Credicorp Ltd (BAP) 2009 Q4 法說會逐字稿

Good day, everyone. Welcome to your Credicorp Fourth 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 Walter Bayly, Chief Operating Officer. Please go ahead, sir.

Okay, thank you, Beth. Good morning, and welcome to Credicorp's fourth quarter and year end conference call.

The year we are closing with the results we are about to present for this fourth quarter have certainly been a challenging one, given the unexpectedly strong slowdown experienced in the Peruvian economy. The international events of the previous year generated more concerns than anticipated in the business community, with a consequent economic slowdown, which resulted in growth of GDP for the year of only 1%.

In this context, the good results we will present in the next slide turned up even more. But beyond the financial results of the year, which in itself are very strong with a 31% increase in net earnings for Credicorp, I'm especially pleased to point out what I consider the most important achievement, which is the fact that we are able to report this year, 2009, excellent business results in all of Credicorp's subsidiaries.

It has taken us some time to reach good operating results, with good profitability levels in all our subsidiaries. We have had to restructure businesses and solve individual problems in each before moving on to a more corporate approach, and being able to align objectives.

Today we can confidently expect to continue our growth path with all subsidiaries running at full power.

So moving on to the fourth quarter and year end numbers -- next page, please.

Despite the fact that 2009 can be considered a crisis year, Credicorp reported the highest level of earnings for the year in its history. Net earnings, after minority interest for the fourth quarter, were $152.3 million, in line with third quarter results. Total earnings for the year 2009 of $469.8 million, which is a substantial 31% increase from last year.

These results achieved this year are especially remarkable for two reasons. One, the difficult economic environment with very sluggish demand for loans. And, two, the very important improvement in the business fundamentals of all of Credicorp's subsidiaries, with all of them achieving good profitability levels this year 2009, and supporting the overall performance of the group.

In fact, the banking business, which had a slow start this year, experienced a turnaround in the fourth quarter, leading to a quarter-over-quarter total loan growth of 8.6%, and total loan book growth for the year of 9.9%. Actually remarkable growth for a year characterized by low demand for credit.

Net interest income for the fourth quarter grew in line with this recovered lending activity. In a good defensive policy on margins, we achieved a strong 11% increase for the quarter. But really remarkable is the 8.4% expansion of net interest income for the year, given the economic context, and reflects a very good management of margins and funding, as we will see further on.

Provisions continued being a burden this fourth quarter, incorporating adjustment to align (inaudible) provisions to the group's coverage level. In fact, the substantial increase in provisions for the whole year, which reached 242%, has been the main reason behind the lower performance of the banking business of Credicorp.

But the performance of the subsidiaries start impacting positively the results of Credicorp through non-financial [link] with an important increase in fee income from Prima, which together with good fee income from banking services, and the significant gains in the sale of securities in the first half of this year -- of last year, resulting in a robust 16.6% growth for this income line in 2009.

Premiums, net of claims, generated by our recovered insurance business reported 25% quarter-over-quarter increase, reaching $45 million for the quarter. The importance of the recovery in this business for the overall results of Credicorp becomes more obvious when looking at the year-end results of this line, which grew 165% from $52 million to $138 million.

Operating cost in the fourth quarter reflect a typical year end increase, and grew almost 23% quarter-over-quarter. However, yearly growth of 10.9%, which includes the impact of the revaluation of the local currency, in which most of the administrative and personnel costs are denominated. And this was in line with expectations.

Therefore, operating income grew 8.1% for the year, which is a remarkable achievement when considering that we are comparing this year's performance with operating results of a peak year with almost 10% GDP growth, as was 2008.

However, the substantially stronger growth in net earnings response to the absence in 2009 of the extraordinary losses in the subsidiary, generated by the significant market turbulence experienced in 2008, and the residual operating problems in the insurance business.

In addition, we reported in the fourth quarter lower income tax provisions, which were primarily the result of tax effects produced by tax deductible foreign exchange related losses of currency index instrument that generated tax free interest income, a situation that was clarified by the tax regulator in the fourth quarter '09.

This important growth in net earnings of Credicorp led to an improved return on average assets of 2.22%, and a 24.1% return on average equity for the year. It represented earnings per share of $5.89.

Page four, please. Reviewing BCP's numbers -- as mentioned before, following the strong contraction in lending activity in the first quarter, and sluggish demand for financing throughout the year, a turnaround was finally recorded in the fourth quarter, particularly in the local currency denominated wholesale portfolio, leading to a quarter-over-quarter total loan growth of BCP's portfolio of 9.4%. At the end of the year, BCP's net loans totaled $11.2 billion.

If we analyze average daily balances per currency, as you can see in the chart, it is clear that loan expansion in the fourth quarter was reported in both the domestic and foreign currency portfolios. Growth in the domestic currency portfolio continues being driven by an expansion in the retail banking sector, which recorded the highest quarterly increase of this year, with 7.3%.

The most dynamic segments this quarter were mortgage loans, which were up 10% for the quarter, and SME, which grew 7.6%, reflecting also the incorporation of (inaudible), probably one of the most important strategic moves for future business growth, and a real commitment to increasing banking penetration and formalization of our economy.

Wholesale banking also grew 1.8% quarter-over-quarter in the domestic currency portfolio, as the corporate banking portfolio recovered from its contracting trend and grew to a strong 5.7% for the quarter.

In terms of the foreign currency portfolio, unlike the scenario seen throughout the year, both the wholesale and the retail banking segments registered growth. This evolution for the year is also reflected by the US dollar's [solace] proportion of our portfolio, which moved from [$68.32] to [$60.40] during the year, an important depolarization of our portfolio. Next page, please.

Portfolio quality remains solid as our pass through loan ratio peaked in the fourth quarter, reaching a lower than expected 1.59%. Provisions for loan losses were nevertheless still kept relatively high to accommodate the inclusion of (inaudible), which required an additional $5.8 million in provisions to align its coverage ratio with the group's policy, and insure a comfortable coverage ratio for the group, which remains above 190%.

Furthermore, leverage on a personal and corporate level is still relatively low in the Peruvian market. While credit information, both positive and negative, is widespread and efficient. This, coupled with conservative credit regulations and risk policies, has led to an only moderate increase in delinquencies throughout the year, which is already leveling out and improving as loan book growth recovers.

Though we feel comfortable with the evolution of our portfolio quality during this crisis, it did mean a substantial burden for our banking business, with a total provision for the year at BCP reaching $165 million, more than three fourth the provisions from the previous year.

This has been no doubt the reason for the slightly lower performance of the banking business of the group, despite the actual good and in some cases extraordinary income generation, as we will see in the next slide. Next page, please.

Income generation was in fact very good, and in some cases, remarkable given the economic environment. Interest income for the fourth quarter improved 3% from the previous quarter, following the recovery of the lending activity. Yet looking at the year as a whole, interest income dropped 4.8%, reflecting the difficult business environment and declining interest rates along the year, which affected mostly our investment.

However, despite the contraction in interest income, net interest income improved a substantial 9.6% within the year as a result of the significant reduction in interest expense achieved in this period, which declined by 24.3%.

The drop in interest expense is the result of a good asset liability management, which led, among others, to the reduction of expensive international financing, and of the almost [idle] high liquidity levels we held at the beginning of the year. The drop in interest rate also reduced the cost of bank deposit.

All this led to an improvement in net interest margin, as reflected in the charts. Net interest margin for our loan book reached 7.9%, and overall net interest margin, which includes all interest earning assets recovered to 5% this last quarter.

Non-financial income also shows a remarkable good performance for the year, growing 15.2%. Hence, helped significantly by the extraordinary and strong gain on the sale of securities we reported in the first half of the year. Nevertheless, we should point out also at the important growth of banking services commissions, which also reached a very sound 9.3% growth within the year.

All in all, excellent income generation, which compensated to some extent the higher provisioning and also higher cost structure, which increased 12% for the year due to the initial cost of the initiatives to improve efficiency rolled out during 2009, and to some extent the effect of a considerable revaluation in domestic currency within the year. Next page, please.

The funding structure on the other hand continues being a strength. Lower interest rates led to a further contraction in the fourth quarter of interest paid on time deposits, which has more than -- which more than compensated the new additional cost generated by the issuance of hybrid debt in November of last year. The overall result was a further improvement in net interest income, as we saw in the previous slide.

I would like to mention the importance for us of the hybrid issue, which was a strategic placement to prepare our bank for further growth of its loan book by maintaining a healthy capitalization levels and without recurring to any stock dilutions.

This issue of $250 million of 60-year debt was well received by the markets, and was way oversubscribed. It will undoubtedly rise the average cost of funding for our bank. But given its equity treatment, results in a very efficient way to bring down the cost of capital for the bank. Page eight, please.

In terms of distribution channels, the number of branches remains stable. This is part of a strategy now focused on redesigning branches to maximize their efficiency before engaging in further expansion. Branch redesign has led to an increase in the number of ATM machines, which went from 890 to 996.

BCP agents grew more than any other channel, growing from 1,800 locations in 2008 to 2,800 in 2009. Therefore, total points of contact rose significantly year-over-year, reaching 4,131 versus 3,071 at the end of 2008, undoubtedly and by far the strongest network in the country.

Page nine. This chart summarizes BCP's performance and reveals strong results for the year. As we have seen, loan growth recover towards year end and earnings generation was sound, and helped also by some extraordinary gains and good funding strategies. However, the burden of the provisions as a consequence of the economic slowdown, reflected in the loan quality chart, did not allow a further growth in net earnings for this year.

Our cost structure did not contribute either, given the investments we are making in the search of future efficiencies and the impact of the revaluation to local currency.

Therefore, net earnings dropped 6.2% to $397.4 million from $423.5 million in 2008. Consequently, return on average equity also dropped to 26.5%. But again, in the context which we have operated, and given that we are comparing this complicated year with probably the best year of the strongest economic growth ever achieved in the Peruvian economy, we are more than pleased with the results, and confident about the future performance of BCP. Page ten, please.

Atlantic Security Holding had an excellent performance in the fourth quarter, reaching net income of $17.1 million. This represents a 102% increase over third quarter results, and show a substantial recovery that contrasts with the losses recorded in '08. This performance can be explained by a significant improvement in its core business income, as well as some extraordinary income for the sale of investment portfolio instruments, which was reflected in realized earnings and other income.

Other income also includes a reversal of excess provisions made in 2008, due to impairment of its investment portfolio.

This excellent fourth quarter result contributed significantly to Atlantic's all time high contribution to (inaudible) for the year of $29.7 million. Overall, after the strong impact of the world crisis and the asset management scandals that Atlantic had to absorb in 2008, the growth of its core business and recovery of its bottom line results has been substantial.

Although the merits of this improvement are due in first line to market recovery, they are also largely the result of appropriate financial management that led to higher margins taking advantage of the low interest rate.

In addition, better fee income in the fourth quarter starts showing the benefits of a corporate focus of improving the group's investment strategies, fee structure, risk policies, and many other elements of the business to achieve the best market practices for Credicorp's asset management businesses. Next page, page eleven, please.

Pacifico experienced once again better than expected results, and reported net earnings of $16.3 million for the fourth quarter '09, topping the $13.3 million recorded in the third quarter '09. This contributed strongly to Pacifico's record earnings contribution for the year 2009 of $37.4 million, in stark contrast to the $13.9 million loss reported in 2008.

Driver of this excellent performance is the technical results, which reflect the core business performance and shows an impressive trend, reaching $29 million for the fourth quarter, and close to $80 million for the year, a significant improvement over last year's results.

This follows the reduction in the claims rate, which is a product not only of a general good year for the insurance business with low claims overall, but more significantly of the changes and improvements that have had -- that have been implemented over the last few years in terms of underwriting management and operating controls. These measures go hand in hand with the risk diversification and the deconcentration strategy that the Company has been working on since 2006.

The improvements are evident in all three business lines, and are also reflected in the combined ratio, which was maintained this quarter at a low 94.2%. This same trend is also reflected by net earned loss ratio, which reached 54.7%, reflecting the low claims level experienced this fourth quarter.

Also significant to this performance is the financial income, which this year reached higher levels, along with the market recovery. Furthermore, Pacifico also registered $12.1 million in earnings on security sales, thanks to adept investment management and stock market performance, in contrast to the $11.3 million provision for impairments that affected the 2008 results.

Finally, Prima's business results for the quarter were in line with expectations, showing a quarterly net income drop which responds to the higher requirements in employee profit sharing, and normalized profit tax, while the third quarter included the effect of a reversal provision.

For the year, net income also doubled to $11 million -- from $11 million in 2008 to $21 million in 2009, as a result of the higher fee introduced a year ago, making Prima a more relevant earnings contributor or category.

Operating expenses for the year also showed the improvement in the Company's commercial positions, since this is largely related to the cost of the sales force. Today Prima generates higher income with less operating cost, and has become a stable income generator with good economic prospects. Page thirteen.

The summary of these results is reflected in the following contributions chart. An important contribution of all our subsidiaries of Credicorp's strong net earnings, growth is very evident in this chart. The significant turnaround of all of the non-banking businesses is obvious. We substantially improved contributions from each one of them, while the strong contribution of BCP is sustained.

Further to this chart, Credicorp shows a reversal of a translation gain booked in quarter two as a result of the effect of the local currency revaluation in that period on declared and not yet paid dividends, which had an equivalent translation loss booked at BCP. The reversal is an internal booking, and is therefore neutral to the compared corporation's bottom line results after consolidation.

These results make the potential in each of the businesses evident, and supports the recent or our strong focus on developing a corporate strategy with aligned objectives in all these businesses, to achieve growth in all of them, and benefit from a group strategy.

Page fourteen, these ratios reflect Credicorp's performance for the year, which has become strong. Credicorp has been able to successfully manage its business throughout what has been considered a crisis year in Peru, and absorbed the embattlements of the market before that. And we still show today a sound 24% return on average equity, and 2.2% return on average asset.

Furthermore, and more importantly, we expect to continue growing as a financial group 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 the dynamic development of such markets.

On page fifteen, we have a chart which (inaudible) our stock performers, earnings per share, dividends, and market capitalization. With this, I conclude my presentation. And we are ready to go into the question and answer section of this call. Thank you very much.

Thank you. And the question and answer session will be conducted electronically. (Operator Instructions). We'll take our first question from Esteban Polidura with Merrill Lynch.

Thank you and good morning, everybody. I have three quick questions, if I may. The first one is related to Pacifico. Do you expect claims of PPS to drop below the current rate? Second, is this level of earnings for Atlantic and Pacifico sustainable? And finally, what percentage of the total loan book is (inaudible)? Thank you.

Okay, Esteban. I will pass the two questions related to Pacifico to (inaudible), who is sitting with me. He is (inaudible) of Pacifico. And he will tackle the Pacifico. Then I will answer Atlantic and (inaudible) question. (inaudible)?

Okay, with regards to the losses, we've had -- this year has been very low with regard to loss claims. And we do not expect that to go any lower. On the contrary. We believe that a loss ratio that we had this year of 53% in Pacifico (inaudible) is slow, and will probably -- we budgeted that up to about 60%. So we expect that to increase this year.

Perfect.

Regarding the --

Regarding the results, we do not expect to -- our budget is lower than what we've -- the result that we have had this year.

Regarding Pacifico's earnings going forward, this past year I think we benefited from some very conservative provisions we did in 2008, which were partially reversed -- were reversed last year. So it has been an extraordinary year for Pacifico. We expect lower earnings this year. But nevertheless, to maintain being a significant contributor to (inaudible).

On the Atlantic front, we expect earnings to increase even further from what we had last year. We are very focused on our wealth management business. We think that fees will continue to increase. And we expect our budget for this year is to have earnings growth at Atlantic.

(inaudible) loan portfolio is about, I think, $230 million over a total loan portfolio of Credicorp of about $11 billion. I don't have my calculator, but roughly those are the two numbers.

This is perfect. Thank you very much.

You're welcome, Esteban.

And our next question will come from Daniel Abut with Citi.

Daniel Abut from Citi. Walter, as you gave the non-banking subsidiaries will continue to contribute, but will not have the impact they had this year -- Pacifico will contribute less in this year, and Atlantic will grow, but probably not -- the level of growth we saw this year. It becomes critical that the bank recovers its growth engine.

So let me ask you on loan growth, in the past you have guided a pretty timid figure of loans for 2010, partly because you are not too confident yet in the level of economic recovery, but partly because the NPL ratio had not peaked. Given that you are calling the peak already in the NPL ratio, and given the strength in the loan growth recovery that we saw in the fourth quarter, what are your current expectations, vis a vis loan growth in 2010?

Good questions, Daniel.

Yes, indeed I think it is evident that the very important growth achieved in Credicorp's earnings, the percentage growth was mostly driven by reversals of losses of previous quarters, which would undoubtedly not happen this year.

Your analysis is correct to the extent that Bolivia is probably going to contribute slowly, marginally lower than what it did this year. There continues to be, in Bolivia, pressures for increased costs -- operating costs and continued pressure on fees.

At Pacifico we have already talked. And Prima will probably have a performance relatively similar to what it had last year. And Prima, just to quickly comment on this, if you recall, there was a law that was passed last year in which salaries paid in July and December were exempt from contributions from the private pension fund. So that will affect this year with two times -- two over fourteen months of income.

So -- but there will be growth in the business. So earnings should be relatively flat compared to last year's. So we end up at the bank.

It has been our experience over many years that the portfolios of the banking system grow approximately 3, 3.5 times GDP growth. So if we are expecting GDP growth of 5.5% this year, more or less, we expect the banking -- portfolios of the banking sector to grow anywhere between 18%, 20%, around those numbers. Let's call it 18%.

Clearly the bank -- we will maintain our market share. We have good marginally -- we expect to marginally increase our market share. So our loan portfolio growth, a good number is anywhere between 18% and 20%.

Regarding loan losses provisions, there will be two trends going on. The first basic concept here is that the portfolio of BCP has correlation with one thing -- GDP growth. We do not have any industry concentrations, any geographic concentration. So the one indicator of what will happen to BCP's portfolio is GDP growth. And clearly we expect to have a good year.

The counterclaims to that is that we are going down market. We are going down market in the consumer business, and we are going down market in the microfinance business. So those two trends will force us -- will go one against each other.

And the net effect, I think we could see marginal improvements if we have a 1.6% pass-through loan ratio I would expect to be relatively there or marginally lower.

Fee -- it will probably be a good year for fees. The big challenge that we have at the bank is expenses. We're extremely focused on expenses. And let me break that in two pieces.

One would be payroll. Last year payroll increased about 4.4% with total year over total year. With a revaluation of the currency of 8% I think it's a very good performance. The main key driver that make us be successful in managing that line is the fact that the important portion of our management and overall payroll is variable.

So to the extent that we do not have an extraordinary year as we had 2008, payroll will remain flat. To the extent that earnings improve, payroll will increase.

So that is the comment I can say at that line. We have no plans -- we are only opening 11 branches this year, practically no increases in personnel. We will probably have marginal decreases in personnel.

The big issue for us becomes general and administrative. And let me comment a little bit on that. And there were some of the analysts who were asking questions of that.

First, this last quarter we have had the effect of having almost a full quarter (inaudible) on our books. On the operating side, that adds about $5 million of operating expenses, whereas this quarter we have practically provisioned all the earnings for (inaudible) to improve the overall coverage.

We have increased expenses in depreciation. And that is clearly really the one that bothers me the most, because very little reversal you can do on that. Once you've made the investments in the investments we have talked about, they are the branches, the expansion of our data center which we are building, to have an appropriate backup for operating purposes, et cetera, et cetera, depreciation is one that there is very little one can manage once you've made the initial investment.

We have been hit last quarter with the expenses of changing our branch network. We have discussed this at length. We are in the process of working our branch network to be focused more efficiency. We have the increase -- we're remodeling the branches, we've put a lot more ATM's. So there's an expense there which shows in several lines -- in maintenance and in some in systems and some in general operating expenses.

This last quarter we have also made an important provision of $5 million for an event. The event is a company that provides us -- gives us the outsourcing for storage of an important -- some important documentation -- had a fire. And important pieces of documentation were lost. And we have made a provision to deal with that. That is $5 million.

Having said all this, we really are extremely focused on reducing, in a very aggressive fashion, general and administrative expenses. That is the one line that we have to tackle -- that we have pending work, and that really will be the focus of our efforts this year. That was a long answer to a short question.

So let me make it a bit longer so at least we match. And it was a good answer, by the way.

But if I look at the page in which you show the ROE, despite that it's remarkable, you achieved a 24% ROE in the year, that global [bank card] in 2009, still short of your original target of 25%. And it doesn't seem to me, even the challenges that you're discussing, Walter, unless you do a great job on general and admin, that you will reach the 25% target in 2010. How long do you think it will take for you to go back to 25%?

We could have very well reached the 25%, had we not done the hybrid issue. We placed $250 million, which has a cost of almost 10% -- that's $25 million pretax times 70% on an after tax basis -- that's almost $15 million, $20 million.

We did that because we felt the market was there. It is capital that we do not need for the full -- for this year. We will start needing it the year after. But we -- I think we have to take those opportunities whenever they are there, and not wait for the perfect moment.

Ideally we would have a lot to be able to do this in small pieces, maybe [20, 30, 50] little by little. But the market unfortunately does not operate that way.

Regarding our possibility of reaching the 25%, yes, it doesn't seem extremely -- it seems like a difficult target this year. I have no doubt that next year we will do it. But I would not discount that we will not make it this year, Daniel.

Thank you, Walter.

You're welcome.

And we'll take our next question from Tito Labarta with Deutsche Bank.

Hi, good morning, Walter. Also one question of follow up and then another question.

In terms of provisions, you did mention that asset quality -- you could see a marginal improvement. But what do you expect your recurring level of provisions? Do you expect it to stay at the levels we saw in the fourth quarter, or could there be some improvements there?

And then the second question, we did see your margin improve in the quarter. I think you mentioned lower funding costs, and it looks like an improvement in the loan mix. What is your outlook in terms of the net interest margin for this year? Thanks.

Sure. Regarding provisions, there is always a lag in terms of when the economy starts moving and when we start seeing it reflected in our provision. We have started to see good growth in the economy in the last month -- I mean the month of December. I would expect that we will remain this first quarter with relatively similar, marginally lower provision levels as what we had in the prior quarter, and then start to come down.

We should have an overall dollar provisioning level which will be lower, I would expect, this year as compared to the previous years. I explained the dynamics of an improvement in the economy versus the fact that we are going down market, which has higher NPL's.

But having said all that, I would expect that the overall dollar amount will be lower. I think we will have a good feel on how that will end up playing after the first quarter. My vision today, my thought, is that it will be an overall marginally lower dollar amount which if you expect -- if you see a growth in the portfolio of 18% to 20%, even having a flat dollar amount would be good.

Regarding margins, the big question here is how fast or when will domestic interest rates rise. It is the challenge of all central banks in the world to manage going from monetary policy that has been expansive to counter the down cycle. But this economy -- if this economy starts growing at 5% as we expect it to be, that is not compatible with having a domestic reference rate of 1.25% as we have it today.

Given inflation, this year should be around 2%, maybe marginally higher. That again is incompatible with having a reference rate of 1.25%. So to the extent that the central bank does move the interest rate upward, which we expect that to happen probably in the second quarter, we could even see (inaudible) of our margins (inaudible), because we have core deposits, which are relatively -- we can probably be a little bit later in raising interest rates in our funding, and benefit from initial upturn in interest rates on the asset price.

The counter to that is that of course there is very intense competition going on in each and every product. So our role -- I would be very happy if net interest margins percentage wise remain flat for the year.

Alright, thank you very much.

(Operator Instructions). And [Jason Mullen] with Goldman Sachs, please go ahead.

Actually my questions, from an operating perspective, have been asked. But maybe just a more general question that we're facing in Peru, the upcoming elections in 2011. We've seen the leading candidates, (inaudible), Fujimori, and Humala -- actually Humala, I think has been increasing. If you can give us an update, and if they've talked about any plans -- regulatory plans for the banking sector at this point in time.

Sure. Our view for the political front is that there will undoubtedly be a lot of uncertainty throughout this period. But our thought is that at the end of the day, we will end up having a candidate that will want to continue the policies, from an economic front, that have proven so successful for the country, a candidate that will be able to attract an independent group of professionals to manage the productive side of the economy.

And to that extent, we really don't care or don't have any particular preference of which candidate it is. We think that an anti-system candidate should have lower votes as it had in the prior election, due to the very simple fact that there has been a trickle down to this economy. If you walk and you visit most of the citizens of the country, you will find undoubtedly that there is an improved -- wealth has been generated and it has trickled down.

Having said this, there are obviously certain portions of the country, particularly in the Southern part of the (inaudible), which this modern economy has not been able to improve the quality of life of individuals. And there will be an anti-system vote. But [logics] and demographics, and even the initial polls tells you that that vote will be smaller than it was in the prior election.

So in that front, we think that there will be turbulence, uncertainty. But we have the expectations that at the end of the day, we will continue the macroeconomic policies that have been so successful in this country.

We do not envision any important changes in regulatory legislation. We continue down the path of Basel II. There will be, undoubtedly, more conservative capital requirements for the banks, and particularly the too big to fail banks. But that is a worldwide trend, and we think that that is not necessarily bad for the system, and is relatively -- we have initially -- we have internally capitalization levels that will exceed regulatory requirements, and we think that is healthy and we will continue to be along those (inaudible). So we are not expecting anything dramatic from the regulatory front this year.

That's very helpful. Maybe just a follow up on one of your comments before on the tax rate. We saw that you were able to lower your effective tax rate, due to some tax credits and such. Should we expect that to continue going forward? Or have you utilized those and we should expect higher taxes this year?

So if you really take the year tax rate, that is the one that you should continue. What happened is I think it was in the second or third quarter, there was a question on how the tax losses -- foreign exchange losses -- or whether the foreign exchange losses should be tax deductible or not on certain instruments. And we took a very conservative position. In one of the quarters we had a very effective -- high effective tax rate legislation clear the facts. And we were able to put that back into the P&L.

So it was a quarter-over-quarter adjustment. Take the year-over-year number and that is the one that we should be focusing on.

That's helpful. Thank you.

Did I explain that well?

Yes. That's very helpful. Thank you.

Okay.

And Boris Molina with Santander, please go ahead.

Yes, hi, Walter. Hi, everybody. Good morning. I had a question more on the side of the strategy to go down market. You have two channels right now -- the (inaudible) position and the (inaudible). How do you see the future of these two channels going forward?

Do you foresee that there could be some sort of synergies in the operations or services that could be launched? And if you could give us just an idea of how important this segment could be for the overall earnings of the bank in two or three year's time, (inaudible).

Sure. Going down market has two fronts. One is the microfinance front, and the other is the consumer front.

On the microfinance front, which is the one you mentioned, it is -- our efforts are mostly focused on (inaudible). We expect (inaudible) loan portfolio to grow (inaudible) around 30%, and maybe a sustainable 20% for the next four or five years.

We have a lot of expectations on that. We are already working. And it will happen very shortly, to the extent that the installments on (inaudible) loans can be made through our PCP agent channel.

So that is already going to be executed in a very short run. We have a lot of expectations (inaudible). There continues to be a lot of potential in the microfinance.

But the other front is going downscale in the consumer. If -- to give you an example on the credit cards, we have about a 19% market share in credit cards, but we only have 6% of the cardholders. So our traditional approach has been to clean -- (inaudible) we call them in Spanish -- I don't know what the word is in English -- the market. That is that we have, of our customers, the upper end of the credit card market.

We have to go down market also in the consumer side. But before going -- and that is one of the huge focuses of our retail strategy. Before -- and in order to do that successfully, we have initiated nine projects. This is all what we call the Huascaran project. Huascaran is because that is the highest mountain in the country, and that is the one we want to climb.

But that project has nine fronts. The first and most important one is to improve and take our credit skills to best practices. We have benchmarked ourselves against best practices with some of our peers throughout the world. And there are some gaps in terms of what our risk management capabilities in managing our retail portfolio. And we're very focused on doing that, and not just going down market without having the right tools to manage the risk.

The same (inaudible) regarding collections. Credit granting and credit collected is one same process in the retail side. And there we have less gaps. But nevertheless we have to work on that.

And there's a whole issue of managing data. Going forward, the successful business model is not one in which you send a sales person to visit a potential customer, tries to convince him to get a loan, a credit card, a mortgage. The guy fills a questionnaire, comes back, it is processed, et cetera. You have to go with pre-approved transactions, pre-approved credit lines.

And to that effect, we have a very strong and very rich database to the extent that approximately 50% of all the transactions in the financial -- in the banking system in Peru happen through BCP.

So through that information, we have to estimate or (inaudible) we have to infer -- thank you -- infer what is the income of individuals. And there are a lot of tools and there's a lot of database management, a lot of work to be done.

But that is the process. And we're very much focused on going down market. We have to improve the way we manage our call center. It is the most efficient cost wise distribution channel to sell products.

So there's -- this is a very ambitious project that takes us over three years where we want to achieve a 30% market share in the consumer side from our 18% today. And that has nine fronts. It's a very ambitious project. And we're very much focused on it.

We have already started to see some initial results. In the past six months we have gained very important market share in the credit card market. And we expect that to continue going forward.

Yes, that's wonderful. Thank you very much. Now one additional question. Have you essentially any new product launches through your (inaudible) platform? Or is the [morale] going to be preserved as is?

And secondly, on the consumer credit front, is there any model or any institution that you've studied in your banks marketing process that you would consider (inaudible)? If you could share the name of this institution for your consumer segment strategy?

Sure. Regarding (inaudible) the business model is very -- is according to best practices in microfinance. There are two things that we believe we contribute to (inaudible). One is clearly availability of capital to sustain growth going forward. And second, systems.

There is a important opportunity to automate and be more efficient in the processing of those thousands of small loan requests. So there is an element of systems and an element of capital.

To give you a sense, in this past quarter, BCP -- in the past -- I'm sorry, BCP captured about 6,000 new customers versus 25,000 new customers at (inaudible). So the capacity of this company to capture new customers into the banking system is a lot higher than BCP.

To answer your questions, no change in the business model. Probably some efficiencies we can obtain by utilizing systems much more intensively. And your second question was -- what was your second question?

Sorry, is there a consumer model on the low income segment that you can see in terms of your benchmarking process that would be the model you would like to replicate? Or is this something that you would like to achieve in terms of a name, either in the region or elsewhere that you could study?

We have looked and observed some very interesting developments regarding sales on banking in Africa. We have looked very carefully at (inaudible) operations in Brazil, very successful in the retail side. And Columbia has a lot of very interesting schemes as well.

So I would just mention those three markets in general. But I would say that we are trying to pick the best from each one rather than one specific model.

Wonderful. Thank you very much.

You're welcome.

And [Alonzo] (inaudible) with (inaudible), please go ahead.

Hi, thank you. Good morning. A couple of questions, Walter.

The first one, if you can make a comment on competition -- how is competition evolving now that activity is picking up. You mentioned a couple of quarters ago that competition, especially from the international banks, had been slowing down.

And the second question is regarding your conversion of branches. When do you expect to finish this program, and what results are you seeing so far?

Sure. Regarding competition, we have different competitors depending on what market product or market segment you are looking at. If one looks at the top corporate (inaudible) competition, is BVVA, Citi. But mostly a lot of international banks operating without domestic branch basis.

We have had a first move from the central bank to increase rates, which was to increase legal resource in US dollars. And that affects only domestic tax, whereas international tax funding abroad do not have that cost on top of it.

So we expect a lot of competition now that the rule is investment grade on the top coroprates from banks without having a domestic operation. And there are several of them that operate basically lending from abroad.

On the middle market, it's the same -- the usual list of suspects which we compete. But again, on the retail side, we have a different set of competitors. There we compete a lot more with financing arms of the retail stores. And with a different set of competitors.

Competition will continue to be very, very fierce. But we don't see any new names appearing, other than in the top corporates, which of course the margins are tighter. And they have probably competitive advantage in terms of obtaining lower funding when it relates to dollar lending. Obviously when it relates to local currency lending, they do not have access to that.

So competition will be fierce. We have very good competitors in each of the different market segments, even on microfinance there's some very good (inaudible) being very successful. And they're a good competitor.

So competition will only get -- will only get tougher. But I think that at the end of the day, that is good. That is good for the consumer, that is good for the banks and for the economy.

Your second question was -- I should write the second question. What was the second question?

Branch program, yes. This is done by we call them waves. The first batch of branches that we remodeled, we should end up the final by the end -- by the first quarter of next year.

So it takes a while because you have to shut down the branch for about a period of 30 days, 20 days. That is always a nuisance when it relates to dealing with the customers. So we try to not close too many at the same time or in similar locations. So this is a process that takes a while.

But it starts first with a physical remodeling. But then it goes into what is equally relevant, which is the changing of the operating practices of the branch.

Not only is the physical layout of the branch being changed, but the practices and the commercial practices of the people and the sales force at the branch is also being modified.

So I would say it's a two year program. And undoubtedly branch that we make the changes, that you'll start seeing the results. It is very evident, and producing very good results.

We think that we will be able to process with the same number of human dollars, if you will, 26% more transactions, or we can process the same number of transactions with 26% less tellers. It depends which way you want to play it. Most likely it will be halfway.

So we are already seeing some of the efficiencies. But this is a process that is not done, and for reasons I explained, in a relatively short period of time.

Thank you, Walter. That's a great answer.

(inaudible)

And there are no questions in the queue at this time. (Operator Instructions)

Okay. Thank you all very much for joining us in this conference call. As I have mentioned, we are very enthusiastic about the position of BCP in a country that is moving very well. We have a lot of expectations on what is going to happen in this economy. And we think that Credicorp and each and every of its subsidiaries are extremely well positioned to capture the growth and profitability. And we are working very diligently to be able to capture that, both from the revenue side as well as from the cost side.

And hopefully we will be able to continue giving you good results as we have had in the past. Again, thank you all very much, and good bye.

And that does conclude our conference for today. Thank you for your participation.