Credicorp Ltd (BAP) 2013 Q1 法說會逐字稿

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

first-quarter 2013 earnings release conference call.

My name is Richard and I will be your coordinator for today.

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

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

(Operator Instructions).

I would now like to turn the presentation over to Mr. Walter Bayly, Chief Operating Officer of Credicorp.

Please proceed, sir.

Thank you.

Good morning and welcome to Credicorp's first-quarter earnings results conference call for 2013.

I will be covering for Alvaro Correa, who is out traveling and I understand we are having some issues regarding the communications, so I hope you will excuse us if you are unable to hear me properly.

The first quarter of the year typically shows slower growth when compared to the peak in disbursements at the end of every year generated by the good commercial activity that accompanies the holiday season at the beginning of the summer in our country.

Nevertheless we are pleased to be able to show we are starting the year with still good growth and very good operating results in our core businesses.

However an issue that has been in our minds, and has been the topic of multiple discussions as our economy and market gradually detach from the US dollar is how to manage the impact on our results of any volatility in the US dollar/sol exchange rate.

Therefore, the discussion of our first-quarter results addresses such impact in most of its analysis, trying to neutralize it in order to be able to evaluate real business strengths and results.

All in all we feel this was a very good quarter in terms of business strength, evolution and achievements.

However, our earnings results were negatively affected by the FX [loss] and present a challenge for us to reach our projected bottom-line growth.

Notwithstanding, our strategies regarding our future expansion remain unchanged.

In fact, as we will see in the following charts, for the full year growth continued at reasonable rates, margin on the lending business expanded, portfolio quality shows the change in the mix will remain sound and in line with expected performance, and costs decreased from the prior quarter but will most likely continue at a high percentage of earnings as the opening of new branches continue in a quest to ramp up our infrastructure and prepare our organization for future growth.

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Following a 1.5% devaluation of the local currency, by the end of the first quarter Credicorp reported for this first quarter net earnings after minority interest of $181.5 million after deducting from its operating results an $18.6 million translation loss.

This result was 9.3% lower than the $200.2 million reported in the previous and last quarter of 2012, which in turn included a translation gain of $30.5 million.

Consequently, return on average equity dropped to reach 17.5% for the quarter.

However, operating trends were very strong with operating income increasing 16% to reach $276.5 million in this first quarter, up from $238.3 million in the fourth-quarter 2012.

As a result, which is also slightly understated given the impact of the devaluation on income generation, loan book growth measured in average daily balances was also in line with the business activity in the Peruvian markets and reached 4.1% growth for the quarter.

However, quarter-end book balances do not show clearly this solid growth and show only a 0.9% expansion.

This is the result of a very steep peak in booked balances at the end of the year 2012 and typical post-holiday loan repayments.

Net interest margin for loans improved to 8.15% as a result of the good expansion of outstanding balances in most of retail products and the price corrections introduced last year.

However, a 9 basis points decrease in Credicorp's global NIM was reported for the quarter as a result of increased investment in Central Bank CDs, as we will explain when looking at BCP's numbers.

The insurance business results reflected its seasonality and reported high claims related to the rainy season which goes from December to March every year, depressing its results.

But the lower operating costs for the quarter made the efficiency ratio look better.

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

Page 4, please.

BCP's loan book growth, measured in average daily balances, reached 4.1% for the quarter.

However, quarter-end book balances showed only 0.7% higher booked loans.

As explained before with Credicorp numbers, this is the result of a very steep peak in booked balances at the end of the year 2012.

In fact, average daily volumes outstanding reveal a constant expansion across the portfolio.

Wholesale banking grew its average daily outstanding 4% in the first quarter, as strong demand for medium and long-term financing was recorded, despite strong competition from capital market alternatives and international banks.

On the other hand, retail banking daily outstanding balances including Edyficar grew 4.4% reflecting some seasonality.

Loan growth is typically lower in the first quarter every year after the Christmas season.

The most extraordinary quarter-over-quarter growth rates were reported at Edyficar, which expanded 11.2% in the quarter, followed by mortgages with 5.6% growth, and consumer lending with 4.5%, while the credit card business, which is being carefully monitored, grew moderately at 1.7% for the quarter.

These numbers look even stronger when taking into account the impact of the devaluation of the local currency when measuring such growth in US dollar terms.

Since 45% of the total loan book is in soles, it is soles-denominated and the retail portfolios are mainly denominated in local currency.

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The low growth in quarter-end balances, which failed to reflect growth with the same clarity as average daily balances, made the past due loan ratio increase stronger and faster, when delinquencies are in fact in line with the outstanding volume growth and new portfolio mix.

Consequently BCP's past due loan ratio jumped 26 basis points to 2.04% in the first quarter for total delinquencies, and 21 basis points to 1.35% for 90-day delinquencies.

Nevertheless, it is important to point out that the credit card portfolios today, after the adjustment to our credit processor's scoring models, totally was in the expected performance.

New vintages in the whole of the cost to consumer sector are performing within expectations.

All other business sectors are performing well with only the SME or Prima sector showing a deterioration which is certain -- which is to a certain extent attributable to a specific event that has early indications of a deterioration that requires some adjustment in our processes.

In fact given that delinquencies are well within expected ranges, the level of provisions remained below the expected level of 2% of loans, reaching only 1.8% of the average portfolio.

This leaves PCP and therefore Credicorp with a healthy portfolio, 48.4% of which is in the retail business, low delinquencies, and relatively low cost of risk, i.e., less than 2% of loans and a good coverage of 173%.

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Given the sound growth in volumes of loans outstanding throughout the quarter, net interest income expanded 4.6%.

This number also understates growth in income generation given the effect of the devaluation on the portion of BCP's income which is today soles denominated.

In fact, and as explained with Credicorp's numbers, net interest margin for loans improved 16 basis points to 8.15% as a result of the good expansion of outstanding balances in most of retail products and the price corrections introduced last year.

However, an 11% decrease in global net interest margin was reported for the quarter as a result of increased investment in Central Bank CDs which were up 10% quarter over quarter.

This is an activity which depresses the total NIM given the low or negligible margins on Central Bank CDs, but reduces the effective tax rate through the tax shields they generate, which in turn makes them an attractive investment.

This led the net interest margin for total interest earning assets to drop to 4.96% in the first-quarter 2013.

Nonfinancial income contracted slightly mainly due to lower gains on the sale of securities.

In fact, fee income which is mainly soles denominated, expanded 7.2% despite the currency [compressions].

Operating expenses dropped 5.1% after the seasonally high peak of the fourth quarter.

This trend repeats itself every year and is also present this first quarter.

Despite the continuing expansion of the business -- 14 new branches opened and 81 new ATMs installed in the period -- the contraction in expenses reported in our US dollar results was this time also helped by the exchange rate move and was mainly in the administrative and general expenses.

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Our Bolivian operation reported a net income of $4.8 million, up 19.7% quarter over quarter.

Net interest income remained fairly stable as its loan portfolio was flat; and income generation was supported by a 7.8% growth in nonfinancial income and a decline in provisions, leading to a stronger bottom line despite the tax levied on sales of foreign currency, in effect since December last year.

This result led to an improved return on average equity which recovered to reach 14.1% on an annualized basis and a contribution to Credicorp of $4.7 million.

Edyficar had this first quarter an excellent evolution and reported a 32.8% increase in operating income reaching $14 million.

This was the result mainly of excellent portfolio growth which reached 6.6% for the quarter, low delinquencies and, therefore, low provisions.

However, also Edyficar suffered the effects of currency fluctuation and strengthening of the US dollar and reported a translation loss that depressed net income to $8 million and a contribution to Credicorp of $7.9 million, 28% down from the results from the fourth quarter last year.

Return on average equity calculated including the goodwill also suffered and dropped to 21.4% for the fourth quarter.

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At Pacifico Grupo Asegurador, net premium growth was sound at 2.9% for the first quarter.

However, due to recurring seasonal increases in claims during the rainy season, which stretches from December to March of each year, technical result in the property and casualty business posted a drop of 67% quarter over quarter but an increase of 200% year over year.

Therefore, property and casualty had this quarter a negative contribution to the insurance group of $4.8 million.

This deteriorated technical result in property-casualty led to a 27% lower total underwriting result for Pacifico Grupo Asegurador.

The health insurance through EPS, however, showed improved results, recovering from previous losses and contributing $1.3 million this quarter.

The medical services business, our new venture, is included in these results and is still in the investment phase.

The life insurance also had a good contribution of $14.9 million.

It is also important to point out that the foreign exchange impact of Pacifico meant $2 million in translation losses, contributing to the drop of Pacifico's contribution to Credicorp, which reached $11.3 million this quarter, 33% less than the fourth quarter last year.

However, on a yearly comparison, Pacifico performed significantly better in all businesses, something reflected in its bottom-line results which were 133% higher this first quarter of 2013.

Return on average equity was therefore 10% when adjusting its equity, deducting unrealized gains on the life business portfolio investments, and 6% without such adjustments (technical difficulty).

Atlantic Security Bank reported net income of $15.5 million in the first quarter which represented an increase of 13.1% with regard to the fourth quarter figure.

Although Atlantic's wealth management business performed well and increased its core results 3.8% (sic - see press release, page 4, "3.6%") for the quarter, the stronger bottom line increase was attributable primarily to income from sales of investment assets following the liquidation of a fund which helped increase its annualized return on equity this quarter to 30.8%, up from the 25% reported in the fourth quarter last year.

Furthermore, Atlantic's asset management business continued expanding with assets under administration including deposits reporting a market value of $5.6 billion.

Overall, Atlantic in fact shows an excellent performance for the quarter with all other indicators showing also improvement, a mature net interest margin of 2.6% and an efficiency ratio of 12%, which on top of the 30.8% in ROA, return on average equity, reflects a truly profitable business.

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In the first quarter this year, Prima's net income and contribution to Credicorp totaled $11.6 million, up 43% with regard to the fourth quarter last year.

This reflects Prima's privileged position as all new affiliations are assigned to Prima, as long as the new AFP winner of the latest bid is not yet up and running which is expected to be June.

In addition, in the fourth quarter last year an extraordinary deferral of income had to be implemented and explains part of the differential.

Consequently, Prima's return on average equity reached a very strong 29.6% this quarter.

Furthermore, funds under management totaled $12.2 billion at the end of the first quarter which represents 32% of the total funds under management in the Private Pension Fund system.

However, Prima's leading position in the market was changed as a result of the acquisition of Horizonte, previously owned by BBVA, by the two other existing AFPs, Integra and Profuturo.

In the following chart we will see the new market shares after the acquisition.

In light of this pro forma market share recalculation, the new leader in funds under management in our Pension Fund market will be AFP Integra with a 41% market share, followed by Prima with 32% market share.

Integra will start as the largest AFP in the market after this acquisition.

Given this new scenario, we are in the process of evaluating the new market environment in order to define a strategy which we will implement in order to pursue the recovery of our leadership.

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Overall, this summary chart of contributions to Credicorp's bottom line shows a negative evolution of net results.

It is important to highlight that operating and business trends have been good for the Group.

The quality of our consumer portfolio which generated some concern in the middle of last year is today fully under control and with new vintages performing as expected.

Delinquency numbers evidenced this and showed the improvement since the adjustment in the credit processes were implemented which will be even more noticeable in the third quarter this year.

All other segments are also performing well with the only exception of Prima SMEs which as we did with the consumer portfolio is being evaluated to take the necessary steps to control the increase in delinquencies reported in that portfolio.

We continue our expansion plans despite the slight slowdown experienced in business activity and the costs incurred are fully within our budgeted numbers.

Our exposure to FX movement has typically been benefiting our results, adding translation gains to our good operating performance in most of the reporting periods in the past.

In a few occasions, and this is one of those, the FX move has generated a translation loss.

This is, to a certain extent, inherent to our dual currency financial system, and represent a challenge we have to manage.

We believe, however, that operating trends and results are the true indicators of growth and future profitability.

For which I would like to close this presentation with the following slide.

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Core income generation of all of Credicorp's subsidiaries show strong expansion quarter over quarter and year over year, and we therefore focus on these results to measure our business performance and estimate their future potential.

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

Thank you very much for your interest.

(Operator Instructions).

Carlos Macedo, Goldman Sachs.

Good morning.

Thank you for the opportunity or for answering my questions.

A couple of questions.

First, obviously I know you are focusing on the core business, but the translation gains and losses do affect the bottom line quite significantly, at least have in the last three quarters.

Is there anything that you can give us more color with how to look at this line specifically?

It was only a 1.5% weakening of the sol that created this translation gain.

Is there a sensitivity here?

Is there something that you can manage to maybe reduce the sensitivity so that we can see the solid results that you generate go through to the bottom line and reduce the static?

The second question, if you allow me, is on asset quality.

Aside from the NPLs which went up, provision expenses went down as you said and the coverage ratio declined quite materially in the quarter.

It is still a high coverage ratio.

I just wanted to know if this is a level, this 173%, is a level that you are comfortable working with and what should we expect with respect to the coverage ratio going forward?

Thanks.

Thank you very much.

Good questions, both of them.

The issue of foreign exchange -- let me go one level deeper.

There are three pieces of our P&L which are affected by translation.

The most obvious one and the one we really highlight a lot is the pure translation line that appears before the income tax.

But there are two other aspects that also affect us very negatively.

One is that a portion of our sol position is through open forwards, which affect the margin.

And that is a line, an impact in this quarter which is not insignificant.

I think this quarter, the number that has affected there is closer to $15 million, 1,5.

And the third element where it affects our P&L is the income tax because even though it's measured in dollars, 25% of our equity is denominated in dollars, when you look into local currency, we do have a dollar position.

That dollar position generated an income in our local currency P&L, which is the one used for tax collections.

So our effective tax rate in the dollar P&L is negatively affected.

So there are three sides which affect the valuation.

What can we do about it?

There are two -- the obvious solution is clearly to increase the coverage so that our long dollar position is not 25% of equity, but to the extreme 100% of equity.

Could we do that?

Yes.

What are the costs?

Two sides.

One is, clearly we would be investing -- we would have more dollar assets which yield less than a local currency asset.

Taken to the extreme, if we were to invest our excess cash in Fed funds we would get practically zero; if we are to invest those excess cash in local currency, we will get something very close to 3%, 3.5%.

So there is a negative carry in buying a long dollar position.

But not only that, and the fundamental reason why we haven't dramatically changed our dollar position, is that we think that the fundamentals are there for the currency to revalue.

What we have seen is the effect of two separate events.

One is clearly a weakening of commodity prices, slowdown in China, et cetera, that affected all of the local currencies.

All of the local currency meaning Colombia, Mexico, Chile, et cetera, et cetera.

So all of the currencies devaluate a bit because the world is -- probably commodities are moving the world into a slower pace.

But there was a second unrelated event which had to do with the Peruvian political situation.

That event generated a certain level of uncertainty and did not allow the currency to rebound as it should have.

So we have not reversed and bought back the dollars.

We have maintained our position because we clearly think that it is going, the fundamentals are there.

The fundamentals being that this country continues to generate a positive trade surplus and continues to attract more foreign investment than outflows.

Thus the potential is there, the fundamentals are there for the currency to continue to revaluate.

Probably not at the pace at which it was happening in the past but clearly we think that in the next quarter or two quarters, the currency should go back a couple of basis points.

That is the main reason why we have not reversed the coverage of our capital.

Let me go into the asset quality and then I really want to make sure that this is understood by everybody and please do ask me more questions or clarifications regarding this issue.

Regarding asset quality, clearly, the concern -- everybody's concern -- was related to the consumer portfolio.

As I mentioned in my remarks, we have made several adjustments, both in the cutoff for the credit scoring, reviewing our processes and our pricing, and we think that that is very much under control.

We have seen obviously slower growth and we have seen -- we are seeing that the new vintages are clearly of a much better quality than the ones in the past.

Having said this, we have to continue to digest the vintages that are already within our books.

And we think that you will -- we will all start to see the positive results of that probably at the third quarter this year.

Sorry, last quarter this year.

The news or the surprise that we have seen is the deterioration of the Prima portfolio, it's not a huge portfolio.

We are in the process of evaluating what segments of that portfolio, which products of that portfolio.

It is clearly related to the revolving part of the Prima portfolio and we will make the necessary adjustments.

We will do our work and review it and fix what needs to be fixed.

It is not an unprofitable portfolio.

So, but in the next quarter, we will be able to give you a little bit more clarity as to the total impact of that.

The coverage of 173% is, obviously, more is better than less, but we do not feel unprotected or with a portfolio that is not adequately provisioned.

We think that around the levels where we are is where we should expect it to remain.

Did I answer both questions?

Yes.

Thank you, Walter.

Just to follow up on the first one, then.

The sol is a remarkably stable currency.

There's no big swings in terms of the direction or the magnitude of the swings on a quarterly basis.

If by any chance something like that starts happening, do you feel you have the tools to protect the capital of the bank in such a situation?

Clearly, yes.

And the simple tool is just to buy dollars.

Okay.

That is a relatively easy decision.

The magnitudes are relatively large related to the amount of flows in the domestic markets so it's not anything we could do in one day.

But it is something we could do in two weeks.

Having said that, let's not forget that our Central Bank has also changed the manner in which it intervenes in the foreign exchange market.

Traditionally, our Central Bank was very aggressive intervening, but smoothing out with the objective -- their driver was to smooth out the volatility in the exchange rate.

They have changed since December last year and now their policy is to allow volatility.

They want to create the volatility within the economic agents so that people do not exclusively go for the currency with the lowest coupon, but rather the currency that has the overall protection that makes sense.

They are trying to get companies that do not have the dollar flow to stop borrowing dollars by creating volatility in the foreign exchange market.

And they are being successful.

So yes we can expect more volatility than we have seen in the past two to three years.

So that traditional comment that the Peruvian currency is the most stable is probably going to slowly disappear and we will have volatility not dissimilar to that of our neighboring economies.

Thank you.

(Operator Instructions).

Thiago Batista, Itau BBA.

Good morning.

I have two questions.

The first one is a follow-up on the asset quality.

You already adopted some measures to reduce the past due loans on the SME segment.

Could you give us some additional color on these measures?

And when do you expect this to [foster] the fact that that is part of the segment?

And talking about the overall PDL ratio, overall past due loans, what is your expectation for the evolution of this ratio during the year?

And my second question is about Edyficar.

Credicorp was a very -- an outstanding loan growth in the Edyficar segment.

Could you give some color to us about your strategy in the segment?

Okay.

On the SME, the initial actions or initiatives we have undertaken are relatively blunt and simple which is to reduce the cutoff and increase prices in the low end.

That is the most obvious response and if you will the one that does not require a more thorough and profound analysis which we are still in the process of doing.

Numbers have just appeared and it takes about 10 to 15 days to really process the detailed data in order to have a better sense of which segment of the portfolio is the one that is showing the weakness.

So we have done some initial moves which are the obvious as I mentioned, reducing the capital and increases in prices in certain segments and I think we will be able to give you further on a little bit more color as to what happens here and which segment is the one that has been affected.

As I mentioned, we know it isn't the revolving side of the portfolio.

That portfolio SME is comprised of term loans.

Term meaning they go from six months to, I think, 24 months installment loans and a credit card, a revolving kind of portfolio.

And that is the one that has been deteriorating.

So at this stage we are doing the simple things and we need to do the more detailed fine tuning analysis in order to produce more fine tuned measures as well.

Regarding the past due loan ratio, we have to be very clear that that ratio will continue to deteriorate.

As the growth happens in the retail sector, which has a higher past due loan than the wholesale, the change in product mix by itself will show that the overall portfolio will have high past due loans.

I don't have a number in front of me that I can give you as guidance, for the end of the year, but one should expect a gradual deterioration of the loan as the portfolio mix changes.

Regarding Edyficar.

Edyficar has a very clear strategy which has not changed in the past since we acquired it -- I think it is 2.5 or 3 years -- which is capturing the customers at the entry level of micro finance.

They have a very good model that basically works quasi-exclusively with customers.

They very rarely share customers.

These are new entrants to the system.

They have got a good pricing model and a very labor-intensive monitoring process that has proven to be very successful.

We still see some room for growth though, frankly, I do not think that the long-term growth numbers are the ones that we have seen in the past.

Most likely, the growth in that sector will slightly start to come down over the next 2 to 3 years.

Okay.

Thank you.

(Operator Instructions).

Jorge Kuri, Morgan Stanley.

My questions have been answered.

Thank you.

Jose Barria, Bank of America.

Good morning.

Thank you for taking my questions.

Just two questions.

One is a follow-up on the translation impact on your results.

So absent -- so I guess looking at what happened the first quarter and seeing that there has been a little bit more depreciation in the sol in the beginning of the second quarter.

I understand you are saying that you expect this maybe to change in the second half.

Wondering if your target of 20% ROE that you have given in the past is still achievable in the absence of these translation gains or maybe even translation losses for the year?

That would be the first one.

And the second is with regards to your strategy on Prima.

If you could elaborate a little bit further about what things you can see.

I am looking here at the chart you presented with market share, then it looks like there is already a high concentration in this space and I'm wondering if there is any limits here that would prevent further consolidation that could lead you to maybe drive more efficiencies in that business and if you expect fees to come down as well there?

Thank you.

Sure.

Our return on average equity would be very impacted.

We are absolutely convinced that the 20% is totally completely achievable and we will reach the 20% this year.

I have no doubt about that in my mind.

This has not been a good quarter.

We do not expect to have 1.5% devaluation every quarter.

We have already seen the currency rebound slightly.

Hopefully that will remain for the rest of the month and hopefully we think that there will be further revaluation of the currency between now and year end.

So, yes, let me be very emphatic.

We believe that the 20% plus return on equity for Credicorp is achievable and that we will achieve it this year.

Regarding Prima, clearly there is no further room for consolidation and even the breakup of Horizonte was something that was required by the Superintendency in order to avoid further consolidation.

From now on we are looking into two directions.

One is clearly is there any way we can become a little bit more efficient?

And second, we will just have to -- the old-fashioned way which is bide our time, earn more customers, and slowly and gradually increase market share.

There will be a certain level of commercial dynamics, a certain number of customers from Horizonte who will find themselves in an AFP that maybe is not of their choice, so there will be some opportunity there.

And we will obviously be there to capture that.

But at the end of the day, I think that our recovering our leadership is something that will happen on a day-to-day basis on a long-term basis.

I don't think -- clearly there is no room for consolidation.

Could fees reduce, could there be a further reduction in fees?

Very, very marginal, but yes.

But very marginal.

Not anything that will necessarily change the dynamics of the market.

I see, thank you.

And just if I may, one other question more with regards to your new sub, I guess Credicorp Capital.

Looking at their contribution it is meaningful in the quarter already.

What can you give us in terms of guidance for this business?

What do you expect the contribution from this business should be on a reoccurring basis after you have completed the consolidation of all the businesses that you are putting together?

Sure.

It is still difficult to see very clearly in our numbers because Correval is still underneath BCP whereas IM Trust and BCP Capital are already sisters of this [CP] world.

They were [Achindero] and we are in the process of making that transition of Correval from BCP to Credicorp Capital.

And we are still not 100% consolidating the properties because we have got the minority shareholders.

We expect the numbers to be much more clear before year-end.

But basically having -- leaving all that aside this is a business that roughly should generate approximately $30 million to $40 million every year.

And we expect good growth rates there.

Got it.

It's not capital-intensive and we think that we are building a platform that will allow us a lot of synergies from the business side.

Excellent.

Thank you very much.

(Operator Instructions).

[Guillerme Cosed] from Itau BBA.

Sorry.

My question was already answered.

Tito Labarta, Deutsche Bank.

Good morning.

Thanks for the call.

Just a couple questions.

Just want to get some more color on your outlook for net interest margin.

Even though the margin on loans continues to increase, we did see some elements in the quarter sort of impacting margins with an increase in Central Bank securities.

You also saw time deposits rise a lot in the quarter.

So when we look at the Group level, how should we think about margins for the rest of the year?

Can the continued growth in retail increase margins going forward or should some of these other elements put some pressure on margin?

And then just a second question on fee income.

We saw good growth in the banking fees, which rose around 7% for the quarter, but at the Group level fees fell around 4%.

So if you could give some more color on what led to the decrease in fees in the quarter?

Thank you.

Sure.

Well, in the net interest margin, really there are two dynamics there.

One is related to the net interest margin on the loan portfolio and, there, we don't see any downward pressure that is material.

Furthermore, because of the product mix, we expect that our net interest margin on the loan portfolio will expand.

There, we are being much more careful in pricing with increased risk so that should -- we are increasing prices.

This is partially to offset increases in delinquencies, but also the fact that some fees are being eliminated and we are somehow recovering our margin out of those fees that are being eliminated, we are incorporating them into the margin.

As to fee income, I don't have a good answer, to be very frank.

The dynamics of the bank are very clear.

Fee income for the bank is in good shape.

I understand it has been growing even though there we do have very substantial and serious pressure from our regulators; and we are in the middle of intense debates as to how is the fee income going to evolve over time.

I really don't have a good answer to that question.

I am very sorry.

Okay.

No problem.

I will follow up with that later.

But just to follow up on the margin question.

So you are saying loan margins will expand but just given some of the elements we saw in the quarter with the higher Central Bank securities and increase in time deposits, should we expect the overall NIM to also expand?

Or do you think there could be some other pressures aside from loan margins impacting margin for the rest of the year?

The overall NIM is a complicated one because it depends on the Central Bank policies.

The Central Bank continues to aggressively buy dollars, as they have been doing; they have to retire those dollars.

Those local currency which they disperse in order to buy the dollars, they have to retire the local currency and they buy -- issue the Central Bank CDs.

So to the extent that they continue to do that our overall NIM will be under pressure because of the low yielding portion of our portfolio.

To the extent that the Central Bank does not continue to buy dollars aggressively thus they're required to issue CDs, that portfolio will shrink.

And we have seen in the quarter that portfolio go down by 10%, which is a lot.

So that is a very tough one to predict.

And I would be careful in doing that.

Having said that, since we expect the currency to have a certain revaluation again I do not expect the Central Bank to lessen its activities issuing CDs.

So I would imagine that our portfolio Central Bank CDs will remain the same at least and thus, the overall NIM could remain under pressure.

But, again, the overall NIM is a consequence.

It is nothing we can really manage.

What we manage is the NIM on the loan portfolio.

Okay.

Understood.

That is very helpful, thank you.

You are welcome.

And we'll get back to you on the other fee issue.

Boris Molina, from Santander.

Good morning.

I have a couple of questions.

One, related a little bit to outlook of asset quality and economy.

In your prepared remarks you also mentioned several times that you are monitoring the credit card basis and I just wanted to see if there are regulatory or fee or other pressures that are leading you to reconsider your standing on the card portfolio or whether this is more related to the overall potential risk in the economy?

I don't know if you are concerned about the slowdown in first-quarter GDP, but (inaudible) Center; is there something that leads you to remain cautious in terms of asset quality on your card business?

And my second question is related to the consolidated Group capital data that you published and this is very welcome and very useful.

However we don't see a Tier 1 calculation like the one you do for the capital ratio when you are talking about BCP.

So we made our own calculations, and we are not sure if we are doing the right calculation or not, but could you tell us a bit what is the Tier 1 ratio on the consolidated Group from this data that you published?

Okay, asset quality and fees.

Yes, there is intense regulatory involvement in the credit card business.

There are certain portions of -- more the credit card consumer finance that the regulator is requiring more capital.

Particularly any consumer finance that extends over five years is requiring a lot more capital.

Thus we are increasing prices on those pieces of the consumer portfolio and, basically, they are being priced out of the market, if you will.

Those products are disappearing because they become extremely expensive because of the amount of capital that the regulatory agencies are requiring against it.

So yes, we expect slower growth in the consumer portfolio.

And there is intense pressure from the regulatory side, as well on the fee income of the credit card.

And we are in the middle of a very intense debate with the regulator as to the fees of the credit cards.

And it is not looking very good.

We are having a lot of confrontations, which are very unfortunate, with the regulator and that could seriously impact the growth of that portfolio.

Because if all the fees that the regulator wishes to eliminate do indeed become eliminated, we will have to dramatically increase prices and a lot of people will be priced out of the market.

So that is something that we have to all watch very carefully in the next quarter or next couple of months.

So, we have all seen credit cards portfolios grow a lot less this quarter because of the initial impact of regulatory changes; and the extent of those are yet to be seen.

So there's a good question there.

Regarding GDP, yes, we have seen a slowdown in GDP.

It has not yet affected any quality of our assets.

We are all being very careful because we hear a lot of the economists that tell us that there are a lot of one-time effects in that slowdown of GDP.

Clearly the world, the emerging market world of China is slowing down a little bit so that undoubtedly will have some impact, but I have yet to see an economist that does not tell us that the world will grow above 6% this year and the next.

So -- but we are very vigilant of the macroeconomic numbers that come, and we expect that we will have a lot more clarity regarding the growth of the economy going forward in the next couple of months.

We have seen as you well mentioned a slowdown in several sectors.

But again, I hear a lot of explanations related to one-time events.

The number of days, the Easter holidays were wrong and affected one month versus last year they were in the next month.

So a lot of one-time effects.

But I am still not very sure that I have enough data to be able to take any -- that merit any drastic changes in our strategy or view of the portfolios.

You had a question regarding Tier 1. I think we don't calculate Tier 1 for the holding company.

(inaudible) (multiple speakers).

I will have to get back to you with those numbers.

I don't have them all clear in my mind.

We do have excess capital and we will clarify the table with you.

Okay.

Wonderful.

Thank you.

Clearly my CFO should have been here.

(laughter).

(Operator Instructions).

Mariel Santiago, HSBC.

Thank you for taking my question.

Most of my questions have been answered, but I just have another additional one on the expenses.

How should we think about operating expenses growth going forward this year?

And at which level of efficiency do you feel comfortable?

There are several angles to that question.

One is, clearly, that we have set ourselves an aggressive growth in our infrastructure, clearly with the assumption that the growth in the economy will be in the 6% to 7% and that, as has been in the past, the financial system would grow at 15%, 18% per annum.

That is the base case scenario that we are still working.

And as I mentioned in the prior question, at this stage, we are being very vigilant of the numbers that are coming, the macros that are coming.

And at this stage, we are still reluctant to shift our base scenario for slower growth, which is relatively easy to do.

So sticking to our base scenario what we have is that it would be relatively easy for us to go down to the 47%, 48% cost-to-income ratio if we just stop doing the investments that we're doing.

We have done so in the past and you see the cost-to-income ratio rather quickly adjusting itself downward.

The fact is that we are in the process of still expanding our infrastructure -- branches, ATMs, salespersons, et cetera, et cetera.

And those are investments that do require a certain period of time to reach maturity.

Branches on average need about two years to reach breakeven and to the extent that we continue to open new branches they have a negative impact on our cost-to-income ratio.

So our base case scenario continues to be that we will be in the 50% to 51% cost-to-income ratio which is not one that I feel comfortable as a steady state cost-to-income ratio; but it is one that we have to live with if we are going to continue with this expansion process.

Okay.

Thank you.

And how many branches -- can you remind me how many branches you were targeting for this year and how much of those have been opened?

About 100 for the year and we have opened, I think, about 30.

Okay.

Thank you.

The exact number is 38.

38.

Thank you.

Great.

That's correct.

38.

At this time there are no questions in the queue.

(Operator Instructions).

This concludes the question-and-answer session of today's call.

I will now turn the call back over to Mr. Walter Bayly, Chief Operating Officer of Credicorp, for closing remarks.

Sir, please proceed with closing remarks.

Thank you all very much for joining us and I apologize for the quality of the communication.

I was barely able to hear your questions.

I hope I have answered most of them and we will definitely follow up on the ones I was unable to answer.

But in summary we are of course very uncomfortable with the way the exchange rate has affected our bottom-line results.

In retrospect we could have been more aggressive in managing that, but we continue to have a view, more of a fundamental point of view that, with managing our foreign exchange position and capital coverage, less of a trailing view and more of a long-term secular view, it is very difficult to hit all the peaks and valleys.

Hopefully the trend that we have anticipated is the one that will prevail.

That is, a slow recovery of the foreign exchange rate to levels not dissimilar to what we had at the beginning of the year.

And that this foreign (technical difficulty).

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.