Credicorp Ltd (BAP) 2012 Q4 法說會逐字稿

Welcome to the Credicorp's Q4 2012 earnings conference call.

My name is Lorraine and I will be your operator for today's call.

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

Later we will conduct a question-and-answer session.

I will now turn the call over to Mr. Alvaro Correa, Chief Financial Officer of Credicorp.

Mr. Correa, you may begin.

Thank you.

Good morning, everyone, and welcome to Credicorp's fourth quarter and year-end of 2012 earnings results conference.

This last quarter of the past year has further shown the strong growth of our retail business as well as continued substantial growth in basically all sectors of the businesses we are in.

To us, our growth is a reflection of the strong economy and the success of our strategies which, despite some tightening in the credit policy in the consumer sector, have allowed us to increase market shares in targeted sectors, which have also contributed to higher margins and profitability.

Given this strong pace, the Central Bank and the superintendent decided to introduce some measures to curb growth in certain types of consumer credit and mortgages, which are more prone to deterioration because of either inadequate currency exposure or the low level of sophistication of new segments of the population with access to credit.

These measures were mainly focused on increased risk weight, and therefore, higher capital requirements for those types of products, as well as additional reserve requirements on deposits and other sources of funding.

However, strong growth also generates (inaudible) increase in cost and investments, which depresses short-term income in lieu of future earnings and profitability.

We understand higher costs are seen with certain skepticism, but we cannot let the significant growth opportunity ahead of us go by without making an effort to capture the business potential.

In fact, as we will see in the following charts, portfolio growth continues at robust rates as the economy maintains its dynamics and investments continue to flow.

Margins expand, portfolio quality remains sound and under control, but costs increase and will most likely continue at a high percentage of earnings in a quest to ramp up our infrastructure and prepare our organization for the significant expansion expected for the coming years.

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Credicorp reported net earnings of $200.2 million, a very good bottom line though lower than the extraordinary net earnings of the previous quarter.

The main reason for this lower result was the high costs recorded, up 19.2% in the quarter, which are also reflected in the deteriorated efficiency ratio for the quarter, up 480 basis points.

Therefore, return on equity dropped temporarily, marginally below the 20% threshold.

For the year, however, the higher costs were better absorbed by the increased income generation as were also the higher provisions.

Therefore, net earnings for the year were 11.2% higher, an excellent result for a growth year, reaching return on equity in line with expectations at 21.1%

Operating trend reflect both the increased costs behind the strong expansion of the business and the higher provisioning, which went from 1.86% of the portfolio to 1.92% this quarter, with a flat delinquencies ratio.

For the year, operating income growth is also contained by the same trends in costs, up 27.5% and provisioning, which went from 1.23% of the portfolio to 1.76% this last year as a result of the significant growth in the retail consumer business.

In fact, given the significant change in the portfolio mix in the last couple of years, the increase in provision requirements can be seen as moderate, reflecting a very sound portfolio as shown by the also moderate increase in the past-due-loan ratio from 1.49% for 2011 to 1.73% for 2012.

Overall, asset growth was strong at 22.1% for the year as was also the insurance business expansion with net premium earned also up 22.6%.

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

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When looking at BCP's loan portfolio, this fourth quarter the strong growth of the retail business becomes again very evident with a 7.9% growth of average daily balances while the corporate book grew 2.4% in the same period.

This tilted the portfolio mix again strongly in favor of the retail book, which reached a 51.2% of the total portfolio, crossing now, for the first time, the 50% target set several years ago and marking a historical breakthrough for our once traditional corporate bank.

At the end of the fourth quarter of 2012, gross loans at BCP totaled $20.8 billion, which represented again robust growth of 5.5% in the quarter and 22.6% year over year.

A similar evolution was evident in the analysis of average daily balances reflected in this chart, which expanded 5.1% quarter over quarter and 20.5% year over year.

The most significant growth in the retail banking portfolio was seen in the SME segment, up 9% quarter over quarter and 32.3% year over year.

The mortgage portfolio, which was up 7.2% quarter over quarter and 28.9% year over year, and the consumer sector with up 6.1% quarter over quarter and 35% year over year.

The credit card business, despite the tightening of credit criteria in the second half of 2012, showed an expansion of 6.5% quarter over quarter and almost 30% year over year.

Edyficar's micro lending loan book growth was also strong, with an expansion of 12.6% quarter over quarter and 47.3% year over year.

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Portfolio quality remained sound as the trends in these charts indicate.

All delinquency ratios show an improvement compared to the last two quarters.

The 90-day delinquency ratio is still at very low levels with 1.14% and the total delinquency ratio remained flat despite continued growth in riskier retail sectors.

In fact, the mix continues trending in favor of the retail book, which gained another 1.3% of the mix to reach 51.2% of the portfolio, but the delinquency ratios of those growing books maintained a moderate increase.

The ratios per segment show a consistently good performance and reveal better risk controls.

The adjustments introduced to our credit models have corrected the deviations seen in the first half of the year and newer vintages are all performing within expectations.

Collections are efficient and contribute significantly to maintain such good risk indictors.

And last, but not least, charges-offs were done in a timely manner since the regulator accelerated its charge-off approval process at the end of the year, a fact that also contributed to the improvement in the ratios.

However, it is important to point out that the change in the mix and its impact on delinquencies will be eventually more evident and reflected in the ratios, especially, over a longer period of time since short-term figures tend to include temporary or seasonal factors.

Furthermore, provisioning reflects already the stronger growth in sectors that have high risk profiles and was 1.92% of the loan book in this quarter, leading to an average 1.76% of the book for the year, setting these levels of provisioning as the new standard.

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Competitive pressures at year-end led to an increase in income generation slightly below the loan book growth, reaching 3.9% for the quarter.

In addition, the continuing trend of additional reserve requirements and increasing funding costs also put pressure on income generation and resulted in a 3.1% quarterly increase of net interest income.

For the year 2012, however, net interest income expanded a very strong 24.5%.

This excellent performance is also reflected in the margin expansion achieved despite competitive pressures and growing funding costs.

In fact, NIM on the loan book has consistently expanded a few basis points per quarter, moving from 7.72% a year ago to 8.06% this year 2012.

Our global NIM, which includes margins on all liquid assets held mainly at the Central Bank which at BCP make up for more than 33% of total assets, has a more erratic performance given the impact of treasury activity sometimes motivated by attractive tax shields on government securities.

Nevertheless, global NIM also improved for the year from 4.92% to 5.2%.

Non-financial income at BCP shows a drop this quarter, which is however mainly the effect of the spin-off of all investment banking and asset management, all fee generating activities of BCP which have been moved to the new regional investment bank which will consolidate those activities with our newly acquired investment banking operations in Chile and Colombia.

At Credicorp, this income transfer disappears.

Despite this effect, non-financial income for the year rose a robust 27.9%, reflecting the dynamics of transactional activity of the Bank which compensates all regulatory changes which attempt to bring down fees through promoting more transparency and therefore, competition.

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On the cost front, however, operating expenses continued expanding at BCP and increased 9.6% quarter over quarter.

Fueled by the continued expansion of our network, investments in the development and improvement of our operational capabilities and our risk management tools increased transactional activity and related volumes that generate variable costs, outsourcing of IT services and once again in this fourth quarter, the strength of the revaluation against the US dollar of our local currency in which most costs are paid.

The incremental expenses are distributed as per the pie charts and reveal that most of the costs -- of the cost increase is related to business growth of our commercial banking activities, IT outsourcing and the expansion in the investment banking fronts.

The consequence of this evolution and some seasonal concentration of costs at year-end is seen in the deterioration of the efficiency ratio to 55.7% this quarter.

For the year, costs also reflect the business expansion expenses and grow 25.7%, leading to a more moderate deterioration as the efficiency ratio moves from 49.4% to 51%.

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BCP Bolivia's performance was good when put in context of the pressures in the Bolivian financial sector, as the Bolivian government introduced higher income taxes for financial institutions.

Net contribution to Credicorp dropped again to $3.9 million this quarter.

For the year, however, Bolivia managed to deliver a contribution to Credicorp of $20.1 million, which was marginally below that of 2011.

Nevertheless, return on equity did drop to 16.6% for the year, given the tax pressures.

It is fair to point out that the Bolivian banking operation is, despite this negative trend, performing extremely well.

Organic growth was still sound at 7.4% for the quarter, whereby the retail sector is also the strongest growing sector and the portfolio quality even improved with a past-due-loan ratio of 1.24%.

The Bank is efficiently managed, and the deterioration in return on equity and contributions is almost exclusively related to external factors.

Financiera Edyficar reported loan growth of 13.7% quarter over quarter to top $750 million.

This represented a staggering growth of almost 48% year over year that reflects continuous expansion with an increasing market share.

This excellent growth also led to a contribution of $10.9 million, which represents a 13.1% increase quarter over quarter and was accompanied by a persistently good and improving portfolio quality as revealed by its past-due-loan ratio of 3.9%.

Return on equity, including the goodwill paid, was about 31.3% for the quarter, a robust number.

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At Pacifico, operations went well.

Net premium growth was good, increasing 3.2% for the quarter, contributing to better underwriting results for the insurance business, excluding medical insurance, which improved significantly and were up 29%.

This reveals a strong growth in the business as premiums for the year 2012 grew at a very dynamic 24% per annum.

Underwriting results improved from $34.6 million in the third quarter to $41.1 million this quarter, up 18.7%, and shows an even better performance for the year, increasing 35.6%.

Despite this excellent operating result, Pacifico obtained net income before minority interest of $16.9 million in the quarter, which represents a 19.6% decline with regard to last quarter's figures.

This was primarily due to the lower financial and other income and higher general expenses related to not only business expansion, but also to an alignment to Credicorp's standards in several fronts including personnel benefit.

In addition, it has been an adjustment and adequacy year for the health insurance and medical services business, where extraordinary expenses were needed in order to bring the newly acquired health infrastructure to expected standards.

The net result, although lower than the last quarters, is evidence that the positive trend seen since the second quarter of the year remains in effect.

The good results obtained in the last three quarters, which are $24 million in the second quarter, $21 million in the third quarter and $16.9 million in this last quarter, helped reverse the impact of the three severe claims reported in the first quarter of the year and which costs the Company $11.1 million.

Therefore, Pacifico was able to close the 2012 year with the same level of results and contribution of the previous year, reaching $66 million, which reflects a 16.7% return on equity and a combined ratio of 106%.

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Better market conditions have allowed a good performance in our asset management business out of Atlantic Security Bank.

Thus, Atlantic reported net income of $13.7 million in the quarter, which represented a 9.3% growth.

This increase was due primarily to the extraordinary income that was reported this quarter related to earnings associated to the spin-off of equity instruments of $1.3 million.

Return on equity for the quarter reached a sound 25.8% while the Basel ratio remained high at 16.9%.

For the whole year, Atlantic reported a total contribution to Credicorp of $48.4 million, showing a 17.8% improvement from last year's contribution, a result of improved market conditions which in turn resulted in better gains from the sale of securities and higher interest income.

The latter was the result of our strategy to rebalance our portfolio and increase the volume of interest earning assets.

Furthermore, Atlantic Security Bank's asset management business continued expanding with its assets under administration, including deposits, reporting a market value of $5.4 billion.

Overall, Atlantic in fact shows an excellent performance both for the quarter and the year, with a major NIM of 2.4%, but an efficiency ratio of 15.5% and a return on equity of 25.8%.

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Prima's business in the fourth quarter reflects the effects of the reform of the private pension system, primarily in terms of changes related to three main facts.

First, a lower management fee, which fell from 1.75% to 1.60% due to the process to tender new affiliates which took place in September 2012 and was won by Prima.

Second, a newly established commission deferment, which caused fee income to drop $7.5 million this quarter.

And third, provisions for charges for personnel and operating support to abide with the new rules and procedures defined by the reform such as mixed commission fee, process to tender new affiliates, among others.

It should be noted that both the second and the third facts are one-time effects, since the commission deferment of the fourth quarter is a cumulative amount to account for all deferrals since the beginning of Prima and should drop to a fraction for each quarter in the future and the adjustments to adapt to the new regulations is done once.

The aforementioned explains Prima's lower contribution to Credicorp this quarter, which reported $8.1 million, but after excluding earnings on the sale of fixed assets to Pacifico, totaled only $4.9 million.

Annual income, on the other hand, was $38.2 million, which represented 17.9% growth year over year and led to a contribution to Credicorp of $35 million, up 6.8% for the figure reported for 2011.

All in all, an excellent performance for a year with significant changes in regulation which is attributable to the fact that the Company's solid base of affiliates has continued to consolidate in a framework of sustained economic growth thanks to Prima's excellent position.

Additionally, Prima won the tender for exclusive affiliation rights in September, which will be in place until the beginning of this year.

Both of these factors were complemented by the Company's strict control of and follow-up on expanses as well as its added search for operating efficiency.

Return on equity, however, and despite these events, was still 23% for the quarter and averaged 27% for the year.

Furthermore, funds under management totaled $12 billion at the end of the year, which represented 31.5% of the total funds under management in the private pension fund system.

With this result, Prima AFP continues leading the market.

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This fourth quarter of 2012 has been a very good quarter for all of Credicorp's businesses despite the different circumstances in each of them and has allowed Credicorp to close the year with excellent results, showing robust growth, good risk management, business expansion in all fronts, with the increase in costs this entails, and a healthy 11% bottom line growth despite all the investments and challenges faced throughout the year in the different businesses.

Those main challenges have been risk management and increased provisioning, further cost expansion due to business growth in the commercial banking business, a challenging construction of a regional investment bank with a three-way merger of different cultures, a change in regulatory framework that affected income in the pension fund and banking businesses, an incursion in the medical service providing network with all its costs and challenges in the insurance business, and a series of smaller investments and business development.

Nevertheless, the results achieved so far are extremely encouraging and we are convinced we are taking an adequate approach to expanding in these different businesses.

In this context, net income of $200 million for the quarter largely satisfied management's expectation and led to the 11% expansion of net income for the year.

Though more importantly, business trends are positive and the Peruvian market is in a privileged situation, we certainly pertain to benefit from.

Therefore, as we said before, the diversification achieved by Credicorp within the financial business has allowed the corporation to weather some setbacks in individual businesses while others surpassed expectations, leading to satisfactory consolidated results.

The investments underway in the insurance business and the investment banking business are yet to bring results while Prima will continue facing challenging times given the new regulatory framework.

The banking business has still a huge growth potential especially for the new products that are being developed, which will most likely compensate for increased competition in the traditional major banking segments and asset management.

I will stop here and open the Q-and-A session.

Thank you very much for your interest.

We're ready to answer your questions.

(Operator Instructions).

Carlos Macedo, Goldman Sachs.

Actually, I would like if you could give us some more color on your expectations for 2013 on loan growth margins, asset quality and particularly expenses, I understand -- and this is kind of a second question -- that you're building out for growth.

Is there an objective that you have with this?

Is there anything you can share with us where you'd say, okay we've reached the point where now we can start harvesting the fruit or harvesting everything that we have planted with all this investment?

Is that something that you expect to see in 2013?

Or should this strong investment for growth last throughout the year and only start seeing a decline in these expenses in 2014?

Thanks.

Thanks, Carlos.

What our expectations for 2013 are of continuing growth.

We still see, what we have mentioned several times, that loan portfolio and the financial system will continue to grow between two and three times GDP growth and GDP is expected to grow above 6%, probably around 6.5% or so.

So we continue to expect growth in that area.

However, we continue to plan for a major expansion in our network.

As a matter of fact, we're talking about around 100 different flavors of branches and places in the country.

Probably 60 or 65 of those are traditional branches.

The rest are smaller branches located in premises of our corporate customers and so on and so forth.

So we do not see in the short time a reduction or slowdown in growth in expenses.

We will be investing and we will start seeing improvements in the efficiency ratio probably 3, 4 years down the road.

And these 60, 65 branches, is that in 2013 or is this something that you're -- it's a longer-term objective?

This year alone.

Okay.

On a yearly basis we will probably open something between 50 and 100 different type of branches.

If you see the level at which the country is in terms of branches per inhabitant, it is far below neighboring countries.

We should have at least twice as many and we will still be at the average.

So there's plenty of room there for continuing opening branches.

Okay.

Now going back to the outlook for 2013, on the NIM side is there -- on the margin side, do you expect funding to still hold back a greater -- a more substantial improvement in margins given the change in mix or is that something that you believe you have addressed towards the end of 2012?

Margins will be kept at the level.

I mean, NIMs should be able to stay at the level or even improve a little, since -- you've seen the pace at which the retail banking is growing and that has allowed us to maintain NIM.

Cost of funds is always a challenge.

But fortunately we are able to transfer that out.

Reserve requirements are also a challenge because more and more of our deposits are being held at Central Bank with very, very little returns.

But that's part of the formula and we are able to maintain margins because of the pace at which the business is growing.

Okay.

Thank you, Alvaro.

Welcome.

Daniel Abut, Citi.

Just a follow-up on the operational expense growth.

I think you explained in the prior question and your remarks in general, we saw a pace of growth in operating expenses this last year of 25.7%, but revenue growth has been in that line.

I mean, we saw both free and top line growing in the mid-20s as well in 2012.

Heading into next year given the expansion plan in the infrastructure and particularly the branches and conversations that I had with your IR team, it indicated 2013 could be another year of 25% or so operating expense growth.

You said in the prior question that improvements in efficiency are 3, 4 years down the road.

But by the time we get to 2014, assuming that the biggest part of that expansion in branches already took place, it seems to me that continuing at a pace of 25% type of OpEx growth per year for several more years, it may be too much on the high side because it is difficult to imagine that revenue growth will remain in the 20s or too long.

At some point there will be margin pressure coming from competition and so on.

Is it fair to say that, although, again any major improvement in efficiency may be a few years down the road, by 2014 OpEx growth should not be in the 25% level?

Well, it is difficult to give you an answer to that question.

It may be the case -- may be the case that we will not be growing as fast given the fact that the base is growing as well.

However, it is in different lines of businesses in which we are growing.

It is not only branch expansion.

There are new projects, new products, new segments that we are getting in.

And typically, what happens is that those projects have a return -- a positive return when you see that on paper, but in the short run they entail losses or negative results.

So that's basically what is happening in the short run because of the initiatives in the business and different business lines.

As of 2014, we will -- as I mentioned before, we will continue to see branch expansion.

Probably, we will continue to see strengthening in some centralized units, especially the risk related units, in order to face this expansion in a healthy way.

So the short answer is, we don't expect a quick or strong reduction in the growth pace of expenses, although it could be lower in that year.

And the follow-up on loan.

You said you continue to believe that two to three times underlying GDP growth remains doable given where Peru is and you are talking about 6.5% real GDP growth for this year.

When you say two to three times, Alvaro, are you saying two to three times real GDP growth or two to three times nominal GDP growth?

It's real GDP growth.

And I said two to three because it varies depending on the type of business.

If you are talking about SME or the lower end of the consumer, you are probably closer to three, even higher than that whereas the wholesale business is probably closer to two.

But for the portfolio as a whole given what we saw in 2012 where you ended up at 20.5%, it seems to me that two times as a guidance for 2013, i.e., the low end of that range, seems too low.

You will be talking about 13%.

Probably, closer to the high end, right, which puts you closer to 20%.

Yes.

You have to bear in mind that there is a reevaluation of the currency effect.

Since more and more of our portfolio is solid denominated, when you translate that into dollars it shows a higher than real growth.

But taking that into consideration, you should expect probably something around the 2.5 times GDP, more than the 2% or two times.

Thank you, Alvaro.

You're welcome.

Tito Labarta, Deutsche Bank.

I just want to get a -- in terms of your long-term profitability, if you look at the quarter and you exclude the translation results, which were pretty high, ROE was closer to, say, 17%.

So just kind of looking forward, if expenses will remain high, efficiency could deteriorate, margin stable to maybe slightly higher and provision seemed to also be stable to slightly higher as a percentage of loans.

I am just trying to understand, do you think you can continue to deliver ROEs above 20%?

How would you get there unless there is either a significant margin expansion, a reduction in provisions or improvements in efficiency?

I am just having a hard time seeing how you can continue to do 20% ROE given the high growth in expenses and not much significant expansion in margin or lower provisions?

If you can maybe just kind of give us your thoughts on that.

Thanks.

A couple of comments there.

One is that the last quarter of each year is typically one in which expenses are usually higher.

There is year-end acceleration of expenses.

So the last quarter is not necessarily a typical quarter.

You should look at the overall year or the average profitability for the year, which is above 20%.

And we consider that we should be able to maintain that above that level.

Even though we had, as you said, translation gains, which were quite relevant, we also had extraordinary costs this year because of the new ventures that we are in, the medical services on the investment banking area, outsourcing and so on and so forth.

So it is possible -- it is very, very achievable to maintain our profitability above the 20% level.

Translation, you have to -- even though we do not control the exchange rate, we do control the exposure to the translation gain.

That's active management of the balance sheet.

So it's part of -- we consider it as being part of our management.

Saul Martinez, JP Morgan.

Two questions.

First on the -- a more specific question on your NPLs.

Specifically, in credit cards, from August of 2012 to November you've kind of seen a steady increase and then a pretty sharp decline, to 4.7, in December, which was sharper than what we saw for the industry as a whole.

Can you give us a sense for what drove that monthly decline and how much of it is related to the fairly elevated level of charge-offs that we saw in the quarter?

And then secondly the -- you talked about the higher capital requirements on US dollar denominated loans and on consumer loans with longer durations.

Can you talk a little bit about what you think the expected impact of those higher capital requirements will be on the market?

Hi, Saul.

With regards to your first question, in the consumer business December and to some extent July are typically very good years in terms of past-due-loans on the ratio -- on the improvement of the ratio, because we have this dual salary in those two months.

There is a double salary in December.

So that gives us or gives customers room for additional amortization of their debts.

So this is quite typical.

With regards to capital requirements and the impact that that may have on the business, we think that this will be eventually translated into pricing.

Interest rates on mortgages, for instance, certain type of mortgages will be higher and we have started to see that already.

We don't see that the impact will be such as to affect dramatically demand for loans, in mortgage loans especially.

And in the consumer sector probably people will have lower -- somehow lower debts because they will require to amortize a little bit more and prices will be affected as well.

A small impact on demand, but not that relevant I would say.

Okay.

I mean, the -- just to the answer to your first question, if I look back historically at Decembers, you see some seasonal pattern, but it was much larger this year.

Also at the system level, NPLs I think improved 10 basis points for credit cards month on month.

Is there something unique about your portfolio that -- or is there something different this time around that caused the -- what looks like a 70 basis points I think decline month on month, which seems pretty elevated?

There is growth so the basis is also -- base is also changing.

There is some additional charge-offs as well this month, as we mentioned before.

And all that together with the dual salary have an impact on past dues.

And collections are also improving.

I mean, the collection process has been improved and upgraded and it also helped a lot.

Okay.

Would you expect -- how do you see that figure evolving specifically in the next year?

Probably that level -- the level on average.

The level of the last quarter -- probably this last month or quarter has improved quite a bit, probably a little higher than that, but not that much.

Okay.

All right, great.

Thank you very much.

Jose Barria, Bank of America.

Just first a clarification on your previous comments on expenses.

You said that efficiency should not improve going forward.

Are you referring to the efficiency level for 2012 as a whole or for the fourth quarter?

I assume it's for the 2012 as a whole, but just want to clarify.

So that's the first question.

Okay.

It's for the whole year.

I mean, the 55% efficiency ratio is definitely on the high end.

We are talking about the level we have seen for the whole year.

Right, so about 51%.

Right.

Got it.

Okay.

And my second question is with regards to net income at Prima.

I wanted to know if, given the changes that you have seen or that we have experienced in the funding system -- in the pension fund system in Peru, this level of recurring net income that you booked in the quarter, which was about $4.9 million, if I recall correctly.

Is this sort of the new normal for net income contribution that you expect to come from this business, given the reduction in fees and maybe not growth in new clients going forward?

This last quarter has been quite special in that we have included there several adjustments that we mentioned in the presentation, some of them related to deferral of income, and that's a one-off.

And secondly, and this is also a one-off, is the adjustments to adapt to the new system, the new scheme.

With regards mainly to the size, for instance, of the sales force and the infrastructure needed since we no longer will need to compete for new commerce, new entrants to the pension fund business.

We will probably compete to maintain our customers, but that doesn't require a larger or large sales force.

That's more a maintenance type of sales force.

So with those adjustments and with the new levels of fees that we are charging, we should be able to maintain the level of income debt Prima has achieved this 2012 and could even improve it going forward.

Okay.

But that would be after adjusting for what happened in the quarter, right?

Yes.

Okay.

And then finally just a follow-up on the previous question on write-offs, in your release you state that the write-offs that you experienced in the quarter had some seasonal effects to it and that you expect those to decline in the future.

Can you just elaborate on what makes you feel confident that we won't be experiencing this similar level of write-offs?

What has happened is not that we have made more write-offs because of additional deteriorations, but because the superintendency typically approves -- actually, has to approve whatever we write-off.

In this case, we got authorization accounting for two months of write-offs instead of one.

So it is double write-off in December.

So it is fourth month in the quarter instead of three.

So it's a one-time effect and that accounts for around $20 million or so additional write-offs for the quarter.

Okay, perfect.

Thank you very much.

Boris Molina, Santander.

I have a question regarding your capital ratios.

We were taking a look at the evolution of the additional capital requirement as these have declined in the quarter previously.

You seem to have restated actually your additional capital requirement from the third quarter numbers.

I was wondering why there is a change in the criteria to recognize the full impact of this capital requirement going forward.

And we also saw a contraction in market risk-weighted assets from the transfer of your investment banking business to your holding Company and we also saw some movements of stocks in BCI also moving to the holding Company.

So my question is, what is your consolidated capital ratio because we are kind of having a very hard time arriving at a capital ratio for the Group as a whole?

I mean, once a year in your 20-F you do publish something that's similar to a consolidated capital ratio.

But given that the growth in capital allocation outside of the Bank and into other areas inside and outside of Peru seems to be driving your capital policy, we really don't know what is your capitalization level.

We tried to arrive at a number and it keeps on changing.

It's pretty volatile.

So is it possible that you will start providing consolidated Group capital ratios on the Peruvian regulation or Basel III or something that is closer to international standards that we can compare with other banks going forward?

Absolutely, Boris.

We will start reporting the consolidated capital ratio for Credicorp.

We have been reporting it for BCP.

It's at a comfortable level of 14.72% as of December and it has been kept above 14%.

But we haven't presented the consolidated capital ratio.

We are regulated for that as well by the superintendent of bank -- of banking in Peru.

We control it.

We will report it.

But we haven't done it to the market.

We will do it so.

Is it materially different from the 14%?

No.

Okay.

And do you have any timeframe when you are expecting to be reporting this?

Is it something we expect for the first, second quarter or something towards the end of the year?

We will report it in our quarterly report, the first quarter of 2013.

Wonderful, wonderful.

Thank you.

Now my second question is regarding your kind of guidance for loan growth.

Some of your competitors have -- including BBVA and more recently (inaudible) have been pointing to loan growth around the mid-to-low teens and you seem to be implying something closer to the high teens, almost 20% in your guidance.

So it would appear -- I mean, even if you just come in with a little bit of an impact of the currency appreciation, you seem to be aiming for substantial market share gains.

Are we right in interpreting this as kind of like your strategy in terms of branch openings and investment, et cetera, or do you think that you are going to probably grow in line with the market and maybe you have just a different view of how much the market is going to grow relative to your competitors?

We will grow in line with the market with some gains in certain specific segments.

That has been the case for a while.

We are not talking about a 20%.

We are talking about 2.5 to 3 times GDP growth, which will be 12% to 15%, probably a little higher than that.

So it's low-to-mid teens as the others have probably mentioned.

This is not a major difference between what we expect to grow with compared to the market.

Then we probably go back to the question regarding ROE sustainability because given that we don't have a guidance of kind of the coverage ratio or your discharge guidance going forward.

But there seems to be a disconnect between kind of like what we were stating in terms of top line and cost growth and would put a lot of pressure on profitability.

So I don't -- you are still at -- I don't have to square the circle.

No, there is not such a mismatch.

We expect margins growing at that same level because of the faster growth on the higher margin businesses.

We expect non-financial income continues -- to continue growing at that level as well, together with expenses.

So it's not only the growth of portfolio, but the type of portfolio we are growing faster at.

And that is compensated somehow by expenses, growth in expenses.

And that will imply a return on equity that should be able to be kept above 20%.

Thank you.

Thank you, Boris.

Victor Galliano, HSBC.

Yes, my questions have been answered, but really just to kind of continue on the route of the expenses.

I mean, when you talk, Alvaro, about a sort of 25% OpEx growth in 2013, how much of that is retail, the focus on retail in Peru, and how much of that is the investment banking build-out?

And when do you expect sort of revenues could realistically catch up against costs there in the investment banking operation?

I think it's more related to retail than to the investment banking business.

The income that is being generated in the investment banking business is compensating growth in expenses in that area.

But it won't be a major part of the cost expansion.

It's mostly related to the retail branch expansion and expenses related to branches; that's branch communications, cash transportation, personnel, of course, not as much as of the investment banking growth.

Is there any sort of -- in Peru, is there any sort of shortage of skilled staff, of front office retail banking staff?

Is that something that's an issue and is driving up your cost there?

It's definitely one of the major challenges we face now.

Right, right.

It's more and more difficult to hire skilled people.

It is a challenge.

It's a challenge that we're facing even by training people, and it's not going to be easy.

The other shortage that you see in the country is space, corners, is branches and that cost is also going up.

Okay.

So it's location and people, right.

Who else of your competitors is investing in the retail franchise in a big way?

Most of them, most of them.

And we're not competing for people and space only with banks.

We are competing with retail in general, you name it.

Right.

Okay.

Thank you.

Welcome.

Amit Mehta, PIMCO.

I think my question has been asked several ways on the cost income ratio, but I just wanted to get a gauge of what kind of jaws are you willing to tolerate in terms of revenue growth versus cost growth?

How wide a gap would you allow that to get going forward for the next two years, please?

We are expecting and targeting an efficiency ratio that should be kept around the 51%, 50%, 52% area.

It's not that we're not concerned about the expense growth.

We're always keeping an eye on that.

So if that goes consistently beyond that, we will definitely have to make adjustments.

But as far as we continue to be in that area, we will feel comfortable.

Can I just follow-up on the net interest margin?

I mean, in the fourth quarter it looks like you've put on quite a lot of volume and yet the competitive pricing is becoming more challenging.

Again, if I look at your ROA, that seems to be slightly coming down as well.

So can you just kind of talk through the profitability balance of the loan growth and impact on your ROA?

The competitive pressure is there.

It has always been there.

It's not having a tremendous impact on interest rates so far.

As you can see in the report, the NIM on loans has been growing from 8.12% in the third quarter to 8.15% in the fourth quarter.

Probably NIM, overall NIM, which includes Central Bank securities, cash and so on and so forth is going down a little.

But in terms of the portfolio, we have been and we will be able to maintain NIMs at least at the same level.

Can I just quickly follow up?

In terms of the windfall that you have had on your securities book, I mean, one of the brokers put a note that you made quite a lot of money on your securities portfolio this year.

If you look at the total net interest margin\ including securities returns, what -- how do you see the outlook for that going forward?

The gains that we have had in 2012 on the securities book have been mostly related to long-term government paper.

We take advantage -- we took advantage of the better prices of those bonds and we sold them.

What you see in the margins is more related to the short-term Central Bank securities that go -- those investments go up and down depending on the cash availability of our solid denominated deposits, not as much related to the gains that we have had as extraordinary in the year.

And the level of income of the Central Bank security is the short-term one -- we'll have -- will be related to the level of the reference rate of the Central Bank, which we're expecting to be kept at [4.25%] for the year.

So on a cumulative NIM basis, you think you should be able to sustain a stable stroke improving level?

Yes, definitely.

Okay.

Thank you very much.

Thank you, Amit.

Tito Labarta, Deutsche Bank.

I just had one follow-up question since I have got cut-off before.

But when you were answering that question you said that you did have some extraordinary costs this year because of the new ventures and outsourcing.

So I mean could you quantify that and does that mean that you won't see those again this year, so expense growth could somewhat slow down this year when you include that?

Thanks.

Some of them will go up this year.

For instance, the outsourcing of IT services started in May or June and this year we'll have the whole year accounting for that.

So there will be an increase this year as well in that line.

In addition to that, we have some projects we are getting in.

For instance, we have-- we are investing in the car loan business heavily.

In the short run that implies additional costs that were not present the whole year of 2012.

The same will happen with the car insurance business.

Some sort of telemarketing type of business that entails some costs in the short run.

So what you will see this year is, again, getting into new businesses that in the short run implies additional cost.

Okay, great.

But nonetheless you think efficiency between 50% to 52% is kind of what you are aiming for?

Yes.

Great, thank you.

[Marco Salla, Compass].

I just wanted to know what are your expectations in terms of costs of funding, if you see any significant long-term changes in the mix between -- in the split between deposits and longer-term funding and also in -- between the split between currencies, all of this considering the recent aggressiveness of the Central Bank regarding reserve requirements.

Funding is definitely one of the things we are keeping an eye on.

We have been seeing deposits in sols growing much faster than deposits in dollars, even though deposits in dollars are also growing.

But what we have in both currencies is a different strategy.

In sols, we have excess liquidity.

We invest that excess liquidity coming from deposits on Central Bank securities.

There is plenty of room there for continue growing in sols in the loan book because of the ratio -- the comfortable ratio we have there.

In dollars, we have a much tighter management of the balance sheet of the ALM.

We are matching -- basically matching everything.

We match short-term lending with short-term deposits and longer-term financing with going to the market and issuing bonds.

And that will continue to be the case.

There is always a level at which we will feel comfortable on the loan to deposit ratio.

We are still within the ranges, even in dollars.

But it's definitely something we have to take care of.

Thank you.

Welcome.

Amit Mehta, PIMCO.

Sorry, a quick follow-up question.

I just wanted to get an update on your dividend policy in light of all this investment spend you are looking to do because in prior meetings, you have kind of conveyed that you would raise your payout ratio or have scope to do so.

Can you just give us an update on that trajectory, please?

Okay.

We have this policy of a payout of above 25%.

We have been close to that for the last few years.

That's the minimum that we are expecting.

You have to bear in mind that in the last year we have made a couple of acquisitions that were quite relevant for the available cash that we had.

Fortunately, we had the cash.

But they entailed around $200 million in the case Chile and Columbia.

We also made quite a few investments in the insurance business, and in the previous years we had the acquisition of AIG's stake at Pacifico and Edyficar.

So pretty much we have been able to maintain the payout ratio in spite of the investments we have made.

It is not clear what new investments we have at hand, but we will definitely continue looking into core businesses and opportunities out there.

So if I understand that correctly, you would rather retain the capital for growth rather than raise dividend payout ratio?

For the time being, yes.

Okay, thank you.

Thank you.

(Operator Instructions).

We will have some closing remarks from Walter Bayly.

Do you mind?

Good morning to all of you and thank you very much for your continued interest in Credicorp.

I wanted to take the opportunity and maybe just take a step backwards and focus for a couple of minutes not exclusively on the quarter, but on the long-term trends which are some of the comments underlined in the questions we had just heard.

It is very clear that Peru does have a very good chance, at least economists believe so, that we will be growing at a rate between 6% and 7% per annum for the next five years, say.

With the current levels of penetration of the banking system in the economy, we feel that there is tremendous growth potential still out there.

What this means is that on a cumulative basis, probably in the next five years, we will double the size of the Bank, as we have done in the past five years.

And that is very much what we are gearing for.

So, yes, we have a lot of room to invest.

Alvaro hinted that when you make a comparison of the number of customers per branch that we have compared to our local competitors, we are 40% more efficient, or the other way to look at it is, our branches are full of customers.

And that 40% becomes more dramatic when you compare it with other countries.

So it is very clear that we will have to increase in a substantial fashion our branch operations in order to capture the growth, and most likely a reasonable number to think is that if the Bank will double in size, we should double the size of the branches.

We currently have about 380 branches, roughly.

That means we should do 80 to 100 branches a year for the next four years.

Our cost will increase.

We expect them to increase at the same pace at which our margins will increase.

Thus our efficiency ratio should very much remain flat where it was last year, between 50%, 51%.

Clearly, if that efficiency ratio deteriorates, the obvious thing you would expect us to do is to slow down the expenses.

But currently, we have to continue being focused on capturing that growth, and that is very much what we see going forward.

This doubling of the size of the Bank this time around entails a lot more challenges due to bottlenecks that are developing in the economy.

So of them were alluded -- in the conference were mentioned the availability of real estate, the availability of the talent, the people, the sales force, et cetera, et cetera, all of which are under strain given the growth that the Peruvian economy has.

But that is very much what we are gearing up for and what we are working in order to be able to capture the growth.

So long term, yes, we are very focused on capturing that growth.

That will -- and during the next four years, we do not expect our cost-to-income ratio to increase quite -- to improve quite dramatically, and I don't think we should be focusing on doing that rather than we should be focusing on being able to make sure that we capture the growth.

Now that efficiency ratio is not perfectly even all quarters.

For instance, this quarter there was a deterioration, which is quite evident, and there were a couple of things behind it.

We have had a lot of difficulty in dealing with the municipalities in order to gain the licenses to open the branches.

During the past three months or two months, we got a lot of the licenses that had been bottled.

There was a bottleneck in the municipalities.

We obtained a lot of the licenses and thus we started opening a lot of branches in December, January and February.

Thus, in the last quarter, we started hiring the personnel.

So, yes, it is uneven throughout the quarters.

But I think that number is one that one should really focus on the yearly number more than a specific quarter, particularly the last quarter that always has a lot of one-off items.

But overall, I wanted to give you the confidence that we are extremely focused in increasing the value of the Company for our shareholders to capture the growth that we see happening in the Peruvian economy, which will require us to do investments and I think we are doing the right investments.

And again, I want to thank you all very much for your continued interest in Credicorp and we look forward to being with you at the end of the first quarter conference call.

Thank you very much.

Thank you.

And thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.