Credicorp Ltd (BAP) 2008 Q4 法說會逐字稿

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  • Operator

  • Good day, everyone. Welcome to the Credicorp LTD Fourth 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 Mr. Walter Bayly, Chief Financial Officer. Please go ahead, sir.

  • Walter Bayly - CFO

  • Thank you very much. Sorry for the delay in getting the call, we had some technical difficulties in establishing the phone call.

  • Good morning and welcome to Credicorp's fourth quarter, year-end conference call. There is probably no doubt in anybody's mind that the year 2008 has been one of the most turbulent and most difficult years for the world financial markets and world economy in the last decades. The market melt down has affected almost everybody and led to faster economic deceleration in the developed markets than expected, which in turn has complicated the emerging markets.

  • The international events have also generated some turbulence in our local markets this year. In this context, the Peruvian economy is showing some resilience and relative stability thanks to the good macroeconomic performance of the last years and will probably remain as one of the fastest growing economies in the region.

  • Credicorp is by no means immune to such world developments and has suffered mainly under the market's loss in values. Nevertheless, we are extremely pleased with our operating results and can confidently say that the impact of all the year's events up to now has not significantly altered our core business, which have had good quarterly operating numbers to close the year. However, these fourth quarter results have to support some extraordinary non-recurrent losses resulting from this extensive financial crisis, which we will further explain.

  • But given the depth of this economic crisis, we want to spend a minute looking at Peru's economy, which finds itself in the best position to withstand the world economic turbulence. So I would like to start with some macro numbers for Peru.

  • In the current environment, the main concerns are centered on expected GDP growth and exchange rate stability. The uncertainties in the international markets with regards to the expected evolution of the developed economies in Europe and the United States make this projection equally uncertain for us. There are many opinions in the market about Peru's expected GDP growth. From the IMS, expecting 6% GDP growth in 2009, our Central Bank expecting a similar number and more pessimistic numbers that come down to 4% GDP for the year.

  • Whatever the rate at which we actually grow, the Peruvian economy does have, today, a bottom of growth, which is driven by the domestic, and to a great extent, also informal economic activities. We believe this bottom is between 3% and 4%. From there on, depending on the effectiveness of the government stimulus package, in the moment in which the international markets also reach their bottom and start turning around, our market will bounce back up and improve growth numbers eventually for the year if it happens in 2009.

  • Our expected trade balance is also factoring in the drop in demand expected not only for commodities, but again, the diversification of our exports is allowing a still good performance for exports.

  • Inflation has already eased and it is expected to continue dropping. The Central Bank has already made a reduction in the reference rate and as inflation continues to ease, we'll probably continue doing so.

  • Our currency, which we have heard is the major concern for the market, has shown surprising long-term stability. We saw significant volatility in 2008, a product of strong fundamentals, generating strength in the local currency. Interest rate differentials and recovered confidence in the local currency, which supported its revaluation against the US dollar. However, the strengthening of the US currency in the financial markets, driven by its role worldwide as the currency of refuge impacted also our local exchange rate, generating volatility and ultimately leading to a relatively small 4.7% depreciation year-over-year.

  • Nevertheless, we believe we will continue seeing volatility generated precisely by such perception of the US currency and a temporary increase of the authorization of our financial system. And on the other hand, reduce US currency inflows as international investments slow down.

  • Consequently, fundamentals behind the dollar strength has changed to some extent and the currency is still to find its new level against the US dollar, showing a bit more volatility. Nevertheless, we do not expect any major devaluation, it might even see the local currency with some strength as soon as we have a turnaround of -- in the international crisis in sight.

  • Page 4 please. So turning now to Credicorp's fourth quarter results, we see that non-recurring extraordinary losses generated by this international crisis affected significantly fourth quarter results, leaving only a modest $13.5 million as net income after minority interest. We could summarize the impact on three fronts. One, the impact of the revaluation of the US currency worldwide that generated a translation loss of $31.8 million and a reduced, but still existent, solid exposure this fourth quarter. The significant drop in market valuation of proprietary portfolios, mainly at Atlantic Security and Pacifico Peruano Suiza that led to the impairment of about $40.9 million of unrealized losses. And last, but not least, a provision to cover potential losses and contingencies related to the impact of the alleged international Madoff] fraud on our Atlantic [budget] fund and our direct exposure to the same, which reached a total of $43.5 million.

  • Of the three fronts of impact, the last one, the Madoff Atlantic Blue Chip Fund, is one -- is certainly a one-off event, completely unexpected. The second front, related to the valuation of the portfolios, we view as a conservative action, given the nature of the securities, which offer some upside going forward as markets normalize and such papers are held to maturity.

  • The first front related to translation losses is probably somewhat more within our control, since the currency position is managed actively and some exposure can and will be eliminated by reducing our solid holdings in order to eliminate the earnings volatility it generates on our US dollar reporting. The reduction of our solid position, which represented about 65% of our equity at the beginning of 2008 started in the second quarter and has to be gradual, given our size in the market. Today, our solid position has been reduced to about 20% of our equity and should be basically reduced to 0% by the end of the first quarter.

  • However, on an operating level, the numbers reveal an improvement from the previous quarter. Loan growth for the fourth quarter was 6.4% with a stable debt-to-loan ratio of 0.8%. Net interest income was up 6.9% for the quarter, leading to an improved -- important improvement in debt interest margin from 4.3% to 4.9%. Non-financial income was up 18.6% for the quarter, led by strong foreign exchange commissions income.

  • Insurance premiums were also up significantly with significantly lower claims, as reflected by the net loss ratio of 78% versus 84% the previous quarter. And even a higher 92% before that. Therefore, before the non-recurrent losses of the quarter, impairment of unrealized losses, the [fourth] consequences, which add up to $84 million and despite some currency translation losses, recurrent net income reaches $100 million for the fourth quarter, reflecting an improvement of operating results as originally expected.

  • Year-end results attributable to Credicorp reflect such good operating performance, with operating income before non-recurring events, translation results, taxes and profit sharing, showing a significant increase of 34.6% for the year.

  • Even after all non-recurring items, net earnings reveals 2% growth, reaching $357.7 million versus the $350.7 million in 2007. This is certainly a significant achievement in view of the extremely turbulent year and reflects the strength of our core businesses within a world performing Peruvian economy and financial system. Though we were not spared a hit in our market sensitive businesses.

  • As mentioned, and despite the important actions taken to absorb any potential loss generated by the financial crisis, Credicorp still reports growth. As seen in this chart, Credicorp's total assets grew 19% for the year and net loan portfolio grew a strong 28.4%, revealing a lively economy in which we are operating.

  • As observed, the crisis affected almost exclusively net earnings growth, which reached only 2%. Despite the above, return on average equity hardly dropped, to 22.3% for the year, versus 22.9% in 2007. Still a sound return on investment in the context of the deepest financial and economic crisis in decades.

  • Results of Credicorp this fourth quarter absorbed what we expected to be the maximum effects in our businesses, of the market melt down resulting from international financial banking crisis, since the non-recurrent losses and provisions that depressed our net earnings are totally related to investment portfolio valuations. Such valuation issues have affected mainly the subsidiaries that hold international investment portfolios, like Atlantic Security and Pacifico, as we will see in the next slides.

  • Page six -- Credicorp investment portfolio breakdown. Before we go into the individual subsidiaries, we would like to give you some detail on the portfolio affected by the market melt down. The total impairment for the year 2008 after minority interest reached $56.3 million, which includes an impairment reported this fourth quarter of $40.5 million. Amongst provision in previous quarters of $9.7 million and $6 million of provisions for an owned investment, affected by the alleged Madoff fraud, are shown separately in the income statement, included in the provisions for Atlantic Blue Chip Fund.

  • It is important to highlight that only 9% of the total impairment corresponds to assets in default and that this class represents only 0.3% of Credicorp investment securities. Excluding Central Bank CDs. Our conservative investment approach in asset management is also evident when considering that 88% of the portfolio at market value is invested in fixed income, of which 47.5% corresponds to sovereign bonds held at BCP. The remaining amount corresponds mainly to Atlantic and Pacific oppositions, of which the amount is [purged], is only 0.8%.

  • In the controversial CMO category, we hold mainly the most senior traunches, which have today a 70% market value. This asset class is an equity investment account for the largest portion of the losses as percentage of the size of their portfolios. We would like to stress that a detailed revision of each individual security, and conservative determination of the impairment of such security was carried out to reduce to a minimum the probability of any future losses on such portfolios and that given the current status and nature of the portfolio impaired, an important portion is expected to have significant upside, as markets recover and the impaired securities are held to maturity.

  • Moving now to the next stage, we will look first at BCP. As BCP results this fourth quarter show an important recovery from third quarter results, which were negatively affected by the local market turbulence generated by the crisis. Loan portfolio growth was, again, 6.4% for the quarter, which added to a market that tolerated slightly higher spreads, given the increased risk perception, a drop in reserve requirements, less liquidity concerns and on the cost side, a drop in interest expense due to a change in deposit composition and fewer international bank loans resulted in net interest income growth of 6% for the quarter. Provisions, though conservative and increasing on the ongoing businesses, reflect a drop in the net provisions line this quarter due to certain reversions.

  • Non-interest income reveals also a strong 25% quarter-over-quarter improvement, despite lower fees from market-related activities, mostly the brokerage included in banking services commissions. Such growth was led by higher foreign exchange commissions income, a result of the currency volatility and gains in the sale of sovereign government bonds and certain equity positions.

  • Operating expenses were in line with the network expansion and grew 6% for the quarter. This positive evolution of the fourth quarter contributed to a very strong quarter-over-quarter operating income growth of 37% before translation losses, which, in fact, made it possible to absorb a still high translation loss for the quarter and continued reporting strong net income generation. This translation loss reached $28 million and resulted from the currency fluctuations within the fourth quarter, as the sol, which had at that point revalued against the dollar from the beginning of the year, dropped 5% in the quarter, following the international revaluation of the US currency, while our solid position had not been yet completely wound down.

  • The bottom line of these developments was a net income in the fourth quarter of $86.8 million versus $93.1 million for the third quarter '08, which absorbs the impact of the translation loss and a higher tax rate have highly reduced our investments in tax sheltered, [solid] denominated Central Bank CDs. However, despite the tough market environment in the second half of the year, year-end results for BCP are, again, a new record level with a significant net earnings growth of 28% for the year, reaching $423.5 million net earnings for the full 2008.

  • With regard to interest income, the structure of interest earning assets changed as reserve requirements were eased and liquidity concerns dissipated. However, achieving good yields in cash and investments position became a challenge since the profitable solid denominated Central Bank CDs matured and were not renewed and a gradual predominance of US dollar assets due to currency risk considerations, also reduced yields.

  • Nevertheless, the increase in funds channeled to loan growth did compensate for lower yields in our liquid investments. This is reflected in interest earning assets composition, where the portion of net loans increased -- reached 62% of interest earning assets, up from 58.7% in the third quarter, while other liquid investments and deposits in the Central Bank dropped their participation in interest-earning assets. Despite a strong growth in loans, and their larger participation in interest earning assets and the better spreads achieved, the difficult investment environment for US dollar assets resulted in an increase in interest income of a -- of only a modest 1.3% quarter-over-quarter.

  • The funding structure, on the other hand, also improved as the portion of spend deposits shrunk in favor of lower costs, savings and demand deposits. Furthermore, the high liquidity position allowed us to also reduce the volumes of short-term international financing, especially the portions that were denominated -- demanding higher spread from us. Thus, bank financing dropped from 11% of total funding to only 7%. Altogether, interest expense dropped 4.8% quarter-over-quarter, having an important positive impact on net interest margins and helping offset the depressed yields of our investment portfolios at BCP.

  • As mentioned, the developments in the fourth quarter worked in favor of profitability, as net interest margins could recover from the squeeze in income in the third quarter. Net interest margin jumps back to 4.6% from 4.3% the previous quarter. But what is more noteworthy is the recovery of net interest margin for our loan portfolio. This reveals an increasing trend from 6.8% a year ago to 6.9% the last quarter and up to 7.5% this fourth quarter and is the result of the improved spread we have been able to apply these last months. Therefore, the main drivers behind our recovering net interest margin as a drop in interest expense, mentioned before, and the expected -- expanded spreads that allowed this higher loan book net interest margin.

  • Following these two drivers, a strong recovery of the overall net interest margin could have been expected. However, in reality, achieving a good return on our liquidity position is, today a challenge, given the predominance of the US currency and our position, which today has historically low yields.

  • The above chart is pretty self-explanatory and reveals the lively economic environment in which we have operated this year, 2008. Strong quarterly loan growth, especially in the corporate sector this first quarter, as corporates will field year-end needs and investment plans. And for the year, loan growth numbers that show the high growth achieved during the last two years in all segments. All above 30%.

  • The above growth is even more impressive when seen against the backdrop of more expensive credits and higher rates in the second half of 2008, coupled with complicated international markets. These events did not significantly slow down the demand for credit. It is only now, as the world economic crisis unfolds and starts reaching our markets through reduced international consumption and therefore demand for our experts, that we are only starting to see a deceleration in economic growth and thus loan growth.

  • However, looking ahead, there is still ample room for growth, considering tight penetration in the country has only just started in the economy, so it is not immune to the international world economic slowdown. It is still expected to grow at a healthy rate, driven by the strong domestic demand.

  • The pass-through loans at 0.79 and provision coverage of 272% are among the highest indicators in Peru and the region. The overdue loan indicators for the retail segment are are also very low at 2.9% for credit cards, 2.5% for consumer loans, 2.7% for small and medium companies, 1.4% for mortgage loans, 0.9% for car loans. Furthermore, personal and corporate debt is relatively low in the Peruvian market, while credit information is widespread and efficient. All of the above, coupled with conservative credit regulation and risk policies contribute to preserve a healthy portfolio. Despite the strength in portfolio quality and as we have pointed out before, we are using more sophisticated risk assessment methodologies, revisiting our provisioning policies, becoming more conservative and increasing our provision for a fast growing retail portfolio.

  • At the same time, our local superintendency has tightened provision regulations as of December, through a new pro-cyclical provision policy aimed at improving provisions for potential losses, far ahead of the liquid (inaudible). Our provisional levels, however, are conservative enough so that we are able to comply with this more stringent requirement in the month of December and did not need the additional two months' time allowed by the superintendency for all other financial institutions. Nevertheless, we should mention that we do expect a moderate, but not significant, deterioration of our pass through loan ratio in the near future as a result of the turn in the economic cycle and the impact of worldwide recession on the Peruvian economy.

  • Our network expansion continued throughout the year and was completed with a total of 70 branches opened in the last 14 months, finishing the year with 330 branches in operation, 890 ATMs and 1,851 [Agentes] BCP. The cost of the expansion will only be fully reflected in the coming year, 2009, while business growth for '09, in view of the world economic slowdown, is being revised downwards, a change that could put pressure on net earnings growth. We are convinced of the need of this expansion and the conclusion it will bring to business growth in the coming years, however we are being cautious and intend to measure carefully the results of this and convenience of further expansion before giving the green light to the consideration of our expansion plans.

  • The expansion of our network is also directly linked to our growing operating expenses, which increased rapidly as the number of branches opened accelerated, though in line with expectations. Nevertheless, since the volatility of our income this year generated also volatility in the quarterly ratios, the ratio for the full year is more significant and shows an improvement from 51.3 to 50.3 for 2008. This is a result of the strong increase in income generation since the cost side expanded aggressively with the network. Profitability ratios, on the other hand, continue showing BCP's strength with return on average equity at 32.8% for the year, almost unchanged from the 33% from last year.

  • This chart summarizes BCP's performance and reveals very strong results for the year. Earnings grew 28% to $423.5 million versus $336.9 million in 2007. As seen in the previous chart, return on average equity in 2008 reached an excellent 32.8%, basically unchanged from last year. Loan quality remained strong and despite the aggressive expansion of our network, the efficiency ratio is a little better than expected, showing an improvement to 50.3% for the year. BCP continues being the strong flagship company of Credicorp.

  • Atlantic Security Holding, on the other hand, is affected more directly by the international financial crisis, since its main business is asset management, both on and off balance sheet. It was here that the strongest impact of the international financial crisis and massive market melt down has been felt. Basically on the on balance sheet proprietary portfolio.

  • But furthermore, Atlantic Blue Chip Fund, an off balance sheet fund, was also among the many victims of the alleged fraud and bankruptcy of the Madoff investments. With regard to the on balance sheet investments and following good market practices and a conservative approach, it was decided to impair a portion of the unrealized losses, leading to an impairment charge of $26 million, effective this fourth quarter.

  • As mentioned before, we believe such impairment offers upside, given the nature and stature of the securities affected. These are mainly fixed income international corporate securities, which are current and performing. In fact, the original rationale for this investment was to hold very low risk, mainly US domiciled portfolio to preserve value since this was considered safer than any emerging market investment. Thus a recovery in the markets and our holding the impaired securities to normal maturities should provide us upside to recover an important portion of the impaired amounts.

  • Atlantic Securities off balance sheet asset management business, on the other hand, has been impacted by the bankruptcy and alleged fraud of the Madoff securities, which affected our Atlantic Blue Chip Fund and owned positions. Again, following good market practices, the Board of Directors of Credicorp and Atlantic considered convening to provision the maximum expected loss and contingencies related to this event, which add up to $43.5 million for the quarter. This number is composed of a provision for contingencies of $36.5 million, related to Atlantic managed funds, a provision of $6 million for our own direct exposure, plus a $1 million provision for a valuation of guarantees on loans.

  • It is important to underscore that we expect this provision to cover all potential losses and contingencies related to this event. Needless to say that Atlantic's bottom line numbers reflect the bulk of the impact of the financial crisis and market melt down on the full evaluations of the group and resulted in a negative contribution to Credicorp, which reached $65.5 million this fourth quarter and a total of $50 million loss for the full year.

  • The insurance business reports a good quarterly net premiums growth of 4.2%, a net premiums growth for the year 2008 of 32%, reflecting the growing economy and low levels of insurance penetration in the Peruvian market. Claims in the property and casualty sector dropped, as revealed by the improvement of net earned loss ratio to 78.6% for the quarter, down from 82% in the third quarter and even 94% in the second quarter, improving significantly its technical results, which reached a positive $3.9 million versus a technical result of minus $0.4 million in the third quarter '08. Thus, the change in business strategy, which aims at a combination of improved assessment capabilities and a reduction of risk retention level in our books for the property casualty corporate business is proving effective.

  • However, valuations in the market, which extended also in the Peruvian Stock Exchange, affected also Pacifico's investment portfolio. Evaluation of its securities and portfolios dropped significantly. Thus Pacifico has followed credit card policies and proceeded as well with the impairment of unrealized losses in its portfolio. Pacifico Peruano Suiza's portion of the total impairment of Credicorp reached $7.3 million. In turn, an almost break-even result of Pacifico into losses this fourth quarter of $7.4 million, exacerbating, as well, the losses accumulated for the year, which reached a total of $15.9 million.

  • Putting aside this one-off event, significant efforts are being made to develop the more massive and better predictable return on business and limit exposure to the wholesale insurance, property casualty business as well as to improve the financial investment management to achieve better overall results.

  • We are confident and the technical results of the company show we are on the right track. The revision of all underwritten risk and reduction of the risk retained on our books is being completed this first quarter '09 and we should, therefore, expect an important improvement on Pacifico's performance going forward.

  • Finally, Prima's results were in line with expectations, showing a solid 30% year-over-year income growth. The quarterly income drop responds exclusively to seasonality, given the double salaries paid twice a year, according to Peruvian labor laws. Operating expenses show also an improvement, with a drop of general expenses as a percentage of income generated. Therefore, net income growth from $3 million in 2007 to $11.2 million in 2008 made Prima become a more relevant earnings contributor to Credicorp.

  • Looking forward, however, Prima's business results should improve further as the first quarter, with the increased fee, which was raised from 1.5 to 1.75 becomes effective. The good trend is evident, operating costs are under control. So Prima should improve contributions to Credicorp in the future.

  • The summary of the results is reflected in the following contribution charts. The impact on the quarterly results of the financial turmoil and resulting contributions of the individual subsidiaries is clearly appreciated and reveals the concentration of such impact on Atlantic and Pacifico. However, it is partly because we are absorbing what we believe to be the maximum impact of our disrupted market in the reported losses and provisions that we do not expect to see this kind of impact in 2009. The latter, added to the fact that the operating side of both Atlantic and Pacifico are becoming more profitable, especially a turnaround we expect at Pacifico, make us feel confident of the important contribution these two subsidiaries will have in 2009.

  • As a result of this unusual evolution in the year, profitability ratios for Credicorp reflect a high volatility of its quarterly reported net earnings. However, its performance for the year is still strong, since Credicorp has been able to absorb the embattlement of the market and it still shows a solid 22.3% return on average equity and improved efficiency. Furthermore, and more importantly, we expect to continue growing as we operate in what is expected to remain the fastest growing economy in the region and in the fastest growing financial market, given the low financial penetration and dynamic development of such markets.

  • Our stock, however, has been dragged down, together with the worst hit financial sector and the emerging markets' additional perceived risk and has been strongly penalized. The nervousness of the market related to the recently announced high level of loss and contingencies provision is also undoubtedly impacting our stock price. We do however -- we do believe, however, that Peru is in a very solid macro economic position that will allow the country to continue growing at probably the highest rate in the region and that we are best positioned to continue penetrating from that scenario.

  • The losses absorbed this last fourth quarter are meant to clean all potential impacts and to set the stage for future growth. We expect Credicorp to grow through this massive financial, and today, also economic crisis, with less damage than most financial corporations and our numbers are demonstrating this. Our fundamentals have not changed with the crisis. The strength of our assets is there and as we have already pointed out, we will continue growing profitably in the market that is also showing signs of resilience in this turbulent world environment. Thank you very much and we are now ready to go into the question and answer segment of this call.

  • Operator

  • Thank you, sir. The question and answer session will be conducted electronically. (Operator Instructions). We'll take our first question from Jason Mullen, Goldman Sachs.

  • Jason Mullen - Analyst

  • Hello, everyone. I have two questions. My first is if you can help us understand this new anti-cyclical provisioning rules that were implemented in -- at the end of last year and how that will impact your provisioning going forward? And in that context, you provide us with a detailed pass-through loan ratio by retail segment, let's say 2.8% for credit cards, 2.5% for consumer, 2.7% for SMEs, et ceteras. Can you help us understand the evolution of those kinds of ratios in prior economic slowdowns? I mean, you obviously are looking for various -- we're all looking for quite strong economic growth in Peru, but it is a significant slowdown from last year, so maybe if you think that that will negatively impact these ratios, where you think they could go.

  • Walter Bayly - CFO

  • Thank you, Jason. Good questions. One, the superintendency announced around the second half of the year, they started having conversations with the banks to the extent that they were in the process of analyzing a potential regulation that would force the group -- induce us to put more provisions in the good moments of the economy as were last year to provide for a further cushion for a downturn in the economy in the years coming ahead. This was called an anti-cyclical or pro-cyclical, it depends on how you want to view it, provision. So they were, in essence, saying, Hey, we're going through very good years, let's create a further cushion for the future.

  • That -- when that was announced and the discussions were being held, we started in anticipation of that, creating additional reserves. So we did not want to be impacted whenever that regulation came. The regulation finally came in December and actually we were expecting it to be a lot stronger. So the provisions that we had already made exceeded what the government, the superintendency, asked us to do and the superintendency allowed for a period of four months adjustment, so that the bank could slowly make up those provisions.

  • Because we have already anticipated that, we were able to do the bulk of these provisions in December. 100% of the provisions in December. And even have some left over, which we reversed in the last quarter because it was such a lousy quarter for everything that I've already explained.

  • So that is done. And that means that for -- by each of the different categories, if the provision required was, for instance, 1%, it is now 1.5%. If the provisions for a pass through or for lending to micro finance was 3%, now I think it's 4%.

  • So it's an increase in the percentage in each of the different categories. And that is done and it's a one-off effect for us that, again, we had already slowly been provisioning. So it will not have any further impact going forward.

  • Clearly, we have seen, in the past two months, early indicators that the trend in improvement in the quality of the portfolio has already reversed. We have some indicators that lead us to believe that our portfolio will undoubtedly be affected by the slowdown in the economy. We have done a lot of work in this. We have tightened our lending standards. We are preparing to be more active and more efficient in the collection process in the retail and we have taken -- we are doing a lot of analysis in how devaluation impacts the different segments of our portfolio. So we think we are well prepared.

  • It is very -- it is not necessarily a good comparison to try to extrapolate the impact on -- we had on the last crisis on the portfolio, because it is a different -- it is a different portfolio, different set of regulations, different set of lending requirements. The way the market operates is totally different.

  • So it is not necessarily a [pallet] to extrapolate. Having said this, I think that our pass through loans could double and that would not be any dramatic effect.

  • We are expecting, as I mentioned, a deterioration of the credit quality, but nothing that will -- that is not budgeted or expected by us. A doubling of the pass through loans is certainly within the ranges of what can be expected and we are more than prepared to withstand that. Did I answer your question?

  • Jason Mullen - Analyst

  • Thank you very much. Yes. Thank you very much.

  • Walter Bayly - CFO

  • Okay.

  • Operator

  • We'll move to our next question from Saul Martinez, JP Morgan.

  • Saul Martinez - Analyst

  • Hi. Good morning, everybody. I want to get a little bit more color on your investment portfolio. Walter, I think, on page six you talked about your fixed income portfolio of $2.4 billion, about half of that is in government bonds. And I kind of want to get a better feel for what the rest of that is. What kind of -- I presume the balance of it is Peruvian -- is comprised of Peruvian and US corporate. Can you give us a better sense for what's in the rest, the $1.2 billion in the fixed income portfolio, what kind of corporates are in there, what the ratings are? Just want to get a better feel for how much risk there is of additional impairment charges.

  • And secondly, on that same topic, can you give us a little bit more color on the thought process behind why you took impairment charges this quarter? You seem to think that there's a lot of value in these securities you wrote down, but can you give us a better feel for what policy you used and your auditors forced you to use, to write down those securities? Is it that these securities fell by a certain percentage and remained underwater for a certain amount of time? Can you just give us, again, I'm trying to get a better feel for whether there is additional risk that there could be further impairment charges down the line?

  • Walter Bayly - CFO

  • Sure, Saul. I was expecting your question, I did read your mail early in the morning, so I am more than adequately prepared to answer you.

  • Saul Martinez - Analyst

  • Good.

  • Walter Bayly - CFO

  • And furthermore --.

  • Saul Martinez - Analyst

  • Thanks for reading our research, Walter.

  • Walter Bayly - CFO

  • No, and please, after my answer now, we are obviously more than open to give a full-blown, detail to anybody that is interested. It's a huge amount of securities and if you want the line-by-line, we are more than happy to provide it to everybody and please contact Aida or anybody in our office that you are very well familiar, so that they can give you all the details you require.

  • But let me give you a feel of the $2.4 billion of fixed income securities. Of that $2.4 billion, 50%, roughly, I'll give you the rough numbers. It's at BCP. And of that 50%, 70% is Peruvian government, dollar and local currency bonds. We did take a strong position on these bonds and -- which has proven to be a very profitable position. So that is the bulk of that portfolio. The remaining portion of the portfolio at BCP is mostly local corporate bonds.

  • Then we have at Pacifico Peruano Suiza, at Pacifico Vida, sorry, a portfolio of about $750 million. That is the match funding, the match assets, for the life portfolio practically had zero impairment. That is a very, very high quality US portfolio, all of it investment grade.

  • The most troubled portion is about 480 million at Atlantic Securities. That portfolio, again, Atlantic Securities, just to remind you, is -- takes deposits from the customers and does not lend money, but mostly invests in a portfolio, which has US investment grade, US cross over and some speculative, some European paper and some Latin American paper. Of that 480 million portfolio, 57% is US investment grade, 13% is cross overs or speculative, 4% is in Europe, 26% is in Latin America, mostly sovereign bonds.

  • And then we've got the CMO portfolio, which is mostly senior traunches. They average AA ratings. The duration of that portfolio is 3.44 years. And the duration of the total portfolio, the $480 million portfolio at Atlantic, is 2.3 years.

  • The thought process here is that this portfolio are investments, which we mark-to-market and adjust directly to equity. But as you all mentioned, there is the rule of impairment, which says if a portfolio -- if an individual security deteriorates more than a certain percentage or remains a certain period of time below a valuation, the impact has to go to the P&L.

  • This is really relatively vague and it involves a lot of discussions, conversations, with our auditors. We have been working with them in the past 60 days to have a methodology that allows us to reach a compromise and we think that a compromise, very accommodative, I think is the English word, to our auditor's position, because we do want to put into last year's results everything. We do not want to see this impairment again this year.

  • This is a good quality portfolio that has a relatively short duration. So we expect, and again, very little of that is impaired, is past due, is not current. So we really expect that the bulk of this impact on the fixed income portfolio will be recovered as we hold these maturities for two or three years and thus they get repaid.

  • Again, the most important portion of everything is US investment grade and it's a large number of individual names. There is no concentration here. You will find most of the names will be relatively familiar to you. And again, we are more than glad to send you a full detailed list, which will be pages long, or try to do some charge to accommodate your inquiries. There is nothing that is confidential or non-disclosure in that portfolio.

  • And, again, the interesting thing is that we build precisely the portfolio at Atlantic and at Pacifico Vida to be our hedge against the volatility of being in an emerging market country. And it has proven to be quite the other way around. The investment grade US portfolio is the one that has given us all the volatility.

  • Again, because it is a high quality portfolio, it is a performing portfolio with relatively short-term duration. We expect to recover most of the impaired amounts that have gone through our P&L this quarter.

  • Saul Martinez - Analyst

  • Great. That's very helpful, Walter. Just a very quick follow-up then. I mean, since a lot of it is US fixed income, investment grade, if the corporate bond market doesn't recover, stays at current valuation levels, are you at risk of having further impairment charges?

  • Walter Bayly - CFO

  • No, if the bond market stays where it is, there should be no further impairments. Precisely. We have impaired everything with prices as of December. Now if the market, the fixed income market in the US, drops dramatically going forward, there should be more impairment, but we do not see that scenario. These are good papers and we are very confident that that is the case and unless you know something I don't, I don't expect the US fixed income market to deteriorate any further.

  • And again, this has good quality papers. If we do further impairment, again, these are reserves. We are not losing money. We will recover them. Those bonds will get repaid and we will reverse those impairments.

  • Saul Martinez - Analyst

  • Okay. Fair enough. Thanks. And, yes, having the additional color would be very helpful. But thanks. That was a very good answer.

  • Walter Bayly - CFO

  • Okay. We'll work with you. No problem.

  • Operator

  • We'll take our next question from Juan Partida of UBS.

  • Juan Partida - Analyst

  • Hi. Good morning, everyone. My question has to do -- well actually, I have a couple of questions. The first one, and I know this is difficult, what -- are you giving any guidance in terms of loan growth for 2009?

  • My second question has to do with the impact on the margins that you may see from interest rates coming down, the Central Bank did cut the rates by a quarter.

  • And my final question is, just regarding asset quality, but more specifically in terms of provisions, even if you don't have an asset quality deterioration, how much do you expect loan provisions to increase just on the back of lower recoveries? So your old past due loan portfolio?

  • Walter Bayly - CFO

  • Sure. Loan growth is an elusive number, but I can try to give you a sense. About 90 days ago, I would have said 20% loan growth for the year. Now I'm probably between 15% and 20%. That's where we are right now. It's a difficult number to pinpoint.

  • There are several factors. One is we usually grow anywhere around 3% to 3.5% GDP growth. So if we think of a GDP growth of 4%, that should put us in the 15 plus range. And that 3.5% is the result of economic activity and the fact that we are also bringing new people into the banking system. So that's, I think, where we are in terms of loan growth.

  • The reduction of the Central Bank reference rate would actually help with the bulk of our local currency loans, or an important portion of our local currency loans, are credit cards, consumer finance, lending to micro finance and we do not not expect to lower the rates there. What will happen is that the cost of our funding will probably be lower. So actually reduction in the Central Bank reference rate will probably be positive for us going forward.

  • And your third question was -- what was your third question? Asset quality provisions, yes. I would say that anywhere between 70% and 100% of what we did last year is the good -- is a good estimate.

  • Juan Partida - Analyst

  • Thank you very much.

  • Walter Bayly - CFO

  • You're welcome.

  • Operator

  • We'll move to our next question from Ryan Stevens, Philadelphia Financial.

  • Ryan Stevens - Analyst

  • Hey, guys. Thanks for taking my question. Several things. I just want to make sure, you -- if you're running at a $25 million provision rate at this point per quarter, you, at one point, said you hope to keep the reserves-to-loan ratio at least 150% of NPA, I'm sorry, reserve to NPA ratio is still 150%. That's still the goal?

  • Walter Bayly - CFO

  • Sure.

  • Ryan Stevens - Analyst

  • Okay. So that means most likely you'll be building the reserves somewhat if the NPA is double from here?

  • Walter Bayly - CFO

  • Yes.

  • Ryan Stevens - Analyst

  • Okay.

  • Second question is you are earning at a 25 million provision rate, about $90 million a quarter in net income. And then it would seem like margins would be up a little bit at this point. But I would imagine that the asset management or non-interest income would be permanently reduced because the impairment's correct. So do you think $90 million to [$1 million], $100 million a quarter is a good run rate at this point?

  • Walter Bayly - CFO

  • Let me give you -- let me try to answer that from a different perspective. And the different perspective would be talking about the different parts of Credicorp. the big upside for Credicorp this year will not come from BCP. If you look at the numbers, Atlantic contributed a minus $50 million. Atlantic, we clearly have, in my view, a positive contribution. More in line, what we have had in the past. So just that $50 million becoming a positive $15 million gives you a $65 million upside.

  • Our insurance company has had a $15 million negative. That will become a positive, make it conservatively a positive ten. Then you have another 25% upside, $25 million upside. And then you look at our private pension fund company, Prima, I would estimate that this year's earnings will increase substantially, more than 50%, on the back of having increased the fee and lowered the expenses related to the commercial sales force. So those three elements are the big upsides for Credicorp this coming year.

  • Regarding BCP, you have a mixed bag of things. Some growth, more provisioning, the full impact on the cost side to the -- I mean, we did build our branch network last year, but it did not start on January 1 last year, but more towards the end of the year, so this year you have 12 months of the costs. You have, and these branches take between a 12 to 18 months to reach break even. So the cost side will be a tough year.

  • So not a lot of upside on the bank, probably similar or marginal upside performance on the bank in terms of earnings contribution. And the big upside coming from the other subsidiaries.

  • Ryan Stevens - Analyst

  • Okay. That's very helpful.

  • So just to go back to a first question. So if you're running at 25 million a quarter in provisions now, and that your loan growth is growing at, call it, 15% we should assume in our models somewhere between $27 million and $29 million of provisions per quarter?

  • Walter Bayly - CFO

  • Yes. That's fair.

  • Ryan Stevens - Analyst

  • Okay. Thank you.

  • Walter Bayly - CFO

  • You're welcome, sir.

  • Operator

  • We'll move to our next question from Daniel Abut, Citi.

  • Daniel Abut - Analyst

  • Good morning, Walter. A couple of questions.

  • First on the -- in the issue that you discussed before about the impairment charges and the realities of your security portfolio, I noted that your equity this quarter came down by about $100 million. So I suspect that additional mark-to-market losses are worth taking to the equity to equity because of a classified as available sale. Are there any scenarios where those close to $100 million that were taken through the equity have to be inventory realized in the P&L in the form of impairment charges if significant time goes by and the valuation of those goods is not recovered? That would be question number one.

  • And related to that, the impact on capital. Because -- probably because of that, we saw a decline in your tier one and VIS ratio. If the loan recovers, is there any point where you have to slow down your growth just because capital is becoming more scarce?

  • And the second question is related to the matter of charge. I think you disclosed to the SEC back on January 30 that you were expecting to take a provision of $33 million and then a few days later, when you reported that number had become 43.5, could you elaborate a little bit more of why the number was revised in such a short amount of time and what was the rationale to increase it by about $10 million more, so close to the reporting date?

  • Walter Bayly - CFO

  • Okay. Good. I was surprised you hadn't asked questions. You are always very active, asking questions, Daniel.

  • Daniel Abut - Analyst

  • Yes, I didn't move the finger too quickly. I have to be fast. I'm getting too old.

  • Walter Bayly - CFO

  • Okay.

  • No, we do not expect any further impairments. It has been a very full one-on-one analysis on the securities. We have constantly unrealized losses and unrealized gains. A lot of that comes from the life portfolio and -- but, no, I mean, as I have mentioned before, we think that unless the US fixed income market shows another dramatic impact, that should be it as far as going through the P&L.

  • Regarding our capital, and we think that we have enough capital. Our plan is to issue about $150 million of tier two securities, those will be mostly done in three traunches in the domestic capital market and with that and the earnings we have already retained at the bank, we think that that will be more than enough to cover the growth for this year. And probably -- and that estimated growth, when I made those numbers, was 20%. It will probably be below that, so we think that we will have no problems at all in having to restrain growth because of shortage of capital.

  • Related to the Madoff, what -- there were three pieces in the Madoff. One, we originally announced, I think it was in December --.

  • Unidentified Company Representative

  • About five.

  • Walter Bayly - CFO

  • About $5 million, which were the impact on our direct portfolio and losses related to loans we have given with collateral, with the fund that blew up. So that was the first initial announcement of about $5 million or $6 million if I recall correctly.

  • Then we announced the 30 -- 33 and that is the provisions we have made. And then, yes, after that we have made an additional $3 million from the announcement, which we made last year. That could be in excess. We might see some of that coming back. What I really did want is to put everything at once, in the year 2008, and not have any spill over whatsoever related to the Madoff problem into 2009.

  • Maybe we have done a little bit more than what we were required. And the way the numbers are up, because we did not announce the whole thing at the same time. First was the direct impact on our P&L. Then the provision related to our customers, which was increased last week for additional $3 million. That way the numbers did not add up to what you had originally -- to what you were saying. Does that clarify?

  • Daniel Abut - Analyst

  • Yes, that clarifies it, Walter. If I could just follow-up, given that the biggest part of that provision is related to you trying to cover part of your -- of the client losses, could you comment on what has been the reaction from clients and whether they have found that proposal satisfactory? It is important not only in terms of limiting potential further losses, but also the potential reputational damage?

  • Walter Bayly - CFO

  • Sure. In this respect, there are a lot of legal considerations and I really want to be very cautious regarding my comments. And I would just want to go on the record saying that the important thing here is that we do not think that there will be any further charges to our P&L regarding the Madoff problem and that we are working very closely with our customers. But again, the important thing, and this has a lot of legal ramifications, we do not expect any further impact in our financial statements.

  • Daniel Abut - Analyst

  • Understood. Thank you, Walter.

  • Walter Bayly - CFO

  • Welcome.

  • Operator

  • We'll move to our next question from Rusty Johnson, Harding Loevner.

  • Rusty Johnson - Analyst

  • Hi. I had a question regarding cost of funds. It has been coming down. I guess we could assume that if the interest rate structure does continue to slide, that we'll kind of assume that your cost of funds will also come down as well? I don't know whether there's a risk premium in the market or whether that's a sustainable trend that you've isolated in terms of also the shifting from, I guess, TDs into your -- the cost of liabilities, which is clearly positive.

  • And the second one is just looking at, roughly, your asset make up. Two-thirds bonds, which are effectively earning you nothing now that you've crowded them into dollars, two-thirds loans, which is where your high yielding return on assets are. Is -- are you just going to run with that? Are you content to run with the big sort of bond holding? Or can you do anything with the capital just looking at the big picture?

  • Walter Bayly - CFO

  • I think, I understood the question, let me take it. We did take, at the bank, an important position in government paper. As I mentioned before, we have already assessed, proven to be a very good decision. We have already started liquidating a portion of that. And we are very happy with that decision.

  • Really our -- in our net -- in our cost of funds, there are a lot of different elements moving. And I will try to mention the most important ones. One is that there is a tendency in the local currency to dollarize the economy. Because of the volatility of the local currency, a lot of our depositors have gone into dollars. The dollar today has a coupon which is lower than the local currency. So that has an impact on the cost, overall cost of funding.

  • We were running very high levels of liquidity to make sure, in the very volatile periods. We decided to build up a cushion of liquidity. We have started to reduce that big cushion of liquidity in two ways. One is that we're buying some paper. And second is that we are paying down expensive, of relatively expensive short-term international borrowings.

  • Another element in the whole mix is that we were holding a relatively high or important Central Bank CD. These are short-term CDs in local currency by the Central Bank. That portfolio has started to mature and the Central Bank is -- wants to inject liquidity into the domestic system and is not renewing the issuance of CDs. Thus that portfolio is shrinking.

  • So there are a lot of elements moving, and some of them in different directions in the composition of our funding and net interest margin. But at the end of the day, the business that we are is a business of lending. What we do is, from time-to-time, take positions in fixed income, but these are -- that is not the core of our business, nor is it to hold fixed income portfolios to maturity. We do that at the insurance company, obviously, and we do that at Atlantic Security for reasons that I explained before.

  • But our BCP, the core of our business, is taking deposits and giving out loans. We do manage our liquidity and do take some positions. But that is not the core of our business.

  • Rusty Johnson - Analyst

  • Okay, thank you.

  • Walter Bayly - CFO

  • You're welcome.

  • Operator

  • We'll move to our next question from [Raphael Yurkia], [Bay Asset Management].

  • Raphael Yurkia - Analyst

  • Yes, thank you, good morning, everyone. My question is regarding your expansion plans to [present one is light in view of your presentation]. I just wanted to have a better idea of, in terms of size, what you're planning regarding this program in terms of new branches, new employees? And what kind of investment is committed to this expansion program that you have?

  • Walter Bayly - CFO

  • Sure, in terms of branches, at this stage, only thing that we have contemplated is 12 branches. And we will closely watch this. At this stage, we are more focused on very important projects related to costs and to the distribution and the utilization of our branches.

  • We are a bank that has become a very transactional bank, as regards to the activity our customers do. A lot of the [space] and activity that happens in our branches is transactional. And we're in the process of doing some pilot testing to have our branches become more of a sales point than a transactional point.

  • We're looking at very interesting -- and we're having very interesting results in terms of how to improve the efficiency of the sales force, and in our transactional activity at the branches. So we think that we can improve our efficiency at our branches without substantially improving the amount of people or number of branches.

  • We will continue expanding our Agent BCP and probably our ATMs, but not important investments regarding expansion of branches, which is where the bulk of the personnel growth comes from. We do not have any expansion plans regarding personnel. What we will continue though is very important investments regarding our systems.

  • We are in the process of -- it's a three year -- we're one year into a three year program where we are upgrading our systems and are creating a second alternate processing facility. And that investment will continue and that will require, I would say, anywhere between $30 to $50 million. Plus the usual investments, maintenance, whatever.

  • But at this stage, investments are only related to that project. We're not foreseeing any important sale of investments, and no growth in personnel. And we do -- have embarked in very interesting, and we have a lot of expectations of some projects related to improve the efficiency and cost reduction.

  • We want to see what will be the impact on the slowdown in our Peruvian economy. We think it will be what we have mentioned, but nevertheless, we will watch this very closely without -- before we take any further expansions.

  • Raphael Yurkia - Analyst

  • And one other question, if I may, while this is not precisely the right question for you, but in the light of the [April] activity that we have seen in the local currency, what do you think is the [more maneuver for] the Central Bank to lowering this rate? They are obviously interested in continue -- well in fostering the economic growth, but on the other hand, I understand that they wanted to reduce the degree of [dollarization] of the Peruvian economy. So I was wondering what's your view about these kind of compromises, or trade-offs, that (inaudible) seem to be facing these days?

  • Walter Bayly - CFO

  • Sure, I can give you some of my ideas there. The local currency -- the three most important elements that provided strength of our local currency versus the dollar have definitely weakened. Our trade surpluses have weakened. The investments from abroad will be less. And the remittances from abroad will be less, though the three main elements that provided the strength or the potential to continue appreciating sol versus dollar have definitely weakened.

  • On the other hand, in the past 30 days, we have seen a shift in the composition of portfolios. There's been a lot of buying dollars because some of the large portfolios or private pension funds have dollarized a bit their portfolios. So there's a one off affect in just shifting the stock of their portfolio.

  • Us banks, and particularly our bank, where the creditors, I have mentioned, we have increased the composition of our position in dollars, just because we want to reduce the volatility in our P&L. We want to have a very predictable result in our future, because of all the volatility. We think there's a value to that.

  • So we have been buying dollars on our own behalf. But also some customers of us, because they see the weakness in the local currency, or the relative weakness in our local currency, have also started doing forwards to cover the dollar liabilities.

  • And we have seen some demand for forwards from international investors as well. And don't forget that whenever there is a demand for forward, we, the bank that does the forward, we have to buy dollars on the spot to cover our forward position. So that demand for forwards creates also a demand for dollars on the spot. So there's been an increase in demand for dollars, which has led to the devaluation of the local currency in the past 10 days.

  • The Central Bank, rightly so, wants to reduce the volatility and is closely monitoring the valuation of the currency to smooth out the affect of this devaluation. Clearly, our currency is still not in balance because one of the ways in which the Central Bank manages to limit the volatility of the foreign exchange, is not only by intervening in the foreign exchange market, but also by limiting the amount of local currency available.

  • Thus, there is temporary, a shortage of local currency. If you have more local currency, probably there will be more demand for dollars. And so the Central Bank is, rightly so, limiting the amount of sol to put less pressure on the dollar. So the domestic interbank rate is above the interest rate for the Central Bank. That means that the economy is not in equilibrium. So we should expect the currency, probably, to slide a little bit more. Or I feel we see the domestic interbank rate which reflects the Central Bank interest rate.

  • Having said that, clearly inflation is coming down, and the Central Bank has all the incentives to lower the domestic interest rate. Not to create another stimulus for the economy. So we think that, that will continue to happen. And we view that as positive for the economy. This devaluation has some positive affects. Our currency has devalued less than other currencies in Latin America. Thus, our exports of non-commodities have lost some competitiveness. So a bit of devaluation is not necessarily bad for the country.

  • And today, the devaluation does not provide -- is not a channel to allow inflation, is important. The international prices have come down. So the impact of the devaluation is not as severe in inflation as it was in the past. So all these elements put together lead us to believe that, again summarizing, our exchange rate is probably not in balance today. What will happen in the future, very difficult to predict. Second, we expect the domestic rates to continue coming down, as inflation comes down. and our -- the exchange rate, which is equilibrium. I don't know if that was a long answer to a short question, but --.

  • Raphael Yurkia - Analyst

  • No, that was absolutely -- it was the right answer. And I guess that I was just trying to get a sense of what the government would -- or the Central Bank's policies would prefer if continuing forcing the economy or defending the exchange rate in order to keep inflationary pressures in check, basically.

  • Walter Bayly - CFO

  • Yes, the Central Bank has repeatedly said that their function, their role, in the economy is not to defend the specific exchange rate, but rather to work on inflation and growth of the country. And I believe that. But again, having said that, they don't want volatility as well, so they will participate in the foreign exchange market, not to change [a print], but to smooth a print.

  • Raphael Yurkia - Analyst

  • Thank you very much. Thank you very much, that's a great answer, thank you.

  • Operator

  • Our next question, from Lucas Ramirez, Merrill Lynch.

  • Lucas Ramirez - Analyst

  • Good morning, everyone, I have a question regarding currency exposure. It's sort of a follow-up. And not so much regarding the translation risk in your P&L, but more on the credit risk side. And I'm just wondering how do we get comfortable with potential deterioration in asset quality from the mismatch in cash flow and balance sheets of your customers? So how do you see the risk of further depreciation of the Nuevo Sol will start having an impact on the repayment capacity of your customers? And what that can do to non-performing loans going forward?

  • Walter Bayly - CFO

  • Sure, good question. We have worked on that a lot. Let's break down our dollar portfolio into pieces. The first one we have to take out of -- that will require a lot more analysis, is the corporate or middle market segment. A lot of the corporates are exporters. A lot of the middle market companies are exporters. Thus, it is fair and valid for them to have their liabilities in the currency in which they receive their revenue.

  • Furthermore, a lot of these companies have dollar denominated assets under balance sheet. Be that inventory of commodities or for this the view of the importer of Caterpillar machinery. You do have an asset on your books that is -- will be sold in dollars and keeps its relative value in dollars. So take on the side, the commercial portfolio, which is more of a case by case, and these companies are sophisticated, they know who to handle that risk.

  • The consumer portfolio is mostly local currency. So at the end of the day, what we end up looking at is the mortgage portfolio. And yes indeed, there is a portion of our mortgage portfolio which is dollar denominated. And these individuals do not earn their revenue, their salaries in dollars. The calculation that we have done is that for every 20% devaluation, loss is double, very simple short answer to your question.

  • If it is gradual, it will probably be less. If it is a one time 20% devaluation, then losses will double. That's our calculation.

  • Lucas Ramirez - Analyst

  • Great, thank you very much, Walter.

  • Walter Bayly - CFO

  • You're welcome.

  • Operator

  • We'll now move to our next question from [Ian Smith].

  • Ian Smith - Analyst

  • Hello, my question's been answered actually, thanks though.

  • Operator

  • We'll move to our next question, from [Ryan Stevens].

  • Ryan Stevens - Analyst

  • A couple of quick follow-ups. You see income, would it be fair to say it's shifting back towards to $100 million per quarter level, or will it be a little bit less than that, because of the write-offs?

  • Walter Bayly - CFO

  • We try not to give specific dollar projections of revenues. That's why I answered the question, the previous question, more focusing on where the upside comes and led you to an indirect answer to that question by saying again, that BCPs results or contributions to Credicorp will be marginally higher, because all the elements above low growth, but more provisions and some more costs. That the big upside comes from Atlantic going from minus 50 to say, plus 10, plus 15, Pacifico going from minus 15 to plus 10, and Prima increasing it's profits by more than 50%.

  • If you make those numbers, you will reach some of the conclusions. And I'd rather continue with our policy of not giving specific dollar projections for the quarter.

  • Ryan Stevens - Analyst

  • That's fair, second question is Bolivia. There's been an increasing risk, politically, on what's going on in Bolivia with the elections down there, and also with increased cause of nationalization. How do you guys position if there's an increasing expropriation of private investment in Bolivia at this point?

  • Walter Bayly - CFO

  • Yes, Bolivia continues to be a challenge. Clearly we are running -- well, it has been extremely profitable last year. We think that nothing dramatic will change. We do not see an expropriation of the banking industry. And we have been assured by the authorities that, that is not in their cards. That is what they have said.

  • We are running a very conservative book. We are running a -- what we see the problem coming is from the fact that there is very limited investment in the country. The country's in an extremely good financial situation. It is a country that I think in Latin America, has the least debt to GDP. So the country will not run into financial trouble for a short period of time.

  • Eventually, the model will probably not work because there will be no investment. But that will take a while to happen. Political volatility will remain high. It is almost a standard future of the country. But nevertheless with the approval of the new constitution, some of these will probably -- some of this volatility will probably slow down. So we do not expect any major surprises in Bolivia, at least for this coming year.

  • But again, it is a difficult and challenging environment. It continues to be heavily regulated. Somehow we have learned to navigate in those waters. We run a very conservative lending portfolio. And there is clearly no exit strategy available there. So we just have to weather what comes in the future.

  • Ryan Stevens - Analyst

  • And that was 10% of your profits, correct?

  • Walter Bayly - CFO

  • For last year, yes.

  • Ryan Stevens - Analyst

  • Thank you.

  • Walter Bayly - CFO

  • Welcome.

  • Operator

  • We'll move to our next question from Mario Pierry, Deutsche Bank.

  • Mario Pierry - Analyst

  • Thanks, my questions been answered.

  • Operator

  • We'll move to our next question, [Mark Lian, Lazard Asset Management].

  • Mark Lian - Analyst

  • Following on from Daniel's earlier question on the Blue Chip Fund insolvency. Can you tell me if the 43 million year that you provided for, that includes compensation that you intend to make to the customers? And following that, can you confirm that all these customers here, third-party customers, i.e. they are not individuals or entities within the Credicorp group?

  • Walter Bayly - CFO

  • As I mentioned before, in the first part of the question, there are a lot of very delicate legal ramifications and consequences of this event. I really will want, not to answer your question, because of the consequences and legal ramifications that I mentioned. What I want to assure you, again, is that there is no further impact on our financial statement expected to occur this year or ever, related to the Madoff event.

  • And the people that have -- and the Madoff event has affected our customers, has affected proprietary positions, and within the customers you have people that work within the bank and people -- that the bulk obviously do not work within the bank. So there is a mixed bag of everything. But again, I have to be extremely careful regarding my comments on this subject.

  • Mark Lian - Analyst

  • Thank you very much.

  • Walter Bayly - CFO

  • You're welcome.

  • Operator

  • We'll move to our final question from [Daniel Pasquale] [Fortress Investment].

  • Daniel Pasquale - Analyst

  • Yes, hello, thanks, could you just repeat the reasons why reductions of the interest rate by the Central Bank will be positive for Credicorp? Thank you.

  • Walter Bayly - CFO

  • Sure, basically it lowers the cost of funds. And we do not expect, because of the markets in which -- in some of the markets in which we lend in local currency, we do not think that, that will necessarily bring a lowering of the interest rate we charge our customers. So maintaining constant, the rate you charge and lowering the cost, should be beneficial for us.

  • Daniel Pasquale - Analyst

  • Okay, thank you.

  • Walter Bayly - CFO

  • You're welcome.

  • Operator

  • We have no further questions at this time.

  • Walter Bayly - CFO

  • Okay, well thank you all very much for a very lively conference call. I think the subjects discussed are valid. I thank you very much for your questions and your interest in Credicorp.

  • Please if you have any further questions you would like more details regarding any specific number or subject, please do not hesitate to contact us. We are, as usual, always very open to give all the information, so that our investors have all the level of comfort and knowledge regarding what is happening within Credicorp.

  • Last year has been a tremendous challenge. Clearly, I did not expect my first year as CEO to be as challenging as this. Nevertheless, what has clearly been proven is the strength of our franchise and the robustness of our core business. We are operating in a market that should continue to be positive, but less than what we had originally intended.

  • Nevertheless, we're very enthusiastic with the turnaround that is happening at Pacifico which had been our subsidiary that had been giving us some headaches in the past. Atlantic should be fairly normalized. And BCP will continue with the dynamics that I mentioned before. Thank you very much for your continued interest in Credicorp. And we hope to have very positive news for the first quarter 2009 conference call. Thank you and bye, bye.

  • Operator

  • That concludes our conference for today. We thank you for your attendance and have a nice day.