Credicorp Ltd (BAP) 2014 Q2 法說會逐字稿

Welcome to the second-quarter 2014 Credicorp earnings conference call. My name is Hilda and I will be your operator for today. At this time, all participants are in a listen-only mode and later we will conduct a question-and-answer session.

Now, I would like to turn the meeting over to Mr. Fernando Dasso, Chief Financial Officer. You may begin.

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

After the improved results reported in the first quarter of this year following the change of the functional currency and all efforts to recover profitability, the second quarter captured the impact of the slowdown in our economy, which revealed the lowest GDP expansion since the 2009 crisis in the month of May, reaching only 1.8% year-over-year growth for that month and an estimated 2% for the quarter.

In this context, Credicorp reported mixed results, with BCP showing the impact of what is probably the tailend of the slowdown in the Peruvian economy, while the other Credicorp subsidiaries revealed undisturbed excellent results, compensating to some extent BCP's lower contribution to the bottom line.

Furthermore, some early signs of a turnaround in the economic activity in the coming months were visible, as well also signs of the slowdown in the PDL formation, which should contribute in stabilizing the level of provisions, and in time, finally indeed to lower provisions.

Nevertheless, year-to-year results are encouraging in all front, being these; loan growth, income generation, PDL ratio, provisioning, efficiency improvement, stability in the currency and several other areas -- that should help us meeting our targets. Furthermore, results for the first half of this year make us confident about the second half of the year and our ability to deliver the committed 20% ROAE.

More so, as the government and central bank have also given the economy a boost with reactivating measures that should help recover business confidence and public and private investment.

Before going into the business discussion, we should point out that we have chosen to focus on numbers excluding Mibanco in most of our charts and business discussions this second quarter. This to avoid the distortions the consolidation of Mibanco generates, especially given the turnaround situation of Mibanco and the interest of the market in following the performance of BCP.

This makes sense since the contribution of Mibanco for this year is expected to be negligible and we count on its contribution only as of next year.

Next page please. Credicorp reported this second quarter of the year a 12% drop in net earnings excluding Mibanco, to PEN582.8 million, leading to an ROAE of 19.9%. Mibanco's consolidation represented a marginal contribution to the bottom line, increasing earnings by only PEN2 million, but affected ROAE more significantly bringing it down 1 percentage point to 18.9%.

Despite the underlying economic slowdown, reported total loans were up 4.7% excluding Mibanco and 4.3% quarter-over-quarter including it. This is still a strong number given the construction in Mibanco's and BCP's SME portfolios. This expansion was however concentrated in the segments that deliver lower margins and recorded at the end of the quarter, which is the reason for the lower growth of BCP's average daily balances of around 2.7%, as we will see further on.

Consequently, net interest income excluding Mibanco was up only 2.4%, but gets a boost from the consolidation of Mibanco, which adds a more significant volume of interest income, bringing the total net interest income up 14.9%. This resulted in net interest margin expansion to 5.7% versus 5.2% in the first quarter. Furthermore, net interest margin on the loan book excluding the Mibanco portfolio also improved 10 basis points, which helps compensate the higher cost of risk.

In fact, the impact of the economic slowdown on the Bank's results is more evident in the increased provisions stemming from the harshly affected SME/PYME sector, and results in a 17 basis points increase in cost of risk to reach 238% before including Mibanco's provisions, and a more steep 55 basis points increase from 2.07% to 2.62% when considering total provisions as a percentage of total loans.

Nevertheless, the overall PDL ratio deteriorated only 2 basis points to 239%, and excluding a particular corporate loan that was briefly reported delinquent and corrected after the cut-off date of the quarter, even dropped 4 basis points to 233%, thanks to a good quality portfolio expansion and a slowdown in PDL formation.

Furthermore, the insurance business continues showing significantly better performance this second quarter not only due to improved technical results overall, but also due to tighter cost management, improved combined ratio and despite a drop in financial income.

Technical results show a strong quarterly aggregate growth of 7.3%, while the medical services technical results improved an important 21.9% quarter-over-quarter.

This second quarter OpEx were up from the low levels of the previous quarter, which despite being still well under control resulted in a higher efficiency ratio of 42.7% for the quarter excluding the effect of Mibanco as a result of a drop in income generation -- and given the high cost related to Mibanco acquisition and merger process, shows a further deteriorated level of 43.9%.

Operating income, therefore, reflects all these moves and shows an 11.8% contraction, which explains the drop in the bottom line and profitability reported -- as a result, a result that does not concern us since we see it as a reflection of a temporary deterioration of the business environment.

The pension fund business, Prima, and the asset management business, ASB, performed better than expected, contributing with good levels of profitability to Credicorp numbers, as we will see in the next slide.

Despite this complicated second quarter, year-to-date results are in line with general expectations for Credicorp, with net earnings of PEN1.2 billion for the first half of 1914 (sic -- "2014") and a net interest margin of 5.56% from 4.90% last year; efficiency ratios of 42.4% and 43.7% the previous year, and ROAE back to 20.2% despite the deterioration in the PDL ratio to 2.6% from 2.2% and cost of risk of 2.3%.

Next page. Looking at BCP's performance, the economic slowdown is evident and affected loan growth and credit quality, as it also the more moderate risk appetite, as reflected in our adjustments and tightening of the scoring model that resulted in reduced accrual rates.

Nevertheless, despite the economic slowdown and even after including a contraction in BCP's SME portfolio, the quarter end resulted -- reported total loans were up 4.9% quarter-over-quarter, a strong number that reveals a pickup in lending activity in certain sectors.

However, measuring average daily balances, BCP's loan book expanded a more modest 2.7% quarter-over-quarter given that most of the portfolio growth was recorded towards the end of the quarter. Furthermore, such expansion was in turn concentrated in the wholesale portfolio, which was up 3.4% quarter-over-quarter since BCP's SME portfolio showed rather a contraction of 0.9%, in line with the evolution of PYME sector and the stricter lending policies implemented.

The only exception is the Edyficar portfolio, which continued showing an excellent evolution and strong growth of 7.5% in average daily balances for the quarter. It is therefore evident that the portfolio quality deterioration and economic slowdown have affected most of our retail book, which as a whole expanded only 1.4% quarter-over-quarter, whereas the wholesale book grew 3.4% for the quarter.

Furthermore, the de-dollarization of our portfolio continues as revealed by growth per currency, with the nuevos soles portfolio growing 5.2% within the quarter and the US dollar portfolio expanding only 0.9% in average daily balances, though revealing a turnaround in the contracting trend and stronger expansion of the US book at the end of the quarter.

Next page. Despite the slowdown in economic activity reported, some early signs of recovery are already visible as loan growth picks up at the end of the quarter, mainly in June, and the PDL ratio deteriorated only 1 basis points to 2.46%, and excluding a particular corporate loan that was briefly reported delinquent and corrected after the cut-off date of the quarter, even dropped 5 basis points to 2.4%. This is explained by the growth reported in good quality loans and a slowdown in the deterioration rate of our portfolios.

The chart with PDLs per segment has been adjusted to show more details and open the more traditional and formal SME loans that we call business loans from the complicated SME/PYME loans, showing a very good profitable SME business book, while the SME/PYME book continues to show the expected deterioration, though at a slower pace.

It is also evident from this chart that all other portfolios have a very good performance and stable quality, leaving only the SME/PYME book in a watch list, and of course also the Mibanco portfolio as expected. Despite the little deterioration of the PDL ratio, provisions still increased, with most of these stemming from the harshly affected SME/PYME sector.

For this second quarter of the year, provisions still have to catch up with loans already reported as past-due in previous loans, as there is a natural lag of up to 120 days between PDL formation and provisions to cover the total of the delinquent loans.

This resulted in a 12.9% increase in provisions for the BCP portfolio, which added to the already expected Mibanco provisions led to a total of 31.9% increase in total reported provisions. As a logical consequence, net interest income after provisions at BCP -- and this without considering Mibanco -- dropped this second quarter, which explains to a large extent a reported drop in the bottom-line.

Next page please. Operating results at BCP, here also excluding Mibanco, show mixed trends. Net interest income was up 3.2% quarter-over-quarter, mainly driven by lower interest expense, which contracted 3.5% in the quarter, while interest income grew a modest 1.4%, as a consequence of the growth composition of the book and the timing of this growth, namely lower yielding commercial loans which were dispersed towards the end of the quarter. Nevertheless, year-over-year net interest income expansion is solid at 20.8%.

Consequently, net interest margins on the loan book improved a significant 10 basis points up to 8.38% in the second quarter of the year, while overall net interest margin was only 3 basis points higher for the quarter at 5.53%. However, the 51 basis points increase for the year revealed a better asset structure with a change in favor of higher yielding assets and that helped recover the ROAE, which for the whole of Credicorp recovered to the 2% plus level from the lower levels reported in 2013.

Non-financial income at BCP was up 2.8% despite some changes in regulation that foresee the deferral of certain fees and led to a contraction in fee income, since this was compensated by higher foreign exchange gains and other income.

Further, this second quarter and excluding the effect of Mibanco, OpEx were up 8.5% from the previous quarter, but reached a reasonable level in absolute term, which given the drop in income generation resulting from the evolution of our portfolio, resulted in a slightly higher efficiency ratio of 47.2%. On a year-to-date level, however, and even including the Mibanco effect, the efficiency ratio of 46.7% in the first half of this year compares extremely well to the 49% efficiency ratio of the first half of last year.

Next page. Even though sustaining a solid and efficient low cost funding seemed to present a challenge in the last year, the funding structure has remained structurally similar and does not show any concerning trend. In fact deposits continued covering 66% of total funding compared to 68% 2 years ago, even though our loan to deposit ratio moved from 88.7% to 98.5%. This responded more to a better asset structure in favor of the higher yielding loan book as the local currency denominated loans picked up in 2014.

Furthermore, there have been moves in the funding structure that responded to a proactive search of more efficient and cheaper funding, since in many circumstances other sources of funding offered by the central bank instruments can be cheaper than deposits -- therefore, and despite the slight variations in the role of total deposits as part of the total funding, average funding cost is a little cheaper at 1.92% vis-a-vis the cost of over 2% reported in the previous year.

Next page please. With regards to the efficiency program we announced last year as a way to compensate for a more challenging environment in future years, we are pleased to say that since its internal announcement in the third quarter of last year and launching towards the end of last year, BCP has been able to benefit from the implementation of some quick win actions resulting from the change, expense patterns due to a strong internal message and commitment and from the collection of some low hanging fruits.

As shown in the chart in this page, BCP shows a very positive trend in the gap between income and expenses growth, something known as [JOI] concept. As a consequence, the efficiency ratio also improved dramatically since the third quarter of 2013, as we can see in the next page.

Next page please. It is however important to point out that BCP's subsidiaries, Edyficar, BCP Bolivia and Mibanco, are not part of the scope of this first phase of the efficiency program. Therefore to measure the success of the program, we should focus on BCP's unconsolidated numbers, only shown in the top chart of this page.

As seen here, BCP has shown an important improvement in its cost to income ratio, moving from 50% in the second quarter of last year to 47.9% as of December of last year, and to 44.8% for the first half of this year. This improvement in BCP's efficiency ratio translates into a more diluted but still important improvement for the whole organization as shown in the same ratios for BCP consolidated in the bottom chart -- and of course also for Credicorp as a whole.

All these numbers show a result achieved to date based on the simple application of the [JOI] concept and tight cost controls, and do not yet include the impact on cost reduction of the more structural changes that are still to come. We are still in the process of determining the scope of such changes, the cost of their implementation and finalizing the analysis of such costs versus the expected benefits in order to decide which projects will be implemented and how far we will go. We are committed to implement the lean management approach and walk this efficiency path in the coming years, and we will inform you as we move along.

Next page please. BCP Bolivia's net earnings contributed -- contribution totaled a PEN19 million in the second quarter of this year, which represented an increase of 22.8% quarter-over-quarter. In this context, the ROAE reached 18.6% and the contribution to Credicorp PEN19 million.

This was due primarily to, first, a 14.4% quarter-over-quarter increase in non-financial income due to higher gains on foreign exchange transactions; second, growth of 3.7% quarter-over-quarter in net interest income due to loan growth; and third, a 20% quarter-over-quarter drop in income tax paid given that in the second quarter of this year there were fewer non-deductible expenses than in the first quarter.

These results were in line with the positive evolution of loans, which expanded 5.6% quarter-over-quarter. This improvement was due primarily to the mortgage segment and the fact that delinquency levels and coverage ratios are under control and reached 1.51% and 256% respectively.

Edyficar continued to outperform the local economy and the SME sector in particular. This evolution is reflected in the Bank's loan growth, which surpasses the 14% growth in the sector, and the fact that its portfolio quality ratios are the only ones in the system that have remained stable and at 3.8% can be considered low for the sector.

In this context, total loans at the end of this second quarter reached over PEN3 billion, while operating income rose 8.5%. These results without including the Mibanco effect helped generate net earnings of PEN32.5 million and a ROAE of 25%, resulting in a contribution to Credicorp of PEN32 million. The reported numbers, however, incorporate the effects of Mibanco and show net earnings of PEN33 million with a ROAE of 12.8%.

Next page please. Pacifico Insurance Group reported net earnings before minority interest of PEN47.7 million at the end of the second quarter and a contribution to Credicorp of PEN46.4 million, which represents a significant 22.5% improvement over the last quarter. With this result, ROAE was 11%.

This positive evolution in earnings was due to better results of the P&C business, which is concentrated in PPS, and life, which is concentrated in Pacifico Vida, while the health division or EPS and the medical subsidiaries showed a decline in this quarter.

PPS reported high underwriting results thanks to an increase in net earned premiums, a smaller adjustment to reserves, a lower commissions -- and lower commissions in the general and vehicle line. This better income was accompanied by lower general expenses due to the cost controls implemented and a decrease in income tax due to an extraordinary tax adjustment in the previous quarter, leading to a better reported result.

In the life business, the improvement registered at Pacifico Vida also starts with a higher underwriting result due to premium growth in all business lines, a lower reserve ratio and lower claims, as well as higher financial income following interest income increases related to adjustments for inflation.

However, lower underwriting results in the health division for Pacifico's EPS resulted from a seasonal increase in claims, while the drop in the medical subsidiaries result was due to higher general expenses resulting from startup costs and a new medical center.

All in all, Pacifico continues showing improvement and contributed already PEN84.3 million to Credicorp's bottom line in this first half of the year.

Next page please. Atlantic Security Bank reported extraordinary high net earnings of $29 million in the second quarter. This represents a significant increase with regard to Atlantic's recurrent results given that it includes extraordinary income of $14.6 million equivalent to PEN41 million relative to reimbursements from reinsurers for a claim on losses incurred during the financial crisis in 2008.

ASB also posted an improvement in income stemming from the recovery in the securities market in the second quarter of the year. Earnings this quarter led to a reported ROAE of 58.3%, which is obviously extraordinary. If we exclude the losses recovered from the insurance policy, this figure reaches a still high 28.8%, which reflects the high profitability of Atlantic's business considering its low level of implicit risk.

The Bank's asset under management, which includes client deposits, investments in funds and custody of financial instruments, totaled $5.8 billion at market value in the second quarter. This represents a sound 6.3% increase with regard to the first quarter and a solid expansion of 15.6% in the year-over-year comparison.

Next page please. In the second quarter of this year net earnings at Prima AFP totaled PEN4.8 million, which represents an important 7% increase with regards to the last quarter's figure. With this result, ROAE reached a high 34.8%.

This result was achieved thanks to the fact that a real estate sale which generated earnings of PEN5.6 million was complemented within the same quarter in which an income deferral of PEN5.4 million was recorded following new regulatory requirements, compensating such loss in income. And in addition the reversal of PEN2 million in income tax from 2013 was also recorded. Nevertheless, even if we isolate this extraordinary effect, ROAE would have still reached a very high 32.2% by the end of the second quarter.

Prima AFP's funds under management at the end of 2014 -- or 2013 totaled PEN34.7 billion. This figure represents growth of 5.3% quarter-over-quarter, and means the Company managed 32% of the system's total funds at quarter end.

Next page please. Looking at total results in our contributions chart, total net income attributable to Credicorp is precisely halfway to reach a total PEN$2.5 billion for the year 2014. However, recurring net income net of extraordinary income and, to be fair, also net of Mibanco shows a shortfall.

Adjusting results roughly from extraordinary income, around PEN$80 million in the first quarter, are at around PEN$40 million in the second quarter. It is clear that the shortfall in contribution from BCP of about PEN$44 million could not be totally compensated by improved results in all the other Credicorp subsidiaries. But this helps sustain Credicorp's ROAE very close to our target of 20%.

In fact reported ROAE excluding Mibanco for the first quarter reached 22.8% and for the second quarter 19.9%, which once adjusted for extraordinary non-recurring income still shows 20.8% for the first quarter and 18.5% for the second quarter, resulting in a solid 19.3% for the first half of the year.

Furthermore, the reasons behind BCP's contribution shortfall, which are related to slow growth of the retail book and high cost of risk, are expected to impact less BCP's results in the second half of this year. Whereas, the positive trends in the business evolution of all other fronts and general macro environment, as well as the changes introduced to correct the identified flaws and the efficiency improvement are all expected to continue, making us confident about the second half of this year.

If we add to this the expected contribution of the Mibanco-Edyficar new venture in the coming years and the effects of the more structural efficiency improvement expected going forward, we believe the potential for growth and better ROAEs is significant.

With this comment, I would like to open the call for questions and answers. Thank you.

(Operator Instructions).

Thiago Batista, Itau BBA.

I have basically two questions, the first one regarding the Bank's margins. Could you give some color about the Bank's margin evolution? What we could expect when we put together the mixed change towards its portfolios, with the contraction and the monetary policy rate in Peru and also the strong growth in the local currency loans? So what is our expectations regarding the Bank's margins?

And my second question is about loan growth in the scenario of weak GDP growth in Peru. How much the Bank's portfolio can expand and is it fair to assume that you will continue to focus the expansion in the low risk portfolio, so in corporate loans or wholesales banking?

Okay. Thiago, I will begin with the second question. Despite this slowdown in the economy, what we have seen in terms of growth of the system or the financial systems, of loan growth in the financial system, comparing June this year to June last year, the system is still growing like 14%, even -- close to 15%. In local currency it is around 22%; in foreign currency it is around 5%.

We believe that this second -- and the government has taken important measure both fiscal and monetary we believe that the economy will speed up a little bit. Despite that, we feel that the growth of the financial system will continue to be around 14%-15% for the year, which is still very healthy. And we believe that our Bank will continue to grow with the system, having the same market share that in terms of volumes.

When we talk about margins, as you have seen in this presentation, we are growing a little faster in our wholesale portfolio and that portfolio has less important margins than the retail portfolio. We feel that that will continue to be the trend. We are seeing very important projects in terms of infrastructure, in terms of the important mining projects coming along. So we feel that the wholesale will continue to outperform the retail. So our margins will definitely show that in the coming months.

Okay, thanks.

Carlos Macedo, Goldman Sachs.

Actually, I have two. The first is on asset quality. We did see a flat quarter-on-quarter, but you mentioned that provision expenses are trailing asset quality. What should we expect in terms of that going through the end of the year? I mean you still probably have to provision more given the weakness in asset quality coming into this quarter from the previous quarters. Does that mean your coverage ratio is going to go up? Where should we expect -- how much should we expect in terms of provisions through the end of the year for you to make based on the evolution of the NPL ratio through the beginning -- in the end of last year, beginning of this year?

The second question is again on efficiency. You mentioned that you are still working on trying to determine how far you can go. You did -- on a standalone basis BCP -- is like operating expenses are going 7% year-on-year. Is that a base plan? Is that something that we consider as a run rate going forward or are there other low hanging fruit that you can take advantage of in the next coming quarters that can push that level a little bit lower? Or on the other hand, should we expect it to be higher given the integration of Mibanco and other things? Thank you.

Thank you, Carlos. I will begin with your first question in terms of asset quality. What we feel in terms of asset quality -- and you can see that in the 21st page of our report -- is that in most of our segments -- and this with the exception obviously of the PDL ratio for SMEs, PYME and for Mibanco -- we feel that most of them will continue to be flat in terms of those ratios. And you can see that trend already happening this year.

In terms of the SME segment in BCP, we feel that that line will continue to pick up until the end of the year. We are taking many measures now in terms of risk, of scores, of collections. But those measures will only begin to produce better results we feel beginning in next year. And that is probably -- that will probably be the case.

In terms of Mibanco, we still are really analyzing very thoroughly the portfolio and we feel that the first good results will definitely come next year. But we cannot promise anything for this year because we are still in this process of analyzing it thoroughly.

Just, Fernando, just -- sorry to interrupt, but just a question. You said there is a lag between when NPLs come and when you have to provision for them. Does that mean that given the NPLs increased through the end of last year, beginning of this year, we should see provision expenses still going up as a percentage of average loans through the end of the year or should we expect them to stay more or less flat?

If I talk about the SME segment, we have already seen in June and also in July a flat evolution in terms of provisions for that segment. So we hope that that will continue to be the case. But as we have already told you in our last meetings, we feel that that line will continue to pick up until the end of this year.

So going back in expenses, I understand that Mibanco is going to contribute next year. But on a standalone basis for BCP, is the 7% that you reported this quarter something that we should consider as a base plan for the next few quarters?

Could you repeat the -- I was going to answer you about efficiency.

Yes.

Could you repeat your question please?

Sure. Operating expenses are growing at 7.5% quarter-on-quarter. Is that a base line going forward for BCP? Should we expect -- are there additional low hanging fruit that you can take advantage of and lower that 7.5% to a lower level? Or will the integration of Mibanco and other factors push that number higher going forward?

Two answers -- yes, two answers. The first one is that when you talk about that 7%, we are talking about BCP by itself. We aren't talking about the other companies related to BCP consolidated. And we feel that that line of around 7%-8% will continue to realign in the future.

If we are able to continue opening that gap, we feel that -- we are very confident on our results. It will be around 8% and the growth in income will be around 16%-17%. That will achieve what we plan to achieve in the next 3-4 years, as we said we plan to achieve in the next 3 year a level of around the low 40s in cost to income.

Excuse me. Carlos, please remember that this is BCP what Fernando is referring to.

Yes, yes of course.

And if you put together all the other elements and Mibanco, obviously have some additional costs and so the consolidated will look different.

Of course.

Carlos, when we talk about Mibanco and Edyficar, as we have already told the market, we are planning to merge both institutions at the end of this year. It depends on the system the merger, but it is coming along. We feel that we will be able to do it. And we will achieve many -- we are already achieving many synergies, but we will definitely achieve more synergies once both institutions get merged during the end of the year and the beginning of next year.

Okay. Thank you, Fernando. Thank you, Aida.

Sure.

Fred de Mariz, UBS.

A couple of questions, the first one is a follow-up. I just wanted to make sure I understood your answer to the previous question on the NPLs for SMEs. If I understand you well, you are saying that the NPL for the SME segment could increase up to the end of this year, but the provisions to loans are going to be flat going forward. That's your guidance. Did I get that right?

That is right.

Okay, thank you. And the second question, you mentioned -- obviously, you had good growth despite the deceleration in GDP. Are you seeing any signs -- any tangible signs of a recovery? Do you see more demand from larger clients, from corporate clients on the consumer side? Just wanted to get some color on what you are seeing with your loan officers?

What we've seen is that -- as you can see in some of the charts, is that our wholesale portfolio especially on the corporate segment is growing at a higher pace than the retail portfolio. And we feel that that probably will be the case for what remains of the year, especially because our Bank -- consumption is not growing as it did in the past and also some important infrastructure projects are coming along, both in terms of roads, ports, airports and this gas pipeline that will go to the south. So we feel that that will begin to be a very important engine for the growth of the economy.

Got you. Thank you. And just a final follow-up on the efficiency, you mentioned a level for BCP of cost to income in the low 40s. I imagine that is a level for the coming years. And I just wanted to know for BAP as a whole do you have a view on the cost to income if you consolidate everything?

Our view on the cost to income for BCP -- and this is BCP alone -- is to achieve that level of low 40s in the next 3 years, as we have already told the market. And that is -- and 3 years ago our level was in the low 50s and we are now around the mid-40s and there is still some room to go through.

Thank you. That is very helpful.

Sure.

Tito Labarta, Deutsche Bank.

A couple of questions, just first a follow-up. When you mentioned your loan growth, you said you continue to expect to grow faster on the wholesale portfolio. But I just want to understand -- yes, I understand the system. You are seeing faster growth in the corporate segment. But the strategy has been for quite a while to really focus on the retail side and I know you've had some issues there with the SME portfolio and trying to control that.

But is this like a change in strategy going forward where you expect to grow more on lower risk segments as opposed to continuing to maybe gain some more market share on the retail side?

And then thinking about your profitability, if your margin is going to come down, do you think you can still get to 20% ROAE? I just want to -- how are you thinking about profitability if you grow faster on the wholesale side? Thank you.

Good question, Tito. The first thing is that we are growing by 3.4% in wholesale and 1.4% in retail. That has been the case this quarter. And if we talk about year-over-year, wholesale was 22.4%, whereas retail was 9.5%.

And this is really because of many things. On the one hand, as I said, there are many projects coming in in terms of large infrastructural projects and big projects. Second, it is because we have begun to be a little more strict in terms of what we do in SME. So SME has actually decreased this quarter around 1% and it has only increased 3.5% for the year -- year-over-year.

And that also happened in the consumption segment. And it is not only helping in BCP, but also in our competitors. We are growing less and that is really the case. We are actually fixing our portfolios and fixing our models in terms of application and scoring models, fixing things in collections. And that is really the case. We are not losing market share in retail, but the whole retail segment is growing less this year.

Despite that, we feel that our margins are going to be -- we are having less margins than our budget, but they will continue to be very healthy this year if we continue growing in that trend. And that is really what we feel.

And, Tito, I would like to add one thing. This is not really a change in our strategy. I think this is a reaction of a situation in the market that we have right now. The strategy in the organization has always been to continue developing the retail side and the SME business. And that's why the acquisition of Mibanco is so important.

And once that together with Edyficar has been put together and organized well, we will probably start seeing a pick up on that front again. I think this is really a temporary situation and we will see a continuation of what used to be the typical growth, retail higher than wholesale, in the coming years. But this is like setting the base for that.

All right, great. That's very helpful. So just in terms of the -- the second question in terms of profitability. If your margins are coming down a bit and you mentioned provisions are stabilizing, I just kind of worry that you don't see much increase in profitability. So how do you think about your bottom line I guess both in the short-term and then kind of longer term as you get back and grow more in retail again?

When we talk about margins, we have to also talk about funding and our funding cost is going down, as you can see in page 14 of the report. And it has come down from 2.34% during the second quarter of last year to 1.92% during this quarter. And that is happening with our funding because of many reasons.

And in terms of our net interest income -- in terms of our net interest income, we are continuing to grow. We have grown this year already between the first and second quarters 3.2% and we feel that we will -- that it will continue to be growing in a healthy fashion.

Also, an additional point there if you don't -- remember that we are in a historical low in interest rates. Right now we have a slight decrease in interest rates locally, but it's a historical low for the general market. And that is expected to go up in the coming year that will improve the margins, because with increasing interest rates and in a growing interest rate environment, we make more margins. That will benefit that fund.

On the other side, remember that to compensate for those affects is why we are doing the whole cost control and efficiency program. So the bottom line should not be impacted.

All right, so --

If you see the net financial -- go ahead, Tito.

No, I was just -- so do you think -- are you comfortable still targeting a 20% ROAE at least in the short-term and is that still kind of what you feel comfortable in terms of your profitability?

Yes, we feel that we will achieve that this year.

Okay, thank you.

Jose Barria, Bank of America.

I just wanted to get a follow-up on the asset quality in particular, what's happening in SMEs and credit cards. I want to know if the deterioration that you are seeing in SME is largely driven by those loans that had been originated before you started changing your credit risk assessment in that segment, or if you are also seeing deterioration in new loans originated after that?

And with regards to credit cards, also we saw an increase in NPL ratios during the quarter. That had been stable after you saw an increase last year, but we are starting to see that pick up again. Is this a function of lower growth in the denominator or you are also seeing some deterioration on the consumer side?

And then a follow-up question on NIMs. What is the impact of the -- on NIM of the lower reserve requirements that we are seeing now especially on the local currency denominated loans? Thank you.

First, when we talk about SMEs -- you were asking about vintages?

Right.

What we are seeing in the latest vintages is an improve compared to the vintages we had in the past. And that continues to be the case month-by-month.

However, since we are growing less in the SME segment, the denominator is really growing less in that ratio. So that's why you are seeing a pick up in the PDL ratio in these months and will continue to see that for this year.

Second, you were talking about credit cards. If you see -- if you go to page 5 of this presentation, you can see the line with credit cards and that line is really going down rather than up. In March (sic -- see slide 5, "December") the PDL ratio was 5.76%. In March it was 5.88%, and now it's 5.45%. So we are seeing a healthy trend in that segment.

And your last question was -- can you repeat it please?

Sure. In terms of the impact of the cut in reserve requirements from the local denominated portfolio or the local denominated deposits, what impact does that have on your NIM?

The reserve requirements in soles have gone down during this year and they are now at 11.5%. In dollars they are around 43%. And they have remained the same for the year. So that really helps because we are able to -- especially in soles, not in dollars -- but in soles we are able to use more funds in better uses.

Right. That's what I was getting at. I mean can you quantify what the -- the impact would be on NIM and is it enough to offset some of the pressures that you are seeing on the yield side?

I'm not able to quantify it now. Maybe we can get back to you with an answer. What we can tell you is that we feel that the central bank should probably continue to lower that rate -- I mean in soles, not in dollars -- maybe to 11% or even 10.5% this year. But we will see.

I see. Okay, thank you very much.

Saul Martinez, JPMorgan.

Two questions. Can you clarify the ROAE discussion a little bit and whether that is on your -- you mentioned a 20% ROAE is achievable for the year, but is that on a recurring or on a reported basis? Because you had non-recurring benefits in the first half, as you mentioned, that are about 10% of your pre-tax income. And on a recurring basis your ROAE in the first half according to your earnings release is about 18.5%.

So when you talk about full year 20% ROAE, is that reported or recurring, because it obviously has a very big implication for the kind of earnings you need to generate in the second half of the year to get to that ROAE?

The second question is on your net interest margin. I'm still a little bit confused as to whether you expect margins to be flat, up or down in the coming quarters, because -- and it seems like you've had, as you mentioned, quite a bit of a benefit from lower funding costs. And I wonder whether -- how sustainable it is to continue to see that given how low they are and given where your loan-to-deposit ratio is and the fact that if you are growing local currency lending, you need to grow local currency funding and obviously you have the mix shift towards wholesale lending.

So how do all of these cross currents come into play? I know you guys have talked about it a lot on this call. But are NIMs going to be -- is it your guess or is it your estimate that NIMs are flat in the coming quarters? Will they compress a little bit in the coming quarters and then stabilize in the coming years as retail loans start to pick up again or -- how do you think about your NIM progression both in the next few quarters and then in the next few years?

First, we are going to talk about the -- your ROAE question. And as you said, our ROAE for this first half is really not a recurrent ROAE. The recurrent one is around 20%, but the other one is around -- is less than 20%. It's around 18%.

We don't know what's going to happen in the second part of the year, but we feel that we will be able -- the efficiency measures will continue to come into place and we feel that for the second half of the year we will be able to reach that 20% obviously on a non-recurrent basis because we have --

On a recurrent.

On a recurrent basis. That's our feel for this year.

I'm sorry, just if I could -- the run rate in the second half on a recurring basis should be a 20% ROAE. On a recurring basis the run rate in the next couple of quarters you should be able to get to 20%. Is that what you are -- is that the idea?

That is correct.

Okay.

That is correct, Saul. If you look at the ROAE in the first half, we do exclude Mibanco from this calculation because Mibanco is really like an external thing, right. But on a recurrent basis, the ROAE for the first half of the year excluding Mibanco was 19.3%.

Okay.

Yes. What we are saying is that on the same basis excluding Mibanco, recurrent ROAE should be able to bring it up to 20% in the second half so that we can close much closer to the 20% on a recurrent basis, excluding Mibanco.

Okay, all right. And on the NIM?

And then related to the NIM, if you go to page 8 of the report, you can see our NIMs being flat this year and already around 5.5%. You are looking at Credicorp. I was looking at BCP. Okay. We are going to this presentation chart, chart number 6. And you can see our NIM being around 5.53% in the second quarter and 5.50%. We feel that that will be the trend this year. We will be around those numbers. We feel confident about it.

Why? Why do you think it will be flat and not fall considering the mix shift and maybe the potential for funding cost to not continue to benefit the NIM?

The one reason is because our portfolio is turning more towards soles and we have larger margins in soles. Also, we are not so sure that interest rates in soles will go up. Interest rates in dollars, as you all know, it depends on the Fed. But in soles actually the central bank has brought down the rate from 4% to 3.75% and we feel that it can come down again in the near future. So we feel that that margins will continue to be very healthy.

Okay. Okay thank you.

Marcelo Telles, Credit Suisse.

I have two questions, the first one is on the de-dollarization trend you've been facing over the past year or so. When I look in this quarter at least on the lending side, we saw that there was an increase in foreign currency loans, right, as a percentage of total loans, which seems like a different trend from what we've seen over the past four quarters.

Do you think we might be getting a little bit closer to the end of the de-dollarization process here or you think this is just something -- a very short-term, that you might resume the trend of local currency loans continue to gain share of your overall loan portfolio? That is the first question.

And the second question -- sorry to get back to the asset quality question. I know there were many questions on that front. But on the SME side can you help me understand how this old vintages are actually being treated in the sense of renegotiations or so, because my understanding is that some of this -- or the bad vintages, they are pretty much from like 2012 or part of 2013. And part of the increase in provisions was related due to the fact that a lot of these loans they became 120 days past-due.

So given that these loans have been originated much earlier than that, I was wondering if the reason why there is such a lag, the past-due and the provisions, is the fact that you have been renegotiating some of this credit or this credit lines with the SMEs have been more of a revolving nature. So if you could clarify that I would appreciate.

Sure. First on the de-dollarization, as you have noticed, at the end -- especially at the end of this quarter we have seen some of our clients beginning to ask now for loans in dollars again. And that's also -- that is very true. And that really depends on the expectations on our clients in terms of where is the exchange rate going to be in the next months. That's really what they do. And also on the things that they are really financing.

First, as I said, wholesale is growing more than retail and that has been the case for this year. And especially now some of the projects that need financing in dollars, the large projects, are coming into place. And that's part of the answer.

The other part is, yes, some of our clients are having -- are changing a little bit their expectations on what's going to happen with the dollar and the local currency in the future. As you probably know, the dollar is strengthening in terms of the soles and that has been the case for the last weeks. And that will probably be the case not only at the soles, but against other currencies for this second half of the year.

So we feel that that could be a possibility, that we will get more demand for dollars than soles than we did in the first half of the year. And it will also depend on what happens to the rate in soles and dollars. And those are changing and they are changing in different directions.

We feel that the dollar rates will continue -- will begin to go up now. They are very low. But they will begin to go up depending really on the Federal Reserve. And the soles ones will begin probably to go a little bit down because our central bank is trying to give some support to the economy with monetary policy. That's on the de-dollarization question.

Then if we talk about SMEs and old versus new vintages, as we said, we are seeing the new vintages coming along better. You also asked about active negotiations with delinquent clients. And we are doing that on a very -- on a more strong stance in this. And we have done this for this last 2 or 3 months. And we are getting some results of that. We don't know what's going to happen in the future obviously, but our new vintages are doing better now.

Okay. No, that's great. Thank you so much. I think we are definitely seeing some encouraging scenarios. Now things are improving I think on the cost side and I think the NPL formation is starting to improve. So thanks a lot for your time. I appreciate it.

Sure.

Boris Molina, Santander.

I have a question to see if you guys could give us a little bit of color of what you have found inside Mibanco in this first quarter that you've been running the bank and we would like to know a little bit of how you see evolution of the volumes and provisions, cost?

Because when you say that -- or you are saying Mibanco is not going to contribute anything, so if we pencil zero percent and zero earnings for the year and you didn't increase capital for this, your return on equity is not going to be affected by Mibanco, but some operating metrics are going to be affected.

Is it going to be more on the provision side? Is it going to be more on the cost side? And have you quantified what is the total amount of integration expenses that you plan to incur this year or you are incurring in the second quarter so far so that we could begin to strip out what is recurring from non-recurring in the case of Mibanco.

And would you expect the loan portfolio to -- it appears to have contracted slightly in the second quarter. Do you think it's going to continue to contract? Do you think that vintages are still showing a deterioration trend and asset quality is going to continue to deteriorate in Mibanco? How could we think about where the bank is going?

Mibanco -- okay, let me begin with provisions. With what we've gathered from what we know about Mibanco now, we feel that there are many things to do in terms of commercial -- of the commercial side of Mibanco.

We have already changed the commercial manager and in this Company the commercial manager is very important. And we have put now in-charge of that side of the bank the actual commercial manager of Edyficar, a person that has more than 20 years of experience, very good experience. So we feel that the commercial side of Mibanco should begin to improve very promptly. We don't know when yet, because we are still contracting. But that should begin to -- because we have also changed some of the commercial -- most important managers in Mibanco.

In terms of provisions, as you already know, we did a very important provision when we took Mibanco 2 months ago. It was around PEN200 million. So we feel that we are on a safe side with that provision which we did in the beginning. Now we are seeing and we are analyzing the vintages. We feel that Mibanco should do as it is doing now. And we still need more information to be able to answer you better.

What else can I tell you about Mibanco? We plan to achieve important synergies. I don't have the number for the synergies that we want to achieve. But it is important. We can get back to you on that. And it will be towards the end of this year. In reality, we cannot tell you that much about Mibanco. We would like to be more -- what you call it?

Open.

-- open in the future meetings.

Okay, wonderful. Thank you. I appreciate the color. Sorry. Aida, were you going to add something?

No, I was just saying in Mibanco we still need to complete the whole acquisition, the merger, the tender offer and several things. So that's why it is not completely open disclosure yet.

Wonderful. I appreciate that. Thank you so much.

The next question comes from Jordan Hymowitz from Philadelphia Financial. Jordan, your line is open. Please go ahead with your question. Thank you. It seems that the participant was not stating their question.

With this, we have no other questions on the line and I would like to turn the meeting over to Mr. Dasso for any final remarks.

Just to thank you all for your interest in Credicorp and we will see you further in the future. Many thanks.

Thank you, ladies and gentlemen. This concludes today's conference. We thank you for your participation. You may now disconnect.