Credicorp Ltd (BAP) 2012 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Credicorp second-quarter 2012 earnings release conference call.

My name is Claire, and I will 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).

As a reminder, this call is being recorded for replay purposes.

I would now like to turn the presentation over to Mr. Alvaro Correa, Chief Financial Officer of Credicorp.

Please proceed, sir.

Thank you.

Good morning and welcome to Credicorp's conference call for the second quarter of 2012.

Despite concerns around Europe, the slight slowdown of China and some persistent social issues which are testing the local government's capability, the Peruvian market continues showing solid growth as our numbers for the second quarter indicate.

This evolution presents, however, some challenges, especially with the financial sector that is focusing its growth strategies in the lower segments of the population that, in some cases, have never had access to credit in the past.

As we have made clear in many opportunities, we know that moving into these sectors means going through a learning process and that finding the right growth formula and pace will require the typical trial and error exercise.

In our case, this is the reason for entering these markets through a strategy of trials in manageable sizes at first.

The second quarter of 2012, Credicorp reported excellent growth numbers and overall results in most areas.

However, we took the top position to prioritize our conservative provisioning policy over the profitability of the quarter and scarified our bottom line to the creation of provisions far and beyond the regulatory requirements.

This was a reaction to deterioration indicators for the consumer business in the system, more specifically the credit card business, which has led to some corrections already as we will see in the next pages.

So move, please, to slide 3. Credicrop reported net earnings of $172 million in the second quarter, revealing a 9% drop from the record earnings reported in the first quarter as a result mainly of a move to a more conservative provisioning policy, something we consider sound that should accompany our incursion in lower income segments of the population and which led to this quarter's high provisioning level.

This decision brought return on equity down for the quarter to 19.2% and return on assets to 2%, an effect we view as temporary.

Nevertheless, for the first half of 2012 net earnings were still 3% higher, reaching $361 million.

This net earnings result and the high provisioning level hide, however, a very strong business performance and expansion.

Credicorp reported robust growth with a 6.3% quarterly expansion of the loan book, a significant 8.4% insurance premium growth accompanied by a low claims ratio, robust expansion of bank and pension fees as well as a resilient asset management fee income.

Consequently, net interest income expansion was strong at 5.8% for the quarter despite some changes in the funding structure that resulted in slightly higher funding costs.

This led ultimately to a stronger net interest margin on loans of 8.1% and stable global NIM at 5% for the quarter.

However, despite a very small 9 basis points increase in the past-due loan ratio for all delinquencies to 1.74% and a stable 90-day delinquency ratio of 1.16%, provisions were up 59% quarter over quarter and reached a high of $110.8 million.

As mentioned briefly, this is a reflection of our move to a more conservative policy to reach full coverage of the high end of the range of expected losses which are determined using internal models, as we will explain later on, and which accounts for 45% of the additional LLPs when compared to the level of the first quarter.

Operating expenses also kept a high growth pace and were up 8% quarter over quarter as expansion continues and new businesses are developed.

Operating income, therefore, suffered a decline of 1.9% quarter over quarter and reached $235.5 million.

In addition, the foreign exchange volatility and temporary strength of the US dollar in the international markets resulted in a minor translational loss this quarter.

This explains the differential of $14.7 million less income, which increases the drop in net earnings to 9%.

We will see all this better explained in the following charts.

Next page, please.

At the end of the second quarter, gross loans at BCP totaled $18.6 billion, which represented robust growth of 5.9% quarter over quarter and 16.8% year over year.

A similar evolution was evident in the analysis of average daily balances reflected in this chart, which expanded 4.3% quarter over quarter and 19.5% year over year.

The significant increase in loans was once again mainly attributable to strong growth in retail banking, where average daily balances increased 6.3% in the quarter and 33.2% for the year.

Growth of Edyficar's loan portfolio stands out with an expansion of 7.6% quarter over quarter and 42% compared to the same period of last year.

Furthermore, the most significant growth in the retail banking portfolio was seen in the SME segment, up 7.9%; mortgage portfolio, up 5.2%; and the consumer sector with a 6.7% growth quarter over quarter.

So all these sectors grew at a high rate; it is only the consumer sector and more specifically the credit cards business that one -- the one that shows a deterioration in its performance, most likely due to the type of loan and lack of experience of some sectors of the population to deal with consumer credit.

It is worth mentioning that the slower 2.6% quarter-over-quarter expansion of the wholesale banking appears to be closely linked to an increased financing activity of foreign banks, which take advantage of lower funding costs, free of the high level of reserve requirements for foreign currency imposed to banks that operate in Peru as well as the increasing use of capital markets for finance corporate banking clients and is therefore not an indicator of the deceleration in this sector.

Next page, please -- it's page 5. Asset quality maintained its very sound structure in general with a stable past-due loan ratio for over 90 days delinquencies of only 1.16%; well within our historical levels and a slight increase in the past-due loan ratio that includes all delinquencies, which takes up only 10 basis points due to the deterioration of our credit card portfolio.

All other segments and products maintained stable delinquency ratios.

This credit card portfolio accounts for 4.9% of the total portfolio and reveals an unexpectedly high 5.5% delinquency ratio versus the 4.6% in the previous quarter, a ratio that had already picked up from a stable 3.8% to 4% in the previous year.

The deviation in the performance of credit card vintages from the end of last year and beginning of this year led to corrections already implemented in the past few months in the scoring systems of -- in the scoring models and approval requirement, a process we view as not unusual as we go up the learning curve and fine tune our model.

This deterioration in the retail consumer sector is therefore responsible for additional $6.4 million in reserves above the projected reserves for the period, which added to the $9.9 million of reserves related to alignment to the system imposed by the regulator, add up to the $16.3 million provision attributed to deterioration in the retail business.

Further, $6.2 million of reserves respond to a couple of very isolated cases of credit deterioration in the middle-market sector within the wholesale business, one of which is by now already solved.

However, the largest portion of additional provisions respond to the conservative approach to create reserves that would be high enough to cover the high end of the range of expected losses calculated based on our internal models.

This additional reserves resulted in a total of $90 million of provisions above the regulator's requirement.

This is arguably a conservative approach that reflects a change in prioritizing the methodology based on expected losses of the local and regional practices, a decision management considers in the interest of our shareholders.

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Net interest income increased 3.4% quarter over quarter.

This is due mainly to a significant 6.6% growth in interest on loans, which is in line with a considerable increase in the total loans we saw before.

However, this strong growth in interest income was partially offset by higher funding cost related to, one, an 8.2% increase in interest on deposits, which was attributable to growth in the average balances for deposits, up 6.8%, in particular time and demand deposits.

And, two, growth in interest on bonds and subordinated notes, up 8.3%, mainly following the new issuance of subordinated debt for $350 million that was conducted in April of 2012.

Nevertheless, the increase in net interest income resulted in an expansion of 50 basis points in the NIM on loans, which was situated at 8.1% at the end of the second quarter.

The global NIM, however, fell from 5.21% in the first quarter to 5.06% in the second quarter, a decline attributable to growth in securities available for sale following the incorporation of Correval's investment portfolio that generate lower returns than our loan portfolio.

Non-financial income was up 9.6% this quarter due to a 6.8% increase in fee income, 11% higher net gain on foreign exchange transactions and an extraordinary increase in other income, which more than compensated the lower net gains on sales of securities, down 19.8% this quarter as conditions did not allow to take strategic gains.

Next page, please; page 7. The higher level of operating expenses reported contributed also to the drop in net results.

Despite the slowdown in the process of branch expansion, costs were high and mainly explained by a general expansion in transactional activity and costs incurred in connection to the opening of branches that will be effective in the following months.

However, there are two important additional generators of extraordinary costs related to changes in the business development and strategy.

First, the decision to outsource IT services, which means a one-off high upfront cost as personnel and capacities are reduced and transferred to the new service providers.

In this case, three reputable international entities that should provide a significantly better, more sophisticated and efficient IT service; TATA Systems and Everis for software and IBM for hardware.

The process started in the first quarter and it carries the larger portion in the second quarter.

And, second, the new business development in the investment banking segment with the reorganization or regionalization of this business through the acquisition of two recognized organizations in their countries; Correval in Colombia and IM Trust in Chile.

A process that entails also upfront costs that vary from contracting some external advisory for certain processes, the consolidation related administrative costs that will lead to the establishment of a separate regional investment bank.

These are in fact extraordinary events which despite the upfront costs they bring are expected to contribute significantly to the sustainability of future earnings growth.

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BCP Bolivia reported a fairly good performance as the economy continues to grow moderately but steadily, despite sluggish foreign investment activity.

Thus, BCP Bolivia showed a strong growth of net interest income of 7.8% for the second quarter, in line with its portfolio expansion of 5.6% and an 8.7% drop in operating expenses.

However, a significant increase in regulatory cyclical provisions and lower fee income allowed for only a small 1.2% increase in net earnings, which reached $5.6 million for the quarter.

Nevertheless, BCP Bolivia's return on equity in the second quarter of 2012 was a good 18.5%.

Finaciera Edyficar posted net income of $7.4 million, which represented a drop of 6.9%.

Nevertheless, it is important to emphasize that operating income grew 7% due to an increase in net interest income in line with expansion in the loan portfolio, which was up 7.4% thanks to this quarter's successful campaign strategy.

However, higher operating expenses related to branch expansion, a much smaller translational result and provisions were behind the drop in the bottom line.

Furthermore, portfolio quality remains the most stable in the lower segments at 4.2% due to the successful lending model.

In this context, net shareholders' equity increased 10.7% in the second quarter due to an improvement in accumulated results and return on equity, including goodwill, was situated at 23.8% in the second quarter.

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Pacifico had a satisfactory second quarter.

Total net earned premiums continued growing and expanded 8.3% quarter over quarter, whereas claims dropped 17.8%.

Therefore, results recovered significantly this second quarter as its contribution to Credicorp reached an excellent $23.7 million, which reflects a 17.6% return on equity.

This was a result of a normalized property and casualty business with significantly lower casualties and claims that resulted in a lower combined ratio of 102% versus a 115% in the first quarter.

Further, the life business and medical lines also performed well and contributed to the excellent result for the second quarter.

The health business showed improved underwriting results and the new clinics reported $1.6 million underwriting results before accounting and legal adjustments related to the acquisitions.

A satisfactory performance as the investments in its vertical integration programs continue according to plan.

Year over year the underwriting result rose 45% but PGA's contribution to Credicorp fell 5.6% as a result of a 45% increase in operating expenses which was in turn attributable to the development of alternative distribution channels, sales force [towards] marketing in the property and casualty business.

For the first half of 2012, Pacifico results do reflect the hard first quarter numbers affected by a marked seasonality and one-off high claims.

In fact, despite a 20.9% increase in net earned premium compared to the first half of 2011 and a 20.6% increase in financial results, Pacifico reached a 21.9% lower underwriting result and a 26.3% lower net earnings resulting in a still depressed return on equity of 10.5%.

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Atlantic Security Bank reported net income of $10.6 million in the second quarter, down 8.1% versus the first quarter.

The slight decline is attributable to a decrease in net gains from sales of securities due to, first, an increase in volatility in the securities market in this quarter following the sovereign crisis in Europe and the weak performance of the US economy.

And second, a drop in fees and commissions for services associated with the fact that higher commissions were paid to third parties to manage part of our investment portfolio and a complicated market for fees based on fund performance.

Nevertheless, results are satisfactory in this market environment giving a 24.3% return on equity for the period.

Atlantic Security Bank's asset management business continued expanding with its assets under administration, including deposits, reporting a market value of $5 billion.

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Prima AFP's net income totaled $11.4 million in this second quarter, which represents a 24.8% increase over the $9.2 million reported for earnings in the first quarter and a superb return on equity of 33%.

Net income growth this quarter is due primarily to higher commissions and lower expenses for administration and sales, mainly a decline in advertising expenses.

Prima's fee income was $30.9 million in the second quarter, which represented growth of 4.4% and 18.7% year over year.

This increase was attributable to solid growth in RAM, the income base, due to dynamism in the Peruvian economy and Prima's successful efforts to capture new affiliates.

Furthermore, funds under management totaled $10.5 billion at the end of June 2012, which represented 31.4% of the total funds under management in the private pension fund system.

With this result, Prima continues leading the market in terms of funds under management.

In this front, however, a new law that regulates the private pension fund system was passed on July 19th.

The law's objective is to contribute to effort to develop and strengthen social security in the area of pensions by increasing competition and efficiency of the system while reducing administration fees among other elements.

It is important to point out that regulators still need to set up the rules for this law and that management is evaluating the reform's impact on the business to define measures that would minimize its potential negative effect.

A summary of these reforms has been included in our earnings release published last night.

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In summary, Credicorp had this second quarter a very strong business development with important growth achieved in all segments and the development of additional fronts to grow its business in the future.

However, as we have indicated in the past, the strategies to increase bank penetration which are fueling part of this growth entail some change -- challenges.

We are aware that this constitutes a delicate process to which we are dedicating significant resources and time to carefully monitor the performance of the business and fine-tune our models accordingly.

The accelerated growth in certain retail sectors, namely the credit card business, has generated an increase in delinquencies in the system and revealed the need to approach the lower income sector with significantly higher caution and allowing for a more gradual learning process for the consumer in dealing with credit.

The corrections to our scoring and approval model have been implemented gradually for the last several months as these deviations in credit behavior and expected losses became obvious.

Given this evolution and as explained before, provisions were boosted following a conservative decision based on the internal modeling of expected losses.

Of course, we have seen other elements that have also contributed to making this quarter a tougher one, namely the higher expenses and the translation loss.

Nevertheless, and despite the setback in earnings, we are confident that Credicorp is on track taking the necessary measures and business decisions to sustain the corporation's profitable growth story.

Results for the first half of 2012 sum up to $361 million, a good result that keeps us within our plan considering that the second half of the year is usually stronger in income generation and that significant extraordinary costs are being digested in this first half.

I will stop here and open to the Q&A session, and thank you very much for your interest.

(Operator Instructions).

Carlos Macedo, Goldman Sachs.

I have a couple of questions on the asset quality.

The first question is related to the coverage ratio.

We did see very high provisions for you in the quarter and the coverage ratio remained flat on the back of the high write-offs that you had.

What should we expect in terms of the coverage ratio going forward?

And together with that, the credit card business is the one that you highlighted as the one where the NPLs are growing at a fast pace.

You are still expanding that business, 5% growth on the average loan balance in the quarter.

Are you still going to develop that?

What should be the outlook for NPLs in that business?

How are you trying to address that given that, as you said, it has to do somewhat with the experience or the lack thereof that the cardholders have in taking debt with that specific line?

Thank you.

Thank you, Carlos.

As of your question on coverage ratio, as a matter of fact we consider that coverage ratio as one of the indicator that we follow.

However, it is not necessarily the most important one.

We are more focused right now on trying to cover what we calculate at expected losses, which is not necessarily coincident with the calculation of the past-due loans that is included in the ratio that you mentioned.

In fact, past-due loans are a definition; that it is a regulatory definition.

It's a strict one for the Peruvian rules but it's just a definition.

However, expected losses is a much more business-oriented measure.

And just to give you an idea, the level of provisions that we have right now in stock cover around 94%-95% of expected losses today while our goal is to reach 100% of that in the next few months.

So the coverage ratio, in short, would be probably moving up and down because it's not necessarily the main indicator that we follow right now.

So would it be fair to say that the expected loss ratio that you have, so to speak, would be roughly twice what the past-due loan ratio is, right?

I would say that --- I don't know exactly that figure, but I would say that it's much closer to the level of reserves that we have in the balance sheet compared to the total loans that we have in there.

Right, which is around 3.3% in the second quarter, up from 3.1%.

So does that mean necessarily that you are going to head in that direction with your past-due loans or NPLs or is that just being somewhat of a conservative measure?

In other words, what kind of conversion have you seen in the past --- in your past experience from your expected losses to actual losses?

That's a very good question.

Expected losses are difficult to calculate, and basically what we do is we define and we analyze data for the last 12 years and there were ups and downs and there is cycle.

And the way we calculate expected losses is by doing it through the cycle, not taking the best year nor the worst year.

So it's really a moving target and it depends on how every year performs.

And this is how we do it, right.

So right now what we see is that --- given the fact that we are in good moment, probably today the expected losses or the losses will be lower than the expected losses that we are calculating, because we are considering worst years in that ratio today.

I don't know if that's clear enough.

That's good.

Just a follow-up to that one, so does this mean that you will still probably make additional provisions going forward and build up, say, the coverage of this -- as you said, from 94%-95% to around 100%.

Does that mean that we should expect to see provision expenses come down from maybe the high levels of the second quarter but not to the low levels of the first?

Exactly.

We expect to continue making provisions in the next following months in order to get closer to the 100% that we are targeting.

Okay.

So just going back on the NPLs for the credit card business, how are you addressing that?

Is there -- is that something -- I know it's a small part of your book, but it's where you are having a lot of growth.

Is this something that you feel like you need to address further given the lack of experience of the card holders in borrowing?

We have already made several changes in that business.

The way we handle this, we attack this by segmenting this -- the credit card business and the groups, the targets, the customers that we have.

We have made adjustments especially in the lower income segments by raising the thresholds on scores in our scoring models and by raising also the requirements on -- for approvals, right.

So basically, this is -- as we have mentioned in the speech and in our report, this is a trial period.

We have been entering new segments for us.

At the beginning of the process, we get the worst of the new loans, so it is logical that when you expand you get the higher past-due loans at the beginning.

So this should adjust and we should expect -- we are expecting in fact to bring this past-due loan level or ratio for the credit card business down in the forthcoming months since in addition to the thresholds on scorings, to the new requirements, we are also reducing the credit lines that we grant for new credit cards, especially in the lower segment.

So it's a combination of measures that we are taking and we should start seeing the results of that in the third quarter and the rest of the year.

Okay.

Perfect.

Thank you, Alvaro.

Thank you, Carlos.

Tito Labarta, Deutsche Bank.

A couple of questions.

First, just following up on Carlos' questions with credit card portfolio and provisions, so given the deterioration in asset quality you are seeing in credit cards, do you think -- and kind of the tighter standards, does that imply you are going to see slower growth in this business?

How is that going to impact kind of loan growth going forward overall and both in the retail business?

And then, how should we think about provisions?

And going forward you said it would probably be lower than the second quarter but above the first quarter.

But should we think excluding these additional provisions of $19 million -- because even if you exclude that, you are still around 2% of loans which is still a pretty big increase compared to the first quarter.

So I just want to get a sense of, is that what we should expect, around 2% of average loans, or should it be even lower than that, maybe somewhere between that and the first quarter?

So if you can maybe give us some more color on that.

Thank you.

Okay.

As of the second question, I think we should continue to see additional provisions -- I mean, to the level -- the level of provision should be probably closer to the second quarter than to the first quarter given the fact that we are growing and that we want to have this expected losses ratio to be fully covered.

And as of the growth in the credit card business, the slower growth, well, that's definitely a consequence of raising the bar, although there are segments at which we feel much more confident, the traditional higher income, higher middle income layer -- sectors.

And we will probably see slower growth in the lower end of the pyramid.

How much?

It's difficult to say.

But, yes -- but there are other segments -- I mean, that's only for the credit card business.

Because in addition to that, we have the consumer loans based on payrolls, we have the SME business growing quite fast.

This is, I would say, pretty much focused on the lower end of the credit card business, which, as you mentioned or somebody mentioned, represents a small part of our portfolio.

So maybe just a follow-up then.

So given now you are expecting now higher provision and probably slower growth in the credit card segment, in the past you have kind of guided for an ROE of around 22%.

But now it seems like growth may be a little bit slower, provisions a bit higher.

Does that mean profitability is then going to be a bit lower?

Should it be kind of what we saw in the second quarter, maybe slightly higher?

Do you think you can get back to that 22% that you have guided for in the past?

I think we should be able to go back to the low 20s since, as we mentioned, this quarter has been quite special in additional reserves and expenses.

Remember that going to lower income segments also entails higher margins.

So the whole idea of this new segments for us is that we make a pretty good business out of it.

So even though we make more provisions, we also have higher margins at which that those provisions should be well paid off over time.

So the margins and the profit, the net earnings of the Bank should continue to increase.

Okay.

Thank you.

Yes.

Boris Molina, Santander.

Alvaro, a couple of questions.

The first one, maybe I would like to talk a little bit about one of the parameters that go into the calculation of your expected losses, because it gives me the impression that rather than being the borrowers that have poor experience also that the banks have -- as you mentioned, are going through a learning process.

So -- and what is a bit concerning is that asset quality is deteriorating in credit cards even with the strong economic environment that we are seeing in Peru.

And there were a couple of instance of countries that we began to see this experience of asset quality deteriorating with a good economic environment and the outcome tended to be asset quality behaving much worse than what we or the banks were expecting.

So what will happen in terms of your provisioning efforts if you were to assume that we are going to see the worst of your experience in what you've seen in segments in Peru in the past given that the strong rate of growth that we've seen in credit in Peru over the last five or six years?

And my second question is, the bank has reassessed the effort of branch openings that you had for the year.

I think you had a total of around a 100 branches, and I don't know if you consider to -- that you are going to deliver on those.

I know that the cost growth was going to be continued on volumes and revenue growth and whether the higher provision effort is going to need the Bank to probably cut down on these targets.

Okay.

Thank you, Boris.

As of your first question, fortunately we have only seen this situation of additional concerns on a specific segment of our product line, that's the credit card and the lower end of the credit card.

So it shouldn't be a concern for us.

Having said that, we have to continue being vigilant and cautious and more strict in the way we grant loans.

But I don't consider this to be a red light on growth.

We have very healthy growth in different other segments and products.

I don't think quite frankly that what you have seen in a very aggressive environment like in neighboring countries should be the case in Peru.

Remember that in this environment we have some capabilities that are a little different from the ones you find in neighboring countries.

For instance is the fact that we have a positive credit bureau, it's very powerful and that prevents banks to grant loans just blindly.

So I think the situation in Peru will be quite different from what you are seeing in other environments.

As of branch opening, yes, we have mentioned the willingness to open 100 branches or so.

It's not been --- it hasn't been easy really to find places and spots, even licenses from local regulators.

Therefore, the speed would be slower.

But not necessarily because we want to slow down the process, but it's just a matter of how we see it is for us to continue with the plan.

We learned from the past experience in 2008 and 2009 after the Lehman crisis that we basically made a decision to stop and not opening more branches in 2009.

I think we paid the bill, because others continued.

The market and the demand and the improvement in the population didn't stop and we were not just there.

So in this opportunity, we will continue opening branches and, as I said, probably at a slower pace.

Do you have an updated view on more or less where your cost growth is going to end the year?

I mean, I know that at the beginning of the year you had something close to 20% or something like that.

I don't know if this is still valid.

I think that it's to that figure now.

So you are still guiding more or less 20% cost growth for the full year?

Yes.

Okay, excellent.

Thank you.

Jose Barria, Bank of America.

Just continuing on the topic of asset quality, I want to know if the sort of more strict underwriting standards are being just applied to the credit card segment or to other segments within the consumer?

I think you touched on this just on a previous question, but wanted to clarify.

And then second on the topic, what is this doing to your expectation of NIM from loans going forward?

Obviously, we have seen a good evolution in NIM from loans over the last quarter driven by higher growth in this lower segment of the consumer space.

But if you are decreasing there is it safe to assume that your NIM is going to be affected or should not be expanding as we saw it in the second quarter for loans?

And my second question is with regards to the regulatory environment.

I saw that you guys outlined what's going on in the pension fund industry, so thank you for that.

We understand also that some fee regulation is being assessed or addressed by the Superintendency, and I just wanted to get what your thoughts were on that front?

That would be it.

Thank you.

Okay, Jose, and thanks for the questions.

Well, as I mentioned, we are basically -- in the credit card business we are basically reducing credit lines on the lower income segments.

We are setting a new level for the scores, the minimum scores to get a loan and the additional requirements.

As of those requirements, let's say, for instance, we had a minimum of three months in a job, that would be --- has been raised to six months on a job and such things would be -- are the ones that are being adjusted.

We consider that in order to bring more people into the system we have been a little bit too much --- too aggressive, and that's been adjusted.

In terms of NIM on loans, I believe that shouldn't be affected.

As a matter of fact, the mix is changing and the segments that are growing the fastest are the most profitable ones, not only credit cards but also consumer loans and SMEs compared to the growth in the middle market and the corporate sector.

So NIM on loans should continue to be strong if not improving in the future.

With regards to the regulatory environment and the fees, well, in the banking industry the fee regulation is the only one that we foresee.

And, yes, there is some regulation that has been pre-published for comments from banks and that regulation relates to the fact that, for instance, we cannot charge for renewing a credit card or for cash withdrawals through ATMs on credit cards and a few other things.

We have already made the numbers and we think that that should have a small impact on our fee income base of around $10 million to $12 million or $15 million a year.

So it's not going to be that material and that should be more than compensated with additional transactional activity in the retail business.

Okay.

Thank you very much.

Chris Delgado, J.P. Morgan.

I was just trying to get a sense -- just kind of going back to the expenses -- of what portion of the growth of this quarter was basically nonrecurring versus recurring?

I know you guys mentioned some additional IT work and what not there, so I just wanted to get some clarity around that.

Thanks.

Let me see if I have more color on that.

Well, if you go to slide 7 of the presentation, there, on the right hand side, there are some bars that have some information on that.

One-off would be bar --- well, the BCP capital line of around $3 million and the outsourcing --- the IT outsourcing project also entails around $4 million of additional expenses.

So that's more or less what I have here, no more than that.

Okay.

And then just kind of going back again --

Sorry, sorry.

All right.

Oh, yes.

Then just kind of going back to the asset quality, could you give us a sense of kind of where you see NPLs ending like year-end or do you see it kind of stabilizing from here?

That ratio should continue to go up.

NPLs are right now at one --- I mean, NPLs including refinance and -- that's 242%.

Past-due loans 180%.

That figure --- those figures should continue to go up a little along with the change in the mix of the portfolio.

I wouldn't say that this should be a stable figure in the future.

It's difficult to tell you what will be the level by year-end but we do expect an additional increase in past-due loans, not because we foresee deterioration, but again because of the mix that is changing.

Okay.

Thank you.

Victor Galliano, HSBC.

Just really --- I mean, my main questions obviously on credit quality have been answered, but maybe two follow-ups here.

Historically, you have kind of carried a, shall we say, long sol policy.

Are you maintaining that going forward?

And focusing in on the cost side I think of the equation, you are talking about 20% OpEx growth for this year.

Aside from the IT, what is that focused on?

Is that focused on the (inaudible) program seeing as you are no longer building out more branches?

What sort of segments is that growth in OpEx focused on?

Thank you.

As of our long sol position, yes, we do continue to have one.

We expect the sol to continue appreciating.

We --- the macro figures for the country continue to be good and promising and we expect growth of ---- or GDP growth of around 5.5% to 6% for this year.

Probably, roughly the same level for next year.

Investment is moving forward, and therefore, we continue to see the currency getting stronger that entails for us to bet on the sol and have a long sol position.

That will continue to be the case.

As of the growth in expenses, it is really related to growth in pretty much every area of the business definitely related to the branch openings.

It is also we are expanding our call centers, we are strengthening our risk units, on central units as well.

But basically, it's related to business expansion and a little bit of that is related to a different strategy, for instance, with regards to the outsourcing of IT and even some other outsourcing services like call centers themselves.

And the same, I would say, for the insurance business, where they are also following a strategy of change in the distribution channels and expanding regionally in the provinces.

So it's really a combination of different elements but all related to the expansion plan.

Okay.

Thank you.

Carlos Gomez-Lopez, Legg Mason.

Two questions, one, more about the credit card portfolio.

And you will excuse our focus on this, but we have seen this segment is probably out of control in many other countries, so we need to monitor it closely.

Now your past-due loans went from 4.6% last quarter to 5.5% this quarter.

You mentioned stability.

Do you think that level of past-due loans is going to peak at 5.5%?

If not, what level do you expect to see it peak and when do you expect to see it peak so that we can monitor it in the coming quarters?

And second, your Tier I capital -- your common equity Tier I capital was 9.05%.

Could you give us an estimate about where it would be under Basel III and what actions, if any, do you intend to do regarding capital?

Thank you.

Okay.

Thank you, Carlos.

I think that the 5.5% area is where we should be.

I mean, we expect it to be and remain at that level after the measures we have just taken.

Quite frankly, it's difficult to give you a number, but the area is where we stand right now.

That's what I can say.

As of the Tier I capital, yes, we have set an internal -- not a regulatory, but an internal minimum asset target that is the 9% Tier I common.

We will be moving around 9% in the short run, but we expect to have a stable 9% minimum in the next two to three years.

We are already above that, but the changes somehow depending on the evolution of the portfolio.

This 9% will be for Banco de Credito and it is equivalent to the 9.05% that you report in your press release, right?

Yes, 9% is the minimum that we have set for Banco de Credito, for BCP.

Okay.

So in that sense you are at the minimum.

You do not have much of a buffer.

As I said, we can go under the 9% depending on the speed at which the portfolio grows, because we don't build Tier I common every month.

We do it once or twice a year by earnings retention at the shareholders meeting in March usually and, in some cases, we do it during the year by retaining current year's earnings in advance.

So it moves quite a bit during the year, but we are targeting to have a minimum of 9% year around in a couple of years from now.

Okay.

And Basel III?

Basel III?

Yes, that's according to Basel III.

Chelsea Konsko, TIAA-CREF.

I understand that what you guys follow more closely than the standardized ratios is your expected loss coverage, and I was just wondering if you've changed your methodology in this quarter -- if the reason for your increase in provisions is more because you want to make sure you are covering a higher percentage than in the past at that 95% or if it's because of higher expected losses than before?

No, we have not changed the calculation, but we have made -- what we have done recently is -- I mean, a few months ago is that we made the decision of trying to get to the 100% coverage of expected losses.

We didn't have that target before.

We do have it now.

But how the way we calculate expected losses hasn't really changed.

And what was your target for coverage before then -- if it wasn't a 100%?

Actually, we didn't look at that.

We were trying to cover the past-due loans, the traditional ratio of 150%.

But now we consider that a better measure is to cover the expected losses.

And that's not necessarily equivalent and following the same trend of covering the past-due loans.

So this is really something that has happened recently, but no changes in addition to that.

Okay.

Thank you.

Fabio Zagatti, Barclays Capital.

Thanks for taking my question.

It's actually a follow-up on credit cards.

I mean, one of your competitors, which is one of the leading players in credit card, has recently expressed concerns that aggressive competition in credit cards and new players coming in may possibly lead to heightened risks that the whole industry experiences more severe in asset quality issues.

So may I ask you if the situation is indeed that alarming in Peru, and if so, would you expect any risks that regulators step in to take control of the situation as we have seen in other regions -- in other country in the region, for instance, in Brazil and in Mexico?

Thanks.

Okay.

I know what you are referring at and the comments of one of our competitors, and that has really happened.

We -- BCP has been much more aggressive in getting into that competitor's traditional area of focus and that has allowed us to grow in market share and that's the aggressiveness that they are referring at.

But, yes, we -- as we have mentioned to the whole presentation is that we are in the process of adjusting the policies and the models in that area precisely because we have seen that not only us, but other competitors are all focusing in this new segment.

We don't expect -- I mean, remember that if you see the overall number even though the trend is not a good one -- if you see the overall figure, it's not an alarming one.

It's still at a very, very decent level, especially considering the profitability that the business entails.

So I don't expect at all for the regulators to come and step in and do any changes with this regard.

The regulator is already very much aware of what the banks are doing and they follow these strategies very closely.

Okay.

Thank you.

Thank you, Fabio.

(Operator Instructions).

Alonso Aramburu, BTG Pactual.

A couple of questions, the first one again on expected loss.

Alvaro, can you tell us how much has the absolute number of expected loss moved in the last few quarters, just to get a sense of how that's moving relative to the NPLs?

And second, going to the insurance company, Pacifico had a target of 20% ROE.

Do you still have that target for this year or has that now moved to a further year given the performance so far this year?

Answering your first question, I will give you a rough number; the expected losses by the end of 2011 were around $500 million.

The expected losses as of May or June of this year are $600 million.

So they went up around, I would say, 17% or so, okay.

But that's a rough number.

And total reserves are a little bit below that.

So that's more or less the evolution that we have seen.

With regard to Pacifico, I will let Guillermo Garrido-Lecca who's with me -- please answer the question.

As Alvaro said during the conference call, the ROE for the year in the first semester has been about 10.6%, if I am not mistaken, and the idea is to get it as close to 20% as we can.

We probably won't make the 20% mark, but we are trying to get pretty close to the 18, somewhere around there, which will leave us pretty comfortable making up for the first quarter, which was really bad with these large claims that we had in the property and casualty business.

Okay.

Thank you.

There are no further questions.

I would now like to turn the call over to Mr. Alvaro Correa, CFO, for closing remarks.

Okay.

We have Walter Bayly here, who is going to do the closing.

Hi.

Thank you all for being with us again.

I just arrived, unfortunately had to go to another meeting and could -- have only heard the last couple of questions.

And I just wanted to make a couple of closing comments.

At the beginning of the year, probably early first quarter, the mid of first quarter, it became evident to us as we started further analyzing and trying to have a clear sense of what should the overall level of provisioning of the Bank be.

The metric that started to gain some importance in our eyes clearly was the expected losses, and that is a number that we continue to make more firm, more accurate as our metrics continue to advance.

But it became evident to us at the Board level and our risk management committee that amongst the several numbers that we watched to determine the overall amount of provisions, expected losses was one that we started to feel a bit more comfortable following closely.

Then we decided to try to close the gap of provisions to expected losses.

What has happened this quarter is two events have happened simultaneously.

We have continued in that endeavor in terms of trying to catch up with expected losses while there has been a deterioration of our credit portfolio.

So the two effects have created a lot of nervousness.

I have just reviewed all the early reports that most analysts have come, and clearly in my mind the issue of credit quality is blown out proportion.

Why did we want to increase the amount of provisions towards expected losses?

Clearly, we are going into new segments of lending to population where we have not lend before.

We are more and more using extensively a new set of risk management tools, which, frankly, we do not have a lot of experience utilizing so extensively.

So it made all the sense of the world to try to have our balance sheet a little bit more provision.

What has I think spooked the market is the fact that we have done two things at the same time.

While we are doing this we have seen some deterioration of our consumer portfolio, which is a small portion of our portfolio.

Frankly, again, I think the issue is overstated, overblown out of proportion.

I really view -- if we want to put it in Olympic terms, which is now fashionable -- running this institution as any financial institution or institution at all more akin to a marathon than a 100 meter race.

The biggest driver for our decisions is not our results for the next quarter, but the midterm management and having a very solid balance sheet.

So frankly, the reaction of the market -- I am very glad for all those institutions, all of those investors that have acquired the stock as well as well wishers of it -- 11 times earnings, which is what we are currently trading of, because obviously if somebody is selling, somebody is buying.

So I think there are a whole bunch of very smart investors that are taking very good positions in Credicorp at, what I view, historically low multiples of earnings.

What we seeing going -- what do I see going forward?

I very reluctantly try to give forward-looking statements for all the risk associated to that, but clearly due to the fact that the market is somewhat nervous I am inclined to stick my neck out a little bit.

And what I would say, I would -- we are going to continue doing more provisions for the next quarter that what are expected from a regulatory standpoint.

Probably what we will do is somewhere less than this quarter that we just finished, maybe closer to the first quarter, somewhere in between.

I think it makes all the sense in the world.

Again, we have -- due to this marginal deterioration of our credit quality, we have taken very serious steps in reviewing everything that we did.

We have hired outside consultants that have gone throughout all our risk management process in the retail side, identified weakness.

And, yes, we have weaknesses -- who does not have weaknesses -- and we are working on them.

But again, with the overall level of provisions that we have in past-dues I don't think this is something that should be of any serious concern.

The return on equity of the Bank for the first quarter has been incredibly good -- so for the first half of the year has been very good.

For Credicorp it's only 19.9% because we have had some weaknesses in other parts of Credicorp.

So I think again -- I feel extremely comfortable with the future going forward.

We have a country that is continuing -- that continues to grow.

You have seen the growth in our revenues, and I think we are doing what is appropriate that we should be doing.

Again, I just wanted to interject this comments.

And maybe some of the things have already -- I am sure been already mentioned by Alvaro.

And I apologize for being late, but just wanted to share these thoughts with you.

Thank you all for joining us in this call once again and hopefully we will all meet together in the next conference call with a more cheerful set of questions.

Thank you very much and good bye.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Have a great day.