Credicorp Ltd (BAP) 2014 Q1 法說會逐字稿

Welcome to the first-quarter 2014 Credicorp earnings conference call.

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

(Operator Instructions).

I will now turn the call over to Fernando Dasso, Credicorp's CFO.

Fernando Dasso, you may begin.

Good morning and welcome to Credicorp's first-quarter earnings results conference for 2014.

After a complicated year marked by a slowing economy, a not large but still important sector of our SME portfolio complicated by higher delinquencies that demanded high levels of provisions and credit tightening, a consequent slowdown in our loan book growth, significant distortions in reported numbers generated by a functional currency different from our business-dominant currency, and the exposure to currency fluctuations due to a structural currency position, which generated significant volatility in reported profitability, Credicorp has started the year 2014 changing its functional currency as of January 1 to the Peruvian nuevo sol, aligning it to the business evolution and local regulatory reporting, and therefore eliminating most sources of distortions seen in the past years.

This change in the functional currency has also had an important impact in the management of our dual currency balance sheet that will reduce and eventually eliminate the volatility generated by the need to hold an open soles position in the previous years, intended to help protect the regulatory capitalization ratio of DCP, which is calculated based on local currency accounting while having the US dollar as functional currency.

As a result of the switch to sol reporting and given the structure of our regulatory capital, the need today of an open position in US dollars is small, reducing our exposure to changes in the US dollar/sol exchange rate.

Furthermore, the stability in the currency experienced in the second part of last year continued in 2014, as did all efforts to control delinquencies, recover profitability, and curb expenses in our organization, leading to a recovery in previous levels of profitability, as we will see in the next slide.

This alignment of the functional currency to the business and local reporting currency will allow reported results to show the true evolution of Creditcorp's businesses.

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Reported IFRS results in Peruvian nuevo sol for first-quarter 2014 show a record high level of income generation at PEN662 million, equivalent to $237 million (sic - see Presentation - "$236 million").

Even when deducting our PEN77.1 million non-core income from the sale of a stake in the capital of [hernar] group and company held as an investment at Credicorp, which was liquidated to finance the Mibanco acquisition.

Net income reached a record PEN586 million above the $200 million.

Net interest income and operating income reflect the solid business potential, while net interest income expanding 6.2% quarter over quarter, driven mainly by a better cost structure and operating income showing a stronger improvement and expansion of 46.7%, as the latter includes significantly lower operating costs and no currency nor market-related losses.

Furthermore, total loans are up 9.6% quarter over quarter, driven by the acquisition of Mibanco at the end of March, but increased only 2.1% measured by average daily balances, which do not include Mibanco, reflecting the economics [chosen] and tightening of credit standards in the low income sectors.

Given the consolidation of these acquired assets at the end of the quarter, income generated by Mibanco assets is not included and restores reported NIM.

Therefore, reported global net interest margin is up only 3 basis points, but excluding the Mibanco assets, net interest margin is up another 15 basis points to reach 5.38%.

Portfolio quality continued its strength with increasing past-due loans ratio as the SME portfolio matures and demands high levels of provisions.

Nevertheless, about 22 basis points of the 35 basis-point increase in the PDL ratio is explained by the consolidation of the Mibanco portfolio, and in addition, the ratio of full delinquencies 10 days past due deteriorated as new loans grow at a slow pace.

However, provisions as a percentage of net interest income and of total loans stabilized and even improved slightly, reaching 28.3% and 2.1% this first quarter.

The pension fund business, Prima, and the asset management business, ASB, reported fairly contributing with good levels of profitability, while our insurance business, PPS, showed a slight contraction in the top net earned premiums, but significantly better technical results in all funds.

Improved control of costs are resulting in better bottom-line contribution, as we will see in the next slide.

Consequently, ROAE recovered and reached 22.3% this first quarter; even excluding the non-core income, ROAE reached 20.3%, as did also ROAA, which recovered to 2.2% from 1.5% the previous quarter.

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Looking at BCP performance, the economic slowdown is evident and is affecting loan growth as it's also the more moderate risk appetite, as reflected in our adjustments and tightening of the scoring models that resulted in reduced approval rates.

In fact, the reported total loans were up 9.6% quarter over quarter as a consequence of the consolidation of Mibanco, which occurred at the end of March, explaining most of the portfolio expansion.

BCP's book grew at a modest 2.1%, measured in average daily balances.

Growth in average daily balances was due primarily to a 3.3% quarter-on-quarter expansion of wholesale banking loans, which was in turn mainly attributable to financing for [riders] for the fishing season to mirror market plans.

In retail banking, although the portfolio grew only 0.5% quarter over quarter, the evolution of the segment was mixed, given the growth in the mortgage, consumer, and credit card segments, offset by decrease posted in the SME and business loan portfolios.

Finally, Edyficar reported loan growth of 6.9% quarter over quarter in average daily balances, which reflects this business's ability to maintain an excellent rate of growth over time that was accompanied by stable portfolio quality and the [good] evolution of risk-adjusted returns.

As noted, our wholesale portfolio continues surprising also on a year-over-year comparison with strong growth that reached 19.8% in the year, while the retail book reached 14% expansion year over year, with Edyficar outperforming all with 32.9% expansion year over year.

Furthermore, the [legalization] of the portfolio continues, as revealed by growth per currency, with the nuevo sol portfolio growing 6.8% within the quarter and the US dollar portfolio contracting 2.9%.

Year over year, this trend persists with an expansion of the local currency book of 34% and a contraction of the dollar group of minus 3%.

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With regard to asset quality, the consolidation of the recently acquired Mibanco added a significant portfolio of about PEN4.4 billion of SME and microloans, including its delinquent book, explaining 22 basis points of a total increase of the PDL ratio, which reached 2.67%.

The delinquent SME and credit card portfolios added an additional 15 basis points to the PDL ratio increase, as the combination of the slowdown in the commercial sector and lower risk appetite, which led to portfolio contraction, and the revolving nature of the complicated book makes us miss our expected turnaround this timeframe and pushes out in time the expected peak in delinquencies.

In the case of the SME segment, the PDL ratio rose from 8.24% at the end of 2013 to 9.40% at the end of first-quarter 2014, which is in line with a maturity period of 24 months, on average, for pre-adjustment vintages, while cost adjustment vintages posted good performance in terms of delinquency, but grew at a significantly lower rate than originally expected.

The quarter-over-quarter increase in the credit card segment PDL ratio from 5.84% to 5.99% corresponds to the effect of the changing the calculation of the minimum payment.

However, in first-quarter 2014, growth in this segment's PDL ratio decelerated, up only 15 basis points versus 24 basis points in fourth-quarter 2013 as a result of the trans adaptation to a new level of debt service.

The good news is, however, that even though provisions keep on increasing as the deteriorated portfolio matures further, that improved risk-adjusted pricing is helping preserve [two] good returns, as shown by the level of provisions as a percentage of the margin, which this first quarter dropped slightly to 28.3% from 28.5% in fourth-quarter 2013, and as a percentage of the total loan portfolio, which drops to 2.1% from 2.2% in fourth-quarter 2013, ensuring no further deterioration in profitability in the quarter.

Another positive is that the collections and bad loan recovery process has improved, reducing the deterioration of 90-day delinquencies to only 10 basis points.

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Operating results at BCP also show improving trends.

Net interest income was up 5.1% quarter over quarter, mainly driven by lower interest expense, which contracted a significant 6%, or PEN30 million, in the quarter, while interest income generated by the loan book remained flat as a consequence of the growth composition of the book.

Year over year, net interest income expansion is solid at 21.3%.

Consequently, net interest margins improved a significant 13 basis points, up to 5.50% in the first-quarter 2014.

However, reported NIM show instead a drop of 4 basis points to 5.33% as a consequence of our distortion stemming from the consolidation of Mibanco at the end of March, which contributed virtually nothing to income generation, but entailed the complete consolidation of all of its assets.

As mentioned briefly, both net interest income growth and net interest margin improvements stems from the lower interest expense, giving that instead of better margins on loans, which contracted slightly due to a change in the loan mix this first quarter to favor wholesale loans, while the higher-margin book SME contracted, the reported structure and the asset structure changed favorably to enhance results.

Operating nonfinancial income at BCP was down 3.1% as a result of lower fees from the credit card business and the absence of some provision reversions, which inflated other income in the previous quarter.

Following the high operating expenses in fourth-quarter 2013, which were strongly affected by several one-off costs and adjustments booked in the quarter, these first-quarter 2014 operating expenses were down 5.1% from the previous quarter.

Excluding one-offs, real operating expenses contracted 5.7% as a result of our control -- of our cost control measures introduced and the seasonal variations.

First-quarter operating expenses are historically lower.

The impact of this group of extraordinary expenses, combined with the higher income generation, resulted in an improvement in the efficiency ratio of 2.2%, down to 44.7% from 46.9% in the fourth quarter.

Although this level is probably not sustainable at this time, it reflects a definite trend toward improvement.

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BCP Bolivia reported net income of PEN15.8 million at the end of first-quarter 2014.

This represented an increase of 43.5% quarter over quarter, which led to a ROAE of 15.6%.

This was due primarily to, first, a significant drop in net provisions for loan losses, given that in fourth-quarter 2013 our generic provision was set aside for additional risk, as required by the supervisory entity of our financial system, and, second, an 11.4% quarter-over-quarter drop in operating expenses.

The aforementioned offset an increase of 319% quarter over quarter in income tax, due to provisions for the addition of [public] quotes for income tax that BCP Bolivia is required to pay due to higher earnings in the first-quarter 2014.

Loans were flat for the quarter, but in annual terms, growth was situated at 27.3%, mainly due to loan expansion in the retail banking segment.

Delinquency levels remained low, despite a slight increase to 1.46% at the end of the first quarter of 2014, and the coverage ratio this quarter was still high at 277%.

With these results, BCP Bolivia has maintained a solid and constant market share of 11% of current banks, or fourth place in the banking system, and 11.2% in total deposits, which places it at fifth place in the banking system.

Edyficar's performance exceeded that of the local economy and, more importantly, the SME sector.

Edyficar's loan growth was higher this quarter than that of its competitors, 6.4%, and its portfolio-quality ratios are the only ones in the system that have remained stable and at levels that are considered low for this sector, 4%.

Consequently, with a loan book of PEN2.832 million, net income reached PEN28.3 million, reflecting an ROAE of 22.6% on its [stroma] equity level.

Nevertheless, this last figure was affected mainly by a capital increase of PEN106 million to finance the purchase of shares in Mibanco at the end of the quarter, which is recorded as an investment in the assets that do not generate a return this first quarter.

With this increased level of equity that reported -- increased level of equity, the reported ROAE was 15.1%.

To accommodate for its strong growth and make our services more acceptable to clients, Edyficar increased its number of branches to 195 in the first quarter of 2014.

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Though Mibanco does not yet contribute to the bottom line of Credicorp, since the closing of the transaction and subsequent consolidation was only completed March 21 of this year, the acquisition is no doubt a significant event with important implications for the strategy and future growth of the organization and deserves spending a few lines explaining some important points.

It is a well-recognized fact that the SME, or PMA as we call it in Spanish, sector is the largest and fastest-growing sector of the [prolenicon].

It concentrates a significant portion of the emerging population and has been and will continue to be an important driver of growth, generating strong economic activity outright, with significant efficiencies due to a lack of formalization and sophistication.

Consensus opinion also recognizes that the sector is facing challenges, given deceleration of commercial activity in the country, which is a core activity of this segment.

In this scenario, the financial system is working to recover previous levels of expansion and profitability, a process we believe is well underway.

Our understanding of the Prima sector, which continues to generate high position levels and post increasingly higher delinquency ratios in its seasoned portfolios, is now much stronger.

As such, the organization is well on its way to fully controlling loan activity in this sector by using the appropriate tools, both for the larger SME world, which is managed within DCP, and for the smaller SME or PMA and microlending world, which is managed through Edyficar.

Mibanco, having been the leader in the SME market, is particularly well positioned to serve this business segment, given that it has the market positioning and branding, infrastructure, and resources to do so.

The problem that Mibanco faced, which led its long-term shareholders to move to sell a controlling stake in the business, are less structural, neither business structure nor market structure related, and stem more from the management and business model, which after [harven] brought the organization to a leadership position sent the Company in a direction that resulted in an abrupt increase in delinquencies and a dramatic loss of profitability.

As such, in the last two years of operation, the flaws in the business model applied by management became increasingly evident.

The strong portfolio growth delivered by Mibanco was achieved by the increase in the average lending to existing clients and little growth of new clients.

And sacrificing yields as a result of wrongly designed incentive compensation and delinquency management skills and a shift of focus away from the duration on micro lending segment growing strongly into the Prima segment and losing the associated culture that used to be the core of Mibanco.

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A full analysis of the markets of Mibanco and Edyficar concluded that the business model for Edyficar can be effectively and successfully applied to the vast majority of the Mibanco portfolio.

Both client distribution by loan segments and volumes maintained certain resemblance between Mibanco and Edyficar and are clearly different from BCP's client structure, pointing at analyzing the differences in the business models which achieve so radically different results, as the charts on profitability and portfolio quality of the businesses show.

Therefore, the focus on implementing a strategy to align great policies, great morals, organization, culture, and risk controls in Mibanco with those of Edyficar should recover and integrate the Mibanco organization with Edyficar in a proven period of time by applying Edyficar's proven micro and small business lending model to almost the whole of Mibanco.

Without intending to underestimate the challenges ahead in this process, the effectiveness of the Edyficar business model makes us extremely confident that we will successfully integrate and recover the business's profitability that generates significant opportunities for healthy growth and support by the government of a strong and dynamic Prima sector going forward.

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Listed on this chart are just some of the main differences in Edyficar compared to Mibanco business models that present significant improvement opportunities.

Such variables are mainly related to the functional variable remuneration metrics at Edyficar, which includes targets of quality, of portfolio, volume, number of clients, et cetera; employee training through Edyficar's school model; strengthening of microfinancing policies, risk policies, and controls; collections process; synergies in network channels; and the recovery of microlending culture.

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Pacifico Grupo Asegurador reported this quarter significantly better results with new income before minority interest of PEN39.2 million in the first quarter of 2014 and a contribution to Credicorp of PEN37.9 million, which is 2.8 times the PEN13.2 million reported in fourth-quarter 2013 and 30% higher than the PEN29.1 million posted in the first quarter of 2013.

This improvement is due mainly to an increase in the underwriting results of PPS and EPS and increasing Pacifico real financial income and lower general expenses, which is reflected in the improved combined ratio of 99.3%.

This led to a ROAE of 9.6%, which tops the 4.2% quarter.

PGA's better underwriting results stems from an improvement in the underwriting results of PPS and the sales segment of EPS.

In PPS, the property-casualty division, better results stem from, first, a decline in net claims in the car insurance line, after corrective measures were taken last year to improve management of pricing and conditions and, second, lower underwriting expenses in the property and casualty business due to a release of provisions from collateral business.

It is important to note that PPA's bottom line, which shows a loss of PEN0.9 million, includes a tax adjustment related to corrected tax calculations from previous quarters of PEN5.6 million, distorting its real performance for the first-quarter 2014.

Excluding this extraordinary tax adjustment, PPS's result would show a profit of about PEN4.7 million.

In the case of the health business at PPS, improvements come from a decrease in claims, which was in turn attributable to seasonality associated with high claims frequency in the last quarter of 2013.

It is important to note that this result was achieved despite a decline in Pacifico Vida's underwriting results related to a drop in unearned premiums, PEN5.9 million, after its contract with AFP Prima ended in October 2013, due to a regulatory change and introduction of our regulatory auction in process for the pension insurance.

Further, higher interest on fixed income at Pacifico Vida, after an increase in the inflation adjustment for PAC assets, after the adjusted for inflation and higher gains from sales of securities, PEN5.4 million in the first quarter of 2014 versus minus PEN0.2 thousand in the first quarter of 2013, contributed to an increase in financial income in the first quarter of 2014 which totaled PEN80.3 million, above the PEN25.1 million posted in fourth-quarter 2013.

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Atlantic Security Bank reported net income of $10.6 million in the first quarter of 2014, which represented a decline of minus 11.8% quarter over quarter.

This [drove] was due mainly to a decrease in the volume of net realized gains on the net investment portfolio due to market conditions.

Consequently, the annualized ROAE this quarter dropped further to 22.2%.

We live in a tough market environment for this business, but still good yields for a low risk business.

Interest earning assets expanded 5.8% to total $1.753 million.

Assets under management, which include client deposits, investment in funds, and custody of financial instruments, totaled $5.465 million at market value in the first-quarter 2014, which represented a portfolio expansion of 4.8% with regard to fourth-quarter 2013's figures.

In terms of our investment portfolio, it is important to note that ASB continues to invest in instruments with good risk profiles.

As such, 59% of its portfolio is investment -- in investment-grade instruments, which reflect ASB's sustained and conservative strategy to concentrate on investments and instruments with high credit ratings.

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Prima AFP reported net income of PEN38.1 million at the end of the first quarter of 2014, which tops fourth-quarter 2013's results by 11.5%.

This led to an ROAE of 32.3% versus 28.6% at the end of fourth-quarter 2013.

This good result was due primarily to lower charges for marketing and third-party services with regard to fourth-quarter 2013 when expenditure on advertising and external advisory services was higher.

On the fee income front, Prima reported this first quarter of 2014 a slight decline of 1.7%, while a year-over-year comparison registered an increase of 10.0%.

Prima's reported [growth] income in the quarter was mainly due to a technical accounting adjustment related to income deferral, and its fee generation was actually up 2% in the quarter.

Furthermore, the lower reported fee income was totally compensated by strong cost reductions.

In general, the good performance of Prima is attributable to Prima AFP's solid ground level, due to a good evolution of the Peruvian economy and the fact that ground level increased following the acquisition of new clients during the assignment period that runs from October 2012 to May 2014; therefore, the lower costs incurred, coupled with commercial efforts to maintain the client portfolio, led to good results this quarter.

At the end of first-quarter 2014, funds under management totaled PEN32.9 million.

Although expenses, as mentioned above, fell 18% quarter over quarter, the drop was less significant in year-over-year terms, 6.3%, due to expenses for the sales force and operating support during the campaign to capture [millifilits].

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By recovery of credit cards, reported profitability is notorious and responds to, first, better risk-adjusted pricing and control of our delinquencies generated by the further penetration of the unbanked population, a process that will continue now with a much better understanding of the segment, better adjusted and more powerful credit scoring models, and the use of the strength of the newly acquired Mibanco with the leadership of the Edyficar management and business model.

Second, better performance and contribution from its subsidiaries, mainly Pacifico and Credicorp Capital, which are aligning their cost structures to a new cross-functions culture with a strong focus on the [filibian].

Third, near [holts] and gradual implementation of the cost controls and changes here of improvement of the efficiency of our organization.

And last, but not least, a better and clearer reporting in the dominant currency of our business, eliminating distortions related to any exchange rate volatility.

All in all, we believe potential for growth and better ROAE is significant.

With these comments, I would like to open the call for questions and answers.

Thank you.

(Operator Instructions).

Thiago Batista, Itau BBA.

Thanks for the opportunity.

First of all, congratulations for the results.

They are very good results.

I have two questions.

The first one is on the ROAE outlook of the bank.

I believe you will probably be able to maintain a profitability about this level, but I want to hear from you guys what you are expecting in terms of profitability for the bank in coming quarters and also in the medium term?

So, it's possible to maintain the area above this 20% threshold?

And the second question is about the efficiency ratio.

We saw material improvements in your cost control during this quarter.

I know that seasonality helped a lot, but we also saw some positive signs, like the contraction in the headcount, for instance.

Can you give us some update about your efficiency program?

Okay, beginning with the second question, as you already noted, we are actually beginning, already in the first phase of this efficiency program, and we are really taking care of our low-hanging fruits now, which are many, and you can begin to see our results of that.

But on the other hand, we are preparing for a more thorough not only analysis, but project in regards to BCP and its efficiency, and there are still many parts of the projects going on and we feel that we can achieve better results for the end of this year.

That's in regards to your second question.

In regards to the results or ROAE question related to BCP, we feel that the country -- and as you know, BCP is a reflection of the country, we feel that the country will continue growing this year.

We're expecting the first-quarter results for the country in the coming week and we feel that we will probably grow by around 5.5%, and that will probably be the case for the next month of this year.

If that prediction works, we feel that we can continue to grow by the same rate that we've been growing during the first quarter of this year, and that will result in ROAEs that will be similar to the ones we have experienced until now for the first three months.

Okay, perfect, and congratulations again.

Tito Labarta, Deutsche Bank.

Thanks for the call.

A couple questions.

I guess, first, just following up on the question on efficiency.

You or Walter had mentioned you may have some update in May or June.

I don't know, it's the beginning of May, so I don't know if you do, but just in terms of your long-term efficiency program, in terms of how much you can eventually improve efficiency, where these improvements can come from and how long it would take and where you see that getting to, I'm just wondering if you had any more color on that.

Second question, in terms of asset quality, you continue to see some issues with the SME portfolio, also on credit cards, and I know you tightened your standards a bit, particularly on the retail side a bit, but just want to get a sense when do you think we can begin to see some stabilization in terms of the NPLs?

Do you feel comfortable that with the tighter standards that maybe you can improve asset quality maybe longer term, or how do you really see that evolving, given the adjustments you have made in the last -- over the last year or so?

Thank you.

Hi, Tito.

This is Walter.

On our efficiency program, the teams are still out there working.

We have five or six different teams tackling different elements of where we can capture potential efficiencies, in the staff areas, systems, operations, the overall branch network, et cetera, et cetera.

So, we are not ready yet; the teams are not back.

I would imagine that this original schedule was May/June, as you mentioned, and it will be probably end of June, but we are very enthusiastic and we are, as Fernando mentioned, tackling some low-hanging fruit out there, but our long-term program is still not fully in place.

So I would ask for a little bit more patience of that until we really get the number.

I want to be cautious and not to really create expectations that we think cannot be met.

We will have a timeframe with specific objectives and we will share those with you when they are really complete.

Regarding asset quality, we have been surprised by the delay in the SME sector, how slowly it has recovered, and you have two types of loans.

One are the installment loans and the revolving loans.

The installment loans are clearly totally under control.

The new loans that are -- are being dispersed are of high quality and that is not an issue.

It is the outstanding revolving loans that have taken a lot longer than what we had anticipated in really to settle down and come to more normalized levels.

The latest conversation we have had in reviewing the numbers with our team tell us that this will happen as early as July, as late as November.

It is a big gap in numbers, but we want to be cautious, again, and as I mentioned, we have been surprised at how slowly it has taken to really get that piece of the portfolio under control.

Now, on the consumer side, that is of zero concern to us.

We did have, I think it was November/December last year, a regulatory increase in the minimum payments.

Going forward on the credit card loans every month, the customer has to pay 100% interest and a portion of the principal of the loan, so that it will -- assuming it is fully repaid in five years.

So, what this force is a very important increase in the minimum payment that customers have to pay, and this created a bump in delinquencies.

That is behind us and that is of zero concern.

Now, the overall number will continue to deteriorate now that we incorporate Mibanco, but looking at the individual pieces, the only one that we still have not fully gotten under control is the revolving of the payment, and again, the timing is as early as July, as late as November, and I am being purposely a little bit vague in putting a date because we have been surprised at how long this has taken us.

Great, thank you, Walter.

That was very helpful.

Maybe just one follow-up, then, on the asset quality.

Does the incorporation of Mibanco affect that at all, why you're being a little vague, just curious on that?

And then, also, even with the higher NPLs, we are still seeing some good profitability, so is it fair to say that once this issue is under control that then there could be some more upside to profitability?

Absolutely, yes.

When I refer to being vague on the revolving portfolio, that is at the banks; it is not Mibanco.

Mibanco, the dynamics is that its portfolio has been shrinking slightly.

Obviously, competition is going after it.

We are doing a lot of changes.

There are personnel reductions.

I think this next six months will be a period of adjustment of Edyficar.

We will be making throughout this quarter provisions for cost reductions, et cetera, et cetera, so -- regarding Mibanco, I would not expect significant profit contributions to Credicorp this year as we fully integrate it into the business, but clearly, going forward, we think it will add substantial amounts of revenue and profitability to Credicorp.

We continue to see good upside in -- at the bank level and at the different subsidiaries for increased profitability of Credicorp.

Great, thank you (multiple speakers)

And just a few remarks there, Tito, Mibanco doesn't have revolving loans.

They mainly have installment loans, which are the loans that we are basically dominating now, in a way.

So, that's also good with [price].

Thanks, that's very helpful.

Thank you very much.

Saul Martinez, JPMorgan.

I want to explore the discrepancy here between what -- and the implications of what amounted to a solerization or a de-dollarization of the loan portfolio and a dollarization of your deposit base.

They are moving in opposite directions, obviously.

And it seems to me like that's not necessarily a sustainable trend.

Your loan-to-deposit ratio in local currency is, if I'm not mistaken, now over 100%.

What are the implications of that?

Does it have implications in terms of forcing you to slow down the growth in your loan portfolio or have to increase rates on local currency deposits and thereby hurt NIMS?

It seems on the surface like the whole -- the story, which is gradual NIM expansion, is as sol lending outpaces dollar lending, that depends on the liability side of the equation reversing what we have seen in terms of a trend over the last year.

So, wanted to get some more color on that and what the implications and what your thoughts are there?

For Mibanco, just I guess follow-up on -- or just clarify the comments, Walter, you made.

So, there could be some costs associated with Mibanco, but basically zero earnings contribution is what we should expect.

But as we head into 2014 and beyond, how much in terms of earnings power can Mibanco contribute, either in terms of absolute earnings or ROE or however you want to define it, just so we can get a sense for how much of a tailwind that could eventually become?

Sure.

Let me tackle the second one first.

Regarding Mibanco, we have valued the bank at $300 million and we clearly expect to get 20%-plus return on equity on our investments.

That should give you a sense of where we think the contribution should come.

Over what time period?

I would say starting one year from now.

Okay.

Throughout this year, we will be making provisions -- there is a merger, there is integration, there is systems, there's a lot of stuff that has to happen, and so I would look to have a one-year grace, if you will.

Okay, got it.

On the solerization, clearly good questions.

The driver behind -- let's take a step back.

It is obvious that with the current scenario, borrowers wish to borrow in local currency and deposit in dollars.

That's a natural evolution of what has happened in the past.

Borrowers are clearly being more cautious.

A lot of the local companies that did not have the dollar revenue had been borrowing in dollars because they had a lower coupon and they have been burned recently.

So that clearly is diminishing and that is a failed detector.

On the other hand, some of these depositors, particularly the institutional depositors, through the weakness in [our] currency have obviously been switching into dollars.

Now, so what we have is a bit of a shortage of local currency, and that is a decision of the central bank.

The central bank has been particularly strict in not allowing excess local-currency liquidity because they are concerned that this excess local-currency liquidity will go into dollars, will create additional pressure on the foreign exchange.

So, deposit rates have increased, yes.

Will they increase?

Depends on what the central bank, how they manage liquidity.

To the extent that there is less pressure on the foreign-exchange market, the central bank will loosen up and allow local currency to be more -- a little bit more expansive and that should be the norm.

So I think that we are going through a period in which the central bank has forced -- even the interbank rate has been above the reference rate of the central bank, which doesn't make a lot of sense.

So, I would imagine this is more of a temporary period of adjustment, which could happen again if the international markets start to get nervous or -- because of the tapering, what not, that creates pressure.

But those are unnormal circumstances.

The central bank has a natural incentive to create enough liquidity so that local-currency borrowing flows naturally and becomes more profitable.

Okay, that's helpful.

Thank you.

Jose Barria, Bank of America.

Thank you for taking my question.

Two questions.

First one, just a follow-up on asset quality.

If you can give us maybe just a rough idea of what your proportion of installment versus revolving loans is on the SME portfolio, just to get a feeling for what percentage of the portfolio is still being worked out?

And second, on loan growth, still very strong on an annual basis.

Sequentially, though, quarter on quarter, we are starting to see some deceleration.

I wanted to know if this is a trend that you continue to see, and where do you see loan growth ending 2014, given these dynamics?

Thank you.

I will begin with the second question.

We see loan growth -- depending on what happens to the world, especially -- but we see loan growth around what we said in the beginning, probably 15% for the system this year.

But more going towards soles growth, rather than dollars growth.

Actually, we are growing very healthy in soles and our dollars portfolio is diminishing.

And regarding the second question, we have around PEN3.7 billion and 2.8 -- in revolving and PEN2.8 billion in non-revolving in our SME portfolio.

Which is more than [60]%.

Got it.

So going back to loan growth, 15% for the system, and for Credicorp, in line or exceeding that?

Yes, it is in line.

Okay.

Okay, that's all.

Thank you.

Carlos Macedo, Goldman Sachs.

Congratulations on the strong results.

Most of my questions have been answered.

I just have one quick question on expansion, talking about loan growth, 15%.

You did open a few branches on Edyficar this quarter.

What's the outlook for branch openings?

Are you going to continue to carry them out or, as part of your efficiency program, you have a view on the -- on refurbishing, maybe changing how the managers work?

Any views there would be helpful.

Thank you.

As you know, in DCP we have now around 400, 410 branches, and if you add up Edyficar and Mibanco, in Edyficar, you have 495 and in Mibanco, you have 120.

We'll probably have to close some branches, but it will be a very small number, a one-figure number, in terms of Edyficar and Mibanco, just to make it more efficient.

And in terms of the bank, we will probably grow by about 40 branches this year.

Okay, thank you.

(multiple speakers) answer your question?

Yes?

Yes, yes, that's helpful.

Thank you so much.

Fred de Mariz, UBS.

Congrats on the results.

Two questions on my side.

The first one is just to make sure I got the number.

Can you repeat what kind of ROE you expect for this year and what will be the sustainable ROE level for the bank in the coming years?

And then, the second question is a follow-up on Mibanco.

The question has to do with this year.

When you integrate into Edyficar, do you expect to have meaningful write-offs?

And I guess the more general question would be to say when you add Edyficar and Mibanco, do you get -- if one and one gives you less than two, basically.

That would be the overall comment.

Thank you.

Regarding your first question, as we said in our last quarterly call, we said that our ROE, we are planning on a long-term ROE of around 20% for Credicorp.

This is what we have actually achieved this first quarter and that's our review for the future.

And those are our long-term objectives.

In terms of the one plus one regarding Edyficar and Mibanco, as you probably already know, when we merged these [two] institutions, we will end up having or controlling the fifth bank in the country, which is important in many ways.

If one plus one will be two or less than two, we feel that we should probably reach more than two in many ways, especially in terms of profitability, because there are many synergies if we merge those two institutions successfully.

That's great.

Many thanks for your thoughts.

Carlos Gomez, HSBC.

I have two questions.

The first one regards margin.

Now at 5.33%, are you going to give the guidance for where you expect it to go from here?

The second question is on capital.

You presented the capitalization for the Group on page 8, and then capitalization for the bank on page 27.

What would be your target and are you targeting a certain capital level at the Group level, at the bank, or at both?

I will begin with the second question.

We basically target capitalization level for the bank, which is a very regulated institution in the country.

Our goal, as you probably know, of our common equity Tier 1 -- we have basically two ratios.

First of all is the BIS ratio, and second, we have the common equity Tier 1 ratio.

Regarding the first one, we have around 15%, so we're comfortably above what the regulator wants us to have, and in regards to the second one, to the common equity Tier 1, we're around 7% now after the purchase of Mibanco, and our goal, and we have this agreement with our Board, is that at the end of 2016, we will reach 10% in the common equity Tier 1 ratio.

And in the meantime, the regulator will begin to audit this ratio at one point.

We don't know when, but at one point, because they are really engaging now in Basel III and its guidance, so we feel that we will reach that at the end of 2016.

10%, which we believe is a very comfortable ratio for our shareholders.

So again, to reiterate, the current common equity tier -- sorry?

It's around 7%.

(multiple speakers)

So you (multiple speakers)

(multiple speakers) in 2-1/2 years time, we will reach 10%.

So, that will be the end of 2015 or the end of 2016?

2016.

2016, okay.

So you have given yourself two years to increase from 7% to 10%?

2-1/2 years, yes.

That's all I have.

Okay, thank you very much.

We have no further questions at this time.

I would like to turn the call back to the speaker.

Sure, this is Walter Bayly, just a couple of closing comments.

We do have a lot of work in front of us.

We still have a lot of open fronts.

Mibanco clearly is a recent front and it requires a lot of attention, a lot of work.

Those mergers are always tricky, and the value has to be captured both in the synergies not only from the operating side, but to integrate both commercial teams, collections, so there's a lot of work to be done there.

Insurance, we have taken very good steps both on the property-casualty and health, but obviously we have to continue pursuing those changes.

We have to take the levels of profitability upwards in both of those businesses, and we have, obviously, the fronts related to risk management and efficiency, which are also very, very intensive.

So, we are -- I believe we are adequately focused.

All our teams have the right direction.

The initiatives are in place and we will just start to deliver gradually over time to close all of those fronts.

Our economy continues to perform well, so that is not an area of concern, so we are very well positioned to continue to capture the growth and deliver improved profitability going forward.

We thank you all very much for joining us in this first-quarter conference call and thank you very much and goodbye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.