter.

I see. Thank you.

You're welcome.

Now, Mr. Bayly, there are no further questions. I'll turn the conference back over for any additional closing remarks.

Well, thank you very much for hearing us out. And I want to thank all the analysts and the investment community in general.

I think we have been very worried to fully translate or transmit the underlying trend of our businesses and to fully have the investment community understand the nature of the fluctuations of our earnings related to the currency translation. We thank you all for taking the time to understand that.

And we look forward to a very good quarter, and we hope to have you in the next conference call. Thank you very much, and farewell.

And that does conclude today's teleconference. Thank you all for joining. Have a wonderful day.