Credicorp Ltd (BAP) 2009 Q1 法說會逐字稿

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  • Operator

  • Good day, everyone, and welcome to this Credicorp Ltd.'s First Quarter 2009 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 Operating Officer. Please go ahead, sir.

  • Walter Bayly - COO

  • Good morning, everyone, and welcome to Credicorp's First Quarter '09 Conference Call.

  • After having successfully steered through a turbulent and difficult year of 2008, it is this year 2009 presents many challenges for the Peruvian economy and therefore our businesses. As we have all seen the market meltdown affected almost everybody and led to a faster than expected economic deceleration in the developed markets, which in turn complicated emerging markets.

  • The international events also generated some turbulence in local markets within Latin America through the volatility of the exchange rates, driven by the search of safe havens for monetary assets. In this context, the Peruvian economy continues showing some resilience, reporting reduced but positive economic growth of about 2% for the first quarter, thanks to the good macroeconomic performance of the last years.

  • This reinforces our belief that we will certainly remain one of the fastest growing economies in the region. In fact, this first quarter we have seen probably the worst effects of the uncertainties in the world markets, which froze the decision making processes of the Peruvian business world and generated defensive actions, such as reduction of inventories and cost cutting measures to reduce potential risks.

  • These measures led to a sluggish demand for financing, and in some cases, a contraction of financing requirements as business tried to tighten up their operations. Therefore, this first quarter '09 has shown a declining trend in lending activity, which we believe is the result of the extreme caution exercised by all economic payers. The recent developments in the world markets, however, have calmed down the nervousness of the business decision makers, which are beginning to resume their investment activities.

  • Furthermore, the government anti-crisis spending program and the aggressive reductions in the reference rate by the central banks will only start becoming effective in the next months, supporting the shift in direction in the recent month. All this leads us to believe the declining trend in economic activity and therefore lending activity should flip around to stabilize and resume a positive trend, so that we will hopefully look back at the first quarter '09 as the slowest in this process.

  • Though Credicorp's core business was not significantly altered by the events last year, but rather suffered mainly under the market loss in values. This first quarter reflect the impact of the uncertainties, precisely in the core earnings generated, as we will see in the next slides. But given the expectations of our Peru's economy, we remain optimistic about the probabilities of resumed growth, though at a moderate rate.

  • Next page, please. We are on page three. So, looking now at Credicorp's first quarter '09 results, we see that despite that deceleration in economic activity operating earnings remained robust, reaching $165 million for the quarter, and a strongly recovered bottom line was reported, which was free of the non-recurring extraordinary losses that affected the fourth quarter '08, and reached a total of $110.6 million net earnings for the quarter.

  • In fact, the elements that have generated the strong earnings volatility in the past shown in this table have been addressed and hopefully minimized and/or eliminated to avoid such volatility in future results.

  • The open Nuevo Soles position that generated such large translation losses or earnings in the previous year has been gradually eliminated by the end of this first quarter '09. Leaving only a remnant loss of $4.7 million related to the volatility of the currency within the quarter. Eliminating the volatility generated by such Soles exposure was obviously done at a cost, since it meant switching from higher yielding Soles denominated government instruments to significantly lower returns on US dollar investments.

  • Two, the conservative approach taken towards provisions for market related value adjustments on our investment portfolio led to a very large impairment amount last quarter that should prevent further significant provisions.

  • Nevertheless, further $4.4 million in provisions were made, given some additional volatility in the first couple of months this year. Nevertheless, a gradual amortization of the international markets is expected, which should provide for more upside than down side in the future.

  • Three, tighter and more conservative asset management investment policies have also been put in place to avoid third-party risks, such as the Madoff event and four -- the stock appreciation rights program has also generated some income volatility through strong fluctuations in provisions necessary because of the imperfect hedge specifically given the recent high volatility of our stock. Therefore, we have introduced a modification of our SAR program to minimize the need of such revisions in provisions for this concept.

  • With these volatilities generating elements out of the way, we can focus on our operating performance. Here the numbers reveal an almost flat outcome, which in the absence of all the non-recurring, non-operating losses from last year results in the increased bottom line earnings of about $111 million, and an actually very strong return on average equity of over 26%.

  • Furthermore, given the distortions incorporated by the same volatile non-operating items in both comparison periods, such comparison becomes meaningless. But to explain in more detail the operating performance, let me go to the individual subsidiaries in the next slides please.

  • Next page, please. BCP's loan book evolution reflected the market reaction to the massive worldwide recession as explained before. The uncertainties in the world markets froze the decision making process of the Peruvian business world resulting in a sluggish demand for financing.

  • Though the retail sector was less impacted and continued growing, loan book balances at the end of the quarter dropped in the still dominant wholesale sector portfolio, mainly in the US dollar denominated portion. Resulting in the contraction of 4% quarter-over-quarter reported on our balance sheet for the total loan book. However, based on average daily balances, which is what is shown in these graphs.

  • Separating the currencies to eliminate distortions, due to currency volatility, quarter-over-quarter total average outstanding balances grew 1.1% and 21.3% year-over-year, though a negative trend in outstanding balances cannot be denied.

  • The above chart reveals the continuation of growth in the retail sector throughout the period, albeit at a much lower rate, reaching 7.3% volumes growth in local currency and a minor contraction of 0.8% in the US dollar denominated retail portfolio. On a weighted average for the whole retail portfolio, this growth reaches 3.3% quarter-over-quarter, and for the wholesale sector, 0.2%.

  • Another interesting evolution is the preference for local currency lending, even in the corporate sector, with the average outstanding balances growing 9% while US dollar average outstanding loans dropped 2.6%. In short, though a negative trend in balances was reported, volumes lend remained at similar levels.

  • Page five, please. This chart show more clearly the positive evolution of average outstanding loans for the quarterly periods and evidences as well as a negative trend in US dollar averages and loan book balances.

  • Page six, please. With regard to interest income, the structure of interest earning assets changed again, driven by a declining trend in lending releasing more available cash flow investments. However, achieving good yields in the cash and investment position continued to be in a challenge. Since our conservative policy on currency exposure which cancelled all Soles open positions forced a shift from the profitable Soles denominated Central Bank CDs to gradual predominance of US dollar assets, which resulted in reduced yields. This has reflected in interest earning assets composition, where the portion of net loans dropped to 59% down from 62% of interest earning assets.

  • While other liquid investments linked to or denominated in US dollars such as Central Bank's CDR's which are US dollar linked Central Bank CD's and US government bonds and other securities increased their participation, as did as well the US dollar deposits at the central banks and other banks.

  • Page seven, though the described evolution in lending activity, there is a drop in quarterly end balances, but slight increase in average outstanding balances, should lead to believe that interest income should remain stable, this did not happen.

  • Interest income did not reflect this and dropped 7.5% since interest from loans was affected by declining market interest rates, especially for US dollar lending in the still dominant corporate sector. But more importantly, because of lower returns on increasing excess liquidity held today mainly in US dollars versus the high returns achieved in the past with holding such liquid positions mainly in Soles.

  • Nevertheless, declining market rates were also affected in the funding costs generated an even stronger drop in interest expense, which reached 15.6, and could compensate not only their impact in interest collections, but also to some extent the lower yields achieved for the US dollar excess liquidity positions.

  • Therefore net interest income dropped only 1.9%. However, to improve income our treasury decided already last October to invest in alternative US dollar and Soles denominated global government bonds which offer better yields and a tax shield instead of keeping its liquidity in Central Bank deposits. This decision provided an improved overall yield on investments, which escapes the net inertest income, and therefore net interest margin calculation, since it appears when sold through gains on the value of these securities and the tax shield which reduces our effective tax rate for the period.

  • Consequently, the overall net interest margin calculated dropped to 4.45% from 4.55%. While non-financial income received a boost. It is however worth highlighting that the net interest margin on loans then improved to the 7.5% following the evolution of market rates, which allowed for further increases in spreads, since interest rate drops are not fully transferred to all clients.

  • Next page please. The explained evolution of average outstanding loan volumes and of net interest income is shown in this summary of key figures for BCP. Provisions, on the other hand increased this quarter as expected, net provision however raised over four times quarter-over-quarter because of the large provision reversals of last quarter and 60% year-over-year more according to our own plan. The increase in provision is being carried out as delinquencies involved within our expectations, which incorporate the slowdown in the economic activity.

  • Non-financial income also grew an important 5% quarter-over-quarter, though as explained before boosted by the gains on sale of securities, US dollar denominated global bonds from Peruvian and Colombian governments, which appear within the other non-interest income. The core non-financial income contributors were actually down by 8.6% for banking services commissions or fee income and minus 38.7% for gains on foreign exchange transaction.

  • Fee income drops as a result of less economic activity leading to a decline in fees related to trade, mortgages, and capital market activities, and less corporate lending, both being also significant fee generating businesses. While the drop in net gains on foreign exchange transactions is linked to the reduced transactional and international trade related activity.

  • Operating expenses were on the other hand below our forecast and remained basically flat from the levels of last quarter, showing the expected increase of 26% over expenses in the first quarter '08 resulting from the branch expansion carried out last year.

  • Given this minimal expense increase for the quarter and the important increase in earnings, our efficiency ratio improved to 55.2% from 57.3% last quarter, but is still higher than the 47.5 level of the first quarter '08. The bottom line of these developments was net income in the first quarter of $100 million versus $86.6 million for the first quarter '08.

  • Next page, please. Looking more carefully at loan portfolio quality, we are confident our portfolio is still strong. Nevertheless, there is a deteriorating trend resulting from a sharper slowdown in economic activity than originally expected, and job losses in certain sectors of the economy.

  • Despite this trend, delinquencies have increased only moderately by $34 million from $84 million to $117 million in this first quarter '09. But given the drop in loan book balances, the ratio of past due loan to loan reached 1.16, up from 0.8 by the end of 2008.

  • The delinquencies indicated for the retail segment are also very low, but at the same time reveal a deterioration reaching 3.6% for credit cards, 3.7% for consumer loans, 3.7% for small and medium companies, 1.6% for mortgage loans, and 1% for car loans. Provisions for loan losses were in line with projections, but not enough to avoid a reduction of coverage, which fell from 272% to 207%.

  • Nevertheless, the increase in delinquencies is in line with the economic slowdown, and though we view and monitor these numbers with some concern and take precautionary measures, it does not represent any major concern since the deterioration is by no means an indication of any significant of worrisome credit quality deterioration.

  • Furthermore, personal and corporate debt is still relatively low in the Peruvian market, while credit information is widespread and efficient. This coupled with conservative credit regulations and risk policies contributes to monitor carefully the evolution of our delinquencies portfolio and to manage our risks.

  • Page 10, please, our network expansion was completed in the first month of 2009, and we have today 339 branches in operation, 926 ATMs, and 2,037 Agentes BCP. The cost of the expansion will be fully reflected this year 2009. Though no significant increases in branches is planned for this year, we are convinced of the need of further expansion and the contribution it will bring to business growth in the coming years.

  • However, business growth for the coming years should have significantly less impact on cost as the efficiency of our distribution model is being evaluated and will most likely lead to less personnel, more ATMs, and more sales function for each office.

  • Next page, please. The expansion of our network is also directly linked to our growing operating expenses, which increased rapidly as the number of branches opened accelerated. Nevertheless, the increased income reported in this first quarter is responsible for the cost to income ratio improvement to 55.2%.

  • Though we are aware that this does not reflect a real efficiency improvement of our cost structure, which is something we are focusing on achieving within the next years. Profitability ratios on the other hand continue showing BCP strength with a return on average equity at almost 30% for the quarter much within the target we expect.

  • Page 12, please. This chart summarizes BCP's performance and reveals the business evolution. Assets remained flat and even though loan book balances at the end of the period reveal a negative trend. Average outstanding loans for the quarter were slightly positive showing the resistance of the Peruvian market, while in the middle of the worst world recession in decades.

  • Earnings grew 15.4% to $100 million versus $86.6 million the previous quarter held by treasury activities to make up for lower net interest income resulting from the cancellation of our Soles position and concentration in US dollar investments.

  • As seen in the previous chart, return on equity in 2008 reached an excellent 29.5% within our target range. Loan quality remains strong, despite showing a turn in trend after reaching the lowest point by the end of last year, and despite the high cost related to the aggressive expansion of our network. The efficiency ratio also improved, thanks to the increased income generation.

  • Next page, please. Turning now to Atlantic Security; after the hard year end for Atlantic, which carried the bulk of the effects from the financial crisis on Credicorp and reported losses of $65.5 million in the fourth quarter, results of the private banking activity at Atlantic have recovered normal levels, which undoubtedly reflects the contraction in portfolio values of the assets management business and reduced investment activity.

  • In fact, the drop in investment volumes responds not only to a drop in market values, but also a shift towards more conservative bank deposits. This move has had an impact on fees since clients have less appetite for more sophisticated investment structures, which generate better fee income.

  • Nevertheless, results are satisfactory, and mean a contribution to Credicorp of $3 million versus $5.7 million a year ago. Furthermore, the strategy for handling the Madoff event contributed to minimize the reputational damage and preserve out clientele. But more importantly, the strategy developed for a coordinated and improved asset management business is setting the stage for future growth.

  • Page 14, please, Pacifico Peruano Suiza. The insurance business at PPS reported a positive numbers in all the insurance businesses segments for the first time in more than 1.5 years. The changes in the business model implemented in the last 18 months, which aim at a combination of improved risk assessment capabilities and a reduction of the risk retention levels in our books for the property and casualty corporate business, are proving effective and enabled Pacifico to reduce casualties significantly.

  • However, as a consequence of this strategy, net premiums earned dropped 5.5% to $102 million from $108 million. But the lower claims in the property and casualty sector, led to significantly improved technical results, which reached $13.4 million in the first quarter up from $3.9 million in the fourth quarter, and a technical result of minus $0.4 million in the third quarter '08.

  • This improvement is also reflected in net earned loss ratio, which reached 69.2% for the first quarter '09 versus 78.6% for the fourth quarter '08, 82% for third quarter '08, and even 94% for the second quarter '08.

  • Furthermore the combined ratio which excludes Pacifico Vida finally fell below the 100% mark reflecting the return to a profitable business result. Therefore, the change in business strategy might reduce premium growth, but they significantly improved profitability.

  • In addition, better cost controls support the downward trend in operating expenses, which reached $11 million versus $18.1 million a year ago.

  • Consequently, total contribution to Credicorp reached this first quarter $5.2 million, a significant recovery from the losses of fourth quarter '08 of $7.4 million, and a very encouraging number even in comparison to previous quarters in the last year.

  • Next page, please. Finally, Prima's business results are showing significant improvements. Prima's fee income was up 11% from last year, reaching $21 million -- $21.2 million in the first quarter, following the successful implementation of the fee increase announced last year.

  • While operating costs were lower year-over-year by 7%, leading to a significant 34% increase in operating profits, which reached $10.4 million, and led to a bottom line contribution to Credicorp of $6.2 million.

  • Furthermore, and despite Prima's fee increase which became effective for this quarter, Prima maintains its dominant position in the market capturing important market shares. 30.3% of assets under management, 32% of collections, and 45% of voluntary contributions to the funds.

  • Recent developments related to the measures taken by the government to incentivate private consumption will affect income of the pension fund systems. Since the additional salaries paid in July and December pursuant to Peruvian labor regulations are being exempt for the next two years from contributions into the pension fund.

  • For this since we charge fees on contributions and not on assets under management, it will impact with about $2.7 million forgone gross income at Prima for 2009, and an estimated $5.7 million in 2010. We are reviewing our cost structure to find ways to mitigate this reduction in our income.

  • Page 16, the summary of Credicorp results which is reflected in the contributions chart you are seeing reveal the importance for Credicorp of the return to profitability of all its subsidiaries. Except for BCP Bolivia, a subsidiary of BCP which reported a drop in earnings, so it's 0% on a return on equity of 25%.

  • All of Credicorp's subsidiaries including BCP itself reported an improvement in bottom line results. Though the impact on the first quarter results of the world recession on Credicorp's banking business can not be denied, it appears mild and almost negligible in the other business segments which in turn have achieved profitable operating results.

  • These results are encouraging and even more so given the recent signals in the market of a gradual though slow normalization of business activity. For our markets, this first quarter appears to have been the lowest point in terms of economic activity.

  • Page 17. As a result of this unusual and uncertain evolution in the year, profitability ratios for Credicorp reflect a high volatility in its quarterly reported net earnings. However, its performance for this first quarter '09 is probably the strongest, with a return on equity of 26.3%, especially since it was achieved without important extraordinary elements of the past and thanks to the recovery shown by all businesses in which Credicorp operates.

  • 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 developments of such market.

  • Page 18, our stock reflects today the recovery of international markets. We continue to believe that Peru is in a very solid macroeconomic position that will allow the country to continue growing at probably the highest rates in the region and that we are best positioned to continue benefiting from that scenario.

  • Our fundamentals have not changed with this crisis. The strength of our assets is there and as we have already pointed out we will continue growing profitably in a market that is also showing signs of resilience in this turbulent world environment.

  • Thank you very much for hearing me out and we are now ready to go into the question-and-answer period of this presentation.

  • Operator

  • (Operator Instructions) We will begin the question-and-answer session with Daniel Abut from Citi.

  • Daniel Abut - Analyst

  • If you could comment a bit more on the asset quality evolution, you did say that the increase in NPLs, the new NPL formation that we saw was more or less in line with what we're expecting, and to be fair, you had guided in prior conference calls that we would see some increase. Is it fair to say that was in line with what you expected or a bit worse?

  • At least, it came more, I mean, beside that, what I carry in my model, and I wanted to ask you about that. This of course is tied to the way you see the Peruvian economy rebounding in future quarters but when do you think we'll see the peak in terms of the NPL ratio? Is it two quarters from now, three quarters from now, and at what level, and you can answer that with the overall NPL ratio or by segment, given that you gave us in page nine a very good breakdown of the NPL ratio by segment. How many more quarters of increases are we going to see and on what level?

  • Walter Bayly - COO

  • All good questions, all difficult questions. Let me try to organize my thoughts. I remember, you asked me this question in the previous conference call, and I believe my answer was that we were expecting that NPLs for the bank as a whole would probably double from, where they were at year end. I believe at year end, we were about 0.8. That's roughly that we would end the year about 1.6 NPLs. We are still below that number, but yes, I agree with you.

  • I think that I have been surprised by the rate at which the portfolio has deteriorated. Nevertheless, it is important that the rate has been working on both sides. The portfolio has indeed deteriorated and there have been no volumes growth. So, the combination of both exacerbates the trend. I still stick into my original number, which is probably end up the year with about 1.6. I'd say that we will see the worst of it by the third quarter. There is a lack here, and I would not expect credit quality to start improving until the last quarter this year. Does that answer the question?

  • Daniel Abut - Analyst

  • Yes. Just as a follow-up, you did consume part of the excess reserve cushion that you have, because the coverage ratio that you addressed in your presentation did come down. As we take two or three more quarters to see the peak in NPLs, are you expecting to draw down from that coverage further or are you trying to provision enough to keep the coverage at around the 200% level that we currently have?

  • Walter Bayly - COO

  • Yes. Good question. We will build it up. The way the provisions are calculated in terms of international financial reporting standards, there is a certain amount of, it is not an exact number, but rather a range and we are going to be pushing towards the more conservative side of the provisioning levels, of the exact provisional levels range. You will most likely see some increased provisions this quarter.

  • Daniel Abut - Analyst

  • So it is to start to coverage ratio going back up from a 207% level that ended first quarter.

  • Walter Bayly - COO

  • Or at least not allowed to deteriorate any further.

  • Operator

  • Now, we will move to Saul Martinez with JP Morgan.

  • Saul Martinez - Analyst

  • Couple follow-up questions on the asset quality. I guess, just looking at my model and kind of looking at the pace of new NPL formation, if you maintain your reserve coverage at current levels, it's hard not to see provisioning levels go up quite a bit from where we are here and likely be much higher than the sort of previous guidance you've given, which was that provisions would double this year, is that a fair assessment? Maybe you see provisioning levels being much higher than that. My first question on asset quality.

  • My second question is kind of a bigger picture question. You gave the PDLs by segment, but I mean, PDLs and credit cards, auto loans, a number of segments are extremely low improved relative to any other market in the world. I don't think I've ever seen PDL ratios that low anywhere. How much risk do you see there if we look out two or three years even if the economy recovers somewhat, these past due loan ratios are going to skyrocket, they are going to double or triple even considering the kind of growth we've had in the last couple years?

  • Walter Bayly - COO

  • Yes, I think that in line with, I've just mentioned, which is that we were a bit surprised with the pace at which the portfolio deteriorated and though we still think that we will end up the year around 1.6%, but having the combination of those two nevertheless, our conservative nature tells us that we should increase the provisioning level more than I have given in the previous guidance. So, yes, you are right there.

  • That was what I was hinting at the previous response that we will go to the upper range of what we can provision according to international financial reporting standards. And we will increase our provisioning levels probably in the next two quarters. So, not because we think that the 1.6% is something that will not be there, but just in case, we are all talking assumptions, we are all talking what we think will happen but nevertheless, we want to take a conservative stance towards provisioning.

  • Saul Martinez - Analyst

  • Is that, sorry, Walter, I will let you answer for the next question surely, because does that put at risk the view that you've had and that you've expressed recently to the press that the bank's earnings itself should be flat this year versus last year?

  • Walter Bayly - COO

  • No, not at all. We still think that that is the case.

  • Saul Martinez - Analyst

  • What's going to offset that? What's going to offset the much higher provisioning level?

  • Walter Bayly - COO

  • We're working very hard on costs, and we expect further gains on tradings as we have seen in the first quarter.

  • Saul Martinez - Analyst

  • Okay.

  • Walter Bayly - COO

  • We should pick up volumes as well and the margins, as you have seen the loan margin book improved the first quarter, we think that, that can be probably improved slightly going forward.

  • Saul Martinez - Analyst

  • Okay.

  • Walter Bayly - COO

  • Regarding the overall level of past due loans, I think when you compared country against country with the overall levels of past due loans, what is the acceptable level of the past due loans, whatever the margin will pay you. Car loans in Peru are extremely have very low interest rates, thus they cannot sustain high levels of past due loans of loan losses and the same can be said in mortgages. So, I think that the levels at which we are, I don't think the product allows for car loans to triple in terms of loan losses and mortgages as well. It is a reflection of the margins.

  • Saul Martinez - Analyst

  • Okay. Okay. Fair enough. Just you mentioned on the trading side you have some more gain. What kind of sustainable trading results can you make, do you still have some sovereign bonds that are booked at gains that you think the treasury can realized, and what kind of treasury result should we be thinking about in the next couple quarters?

  • Walter Bayly - COO

  • Very difficult to predict, really.

  • Saul Martinez - Analyst

  • Sure.

  • Walter Bayly - COO

  • Because trading is volatile and you're asking me to give a lot of details, Saul.

  • Saul Martinez - Analyst

  • Yes.

  • Walter Bayly - COO

  • Information going forward --.

  • Saul Martinez - Analyst

  • So let me ask you this way --.

  • Walter Bayly - COO

  • Which I'm reluctant.

  • Saul Martinez - Analyst

  • Yes. Let me ask you this way, is it fair to say given your response to the previous question, that the trading results are probably going to be better than what they've been or higher than what they've been in the last couple of years on a run rate basis?

  • Walter Bayly - COO

  • Yes, sir.

  • Operator

  • Next question will come from Lucas Ramirez with Merrill Lynch.

  • Lucas Ramirez - Analyst

  • Just, I've question on your net interest income. You mentioned that there was some pressure in the quarter given the rapid cut in interest rate from BCRP. Now given yesterday's 100 basis points and we think room for some more due to the decline in inflation expectations, what do you see in net interest income over the coming quarter? Do you think these pressures are likely to persist or you think that you're being able to offset those lower base rates with higher lending spreads?

  • Walter Bayly - COO

  • Yes. Good question and good morning, Lucas. The transmission of lower reference rates from the Central Bank is almost immediate to the local currency corporate loan book. The truth is that there is relatively limited possibilities of reducing our funding cost in local currency on our core deposits, which as you know we rely heavily on what our core deposits, which are aside savings and CDs.

  • The lower funding cost will be translated to kind of institutional money, the money one takes on the margin, so net-net probably a reduction in the domestic reference rate will put pressure on our local currency margins. We are trying to compensate that with increased rates on the retail side which do have some margin and the markets are less interest rate sensitive. So, I'd expect that we can probably defend our net interest margin on the local currency book and probably work on the US dollar portion of our book to try to increase that.

  • Operator

  • Next question will come from Mario Pierry with Deutsche Bank.

  • Tito Labarta - Analyst

  • It's actually Tito Labarta here. Just a follow-up on the question regarding the lower rates, what do you think then would be the impact then for the net interest margin given what you said the local currency bond and the US dollar would be flat or do you expect the margin to decrease slightly? Then the second question, what do you see is the impact of the lower rates on your loan growth for the year, do you still expecting with your previous guidance or what would be your loan growth forecast for this year? Thanks.

  • Walter Bayly - COO

  • Sure, Tito. On the margin just to be conservative, keep it flat. On the loan book, if you see the numbers, the retail has been fairly robust. I think it grew 7% for the first quarter, which is in local currency, which is a very robust rate. The big question is what is going to happen to the wholesale portfolio.

  • There probably it has been exacerbated in the first quarter, a tremendous reduction of inventories. Most of the companies went into the year end when the country was growing at 9%, and we're expecting demand to continue very aggressively and they'll build up inventories towards the year end. We have seen how they have stopped buying and accumulating further inventory in production just to consume what they have. We think that that process is mostly over.

  • Furthermore, lending volumes in dollars are also affected by the overall level of the commodities. If I was financing one shipload of any commodity, the price of that commodity has come down and it requires less lending. So I would say that the dollar lending would probably be more conservative. I'd say that for the bank as a whole anywhere between 10% and 15% loan growth for the year is probably a reachable number given the scenario that we see right now. Probably 10% would be on the low side, 15% a more reachable number.

  • Tito Labarta - Analyst

  • Alright. Thank you. It's very helpful.

  • Operator

  • Next question from Victor Delano, HSBC.

  • Victor Delano - Analyst

  • Yes. Hi. My questions have been largely answered, but one thing. Walter, I wanted to ask you further on the NIM. I mean, what percentage of your book is fixed rate on the lending side, and therefore serve to protect you from this decline in rates or is it all pretty much floating?

  • Walter Bayly - COO

  • No. We do have a portion which is fixed rate. I wish I had the number in front of me. We do have our mortgage portfolio which is fixed rate, and a portion of our medium-term wholesale portfolio is also long-term. But I don't have the number in front of me. Frankly, I will ask Aida to look for the number and give you a call.

  • Victor Delano - Analyst

  • Okay. Thank you.

  • Walter Bayly - COO

  • You're welcome. But overall, I would say that we do not take huge interest rate cuts. We're positioned for the market that we see going forward, which is probably the dollar interest rate raising on the long end, but we'll give you the exact numbers.

  • Victor Delano - Analyst

  • Just a quick question on the insurance business, now that you're there, I mean that seems to be heading in the right direction overall. Do you have a target combined ratio for this business or anything along those lines that you can give us in terms of where you can go in profitability with that business?

  • Walter Bayly - COO

  • The target is 99.9, so we're actually below the target.

  • Victor Delano - Analyst

  • Okay. Thank you.

  • Walter Bayly - COO

  • You're welcome.

  • Operator

  • (Operator Instructions) Moving onto Ian Smith with Nevsky Capital.

  • Ian Smith - Analyst

  • Hi. I just wanted to ask what your current view is on the economy. I mean, for example, where do you think GDP growth might be this year or next year, and also what's your view is on rates and FX?

  • Walter Bayly - COO

  • Okay. I have not seen the projections of any economist so far that say that Peru would be anything below 3%. I think, the consensus of GDP growth for this year for most economists is between 3% and 3.5%, and I concur with that. And for next year something above that, probably around the 4.5%.

  • On the foreign exchange rate, the truth is that we have a seen a lot of volatility, and it is very difficult to have a very clear view, because one looks at the relationship between the Soles and the dollar, and clearly, we continue to be in a positive situation against the dollar because of the trade flows coming in. Though we have less exports and less remittances and less investment abroad, we still have positive flows against the dollar. But then the whole question comes, what is going to happen with the dollar against the other currencies?

  • So it is very unclear and again the consensus of the analyst in the Peruvian economy is that exchange rate will remain very much around where we are today with a 5% above and under. Nobody sees major drastic changes from where we are today; of course, volatility will be, but very much around from where we're today.

  • On the domestic reference rate, clearly the Central Bank has all the right incentives to try to bring it down as inflation comes down and that has happened and if that low inflation continues, we expect the Central Bank to use that instrument of monetary policy to continue create incentive for growth in the economy. So, that's probably, we intend to have a real interest rate of about 2%, and it seems that we will be having inflation of about 1.5%. So some further reduction in the reference rate can be expected as long as inflation stays down.

  • Ian Smith - Analyst

  • Great and just on FX, in terms of the NPL creation that's between FX loans and domestic currency loans, is there a noticeable difference or is it pretty consistent between the two?

  • Walter Bayly - COO

  • That's a good question. It is actually very consistent. We've done a lot of comparisons of taking loans that were disbursed in both currencies, and this can be applied to mortgages, consumer, or whatever, plus they were the same period of time, and how they have evolved, some being in dollars and some being in local currency, and there is no noticeable difference in the NPLs. What we think will impact NPLs as they refer to the currency is if there is a very sudden change, and sudden being more than 10% change, in the devaluation or revaluation that would affect the NPLs. But a slow and gradual variation does not seem to have any real impact on NPLs per currency.

  • Ian Smith - Analyst

  • Alright. Thanks a lot.

  • Walter Bayly - COO

  • Welcome.

  • Operator

  • We will take another question from Saul Martinez with JP Morgan.

  • Saul Martinez - Analyst

  • Hi. Just a very quick follow-up, Walter, on your expenses, I think, in the past and correct me if I'm wrong, you have been talking about something like a 20% expense growth in '09, and it's really driven by the follow-up on or the carryover effect of the branch expansion plans you've had, but you've also talked about. I think you guys have been putting a lot of emphasis on improving efficiency through various means and obviously, you've stopped your branch expansion plans are no longer in play. Is the 20% guidance still applicable or should we see improvements in the efficiency ratios in terms of efficiency, and maybe expenses could come lower than that? Just want to get an update on how you look at expense growth this year.

  • Walter Bayly - COO

  • I'd say that our base scenario is first quarter times four. Obviously, we are working very hard to make that a better number, but I'd be reluctant to encourage you to assume that that is going to happen on the short run.

  • Saul Martinez - Analyst

  • Okay. But the first quarter also had this other thing that had a lot of noise in it, which was the other within the cost line was $35 million, which some of it seems like it was non-core, non-recurring. Should we be thinking about that as part of the growth number, because I would imagine like you said the stock appreciation rights and all of that stuff was in there?

  • Walter Bayly - COO

  • Yes.

  • Saul Martinez - Analyst

  • Should we be normalizing for that and just looking at salaries, admin expenses and depreciation just kind of the base to work with?

  • Walter Bayly - COO

  • Yes, you should do that. Yes, the other was very high. Actually it was very low. In the last quarter, it was actually negative, I believe.

  • Saul Martinez - Analyst

  • Yes.

  • Walter Bayly - COO

  • Yes, the $16 million that we have in the other, we should be working to bring that down, but on the other hand, I'd be reluctant to give you a lot of upside there.

  • Saul Martinez - Analyst

  • Okay, fair enough. Thank you.

  • Walter Bayly - COO

  • Don't forget that the revaluation of the currency also works against us when we report in dollars.

  • Saul Martinez - Analyst

  • Okay. Thank you.

  • Walter Bayly - COO

  • Welcome.

  • Operator

  • Once again, we'll hear from Lucas Ramirez with Merrill Lynch.

  • Lucas Ramirez - Analyst

  • Yes, thank you for taking the extra question. Just want to touch on the insurance business, which seems to be gaining good momentum in terms of the turnaround of you diversifying risk and increasing your exposure in property and casualty at the retail level. If I'm not mistaken, you spoke about kind of a target $15 million contribution to Credicorp for the full year. You did $5 million this quarter. So my question is, have you adjusted your expectations there upward?

  • Walter Bayly - COO

  • No. Not yet. This is the first quarter in which we have seen all lines of business at the insurance company provide positive contributions. Let's be a little conservative and wait for couple, at least, one or two more quarters of that happening, before we can become more bullish on giving you another guidance.

  • Lucas Ramirez - Analyst

  • Okay, great. Thank you.

  • Walter Bayly - COO

  • Welcome.

  • Operator

  • We have a question from Alonso Aramburu with Santander.

  • Alonso Aramburu - Analyst

  • Hi, guys, good morning. Walter, I wanted to ask you about the high liquidity position in US dollars on the asset side. Obviously, that moved over the last couple of quarters with the volatility, but with volatility dying down, do you think the bank would be willing to transfer some of that liquidity into Soles to look for higher yields, or how set is that policy right now?

  • Walter Bayly - COO

  • It's almost the same question to the previous question, Alonso, which is we've seen one quarter in which we are cleaning out the volatility. Why don't we wait a couple of more quarters before we do something different? I don't think that further volatility can be expected. I think we want to focus ourselves and the analysts on our core businesses for the next quarters and be conservative on other things. So, no, we are not looking to change that in the short run in any significant fashion.

  • Alonso Aramburu - Analyst

  • It was a very nice quarter. Thank you. And my second question was regarding Prima, I believe, there was an announcement by a competitor today about the possibility of raising fees on the back of the exemption from the contributions. Is that something that you will consider?

  • Walter Bayly - COO

  • No. Not at this stage. We're working on the cost side.

  • Alonso Aramburu - Analyst

  • Great. Thank you.

  • Walter Bayly - COO

  • Welcome, Alonso.

  • Operator

  • (Operator Instructions) With no additional questions, I'll turn the call back over to Mr. Bayly for closing remarks.

  • Walter Bayly - COO

  • Well, thank you all very much for and I am very encouraged by the amount of people attending our conference calls and by the level of detail and very good quality questions from all of you. We appreciate that and we think that is very helpful. We are as usual available for any further questions that you might need.

  • We are encouraged by the operating trends in all our businesses, and we have this expectation as I mentioned before that this first quarter is probably the bottom of what is happening at the Peruvian economy, and hopefully, on the next conference call, three months from now, we will be able to report some growth and further earnings growth from our corporation. Thank you again very much for your interest and the level of detailing which you dedicate to our numbers. Thank you very much. Good bye.

  • Operator

  • Once again, that will conclude your conference for today. Thank you all for your participation.