Credicorp Ltd (BAP) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Credicorp Second Quarter 2011 Earnings Release Conference Call.

My name is Jusenia and I'll be your coordinator for today.

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

Following the prepared remarks there will be a question-and-answer session.

(Operator Instructions).

I would now like to turn the presentation over to Mr.

Alvaro Correa, Chief Financial Officer of Credicorp.

Please proceed, sir.

Good morning, everyone, and welcome to Credicorp's Second Quarter Conference Call for 2011.

The results of the second quarter are no doubt better than expected since the presidential election process was expected to have a stronger negative impact on investment mood, and therefore economic activity and resulting demand for loans.

We have seen, however, a resilient economic activity, which despite the uncertainties prevailing throughout the process continued expanding at a lower, though still strong base.

The results of Credicorp for the second quarter show a robust loan booth expansion as well as growth in other business fronts.

Obviously, part of this expansion results from certain inertia in investments already initiated before the political process started taking its toll in investor confidence.

But there is also a good level of activity which is not being derailed by the political changes.

Consequently, core income generation was strong and excluding non-recurring items resulted in 4.8% stronger net income generation as we will see further on.

But before getting into Credicorp's results, I would like to show a briefly -- to show briefly some indicators of such economic performance throughout the first semester.

Next page, please.

Economic activity in Peru remains sound with real GDP growth above the Latin American average.

However, this line does show a gradual slowdown resulting from the uncertainties of the election process.

Business confidence drops with the results of the first round in the elections, but stabilizes as a more moderate speech starts dominating the political scene.

In fact, an initial turning point could be seen in some indicators like energy consumption, imports of capital goods, market capitalization and strength of the local currency.

These, however, are no guarantee of a full recovery in confidence and investment growth but are certainly encouraging coupled with a recent cabinet and government officials appointment.

Next page, please.

Credicorp reported net earnings of $174 million for the quarter, which repeats the excellent results of the previous quarter and reflects a 7.5% quarter-over-quarter growth in core earnings that is excluding non-recurring gains reported in the first quarter.

This puts Credicorp -- Creditcorp's results at a peak and reflects robust market evolution during the first six months of the year.

Certainly, the robust 10 -- a quarter-over-quarter -- 10% quarter-over-quarter loan portfolio growth stands out and reveals the resilience of the brewing economic growth drivers.

Loan portfolio growth was, however, not fully reflected in net interest income due to the marginal interest income expansion and increased in interest expense as we will explain further on.

The income was strong both at the bank and in asset management business as was also premium income from the growing insurance business, which explained -- which expanded quarter-over-quarter 6.5% and 5% respectively.

Provisions were however significantly higher growing 45% quarter-over-quarter but in line with a substantial portfolio expansion.

Nevertheless, and despite such good business evolution, the proportionately lower growth in net interest income and the one-time gain on sales of securities reported in the first quarter are behind a drop in operating results, which was more than compensated by the positive translation gains and lower tax provisions leading to the reported strong net income for the quarter.

All this represents a profitability of 24% in return equity and a stable return on assets of 2.4%.

We will see this better explained in the next slides.

Next page, please, page five.

At BCP, again a strong 9.4% quarter-end portfolio growth or 6.2% average balances growth for the quarter reveal a dynamic expansion, which was we just heard across the different business lines with some special predominance of the retail products.

This strong growth did not translate, however, into similar net interest income expansion since the increase in interest income was marginal as growth was funded mainly through a re-composition of interest earning assets rather than growth of these assets.

And on the cost side, interest expense increased into the need of more expensive term financing induced dollars.

Therefore, net interest income was up only 1% in the quarter.

Provisions, however, did move according to the loan-to-loan balances and increased a substantial 45% quarter-over-quarter.

These results from the fact that quarter-end portfolio growth this second quarter has more than doubled that of the first quarter, therefore, requiring much higher up-front provision.

On the other hand, non-interest income showed a very good performance increasing 7.4% in the quarter, especially banking fees and foreign exchange transactions while operating expenses showed an increasing 5.5% quarter-over-quarter due to the overall business expansion and higher variable remuneration.

As a result, operating income dropped 8.5% this quarter.

This shortfall in operating income was however more than offset by the substantial positive translation results and significantly lower tax provisions reported in the quarter.

In fact, translation gains are the result of a sound asset and liability management and a position taken in Nuevos Soles at BCP while the lower tax provision resulted from lower taxable income and local accounting, which in turn results from a translation loss consequence of the position we usually have in foreign currency.

Consequently, the bottom line expansion of 5.2% for the quarter was reported increasing the contribution of BCP to Credicorp by 5%.

Next page, please.

These charts show the continuous growth trend where loan growth measured by quarter-end balances expands 9.4% and 6.2% when measured on an average outstanding balance.

This loan growth was the result of persistently strong retail activity and demand for credit, which pushed retail average outstanding balances up 7.2% in the quarter.

In the wholesale business, continued demand for ongoing investments and projects as it were underway and some seasonality associated with financing for fishing industries resulted in 5.6% expansion in the wholesale loan book.

The de-dollarization process observed in the previous quarter was slightly reversed due to the weakness of the US dollar and consequent preference of borrowers for loans in such currency.

However, portfolio quality further improved, reaching a past due loan ratio of 1.52% with coverage stable at 194%.

And as we mentioned before, the higher level of reserves of about $60 million for the quarter is mainly explained by the portfolio expansion since no further relevant deterioration has been observed.

Next page, please.

Looking at income generation, net interest income grows only 1% in the quarter since interest income from loans increased in line with loan expansion.

The total gross interest income grew only marginally at 2.8% and reflected a shift in asset allocation from deposits with a central bank and other banks to fund the loan book expansion.

Hence the 6.6% growth in interest income on loans was partially offset by lower interest income on deposits.

Furthermore, interest expense shows strong expansion of 6.8% due mainly to the issuance of corporate bonds at the end of the first quarter that generated an increase of interest expense for the second quarter.

Therefore, and given the low expansion of interest-earning assets of only 2%, net interest margin remains unaltered but shows the slight increase in funding costs forming on BCP's loan portfolio.

Non-financial income shows a healthy expansion of mainly bank fees reaching 7.4% quarter-over-quarter growth.

Operating expenses also grow 5% with business expansion, mainly reflecting expenses in marketing activities, advisories and a slight increase in personnel due to new hiring, but mainly due to higher variable income following the strong portfolio growth.

All these led to a slight deterioration of the efficiency ratio to 48.4%, still within our expected range.

Next page, please.

This first quarter, BCP Bolivia reported a 37% drop in its earnings contribution, which totaled $3.2 million.

This was due to the fact that its income level normalized after having reported a significant tax reversal in the previous quarter that boosted bottom-line numbers.

In fact, operating results are better and reflect 11% quarter-over-quarter growth in BCP's loan portfolio and similar net interest income expansion.

However, this additional income was offset by higher operating expenses and lower translation results leaning to relatively flat business performance as is reflected by the return equity of 18%.

In Finaciera Edyficar, continued expanding this business and reported a contribution to Credicorp of $6.4 million in the quarter, which represents an increasing contribution of 9% and 28% year-over-year.

These results reveal strong loan book expansion of 8.4% in the quarter, which was accompanied by 8.1% growth in interest income.

Next, at Pacifico, a 5.7% growth in net earned premiums and a similar growth on claims and income from commissions together with a 9.7% higher other direct costs led to a 4.3% improvement in the underlying results -- underwriting results for this quarter.

In addition, financial income was 7.7% higher quarter-over-quarter and expenses actually dropped 4.3%.

The insurance business is growing fast and the underwriting results are higher but these explain only a small portion of the increase in net earnings reported.

In fact, most of the higher income reported this quarter at Pacifico stems from the life insurance business, which benefits this second quarter from higher translation gains as well as significantly lower tax provisions following a ruling that exempted underwriting reserves.

Consequently, contribution to Credicorp was 64% higher this quarter totaling $25 million.

Pacifico reported for this quarter an extraordinary return equity of 28%.

However, the combined ratio did show a slight deterioration since the main income generation -- generator for this quarter was Pacifico Vida which is excluded from the combined ratio.

In this context, the combined ratio was 102.8%, up from 99.5% in the first quarter reflecting higher acquisition costs.

Next page, please.

Atlantic Security Bank reported $11.5 million for the second quarter, which represents an 11% drop in its contribution level.

The quarter-over-quarter drop is primarily attributable to lower interest rates and a strategy to reduce the duration of assets of the investment portfolio, affecting interest income.

Better fee income stemming from the off balance sheet asset management business only partially offset the drop in net interest income.

This result brought Atlantic Security Bank's return equity bound to 25.6% from 27.4% the previous quarter, still at a very good level.

This is a very good return for this relatively risk-free business, which continues to make excellent contributions to Credicorp and attests the importance -- to the importance of our asset management and private banking business.

Next page, please.

Prima has also managed to maintain its high level of contribution reporting $7.8 million for the quarter.

This represents a 3% drop with regard to the first quarter attributable to higher taxes stemming from a higher taxable income reported in local accounting due to the foreign exchange gains on US dollar denominated obligations and earnings from reserve requirements which are taxed under Peruvian tax rules.

In fact, business evolution was excellent.

Fee income was 8.5% higher quarter-over-quarter and operating results were also 6.2% stronger.

Furthermore, Prima continues to lead the system this quarter with market shares above the 31% level in all aspects measured, including in terms of assets under management.

Next page, please.

Page twelve.

The contributions chart makes the good business performance evident despite the widespread fears of a significant deterioration due to the uncertain political scenario.

The result reported this second quarter puts us on track to achieve our target for the year with almost $350 million net earnings for the first half of the year.

Furthermore, in a growing and developing market like the one in which we operate today, we believe there are multiple opportunities that could open new fronts to further develop and grow our financial business at an even faster rate.

We have a dedicated team of highly qualified professionals that are identifying and exploring these opportunities to make sure we enter into businesses that are complementary to our own, leverage up our existing operation and network and therefore add value to Credicorp.

To give you a flavor of a complimentary investment, we are carrying out, please move to the next slide.

Multiple opportunities we are exploring, the ones listed are the most advanced, in some cases already publically announced, in others in the process of being implemented and launched.

The joint venture with Carlyle was actually publically announced last March and is in the process of implementation.

We believe there is a huge market for both the investor and taker sides of the private equity business, which will be addressed through this joint venture in the most professional manner, given the wide experience of our partner and will provide an interest in fee income.

Joint venture with Tarjeta Naranja of Argentina is also a highly promising venture that gives us the opportunity to develop a market that has huge demand for credit.

This is a new model for Credicorp that has been successfully tested in Argentina and we believe that the combination of the know-how of Tarjeta Naranja added to the knowledge of the local market brought to this joint venture by BCP will make this a very powerful product.

The insurance brokerage business also an important fee income generator has been identified as offering a huge potential in the market with the low insurance penetration like ours and with high need of a professional advisory service to educate the market and introduce efficient insurance product.

Again, partner with a top international broker like Willis with whom we provide a powerful network and access to clients can become a significant source of additional fee income.

Besides these three initiatives, there are several in the making that will be announced as these materialize.

In this context, we also thought appropriate to explain briefly Pacifico strategy, which has led to recently announced acquisitions of two clinics in Lima -- in the Lima area, especially given that these investments move further out of our financial [real] into an operational level but has a rational and powerful reason behind.

In fact, Pacifico has developed in the last years comprehensive, well-thought development strategy with which is worthwhile explaining.

This I will ask Mr.

[Lavitsi Tony], CEO of Pacifico to take over the presentation and proceed to a brief explanation.

Next page, please.

Thank you, Alvaro.

Good morning, everyone.

As you are well aware, Pacifico Seguros operates in an industry characterized by cyclical results and low levels of return on equity.

However, there are a handful of world-class insurers which consistently show attractive ROE' and they all roughly share six common characteristics which set them apart from the rest of the pack.

These so-called key success factors are listed under the first bullet of the slide and for the past five years, Pacifico's corporate strategy has been focused on developing competitive advantages around each one of them.

Our relative success in the execution of this strategy has led to more stable and predictable results as well as to acceptable -- an acceptable return on equity, taking Pacifico's contribution to Credicorp from $5 million in 2005 to $47 million by 2010.

Last year's acquisition of ALICO's stake in Pacifico Vida, our life insurance subsidiary has further strengthened the quality of our earnings and given us direct control over a 1,300 person sales force capable of distributing a wide variety of personal lines products in 19 of Peru's most prosperous cities.

One of the more visible effects of our corporate strategy has been the recomposition of our insurance portfolio which have shifted away from large corporate and casualty risks towards less volatile personal lines risks, particularly life, motor and health.

In fact, health is now Pacifico's largest line of business in terms of net earn premiums and is an important pillar in a relationship with clients as they often prefer to work with insurers who can meet all of their insurance needs.

Now, despite representing a little over 40% of Pacifico's premiums, the health business accounts for only 10% of our net income and given the strong fundamentals of Peru's health sector, we believe that there is ample room for achieving greater profits through a vertical integration.

As it turns out, strong demand for health services has also shifted power away from us and towards health service providers, threatening the sustainability of our traditional health risk financing model and creating the strategic needs to integrate vertically in order to remain competitive.

As I will describe in the following three slides, over the past couple of years we have designed a robust strategy to address these issues by leveraging our solid customer base and experience in providing health services to build a profitable health risk management network largely based on Kaiser Permanente's proven model.

Please turn to the next slide.

Pacifico has offered health insurance products since its foundation.

But health was traditionally viewed as a marginal business, necessary only to provide our property and casualty clients with an integral insurance offering they demanded.

When the government created the EPS system in 1997, setting the foundations for the partial privatization of the public health services system run by EsSalud, Pacifico was slow to embrace it and ended up creating its own EPS, Pacifico Salud, only after competitive pressures made it absolutely necessary.

This was in 1999.

The EPS legislation effectively created private health service providers, similar to HMO's and required participants to have direct control of at least 30% of the health services they provided.

Back then, hospitals in Lima had excess capacity so Pacifico was able to fulfill this requirement by entering into outsourcing agreements with a few major hospitals in relatively favorable terms as well as by setting up its own health facilities in towns where lack of private providers made it necessary.

This legislation, however, also made the EPS jointly liable for services provided to third parties -- by third parties, making quality of service a major priority, a factor which in hindsight has proven difficult to manage through outsourcing contracts.

As most of you are aware, Pacifico had a difficult start in the EPS system accumulating losses that were hardly justified by the argument of providing our property and casualty clients with an integral insurance offering.

This scenario was changed drastically however, by two events.

First, was the achievement of significant economies of scale through the acquisition of Novasalud in 2004, which instantly quadruped other premiums from $20 million to $80 million.

Second, was the introduction of improved management practices in 2006, which drastically increased the quality of our information and enabled us to negotiate new contracts with healthcare providers that transferred a significant part of the risk to them through episode-based or bundled payment schemes.

As a result, we now have a profitable health risk financing business with a solid customer base of 1.2 million insureds.

We have also acquired significant experience in the provision of healthcare services through the 130 medical professionals we employ and who annually perform over 300,000 medical services at the 96 medical facilities that we operate nationwide.

These developments have given us the capacity to run our health insurance business on a margin basis where Pacifico's results are determined by the difference between what we charge our insurance on average and what we pay our healthcare providers on average as depicted by the blue and orange lines shown in the chart.

However, not having total control over the provision of health services makes this process very difficult.

As evidenced in the chart by the two periods when the blue line approached or even crossed the orange line.

The first episode occurred in 2008 when one of our main healthcare providers was acquired by our competitor and rates were doubled overnight.

The second episode occurred in 2009 with the swine flu epidemic, which massively increased the frequency of hospital visits.

Vertical integration would have helped us avoid these two episodes.

As we will see in the next side, the case for vertical integration becomes much stronger when we consider the dynamics of the proven health sector and the significant increase in demand for healthcare services that have taken place as a result of economies expansion during the last decade.

Next page, please.

During the past decade, healthcare has been one of the Peruvian economy's most dynamic sectors.

Expanded at nearly three times the rate of GDP growth.

Given Peru's low level of healthcare expenditures with respect to GDP, which is only 4.6% as compared to Colombia 6.4% and Chile's 8.2%, we expect this trend to continue for many years to come.

The EPS system itself is also poised to grow significantly in the following decade as private investment increases the availability of healthcare services nationwide.

In the past, the sale of private insurance has been limited by the lack of availability of private healthcare services.

This has been especially true outside of Lima where EsSalud is by far the best healthcare provider.

Shown in the pie chart, the EPS system currently only has 1.2 million participants versus EsSalud's almost 6 million.

So there is clearly ample room for growth as private investment increases the supply of healthcare services nationwide enabling private insurers to compete with EsSalud.

The mantle for healthcare services is expected to increase even further following the government's recent enactment of a universal health insurance law, which makes insurance mandatory for the entire population and which will be gradually implemented in the coming years.

Unfortunately, this increased demand for healthcare has also had a negative effect on us for although it has created very profitable opportunities for those who invest in healthcare services, it has also shifted power away from us and towards health service providers, making our stand alone health risk financing model unsustainable.

This is evidenced in the graph on the right which shows that Pacifico's demand for hospital beds has grown at a much greater rate than supply putting significant pressure on costs.

In the past we were able to fend off these cost increases by replacing those healthcare providers who raised their prices with new ones, but this is becoming more difficult now.

In fact, our low-cost network has been reduced to only three providers, increasing our vulnerability to our main local competitors which all work under vertically integrated model.

In addition, there has been significant M&A activity in the healthcare system with important operators entering the market, such as [Ban Medica] of Chile and [Cosanettas] of Colombia.

This has been prompted by the fact that most of existing private healthcare providers are owned by individuals or associations of physicians who lack either the governing structure or necessary resources to finance their growth.

The health industries, strong fundamentals have also prompted many private equity investors to scout for investment opportunities in this sector.

So we expect the market to remain dynamic for some time to come.

Given the current context, the sale of one of our low-cost providers to a competitor would significantly affect our profitability.

This is a scenario which we cannot afford and it became abundantly clear about three months ago when the shareholders of our flagship provider of healthcare services, Clinica El Golf announced that they were putting their hospital up for sale.

Fortunately, we had anticipated the situation and as I will describe in the next slide, we had a robust strategy in place which enabled us to act swiftly in order to acquire Clinica El Golf as well other healthcare providers and thus set the foundations for a very profitable health risk management network modeled after Kaiser Permanente's proven system of healthcare delivery.

Please turn to the following and final slide.

Our model of health risk management has three key articulators to help us leverage our experience and strong customer base to build a profitable network of accessible and cost-effective care.

First, are the healthcare facilities themselves, which will be layered according to a required level of complexity, from basic consultations to home visits or neighborhood clinics to critical illness treatment through hospitals in specialized treatment centers.

Second, the use of electronic health records to guarantee continuity and quality of service throughout the entire network as well as to facilitate the health risk management process.

And third, the use of telemedicine in order to deliver the highest possible level of service throughout the entire network at the lowest possible cost, especially given the increased scarcity of capable healthcare professionals.

The design of this strategy has been two years in the making and we have collaborated closely with local and international consultants who are experts on the subject.

Apart from multiple visits and interviews with Kaiser Permanente's staff, we have retained Medical Group Management Association or MGMA for short to design our medical protocols and operating procedures.

Deloitte & Touche, who also work close with Kaiser Permanente, to design the IT architecture required and HKS, the US-based architectural design firm responsible for the design of the Dubai general hospital and Miami children's hospital among others to perform the architectural design of our medical facilities.

We expect to invest approximately $150 million during the next couple of years to build our health risk management network.

Fortunately, the recent M&A activity of the healthcare sector has enabled us to gain valuable time and build very solid foundations for this endeavor through the following acquisitions.

Doctor Plus, which is a company specialized in the management of house call visits and small medical centers and which will help us handle high frequency services and chronic patients and low cost.

Clinica El Golf, which is our flagship healthcare provider and critical to our cost containment efforts.

It has the additional benefit of being located in a prime real estate zone of San Isidro and has ample room for expansion.

Clinica San Borja, which is the center of medical excellence, with highly qualified and well-known physicians and which immediately positions us among the top three healthcare providers in Peru.

Clinica Galeno, which is a hospital in Arequipa and will be positioned as our medical center of excellence to serve the southern region of Peru.

Making these acquisitions, we have made significant efforts to identify the top talent of each one of the targets and have retained them through long-term contracts so us to ensure the long-term success of each operation.

There are a couple of acquisitions still underway, which have already been contemplated in the total sum I mentioned and which will strengthen our network even further, but which cannot be revealed yet.

We are confident that these acquisitions will benefit from the flow generated by our current insurance business and the insurance business will in turn benefit from the increased availability of healthcare services that will result from our investments.

In the end, we expect to generate a virtual cycle of health risk management that will achieve ROE's in excess of 20% and help us [travel] the contribution of our health business by 2015.

That's the end of the presentation.

Thank you, [Alied] and now we're open for Q&A.

Thank you very much for listening.

Ladies and gentlemen, we are ready to open the lines up for questions.

(Operator Instructions).

The first question comes from the line of Tito Labarta from Deutsche Bank.

Please proceed.

Hi, good morning and thanks for the call, everyone.

Just a few questions.

First on loan growth, you had very strong growth in the quarter.

Just wanted to get a sense going forward, particularly with you know what's happening in the global economy, just want to get a sense of what kind of growth you could see going forward.

And then in terms of asset quality, even though you had some slight improvement in the quarter, you did mention there was some small deterioration in some of the consumer and SME segments, just wanted to get a sense of how you see asset quality going forward.

And then just on the insurance, just to clarify when you're saying you expected to contribute three times what it's contributing today, does that mean like insurances around 8% of total earnings in 2010.

Does that mean in -- by 2015 you expect that to be around 24%, 25%?

If I -- just want to get a little more clarity on that.

Thanks.

Great.

As of loan growth, what we are seeing nowadays is that basically we're experiencing the same trend as in the first and second quarter.

That is, strong demand on consumer loans.

Hello?

Yes.

Yes, strong demand on consumer loans, middle income, low income mortgages as well, SME's also.

Some slowdown still present in the high income mortgage business, basically waiting what will happen with first moves of the government.

And on the wholesale business again the middle market moving forward, some seasonality there.

Probably a few investments are -- especially in large projects, mining waiting for the new rules of the game.

That's probably where we will see more slowdown in the few months to come.

As of asset quality, you mentioned consumer and SME, that's correct.

In terms of consumer, basically the total past due loan ratio is not deteriorating, but what has happened really is that there is further deterioration of already deteriorated loans.

That's what is bringing reserves on consumer loans a little bit up.

And the same happens in SME, especially in Edyficar where a couple of areas in the country have been affected.

For instance, Puno, especially with riots and the problems that we had in May and June in Puno, the portfolio there deteriorated quite a bit.

And the northern part in one area in the countryside also.

That's basically it.

On the health business side, what we mean is that the $7 million that we generated in net income in the health business, we expected to make three times that.

Not -- it's not a reference in terms of percentage.

Okay, great, thanks for clarifying.

And just to follow-up, so in terms of, Alvaro, and the loan growth, you mentioned you could see a little bit of a slowdown.

Maybe, just maybe quantify that a bit.

So a 10% growth in the quarter, I wouldn't expect that to be sustainable, but what kind of growth could you expect going forward like for the year if you could maybe quantify a little bit.

Tito, we still expect the loan growth to be three times GDP growth.

We are foreseeing a 6% GDP growth for the year.

Therefore, we should be talking around 18% or so.

That includes, incorporates the slowdown in certain specific sectors that I mentioned.

Okay, great.

And then maybe just one follow-up on the health side.

Just kind of given the strategies and -- just want to get a sense, you mention -- you bought some hospitals and stuff, like when do you start to go too far out of maybe your core competencies, just want to get a sense of how you expect to move into execute this strategy, maybe get a little bit more color from that perspective.

Sure, the [FAS] -- the FAS system, the EPS system is actually a health services provider system.

So we've been providing health services for the last eight, ten years or so.

And what we're doing now is we're setting up our own network so that we can control costs and actually that will allow us to do another thing that will ensure that we get more stable results and that's that we can go from a financing model to a model where we actually start managing health risk of patients.

And that's why the investment in the electronic health records and telemedicine becomes important so that we can actually manage health issues before they get to the hospital.

All right?

But with investment that we've made and the amount of money that I've mentioned, there's $150 million, we expect to set the necessary network to get our business going on for many years to come.

All right, thank you very much.

Okay, the next question comes from the line of Saul Martinez from JPMorgan.

Please proceed.

Hi, good morning, everybody.

I have a couple of questions as well.

First on your net interest margin, as you -- it seems like there were a lot of moving parts this quarter and you had a very strong loan growth, you saw a shift in the assets, you had the bond issuance, you had some funding cost issues.

Can you give us a sense for what you're -- how you're thinking about the net interest margin and net interest income growth going forward?

What are kind of the dynamics there?

One other thing that you look at, your loan-to-deposit ratio is still very strong, but it has increased quite a bit over the last two years and is now a little under 90%.

Should we continue to see funding cost issues on the back of that?

And then secondly, you know thanks for the color on the credit quality issues, I think that helps a little bit, but your loan loss provisions went up substantially, your coverage went up, your underlying asset quality seems okay.

I'm just curious if you think you took a conservative stance in terms of provisioning and we should see the provisioning levels decline from second quarter levels going forward?

Okay, as of noon yesterday, you're right there were several changes in different lines.

We foresee a more stable situation in the months to come and therefore, we expect to name -- to stay roughly at the same level, no major changes in interest rates both in local currency and foreign currency given what is happening internationally and even with slowdown in inflation fears in the country.

Therefore, that should remain stable.

As of the loan to deposit ratio, you're right and the fact that the loans -- that it has been going up has to do with the increasing need to go and issue paper internationally in order to fund long-term dollar to nominated loans basically.

Deposits in dollars are not necessarily growing at the same pace.

Deposits in [somehow less] with the strengthening of the local currency are growing faster and that brings a mismatch to what we have.

That is being covered by this -- these issues.

That should continue, although we believe that never all, a lot of our customers both in the regional and the wholesale business will still have dollar-denominated deposits and that should continue to grow, although at a lower pace.

As of loan loss provisions, really what we are doing is respecting basically what we need to provision even the local regulation.

It's not that we're being more conservative or less conservative, basically we're following the rules.

And do you have a view in terms of what -- how to think about provisioning levels going forward?

Provisions averaged loans jumped from 1.1% to once in the first quarter to 1.6% annualized in the second quarter, which is you know -- haven't seen those kinds of levels since the crisis.

What are you -- how should we think about the provisioning levels in the coming quarters?

It has -- it's closely related to the growth in the loan portfolio.

Okay.

It's because this, as you know, these are up-front provisions.

So the bulk of this is up front and it's an average of 1%, 1.2% of growth -- of the loan book growth.

Therefore, it's closely related to that, it's difficult to say what would be the ratio there.

But we expect probably not the same jump from the first to the second quarter, but it will definitely continue to grow.

Okay.

All right, thanks a lot, Alvaro.

Your next question comes from the line of Fabio Zagatti from Barclays Capital.

Please proceed.

Hi, gentlemen.

Good morning.

How about a couple of follow-ups?

On asset quality, following-up on Saul's question, just curious to understand the rationale for the decision to strengthen coverage ratio in 2Q.

You mentioned that you were not conservative during the quarter, but is it fair to assume that you prefer to err to the safe side or is it anything else that makes you I mean more concerned about the future?

Okay, Fabio, thank you.

Let me explain a little bit better the jump in provisions, which is obviously relevance here, its 45% jump.

The way it works is that we make reserves on new loans, 1.3%, 1%, 2.5% on some retail loans.

There are different percentages depending on the type of loan.

What has happened in the first quarter is that the portfolio from December to March grew at about $670 million and that implied a certain level of provisioning.

In the second quarter, that change was not $670 million but close to $1.680 billion.

Therefore, it more than doubled from one quarter to the other.

That's the reason -- and applying the same percentages, that's the reason why when you account for reserves in the quarter, those grow that much.

It is a mathematical calculation of how much you have to that of provisions.

It's not that we're taking or not taking a conservative approach.

As I mentioned we just apply the numbers and the percentages and that brings out the provisions that we have to set.

Okay, got it.

In the margins, I understand that you actually guided for stable margins going forward, but I was particularly surprised by the trends that we saw during the second quarter.

Credit growth was very strong but we haven't seen necessarily a net interest income growing in the last quarter.

Is it the case that Credicorp's net interest income we will eventually expand at a faster pace throughout the second half of '11 in spite of the stable margins?

I just want to -- understand the dynamics of your credit growth related to your net interest income.

Okay.

There's a chart in the report we published, that we published last night that explains -- that shows the change in our asset lines on bank deposits, central bank deposits to trade insecurity or to securities available for sale and to current loans.

And although -- and that's correct, the change from the first quarter to the second quarter was probably larger than what we will see in the third quarter happening.

Therefore, we should have a much more stable situation.

And that would help since we have more assets in loans and less in deposits.

Therefore, the -- as a matter of fact, average loan grew 6.2% and interest income on loans grew 6.6% basically the same percentage.

What has happened is that the reduction in deposits from $6.2 billion to $4.3 billion implied that interest on deposits came down by a lot.

Therefore, that shouldn't be the case in the third quarter.

We should have a more stable situation.

Okay, and if I may, I wanted to ask you on your overall assessment of the macro backdrop.

Now that the newly elected president took office and appointed his cabinet, has the outlook changed in any manner in Peru or is it too early to tell?

Thanks.

Hi, this is Walter Bayly.

Yes, we have seen now a good amount of nominations or people that have been appointed in several posts of the government.

We do have a mixed bag.

We are extremely confident and very relieved by the people leading the economic team, both at the central bank and the Ministry of Finance.

But at the end of the day, it is -- we will have to see what the end result of the whole package is and the actions that will be taken.

It is still probably a little bit early to tell.

Clearly, going forward, domestic events and world events will effect GDP growth in the country.

Peru will have to become more aggressive at capturing foreign investment and promoting domestic investment and hopefully the government will be up to the task.

We are all looking now at GDP growth going forward of around 6% for next year, which is a bit lower from where we were thinking was going to be next year about six months ago, but given the world scenario it continues to be still a very good number.

Thanks, Walter.

You're welcome.

The next question comes from the line of [Hillary Brown] from LV Asset Management.

Please proceed.

Hi, I wanted to touch again on just the economic outlook.

I see that your graph on your presentation goes until June and I was just wondering if you've seen any uptick in the business confidence level since then and do you expect it to return to pre-election levels?

Maybe it's too early to tell with all the activity going on.

And also, can you touch more on your loan growth expectations for 2012 and on NIM expectations for 2012.

Sure, I'll take the first on macroeconomic and I'll leave to Alvaro the second part.

No, we do not expect business -- how do you call it?

Confidence levels?

Expectations or -- yes, -

Confidence.

-- to reach the levels we had before the election.

Clearly, there is a certain level of uncertainty as to how this is all going to be played, what will be the true result of everything.

But clearly the world also has an impact.

The world events on the business confidence and clearly what's happened in the States and in Europe are not very positive events.

So in short, the answer is no, we do not expect business confidence to return to the levels we had in the first half of the year.

And as of growth expectations for next year as Walter mentioned, we expect something around 6% GDP growth.

We expect the ratio of loan growth compared to GDP to still be at around three times.

And mainly focused and concentrated in the retail business and middle market probably and probably slower pace on the wholesale.

Therefore, margins should not be affected that much since the higher profit businesses is growing as fast as before.

That's basically what we are expecting and in line with that, we will continue to open branches, install ATM's and [Ascentis] network expansion in general, together with additional people to handle those channels.

Okay, when you said on the 6% GDP growth initially, I thought that was for 2011.

So do you have basically some expectations for the remainder of 2011 and 2012?

No, in 2011 we're probably going to be above that.

Okay.

Maybe 6.5% and 7%.

As of the first half of the year I think we're already 7.5% I think.

So we should end up -- end the year between 7% or 6.5% and next year, [sub-tick] down to 6%.

Okay, and loan growth in 2011 will still be three times GDP/

Yes, you should always think that loan growth will be between 2.5 and 3 times GDP, that's being the number that has proven to be quite resilient over periods of time.

Okay, thank you.

You're welcome.

There are no questions at this time.

Okay.

Walter, you want to -

Sure, just a closing comment.

On the prior conference call, I was quite conservative and negative in my view of the quarter that just finished.

We have had tremendous amount of volatility happening in the market.

I think we've been extremely successful in going through the quarter without being on the wrong side of the trade and the trade could be at a foreign exchange position, fixed income equities.

We have gone through an extremely volatile quarter where the prices have moved dramatically based on polls and expectations on political events and we have navigated through those coming out what I think has been a very, very good result.

I've read some of the results of the analyst, results clearly the numbers are not spectacular quarter-over-quarter, but considering everything that has happened this quarter, I am extremely positive and very satisfied with the results.

I hope that all this volatility, both domestic and worldwide stabilizes in the next quarter then we can resume some long-term growth visions of where we are going.

We continue to have a lot of room to grow in this country.

Our fundamentals are still very strong and hopefully the volatility, the short-term volatility caused by the US, Europe and the domestic volatility will cool down and we will be able to have a longer view and really capture the growth that we see out there very much.

Thank you all for continuously joining us and with this, we'll finish this call.

Thank you and goodbye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.