Credicorp Ltd (BAP) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, to the Credicorp Ltd.

second quarter 2010 earnings release conference call.

My name is Marcela, and I will be your operator for today.

At this time, all participants are in a listen only mode.

Later, we will conduct a question and answer session.

(Operator instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr.

Alvaro Correa, Chief Financial Officer.

Please proceed, sir.

Thank you, Marcela.

Good morning, and welcome to Credicorp's second conference call for this year.

As it is widely acknowledged, the economic growth reported in the first months of this year marked a more dynamic pace of recovery of the Peruvian economy, which is poised to become one of the fastest growing economies in the region.

The pure signs of recovery and growth achieved month after month generated revisions in annual GDP growth, which are now reaching 7% or higher for the year, although we will remain cautious, given the uncertainties in the world economy.

Therefore, the good start of Credicorp in the first quarter of this year is being reinforced by the excellent results we are pleased to report for this second quarter, which beats our own expectation.

And we will see further on Credicorp's ability to generate income, continuous growing, and is becoming more diversified, as all subsidiaries continue improving their performance.

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The highlights of this second quarter show a very strong business expansion, and where, in the first place, the strong 30.7% net income growth, higher net interest income, which led to improved net interest margin, extraordinary trading gains which boosted non-financial income, lower net provisions, strong quarterly underwriting results of the insurance business, substantial improvement in efficiency, and overall, strong growth of core operating income, revealing a solid business expansion.

Throughout the next slides, we will explore all these highlights.

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Looking at this summary of results for Credicorp, the growth reported in all profitability indicators stands out, all showing an expansion above 25% for the quarter, which led to the excellent return on equity and return on asset ratios of 27.5% and 2.7% for the quarter, respectively.

A distinction we are making between core and total operating income refers to non-recurring income generated by extraordinary events or transactions, which, this quarter, is made up by a gain in the exchange of sovereign securities, a transaction initiated by the government, and which led to the recognition of unrealized gains related to certain sovereign paper we held in our books.

Therefore, operating income grew an extraordinary 42% quarter over quarter, but even core operating income grew a strong 26.6% for the same period.

Such strong growth is mainly explained by a solid business expansion, including, one, both loan growth and fee income growth related to the recovered investment activity in the country, as well as good insurance premium growth.

Second, a careful funding structure that reduced interest expense, improving NIM.

Third, 28% lower loan provisions related to the improved performance of loans, and 3.2% lower claims for our insurance underwriting.

And four, a continuing cost control policy and effective efficiency measures, leading to the improved efficiency ratio, which dropped 2.5% to 39.6% from 42% last quarter.

BCP's capital ratio continues showing a solid 13.6%.

That leaves space for future growth, though a recent decision to increase our shadow ratio from 11.5% to 12.5%, to strengthen capital even further, will eventually lead to higher than originally planned capitalization required.

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BCP, being the driver of Credicorp's results, reported numbers which are explained in a similar way as the previous chart.

Again, the drivers of such good results are the solid net interest income growth, up 4.3% quarter over quarter, following the robust loan book growth, which we will explain in the next slide.

Second, the 28% lower net provisions, which reflects the improvement in our loan book performance, and after fixing the collections problems experienced last quarter.

Third, the good fee income, up 5.9% for the quarter, related to a reactivation of investment activity, which generates advisory, [structuring] and placement fees, as well as stronger transactional activities across all these lines, and for an extraordinary non-core gain in trading activities mentioned before, which boosted non-interest income up by 23% for the quarter.

Furthermore, the cost side also contributed to this result.

The numbers show a controlled situation, with all operating costs dropping 1% for the quarter, given the much lower redundancy costs incurred compared to the last quarter, and all efficiency measures taken, which are proving their effectiveness.

Therefore, net income shows an extraordinary strong 32% growth for the quarter, reporting $134 million in the second quarter, versus $102 million in the previous quarter.

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Looking at the evolution of our loan portfolio, and as pointed out in the past, the reactivation of economic growth in the country started already in November, 2009, as is obvious from this chart, and has maintained -- or rather, increased its growth rate in the first half of the year.

Furthermore, our foreign currency portfolio continues being concentrated in wholesale loans.

This foreign currency portfolio has remained flat for the retail sector, while its growth was triggered by the reactivation of investment activity within the wholesale sector, which typically demands US dollar loans.

Such activities are still very much [dollarized].

The domestic currency portfolio, on the other hand, is mainly concentrated in the retail business.

The retail domestic currency loan book has continuously grown for the last 12 months, showing a good performance even throughout last year's crisis, driven by all products, though especially by the strong growth of domestic currency mortgages, and SME activity.

The preference for domestic currency loans of the corporate sector has dropped recently, driven by the nature of the investment, and the strength of the local currency vis a vis the US dollar.

Overall, loan growth is strong, and we expect it to continue this trend for the year.

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This chart looks [important] and contains a lot of information, but the main revelations it makes are the following.

Interest on loans, which is the darker blue in the upper part of the axis of the left chart, is in line with the growing lending activity, and shows constant growth.

This growth is, however, diluted by the more volatile interest income on trading securities and other interest income, resulting in a total interest income with very little growth.

Core interest expense -- mainly, interest on deposits, our main funding source -- contracted substantially compared to the last year, given the evolution of the reference rates and the US dollar international rates, and their impacts on time deposits, while interest on borrowed funds and other interest expense, which include interest on bonds and securities, expanded when compared to last year as a percentage of funding costs, since we took advantage of market conditions to issue some securities and increase borrowings internationally in the last 12 months.

Altogether, however, our funding cost structure to date is more efficient, and lower, contributing significantly to our margin.

Therefore, net interest income does improve 4.3% quarter over quarter, and 9.2% year over year, or more importantly, it is up 13.2% for the year to date compared to the same period of last year.

The impact of this evolution on NIM is positive, showing a stronger increase in NIM for loans only, which goes up from 7.8% to 8% for this quarter, and from 7.4% to 7.8% for the first half of the year.

The changes in reserve requirement up to date, however, will undoubtedly have some negative impact on NIM, with the changes made so far having a negative impact of around 10 basis points.

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As expected, and as we explained last quarter, the correction of the problems that rose in the collection process, and that led to the deterioration of our PDL ratio reported last quarter, led to a normalization of PDL.

The chart above is very clear, and shows the improvement in the SME PDL line, where the problem was concentrated.

Furthermore, the evolution of PDLs per product is, overall, stable to positive, showing a good and effective risk evolution process.

Looking forward, we believe the changes we will see in our past due loan ratio, which this quarter reached 1.7%, will be basically linked to a change in portfolio mix, moving upwards in line with this PDL landscape, and the weight of each segment in the portfolio.

In addition, and for comparison purposes, since our calculation normally considers all delinquencies, including even the 90 plus day delinquencies for commercial loans, we have recalculated our PDL ratio for over 90 day delinquencies, which reaches a significantly lower 1.19% ratio.

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Following the improvement in delinquencies, and stable performance in general of our PDL portfolio, which remained flat for the quarter, provisions for loan losses dropped for the quarter.

This is also clearly reflected by the percentage of the loan portfolio which qualifies as normal, which goes up to 94.6% from 94% last quarter.

In fact, net provisions dropped 28% to $31.2 million, from the $43.4 million, contributing this weight to the strong income growth reported this quarter.

Going forward, though, with a strong growth in loans we expect for all segments, we also expect provisions to be more in line with the first quarter level.

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Non-financial income increased 23% quarter over quarter, mainly driven by the $26 million earnings on sales of securities relative to the Peruvian government's exchange and repurchase of bonds.

It is, however, noteworthy that the core fee income related to banking service commissions at BCP -- this grew 5.9% quarter over quarter, even though the more dynamic economy drove an increasing banking transactions and investment activities, which generated strong financial structuring and advisory fees.

On a year over year, or year to date comparison, however, the good evolution of core non-interest income, which includes fees and FX income, is evident.

It will get diluted since, in the first half of 2009, both in the first quarter and the second quarter, substantial extraordinary non-interest income was generated through market gains on trading of sovereign securities, and led to a lower 12.6% year over year growth, and a very diluted 2.9% growth for the first half of 2010 compared to the first half of 2009.

This non-core income certainly contributed to the extraordinarily strong bottom line results of Credicorp for the quarter.

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The 1.2% quarter over quarter decline reported in operating expenses was due primarily to the decrease in salaries and employee benefits, in 7.6% quarter over quarter, which is related to the high level registered in the previous quarter, due to the incurred redundancy costs in that period.

This lower cost in the salaries line helped offset a slight increase in administrative expenses, which was related mainly to higher spending on marketing and consulting.

Overall, expenses are growing at a slower pace than income, which was precisely the objective of all our efficiency-geared efforts.

Furthermore, the impact of all measures being taken is still to be seen.

Nevertheless, the efficiency ratio reported by BCP is already showing important improvement, with a drop of over 3 percentage points in the quarter, from 51.3% to 48%.

For the year to date, this drop is 2.6 percentage points, down to 49.7%, a drop we feel pleased to have achieve in this short period of time.

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Going into BCP main subsidiaries, BCP Bolivia's earnings generation has contracted further.

This is the result of the prevailing economic, political and regulatory environment, where excess liquidity could not be invested in once profitable CDs, and lower interest income due to the reduction of loan interest rates, combined with higher interest expenses as the regulatory environment pushed for higher rates to be paid on retail deposits.

Therefore, BCP Bolivia reported a further reduction of its contribution, to $3.3 million.

Nevertheless, our return on equity of 20% can still be achieved for the quarter, although we expect a further reduction going forward.

Edyficar, BCP's micro-lending vehicle, has also reported a very good business evolution, with lending activity growing for the quarter at a strong pace of 6.6%.

Nevertheless, reported contribution to Credicorp shows a drop of close to $2 million, which is clearly explained by a $1.1 million differential in provision, spurred by adjusting the methodology to determine provision level, added to strong lending expansion.

And another $1.1 million differential in translation gains, given the stability of the currency in the second quarter.

Therefore, Edyficar continues being a strong performer, and is also a good contributor to BCP's bottom line, showing a strong 22.6% return on equity, including goodwill, and 61.6% return on its tangible equity for the year.

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Turning now to Atlantic Security Holding Corporation.

Atlantic reported fairly unchanged income generation and earnings contribution of $13.1 million, maintaining the good level of the first quarter of $13.4 million.

The slight drop responds to a further reduction of fee income from clients' trading activity, and less net interest income from lower interest earning assets.

But the core business remains a solid and steady generator of income.

Total administered funds, which include assets under management and deposit, increased again 4.7% for the quarter, versus 5% the previous quarter, reaching $3.7 billion, whereby this time, the growth reflects net increasing funds under management off balance sheet.

The deposits stayed flat.

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Pacifico obtained net earnings of $16.5 million for the quarter, and contributed $12.5 million to Credicorp, a strong 47% increase in contribution from last quarter.

And 8.9% growth in net earned premium, lower claims, and stronger commissions led to significantly stronger underwriting results for this quarter, which reached $27.8 million for the second quarter, up 62% from $17 million in the first quarter.

Slightly lower financial income and controlled cost expansion resulted in net earnings growing 36.2%, reaching the $16.5 million mentioned above.

In addition, the net earned loss ratio for the consolidated business shows a further improvement, to 60.6% this second quarter, versus 68.2% in the first quarter, and 69% a year ago.

Furthermore, the combined ratio for the insurance business, ex-life, excluding life, is currently 92%, down 4% from the 96.4% in the first quarter.

This result is certainly one of the best performances of PPS, and a strong contribution to Credicorp's bottom line.

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Finally, in the second quarter of 2010, Prima's income was $20.9 million, representing 2.2% growth quarter over quarter.

As in the first quarter, this is attributable to an increase in the RAM level -- that is, the total insurance remunerations of [affiliates], due to the reactivation in the local economy, and to a lesser degree, to the fact that the local currency further appreciated during the period.

Thus, net earnings totaled $5.9 million, basically flat, whereby the slight decrease quarter over quarter of 1.5% is related to tax provision adjustments.

Looking at year over year numbers, a significant increase of 25.6% was recorded.

This year over year increase in net income is equally attributable to higher RAM, and an appreciation of local currency while operating costs remain stable.

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The contributions chart you are seeing reveals the importance for Credicorp of the return to profitability of all its subsidiaries.

All of the, including BCP as its main contributor, have improved their results, and increased contributions as described before, leading to earnings generation, which this quarter beat expectation.

Furthermore, the importance in terms of percentage or weight of each subsidiary's contribution to Credicorp, is showing the substantial improvement in the profitability of the insurance and asset management businesses, which this year already represent over 20% of Credicorp's net earnings, a significant improvement from the 14% they represented in the same period of last year, and even lower in the past.

These results are encouraging, and even more so, given the signs of continuation of the recovery in the domestic market.

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The market data on this slide is recognizing the evolution of results and performance of Credicorp, and speaks for itself.

We are certainly pleased to see our stock having beaten the $100 mark, and our market cap at $7.8 billion.

So I would like to stop here, and thank you all for your attention.

We will now gladly answer any questions you may have.

I would like to open this session for Q&A.

(Operator instructions) And your first question comes from the line of Daniel Abut with Citi.

Alvaro, on asset quality, you mentioned that the past due loan portfolio remained at $200 million, compared to the prior quarter.

They noted, however, that it wasn't [restructuring] loans, (technical difficulty), thereabout (inaudible) million dollars the prior quarter, that we see that portfolio (technical difficulty) million dollars.

We haven't seen that in early '08.

Could you tell us what happened there, [have pools] of certain loans in (inaudible), and have entered [restructuring] (inaudible)?

Why (inaudible)?

And is that (inaudible), because it would have been worse, you haven't done that restructure and refinancing?

And related to that, why do you think a more significant improvement in the underlying (inaudible) the strength of the economy in the second -- if I compare, for example, what we've been seeing in Brazil, it's another economy (inaudible) outside in terms of economic performance and GDP improvement, we have seen it much more pronounced in NPL ratios in the second quarter.

Daniel, hi.

We heard you a little -- with some disruptions.

I -- we couldn't get the first question.

Can you repeat shortly what you were asking, please?

The first part was related to restructuring and refinanced loans, which I know it was (technical difficulty) by about [$13 million].

So I was wondering if there's any loans that have been classified out of the loan portfolio in the refinance, which would therefore have benefited a little bit the PDL portfolio that show performance in the quarter.

And then the second was a more broader question about why we haven't seen a much more (inaudible) improvement in the ratio, given the trend of the economy that you made in your remarks.

Okay.

We haven't seen any extraordinary changes in the restructuring of loans.

No major changes there.

I don't know if that's the question.

There is not a significant change in -- or a change in policy, or -- if I get it correctly, right?

I mean, I'm just looking at the balance of the loans that you reported in restructure and refinance, from $60 million at the end of the first (technical difficulty) to about [$73 million], so it's an increase of about $13 million.

I was wondering if those are loans that would have been part of the PDL portfolio before, and have, in that respect, (inaudible).

We would have seen the (inaudible) in PDL portfolio that we (technical difficulty).

Well, that's -- well, some of the loans that we had were restructured.

They were [erased], that's true.

That's part of the process of recovery and collection.

No major changes there -- I mean, no significant elements there.

With regards to the second question, I say we will see that change, what is happening in Brazil, probably in the following months, since even though the retail sector has grown, it hasn't grown that fast.

We are still seeing the wholesale business growing quite fast in the second quarter.

But as long as we see the portfolio in the retail sector growing faster, that ratio should start coming down.

That is your question?

Okay, that (inaudible), Alvaro.

Quickly, of course, you mentioned that the results of all the measures taken vis a vis (technical difficulty), but we have not see the full effect yet.

Expenses have grown 10% if I look first half of the year, compared to (technical difficulty) half prior year.

Do you think that (technical difficulty) we're going to -- they grow up into single digit levels?

Yes.

Yes, we are expecting to grow in some new branches, but the new branches that we will open will be probably smaller branches, more sales oriented, and therefore, with fewer number of people.

So we should grow in expenses, but not in the same pace as we were growing in the past.

That's true -- that's correct.

Thank you, Alvaro.

And your next question comes from the line of Tito Labarta with Deutsche Bank.

Please proceed.

Hi, good morning, Alvaro.

A couple of questions.

Just a follow-up on the asset quality.

Just want to get a sense, in terms of how much of an improvement you think you could see, and given the expected growth in the retail segment, will there be an improvement, or will the change in mix maybe lead to some deterioration for the rest of the year, or even into next year?

And then also, what that would mean for your provisions, given that your provisions fell quite a bit in the quarter.

Is that kind of sustainable going forward, or what do you see in terms of provisions?

And then the second question, as you mentioned, the increase in your internal requirements, I guess, for capitalization.

Does that mean you would need to raise capital next year, or would that just come from retained earnings?

If you could just give a little more color on that.

Thank you.

Okay.

With regard to the past due loan ratio, we expect it to be quite stable.

So on the one hand, our portfolio will be growing, but at the same time -- as you know, we're going to different segments in the population, where we should expect to have a little higher PDL ratio.

Therefore, overall, we expect for the retail sector, basically to stay relatively flat.

Although, as we mentioned before, some changes should be seen in the mix of the growth and of the whole portfolio, therefore affecting that average PDL overall.

But answering your question, it should be basically at the same levels that we see now.

In terms of provisions, since we are growing quite fast, and somehow which we are reviewing the methodologies for provisioning, especially on the retail sector and the micro lending, we expect for the third quarter, and probably the fourth quarter, in terms of -- in dollar terms, provisions to be -- to go back to probably what we see in the first quarter, or somehow -- or somewhere in between.

Probably closer to the first quarter levels.

With regards to capital, we have a capital plan that started maybe a few years ago, and last year, as you know, we issued subordinated bonds, the hybrid bonds, to strengthen Tier 1 capital and some subordinated Tier II bonds as well in the first half of last year.

together with [interim] or earnings retention to strengthen capital.

We ended up having 14.5% BIS ratio by the end of the last year.

Now we're a little lower.

But the plan continues, and the plan was based on a minimum level of 11.5% for -- that's an internal ratio.

Now that the Board -- and after our proposal from management, decided to raise that minimum from 11.5% to 12.5%, seeing what is happening in the world, and probably the trends that we will see on regulation, we will start doing so.

We're not sure whether we need to do it this year, but for sure, next year, we should retain additional earnings from income generation in the bank.

And you should be seeing that in the upcoming months.

Okay, great.

Just to follow up with that, would that mean that your dividend would decline next year potentially?

Not necessarily, since we expect more earnings than last year.

We should probably retain more, but the dividend should stay roughly at the same level.

Okay, great.

Thank you.

And your next question comes from the line of Jason Mullen with Goldman Sachs.

Please proceed.

Hi.

There's a significant echo on the line, but I have two questions.

One related to the segment of your loan book that seems to be growing the fastest, mortgages in local currencies.

You can talk a little bit about the competition, the products that you're offering, the pricing, and how that's going.

There was an impressive 41% growth year on year in mortgages in local currency, although it's still a -- you know, not that large a book.

But -- and my second question is related to something you mentioned which is the impact of the higher reserve requirements on the bank's earnings.

You mentioned a 10 basis point decrease in NIM due to higher reserve requirements.

Is that just on average you expect that the NIM to decrease by 10%?

Maybe you can talk a little bit about the sensitivity of the bank's earnings to the higher reserve requirements, all else equal, and give us a sense of whether you expect that trend of higher reserve requirements to continue as the economy grows at a very robust pace.

Perhaps we'll see more monetary policy measures.

It's not only focused on interest rates, but continued on reserve requirements.

Okay, thank you.

In terms of mortgages and competition, yes, we see many banks, especially the four largest banks, going after that market.

There is a tremendous opportunity there for housing and mortgage lending in -- especially in the middle and lower segments.

And the government is actively promoting that.

Therefore, we're after that, and we are finding the way to be as successful in those segments as we have been in the upper ones.

The competition there is very strong, in terms of rate.

All the banks have low funding costs.

In (inaudible), they have liquidity, they are aggressive in terms of their pricing proposals.

So we are having, and we expect to have, very strong competition.

As you know, we are not only selling mortgages at the branches, but especially going after the housing projects, and finding a way to be the first ones to get into those projects.

And of course, taking into account the risk that they imply.

With regard to the reserve requirement, yes, we have made a calculation of the cost.

Basically, what -- the way we do this is by assessing the opportunity cost of those funds that have to be placed in the Central Bank, receiving a very, very low interest rate, which is -- I think it's now the overnight LIBOR times 0.6.

So it's very, very low.

And the money that we have to place there is quite expensive, since we have this opportunity cost.

We expect -- I mean, the Central Bank has been doing this for three or four times so far this year.

They have said that they could increase this a little bit more.

We think they are already at very high levels.

As you know, the reserve requirements for dollar deposits are at -- it's 50%, and for lines, for borrowings from foreign banks, it's 65%.

So it's very, very high.

I expect really to -- for the Central Bank to stay basically with this level, and not going up, further up.

Maybe just a follow-up on the mortgage market.

Can you -- and your mortgage business.

Can you talk a little bit about where spreads are today, and where have they been, and do you expect them to continue to go down, if they have indeed gone down?

The average rate for that business, for the [solid] denominated mortgages, is about 9%, 9.5%, more or less.

And our cost of funds, if we match that funding, it is roughly at about 7.5% to 8%.

So the spreads are between 1.5% and 2% now.

And do you see downward -- I mean, is that -- you're talking about competition.

Is this where we think the spread can stay, or that we should expect more downward pressure, if in fact it has -- spreads have gone down?

We expect them to compress a little, since competition is very strong, and we're all after that market, which is, as you know, quite stable for -- on our relationship basis with the customers.

What is really happening here is that not everybody is doing what we do in terms of matching funds, so some of the banks are taking some gap in risk, since they have much lower rates on deposit, short-term deposit.

But eventually, this will have to be fixed.

But the spreads should come down, definitely.

Hi.

This is Walter Bayly.

On the mortgages, two points I wanted to mention.

If you look at the spreads, the Chilean banks have the mortgages, they're about a third of what we have.

So I'm not saying we're going to go there next quarter, but you know, if what happened in Chile is a good indication of where we are, where we are going to be ending up in a couple of years, yes, there is room for, unfortunately, spreads to continue tightening.

If you look at some of the numbers that we have published, we have even, with the incredible 41% growth in local currency mortgages, we have lost a little market share, so the market is extremely aggressive.

And regarding the currency composition, actually, of the disbursement, it's practically 50/50 -- 50% of the mortgages that we disburse are in local currency, 50% in dollars.

But what happens is that our mortgage -- our dollar mortgage portfolio is much older, thus, there are a lot of maturities.

So the balances increase aggressively in local currency.

But the actual disbursements are actually 50/50, still.

Very helpful.

Thank you very much.

And your next question comes from the line of Saul Martinez with JPMorgan.

Please proceed.

Hi, good morning.

I hope you guys can hear me.

My connection is not great.

But I had two questions.

First, can you talk about the outlook for your post-provision net interest margin?

As you mentioned earlier, you have -- there is a mix shift PDL ratio over time.

This could start to trend upwards, even with a strong economy.

But at the same time, your net interest margin and your mix shift should (technical difficulty) from that.

But on the NIM, you also have countervailing factors, like tighter reserve requirements, competition, and whatnot.

Can you give us a sense for how you can (inaudible) after provision net interest margin might evolve in the next year to two years, or should we think that there's [been some] tightening there?

And secondly, can you comment on the sustainability of your underwriting margins in insurance, and especially in the property and casualty business, where certain segments, your loss ratio is extremely, extremely low -- I suspect some of that is seasonality.

But you've had very good results there in the last few quarters, and do you think you can sustain those kinds of (technical difficulty)?

Sure.

On the NIM, the -- yes, as you well mentioned, there are a couple of factors that, you know, go one against the other, and it's difficult to be very precise about what's going to happen.

But I would say that the overall trend here is that if you take a step back, the strength of BCP has always been its capacity, its ability to capture low cost, very stable savings accounts and [safe] deposits.

That advantage was not -- was very difficult to get translated into actual profit when interest rate environment is extremely, extremely low.

Our competitive advantage practically disappeared.

Thus, as we see rates in local currency particularly inching up forward -- upwards, due to the growth in the economy, we expect our competitive advantage to come back to us, to start producing results.

That is, as the government, the Central Bank increases the reference rate, most likely -- or, what had happened in the past, we did not follow the same pace increasing our deposit rate.

We will have to increase our deposit rate, but obviously, at a slower pace.

Thus, the margins we get on our deposits will most likely increase.

That should be the overall trend.

And I think that that, in the next year or two, will offset a lot of the competitive factors that we will see on putting pressure on the downside.

Did I -- did I explain that properly?

Yes, I think that's fair.

My question is also just looking out in terms of after provision, (technical difficulty) NIM, if you expect -- if you do expect loan loss provision levels to go up (inaudible) shift, in theory, (inaudible) NIMs were flat, that would mean that the [post] provision net interest margin would actually decline some.

So I'm just curious if you see the after provision NIM remaining -- you guys can sustain the kind of levels you have now, even if -- especially if provisions (technical difficulty) trends upward (inaudible) percentage of loans.

Yes, well, asset quality is an issue, because again, you have several forces playing one against the other.

Clearly, we are going down market, and we should expect some high provisionings there.

We also have changes in methodologies, both on the retail and on the wholesale side.

We just started on July with a new methodology of classifying the loans in seven categories as opposed to four, and that has created some.

So there is a lot of movement.

But I would say that the [old] -- and two important factors.

One is that clearly, the economy is improving, and that should produce some results.

But on the other hand, we have a couple of sectors that are, I think, going to be heard in the next quarter or two, particularly the textile business.

We've seen the prices of cotton increase quite dramatically, and it's not very clear that there will be, at least in the short run, able to pass those costs through.

We've seen some decreases in the prices of -- what is it, (inaudible)?

And some of our customers are not going to be able to pass those costs quite rapidly.

We are quite uncertain about the world environment, what's going to happen.

So we are being very cautious in saying that the overall improvement in the economy is going to directly impact asset quality.

We want to be very cautious there.

We're even thinking that maybe we should increase a little bit more our provisioning levels just to be on the safe side.

So I'd be very cautious in terms of saying the economy is growing at 7%, and that is going to be the overall driver to allow me to predict that provisions are going to be lower.

But at the end of the day, if the economy grows, if our assets grow, we should have a NIM that improves over time, net after provision.

Okay, great.

That's very helpful.

And on insurance, the underwriting --

Yes.

David Saettone, who runs our insurance business, is here, and he can probably answer more accurately what you just asked.

Okay, good morning.

So definitely, we are experiencing very, very good underwriting margins currently, and there is a seasonal factor there that explains -- especially in the property and casualty side, the low ratio.

And we should expect that to go up as the economy improves, and as the economy grows, and as companies increase their production capacities toward their maximum.

But we have done a great deal of work in trying to segment the risks of the clients that we insure, and in [seeding] those risks that we don't feel that comfortable with.

And I can tell you that there's a -- in our gross loss ratios, you will see a lot of those clients experiencing claims, but obviously, we're not taking them in our books, because of the reinsurance.

And what we've also done is, we've moved away from the corporate side, and we've concentrated our book more on the retail side, where we have our portfolio more optimized from all the risk, and therefore, more predictable.

So we are not sure, but the answer is that we should not expect loss ratios as low as the ones that we've had.

We should expect them to move more towards 60%, which is what we use in our models to set rates.

And what we have to do in order to keep our net income in line with our projections is to improve the volumes of the premium that we underwrite.

All right?

So just to be clear, this quarter was really more -- it was really more a seasonal thing, why the loss ratio (technical difficulty) --

I think there is -- I think we shouldn't expect a big jump.

I think the portfolio has a lot of smaller risks, so it should be more gradual.

But definitely, I think we're at a very, very good point in our loss ratios, and we shouldn't really expect them to be that low in the future.

And what (technical difficulty)?

Well, we're shooting for the 20%.

Perfect.

Great.

Thank you very much.

All right.

And your next question comes from the line of Luis Guzman with Santander.

Please proceed.

Hello, (technical difficulty).

(inaudible) couple of questions.

Most (technical difficulty) questions regarding the (technical difficulty).

Can you just give us a little bit more detail on what goes on (inaudible), and what to expect going forward?

And secondly, (inaudible) transactions that you mentioned in sovereign [bonds], can you give us more details?

(inaudible), capital (technical difficulty) in terms of price appreciation during the quarter, or the available (inaudible) portfolio, and I think it has something (inaudible), stock of the (technical difficulty) available portfolio is quite substantial, (inaudible) [$40 million] in the quarter so, (inaudible) sense of where this decline was (technical difficulty)?

With regards to the second question, yes.

What we had is, in May, I believe -- yes, it was in May -- it was an exchange called by the government of some of the bonds that they had.

They changed a Eurobond for -- a 2014 Eurobond for a dollar denominated [33].

And there was an exchange, and we went after that, and the exchange implied earnings on the Eurobonds for about $26 million.

Yes, realized gains.

Those were in the unrealized gains at the equity of the bank, and we ended up realizing those gains.

I don't know if that answers your question.

And that has to do, of course, with the reduction in the unrealized gains that you were asking (inaudible).

Okay, thanks, (technical difficulty).

There was a question (inaudible) --

(technical difficulty).

Oh, yes.

We are -- we had made some provision reserves on a couple of lines or issues that we -- operating issues that we had, and those accounted for about $3 million.

Now, those are non-recurring, and -- yes, that went into the other expense line, really.

Nothing major.

Okay, excellent.

Thank you very much.

(Operator instructions) At this time, we have no more questions.

I would like to turn the conference back over to Alvaro Correa.

Please proceed, sir.

Well, thank you very much, everyone, for being here today.

I would like to apologize for the communication problems and the echo.

We couldn't get clearly all the questions.

I hope you had all the answers, and we will be gladly to be, for you, if you have other questions later.

Thank you very much.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.