Credicorp Ltd (BAP) 2010 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Thank you for standing by and welcome to the Credicorp First Quarter 2010 Earnings Release conference call. As a reminder, today's conference is being recorded. Now at this time, it's my pleasure to turn the conference over to Alvaro Correa, Chief Financial Officer. Please go ahead.

  • Alvaro Correa - CFO

  • Thank you, Duane. Good morning and welcome to Credicorp's First Quarter 2010 conference call.

  • Credicorp was off to a good start this year with a sound recovery in economic recovery. Already, in the fourth quarter of last year, the recovery started to become evident, but the growth reported in the first months of this year marked a more dynamic pace.

  • These clear signs of recovery are generating revisions in GDP growth expectations which go from 4.5% to 6.5% for the year. However, we remain very cautious about the potential impact of recent international events on the Peruvian economy.

  • Our generalized view is that the recovery will, most likely, impact our numbers positively slightly faster than the negative effects of the crisis and recession did, whereby growth should come first in the corporate wholesale segment as the economic activity expansion and new investments are implemented and demand for financing expands and only later, as these investments impact positively the labor market and micro business, to increased consumption and demand for credit in the retail sector.

  • Consequently, our businesses and their performance also reflected this recovery in activity and reported healthy growth. As we will see further on, Credicorp's ability to generate income continues growing and is becoming more diversified as all subsidiaries continuing performing profitably.

  • So we will start with the slides on some macroeconomic indicators that show this solid turnover. Next page, please.

  • These indicators show a clear trend of recovery. This has led to a series of revisions of GDP growth forecasts, which today start at 4.5% and, as I said, reach 6.5% annual growth.

  • What is clear is that, as we said before, there is a natural sequence for this recovery to impact our business profitably. The corporate investment activity has to resume first, as is happening, and translates into more jobs and more demand from smaller businesses for the retail sector to recover its high-growth rate. This is exactly what we will see reflected in our numbers in the next slide.

  • In any case, the economic recovery has started at a good pace and we expect decent growth for the next year. Following page, please.

  • Looking at Credicorp's reported numbers, it is clear it was off to a good start this year as the recovery in economic activity became visible. It reported first quarter 2010 earnings of $123.9 million or $1.55 per share, reflecting earnings growth of 1.3% quarter-over-quarter and 12% year-over-year.

  • But the recovery in the business is more evident in the operating results line, since net earnings comparisons between quarters were distorted by uneven tax burden due to excess tax provisions during 2009, which were reversed in the fourth quarter of that year. In fact, operating results reveal a robust growth of 7.8% for the quarter.

  • The first driver is loan growth recovery, since average loan volumes expanded a solid 6.7% for the quarter. Quarter-end loan balances, though, did not reflect this, due to various specific repayments of large corporate loans at the end of March and rose only 2.9% for the quarter.

  • It is noteworthy that most of this growth stems for our reactivation of corporate and middle-market investment and working capital expansion. The retail segment had a more differentiated performance, as we will see later.

  • Net interest income increased 3.2% quarter-over-quarter. This is lower than the average loan volume expansion, given that a large portion of additional loan volume came from segments with lower spreads. This impacted margins slightly as did the large liquidity position that resulted from -- one, an increase in funding last year, including the tier-one bond issue to support long-term growth, reflects in our high regulatory capital of 14.5%; and two, some senior debt issued to reduce the gap in tenor based on a conservative asset and liability management policy. Thus, net interest margin slipped from 5% to 4.9%.

  • Fee income performed well and remained basically flat in the first quarter, while income from FX transactions improved by 9.4% for the quarter and 13% for the year. However, in the absence of gains from sales of securities, which boosted non-financial income in the first half of 2009, non-financial income dropped 3.6% quarter-over-quarter.

  • The continuing good performance of the insurance business is reflected in the $32.5 million in premiums, net of claims. As anticipated this lower-- this is lower, compared to the previous quarter, since an unusually low claims rate and resulting provision reversal led to extraordinary results of four quarter '09.

  • Operating costs reflect a remarkable drop of 88.6% for the quarter, following the seasonally high year-end costs in four quarter '09 and the significant efforts to reduce costs and increase efficiency. This is especially noteworthy, given that the first quarter also had to absorb significant redundancy costs related to some personnel reductions, which were possible through the implementation of the efficiency improvement plan.

  • The significant improvement in Credicorp's operating results continued to be supported by the good performance of the non-banking business, as we will see in detail in the following charts. However, return on average equity, which dropped to 21.5% does not reflect this operating improvement as our net income is affected by the nature of our growth this quarter, concentrated in the low-margin businesses, plus more costly senior and subordinated issues, while our equity was strengthened through capitalization of retained earnings. Next page.

  • BCP, being the driver of Credicorp's results, reported numbers which are explained the same way as the previous charts. Average loan volumes showing robust loan activity, which is up 6.8%, net interest income up 3.8%, less than loan volumes, given that the growth is concentrated in low-margin portfolios, but partly compensated by lower interest rate-- interest expenses on deposits.

  • Provisions dropping less than expected as a further increase in past due loans was recorded as a consequence of seasonality in SME delinquencies, coupled with some operational problems with our newly implemented collection system.

  • Non-interest income reflects the absence of the extraordinary gains in securities from last year and operating expenses show the first results of our efficiency initiative and cost-cutting efforts.

  • Therefore, and anticipating Credicorp numbers, operating income shows a robust growth of 13.2%. However, the uneven tax payment reflected in the quarter before, were actually generated at BCP and caused the same distortion that is passed to Credicorp. Consequently, net income and BCP's contribution to Credicorp shows a drop of 5% for the quarter from $104.5 million to $99.3 million this first quarter. Next page, please.

  • Looking at the evolution of our loan portfolio more carefully, we can observe that the reactivation of economic growth in the country started already in November 2009, as is obvious from these charts. Only March shows a slip, related basically to several repayments of large corporate loans due to the trend in liquidity position.

  • Therefore, the quarter-end balances show much lower growth since it captures these repayments. But average loan growth reveals the real evolution of outstanding volumes and shows a robust 6.7% for the quarter.

  • The charts you are seeing are especially geared to show that foreign currency loans and domestic currency loans are having similar trends, which is a reflection of the recent borrowing activity of the corporate world in the last two quarters, which typically demand foreign currency loans.

  • The retail segment had a more differentiated performance, given that the mortgage business reflected significant growth, reaching 7.7% quarter-over-quarter and 41% year-over-year. Given the strong demand for housing, which has not weakened for the consumer and SME sectors, show more subdued performance due to strong seasonality, which peaks at year-end, and the lag between corporate and retail growth. Next page, please.

  • The nature of this quarter's loan growth, mainly wholesale and mortgage books, has contributed to comparatively lower growth of interest income, which expanded only 1.5%. Furthermore, the cost of additional tier-one capital through the hybrid bond issue, as well as the senior debt issue, impacted margins for the short-run.

  • Nevertheless, net interest income expanded 3.2% this quarter, thanks to a further contraction of interest expenses resulting from lower interest paid on deposits as large portions of CDs with high locked-in rates rolled out at the end of 2009 and moved to low-cost deposits. This relatively lower expansion of net interest income impacted margins slightly and resulted in net interest margins to 5.0% to 4.9%. Next page, please.

  • A further increase in past due loans in this first quarter was mainly the result of a seasonal increase in delinquencies following the Christmas campaigns, mainly in the small business lending and a further deterioration of existent delinquencies, with both trends being strongly exacerbated by an internal problem with our collection system, which resulted in a direct drop in collections efficiencies and, therefore, higher past due loans for this period.

  • It is reassuring, however, that the loans classified as normal in our portfolio remain stable at 94% of our total loan portfolio throughout the last month, showing a stable performing market. Nevertheless, our past due loan ratio increased to 1.8% because of the way past due balances for further deteriorating loans are accounted for. Consequently, provisions for loan losses remained at a relatively high level for the quarter as the classifications of already reported bad loans deteriorated, showing only a 2% growth from the previous quarter. Next page, please.

  • The 4.9% quarter-over-quarter decrease in non-financial income can be primarily attributable to the fact that net gains on sales of securities were virtually non-existent in a context of gradual market stabilization and a lack of fresh opportunities. Furthermore, it is important to point out that income from banking services commissions has remained high, though slightly level than the level in four quarter '09 due to some seasonality and gains on foreign exchange transactions grew 8.8% quarter-over-quarter. Next page, please.

  • Operating expenses demand today high attention as we have the objective to improve the efficiency of our organization. The reduction in operating expenses at BCP with regard to four quarter '09 demonstrates the initial result of this special effort to improve efficiencies and curb expenses across Credicorp.

  • This reduction was achieved primarily thanks to our 17.4% contraction in administration expenses and a 63% decrease in other expenses. In terms of administrative expenses, the plan was achieved through lower spending for almost every component, particularly maintenance expenses, marketing and consulting fees.

  • The other two segments contracted due to lower provisions for the stock appreciation rights program, provisions for litigation, claims and other contingencies.

  • Finally, it is important to emphasize that the 10% increase quarter-over-quarter in employee salaries and benefit expenses was due to extraordinary expenses associated with personnel reductions. These personnel cuts, which were in line with efficiency targets, generated an expense of approximately $10.5 million in the first quarter, higher than the $1.4 million registered in four quarter '09 and should lead to lower personnel costs in the coming quarters.

  • Overall, some improvements in the efficiency ratio is already evident as it dropped to 51.3% from 53.8% in four quarter '09 and 55.2% a year ago. Next page, please.

  • Turning now to Atlantic Security, Atlantic reported very good results in this first quarter, with earnings contributions to Credicorp of $13.5 million. This result reveals a drop from four quarter earnings which were, however, boosted by gains of securities and other non-recurring income.

  • However, Atlantic's core business remains strong, though slightly lower in both interest income and fee income from the asset management business and report, as well, lower provisions following the better market outlook from realized gains as the market recovers.

  • Today-- sorry, total administered funds, which includes assets under management, as well as deposits, increased 5% quarter-over-quarter, reaching $3.6 billion whereby the shift from bank deposits to assets under management continues. Next page, please.

  • After a year of extremely low casualties, which led to unusually high technical results in four quarter '09 through the reversal of excess provisions, this year started with the first large casualty for the insurance industry, the flooding of the Cuzco and Machu Picchu highlands. Nevertheless, PPS, Pacifico, experienced again better-than-expected results for the quarter and reported significant gains in its property and casualty and life businesses, reaching a contribution of $8.5 million.

  • This good performance continues to be driven by significantly better technical results under a more normal casualties occurrence scenario and a focus on risk control and diversification, which is evident in the recent events and translated into a combined ratio of only 96.4% for the quarter.

  • Furthermore, net earned loss ratio also reached a good level at 64.9%, with operating costs under control as reflected by the 31.4% efficiency ratio. Next page, please.

  • Finally, in the first quarter of 2010, Prima fee income was $20.5 million, representing 3% growth, quarter-over-quarter. This is attributable to an increase in the average income level for affiliates, due to reactivation of the local economy and, to a lesser degree, to the fact that the local currency appreciated during the period, 1.7%.

  • Compared to first quarter '09, a 3.3% decline is evident. Nevertheless, this resulted from the government's decision to exonerate additional salaries paid in July and December from pension fund contributions until December 2009. Operating expenses fell in comparison to the previous quarter, due to lower expenses for advertising and marketing, as well as low provisions for administrative personnel. This is in line with the overall effort with Credicorp to improve efficiency.

  • Thus, operating results show a 25% quarter-over-quarter increase in income, which the flat other costs led to a substantial 41% increase in Prima's contribution to Credicorp, reaching $5.9 million for the quarter. Next page.

  • The contributions chart you are seeing reveals the importance for Credicorp of the return to profitability of all its subsidiaries. All of them, including BCP as its main contributor, have maintained good results and contributions, as described before, leading to earnings generation very much in line with our expectations.

  • Just as a reminder, the Credicorp Limited line, which includes normally only the provisions for withholding taxes on dividends received by Credicorp included, in four quarter '09, a translation loss related to those dividends, given the currency volatility of 2009.

  • These results are encouraging and even more so, given the signs of recovery in the market. Next page.

  • Performance ratios reflect the improvements achieved so far and show what we consider a temporarily lower return on equity, favorable return on assets and improving efficiency. Next page, please.

  • The market data on this slide speaks by itself and reflects the market downturn following the recent events in Europe that also affected Credicorp's stock price.

  • So I would like to stop here and thank you all for your attention. We will now gladly answer any questions you have. So I would like to open this section for (inaudible).

  • Operator

  • Very good. (Operator Instructions). Our first question will come from Daniel Abut with Citi.

  • Daniel Abut - Analyst

  • Good morning, Alvaro. I wanted to follow up on the NPL ratio increase that we saw in the quarter. You attributed it mainly to seasonal factors on the SME side and also some problems, some internal problems, on your calling effort.

  • As I'm looking at the NPL ratio at SMEs, it was about 3.5% before the global crisis started. So despite a seasonal factor that you could argue, it's about 3 times higher than it was before the crisis. I mean, it appears a little high to me, given the strength of the recovery that we are seeing. What should we expect to see in future quarters, once you eliminate that seasonal (inaudible)? When should we start to see this ratio stabilize?

  • And second, have you fixed the internal calling problem and will that be impacting an improvement in the NPL ratio in future quarters?

  • Alvaro Correa - CFO

  • Thank you, Daniel. It is very difficult to assess the level of the past due loan ratio for SMEs, given this problem that we have with the collection system. What happened there -- and let me answer that first -- is that we implemented this first quarter the system called Triad from Fair Isaac and it is in the middle of the stabilization phase. And what happened there is that the collections system was opening quite late in the morning every day, especially in March.

  • And that affects a lot, because the best time to collect is between 7 a.m. and 9 a.m. in the morning. So if you receive data at 9 a.m. and you can start collecting at those times, it's very difficult to get very good levels on collections.

  • So that's the main problem. There are some problems with Telefonica telephone lines which changed recently. And that added and had a very strong impact on the ratio you see.

  • What we have seen from the field is that we have-- as we have said before, we have seen a stabilization of this level of delinquency in the last few months, not a major improvement yet, but not additional deterioration.

  • Walter Bayly - COO

  • This is Walter Bayly. Let me add a little bit more color to Alvaro's comments for the record. There is usually about a six-month lag between the time you have changes in the real economy and they hit the quality of your portfolio. And that works both ways, both on the upside and on the downside.

  • What we saw last year in terms of economic activity was a very strong slowdown coming from probably around 5% or 7% growth in the first quarter to almost zero or marginally negative in the third quarter and then bouncing back. If you take the six month lag, to a certain extent we were not expecting major improvement in the quality of the portfolio yet because of the six month lag.

  • We are still-- I mean, the first quarter was the last stage of digesting what happened six months before, the very strong slowdown. So to a certain extent, our budgeted provisions for this quarter are not too much-- are not too different from what actually happened.

  • The whole effect of our system changing, et cetera, et cetera, had an effect of maybe $4 million but at the end, the budgeted provisions are not too much out of line with what actually happened. What happened in the first quarter was the last digestion of the slowdown which happened in the first and second quarter of last year.

  • The economic activity started to recover in Peru around November, so we should expect, six months after that, to really see an improvement in the quality of our portfolio. I would expect that provisions for the second quarter will be no higher than $35 million -- that's my personal number -- and hopefully we might be able to even exceed that.

  • But this was expected. Obviously, the second component was not expected and that did not help, but we were not expecting this first quarter a major improvement. The fact that we had the technology problem is also evident because (inaudible) portfolio deteriorated in line with the market and in line with what was expected and the bank's portfolio was the one that created the problem.

  • So we are not concerned and we do see improvements or lowering provisions going forward, because, again, the six month lag is now going to take effect.

  • Daniel Abut - Analyst

  • Just to make sure I understood the number, what's your personal number of provisions for second quarter you said, Walter, $20--?

  • Walter Bayly - COO

  • No, no, $35 million. I knew you were going to write that number down.

  • Daniel Abut - Analyst

  • $35 million. I'm going to hold you to that number.

  • Walter Bayly - COO

  • You always do.

  • Daniel Abut - Analyst

  • But in general, if the six months applies, second quarter should see better delinquency numbers and a decline in this NPL ratio after the increase that we just saw.

  • Walter Bayly - COO

  • Yes, because it will hit us from both sides. One, you will see some more loan growth and second, we will have fully digested the problems from the slowdown in the retail-- in the Prima portfolio and the new portfolio is coming up very good, because the economic activity started to push up in November, December last year and, obviously, the technological issue will not be there.

  • Daniel Abut - Analyst

  • Thank you, Walter and Alvaro. If I could quickly add a second question, if I look at the contribution of your bank in Bolivia, which for many quarters defied the uncertainty and the political situation in Bolivia and continued very nicely, it saw a major drop this quarter. Is that the new run rate that we should assume? I mean, finally, the political situation caught up with the contribution or there's anything kind of one-off in this quarter performance?

  • Walter Bayly - COO

  • I think that the number that you have seen in the quarter is a sustainable number. That represents a return on equity of 35% on our Bolivian investment. And we-- that is a sustainable number. What we had in the past four or five quarters was unusually high and clearly not sustainable over time.

  • I mean, the number looks-- doesn't look good when compared to the previous quarter, but this quarter we have had a 35% return on equity, which is quite good.

  • Daniel Abut - Analyst

  • Fair enough. Thank you, Walter.

  • Operator

  • Our next question comes from [Jorge Friedman] with Merrill Lynch.

  • Jorge Friedman - Analyst

  • Thank you. I appreciate the opportunity. Good morning. My question-- my first question is regarding the efficiency improvements. I understood that you still incurring severance costs, but my question is, in terms of other expenses, I know that a significant decline in provisions for the stock option program and also a reduction of some provisions for litigation, et cetera.

  • My question is, if lower personnel costs from now on, could be somewhat compensated by higher expenses, other expenses? This is the first question.

  • And my second question is just a followup from Daniel's question in terms of provisions. I'd just like to understand. I know that, also, you reduced the NPL coverage this quarter. Given that you believe that NPLs are going to decline with time passing, I'd just like to understand if I know you are going to be able, also, to increase, again, the NPL coverage or if you believe that the current ratio is comfortable enough. Thank you.

  • Alvaro Correa - CFO

  • Answering your first question, we don't expect other expenses to compensate the same as we are achieving on the (inaudible), if I understood the question correctly. We are preparing the bank, the organization, to be able to maintain better costs-- a better cost structure and a better efficiency level.

  • On your second question, we believe that the coverage that we have now is a good one. Anything above 115% is good. We are trying to maintain our coverage a little bit higher.

  • Jorge Friedman - Analyst

  • Okay, perfect. Just a followup on the first answer. Okay, I understand that other expenses will not, maybe, compensate lower personnel costs but could we saw that this level that was posted in this quarter was an exceptionally low figure or could we extrapolate that to the upcoming quarters? Thank you.

  • Alvaro Correa - CFO

  • It could be-- it could be extrapolated, yes.

  • Jorge Friedman - Analyst

  • Okay, perfect. Thank you.

  • Operator

  • The next question is from Tito Labarta with Deutsche Bank.

  • Tito Labarta - Analyst

  • Hi, good morning. I just had a couple of questions. First, in terms of your loan growth, we did see the corporate segment growing a bit faster than the retail segment. I just want to comment-- if you could just comment on that. Is that more due to seasonality? Do you expect that to switch, going forward, where you see more retail loan growth? I just wanted to get your expectations on that.

  • And then a second question, in terms of subsidiary, particularly Atlantic and Pacifico, as you mentioned the decline-- net income declined a bit in the quarter. I just want to get a sense of kind of a more recurring level going forward. Do you expect it to remain at these levels? Or do you see further improvements from the first quarter? Thanks.

  • Alvaro Correa - CFO

  • Well, in general you should see what we have seen in the past few years that the retail segment should be growing faster in the future than the corporate segment. So we expect a change, or shift, in the mix of our portfolio.

  • What has happened recently, again, is that when you see a recovery of the economy it impacts faster, shows faster, on the corporate sector. But the next few months we should all start seeing the retail growing faster.

  • On your second question, related to-- referring to Atlantic and Pacifico, I think these-- this quarter is probably what you should expect in the future, much more real than the last quarter of last year where we had extraordinary reversals of reserves in both companies.

  • Tito Labarta - Analyst

  • Okay, great. Thank you.

  • Operator

  • Our next question comes from Alonso with BTG. Please go ahead.

  • Alonso Aramburu - Analyst

  • Hi, thank you. Just one question, Alvaro or Walter, on the NIM. Can you just give us a sense of what the impact of the interest rate hike yesterday from the Central Bank will be on your NIM in the short term? Thanks.

  • Alvaro Correa - CFO

  • Well, the hybrid, of course, is going to cost us more, but you have to see this as capital and not necessarily as funding. We wouldn't have done it based on funding costs or funding needs. Yes, there is a small impact, but it will be lower-- increasingly lower, compared to what we expect to generate in terms of margins.

  • Walter Bayly - COO

  • Alonso, the increase in rates from the Central Bank yesterday, in the long run, a higher rate environment is good for us. If you think about the strength of BCP, it is clearly its capacity to gather this very low-cost, stable funding base. The truth is that today's environment that low-cost funding base is not a differentiating element from other domestic banks, but the funding costs are so low that-- so low that there is no differentiation in the funding cost of BCP vis-a-vis some of our competitors and that has not been the case always in the past.

  • So to the extent that you have higher base rates, clearly that is in our advantage. The change of just a quarter is not, I think, anything that will become significant in our net interest margin. I don't think this is the beginning of a periodic increase. I think we will have-- it has been a very opportunistic and, I think, smart move on behalf of the Central Bank to the extent that their concern was always that increases in the domestic rate, which they would have to do-- they will have to anyway, the moment they picked was a very smart one to the extent that their concern was always that increases in domestic rates would create further pressure to revalue the currency.

  • But it was done in the middle of a revaluation of the dollar. So this will generate very little, if any at all, pressure on the revaluation of the sol. So I think it was a smart move, a preemptive move, and done on a very timely fashion and I really think it will have no impact on our net interest margins.

  • Alonso Aramburu - Analyst

  • Great. Thank you.

  • Operator

  • Your next question is from Victor Galliano with HSBC.

  • Victor Galliano - Analyst

  • Yes, good morning. Just to follow up on the expenses question, so the severance costs for this quarter were $10.5 million and the previous quarter you had severance costs of around $1.4 million. Can you give us some sort of indication where we can expect this to go in the coming quarters or in the rest of the year? Have they now peaked at $10.5 million? Or do you expect them to stay at a relatively high level in the coming quarters as you continue to shed staff?

  • Alvaro Correa - CFO

  • That particular concept has-- that $10.5 million is probably 70% of what we expect to be for the year.

  • Victor Galliano - Analyst

  • Okay.

  • Alvaro Correa - CFO

  • And the rest of that would be showing this second quarter, maybe a little bit on the third.

  • Victor Galliano - Analyst

  • Okay, Thank you.

  • Operator

  • (Operator Instructions). We'll next go to Saul Martinez with JPMorgan.

  • Saul Martinez - Analyst

  • Hi, guys. Good morning. A couple of questions, as well. I wanted to follow up on the asset quality question. I think, Walter, you said that the collection problems themselves had about a $4 million impact on provisioning levels. Correct me if I'm wrong, if that's the number, but if that's the case, it seems like the collection problems didn't have a substantial impact, necessarily, on your NPL ratio and it was really more the result of seasonality and other factors that played a more important role.

  • If that is the case and I realize you guys sound pretty optimistic about NPLs improving, but should we be concerned about the tick-up in NPLs, especially in an environment where economic activity has been pretty robust? And I think the concern that some of us have had is that provisioning and asset quality levels are unsustainably low in Peru. If you can, just comment on your outlook for credit quality and especially the question about to what extent the collection problems really did have an impact on the NPL ratio?

  • Secondly, on your earnings power, you've had about three consecutive quarters of about $122 million, $123 million kind of earnings. And not that you should manage your business in terms of what the consensus thinks, but consensus expectations are for earnings to really ramp up in the coming quarters. I know there's a lot of moving parts in your numbers, but how comfortable are you that earnings momentum will start to evolve in a more positive direction in the coming quarters?

  • Walter Bayly - COO

  • Sure. Your assessment on the NPLs is correct. Yes, they were impacted in the range of numbers -- it is very difficult to isolate one specific event, but overall, my sense tells me that the impact on the NPLs due to the technological issues was in the range of what you mentioned, what I mentioned, the $4 million.

  • To understand BCP's portfolio, we have done a lot of work and it really has correlation with one thing -- GDP growth in the country. Our portfolio does not have any geographic concentration. Our portfolio does not have any industry concentration. What that represents is really the economic activity of the country. It is so widespread through all sectors of the economy that it is practically impossible for BCP's portfolio to perform positively if the economy is not and vice versa.

  • So having taken that as a base scenario, what I mentioned before is quite valid. I feel that there is a six month lag between economic activity and the real performance of the portfolio. And that is exactly what we have seen.

  • The pickup in economic activity started around November and we should start to see the results in the second quarter this year. And the slowdown in the economic activity started in-- at the end of the first quarter last year and lasted until July, October, and we're seeing the tail end of that.

  • So I have no concern about the quality of the portfolio today. One thing to take into effect is the relative shift in the type of portfolio that we have where, because of the acquisition of (inaudible) and the growth of the retail side, clearly our portfolio is more skewed towards the higher NPL side of our portfolio vis-a-vis the top corporates where clearly the NPLs are lower.

  • So, going forward, my projection is that we will see marginal improvement in the quality of the portfolio as this mix takes place, but the overall level, as you mentioned, is a very healthy one. What we should not expect is a dramatic increase in the quality of the portfolio. We should expect lower provisions for the quarter, but not lower NPLs.

  • Alvaro Correa - CFO

  • Let me add, Walter, also that you have to take into account the way we calculate the past due loan ratio. That includes at the early stages of delinquency just the installments. When those same loans get older, they start getting additional-- not only additional installments, but also the full balance of the loan. So even if you have the same loans as past due loans, you get a higher ratio over time.

  • Walter Bayly - COO

  • Going back to the earnings momentum, I'm very confident that earnings will increase and, again, because of the simple reason that BCP Bank, you'll recall, if there is a better description of a bank being a leverage player in our economy, I think that is Credicorp and BCP.

  • As the economy recovers, all of the different portions of our portfolio -- our private pension fund business, our loan portfolio, insurance, et cetera, volumes will start to pick up. We have-- I think it is sometimes good to focus on the core earnings because our numbers, as you mentioned, move a lot. But if you focus on the core earnings, you will see that those have improved and I have no doubt that we will see improvement in our earnings in the next two to three quarters, which will take us out of the $122 million range that you just mentioned.

  • Saul Martinez - Analyst

  • That's very helpful. There's just one quick final followup on your efficiency ratio, 51%. It's been coming down nicely. Where do you think that could get to, say, by year end?

  • Walter Bayly - COO

  • On the last quarter we should make it close to the 47%, 48% for the quarter. I'm not sure on an accumulated basis. I haven't done the numbers. Our medium-term objective, really, is the 45% and that will take us a good year and a half or two. But that is the number where we're shooting, the 45%. And I really want to get there and we are working very hard towards achieving that objective. I think it's a doable objective and-- but it's-- we've done, if you will, the easy part. Now the remaining cost reduction efforts have to be more careful in that you don't want to hurt earnings capacity or create separation problems.

  • But we have said internally our targets have been 45 by the end of next year or the beginning of the year after and we're working diligently towards that.

  • Saul Martinez - Analyst

  • Okay, great. Thank you very much.

  • Walter Bayly - COO

  • You're welcome.

  • Operator

  • Our next question is from [Luis Guzman] with Santander.

  • Luis Guzman - Analyst

  • Good morning. I have two followup questions. First, regarding the cost of funding this quarter was low compared to last quarter and you mentioned the reasons, but could you give some guidance of how the cost is going to play on the year?

  • And the second question, regarding the efficiency improvement plan, do you have any target of efficiency ratios for the year?

  • Alvaro Correa - CFO

  • The target for efficiency ratios is what Walter mentioned. We would like to have by the fourth quarter of this year, like around 47% or 48%. On average, the whole year will be probably closer to 50% and getting lower in the next years.

  • And your first question was related to cost of funds, what we should expect in the next coming months. That depends, really, on what we see on the reference rate of the Central Bank and how inflation behaves here. We don't expect high inflation to-- inflation to pick up this year, although the Central Bank has already started moving the reference rate.

  • Overall, we should see a fairly stable cost of funds, maybe a little higher, but we should be able to compensate that through additional or higher interest rates on loans.

  • Luis Guzman - Analyst

  • Thank you.

  • Operator

  • And we do have a followup from Victor Galliano with HSBC.

  • Victor Galliano - Analyst

  • Yes, hi. Just a quick followup here. Do you have any explicit loan growth guidance and would you-- for the year, would you have that based on corporate and retail you could share with us? Thank you.

  • Alvaro Correa - CFO

  • Well, what we have mentioned several times is that we have seen in the past is that the loan portfolio grows on the average between 3 and 3.5 times what the GDP of the country moves. If we expect a 5.5% GDP growth for this year, you make the numbers and you get something between 15% and 17% growth on loans, probably a little faster on the retail and slower on the wholesale, but above 15% should be a fair number, if that is the GDP growth.

  • Victor Galliano - Analyst

  • Okay, thanks.

  • Operator

  • And with that, this does conclude today's Q&A session. I'd like to turn the call to Walter Bayly for an additional or closing comment.

  • Walter Bayly - COO

  • Well, thank you, gentlemen, for continuing following our results, our evolution. It is very important that I reiterate the comment before that the level of economic activity and Credicorp's profitability is very much tied to the GDP of the country. I think if we all watch that number very closely, we will be able to better predict or understand the dynamics behind our results.

  • Having said that, I also want to reiterate our commitment towards achieving higher efficiency levels. I think that we have high expectations internally. We have initiated a series of cost initiatives that hopefully will take us down that path.

  • Again, thank you very much for joining us and with this, we conclude this first quarter conference call. Thank you. Goodbye.

  • Operator

  • And, again, this does conclude today's conference call. Thank you for your participation.