Credicorp Ltd (BAP) 2014 Q3 法說會逐字稿

Hello and welcome to the Third 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.

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

I will now turn the call over to Credicorp's Chief Financial Officer, Mr. Fernando Dasso.

Mr. Dasso, you may begin.

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

Our country's economic performance has become a source of concern, given that it's GDP has fallen significantly in the first half of this year.

Though we cannot take these signs lightly, underlying trends in the business evolution are more encouraging.

We can only understand these as a result of our significant lag between investment activity and GDP growth.

More proactive (inaudible) investment government measures are expected to reactivate the Peruvian economy, which should be able to deliver 5% GDP growth next year if these are effectively executed.

In this context, the deterioration in portfolio quality and slowdown in non expansion, which affected our profitability in previous quarters, are showing improving trends.

Credicorp's results this quarter started showing a significant improvement in both fronts and others that we will see in the coming charts.

As in the previous conference call, we continue showing numbers that include and exclude the consolidation of Mibanco, a business that is going through a clean up period.

This will allow a clear understanding of a turnaround situation of all the other Credicorp's subsidiaries.

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In this page, the shaded bar includes Mibanco -- no, excludes Mibanco and not shaded part, the Tier parts includes the whole Credicorp.

This third quarter, Credicorp reported a significant improvement in net income, which reached solid PEN666 million, excluding Mibanco, as it is reflected in the ROE of 21.7% and ROA of 2.2%.

Mibanco's contribution to Credicorp is still negative.

Therefore, it affected the Group's ROE and ROA downwards to 19.7% and 2.0% respectively.

Despite the underlying economic slowdown, loans continue performing well and were up 3.3% excluding Mibanco, and 3% quarter-over-quarter including it, reflecting that contraction of Mibanco's portfolio.

However, loan growth of average daily balances was 4.1% this quarter, well above 2.7% rate of the previous quarter, which explains the significantly better income generation.

Furthermore, NIM increased 8 basis points to reach 5.75% despite the fact that loan growth was still mainly concentrated in the wholesale banking, a business with lower margins.

NIM expansion was, therefore, achieved as a result of better pricing for our reactivated retail business on the one hand and good management of funding costs on the other.

But probably the most relevant evolution this quarter is a significant reduction in provisions and improvement in portfolio quality indicators.

Provisions, excluding Mibanco, represented this quarter only 1.85% of total loans after reaching the highest point of [2.38%] last quarter.

Even including Mibanco, this indicator dropped from [2.62% to 2.29%].

The aforementioned represents the first signs of a turning point, which is also reflected in the 6 basis points drop in the PDL ratios that went from [2.23% to 2.59%] excluding and including Mibanco respectively.

In addition, the insurance business continue showing significantly better performance and the insurance underwriting results and medical services gross margins, which grew 13% and 14%, respectively.

This was a reflection of lower claims, improved cost control, and good financial income.

Credicorp's efficiency ratio continued improving and dropped around 240 basis points.

This shows the progress achieved to increase the gap between income and expenses growth.

However, please bear in mind, that on a quarterly basis some volatility will always be evident.

Year-over-year, the efficiency ratio improved 100 basis points, in line with our long-term expectations.

Therefore, operating income expanded 19.8% quarter-over-quarter or 15.8% when we include Mibanco.

All in all, a very good result for Credicorp, which we will look at in more detail in the following charts.

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Looking at BCP's portfolio performance, an improvement is also evident.

Loan growth picked up this third quarter, especially measured in average daily balances, which grew 4.1% this quarter versus 2.7% last quarter.

The recovery is mainly evident in the retail banking book, in particular the SME-Business loan book, which was up 12.6% quarter-over-quarter, followed by the mortgage and consumer segments.

But probably more evident is the turnaround in the SME-Pyme loan book, which resumed growth with 1.7% increase quarter-over-quarter.

Although, this still a low quarterly growth number, it is a reflection of an improved scenario after our portfolio contraction recorded in the two previous quarters of this year.

An important signal of the expected recovery in the Peruvian economy is the growth in the middle market loans, which expanded 6.5% quarter-over-quarter and 20.4% year-over-year.

But especially noteworthy is the evolution of Edyficar's loan portfolio, which grew 6.3% quarter-over-quarter and 33% year-over-year with stable and good portfolio quality, despite being in the same segment as Mibanco.

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With regards to portfolio quality, after almost two years of constant gradual deterioration of the SME-Pyme book, it's PDL ratio dropped 16 basis points to 10.57% this quarter.

This is significantly more relevant when we look at provisions, which were, this quarter, almost 10% lower at BCP, marking an important turnaround.

We will see this in the next graph, but before I would like to point out that good -- a few cases improving performance of practically all other business segments of our portfolio, excluding of course Mibanco, which is still in a process of cleaning up its portfolio.

Furthermore, I would also like to point at the 90-day PDL ratio, represented by the light blue line closer to the bottom of the chart, which remains at very low levels for the total portfolio, reaching only 1.7%.

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This chart shows an inflection in our cost of risk.

Cost of risk peaks in the second quarter of this year, when it represented 2.5% of total loans, and 2.7% including Mibanco's portfolio.

A significant reduction in the cost of risk of BCP's portfolio, which went down to 1.9%, reflects the important efforts implemented to recover more adequate levels as a deterioration -- duration of the portfolio and measures to recover delinquent clients were successfully implemented.

A drop in cost of risk was also reported on the Mibanco, but not a significant as in the case of BCP.

Though the cost of risk decreased after implementation of improved credit risk management, we should keep in mind that the cost of risk also reflects in the portfolio mix and thus, it will increase gradually once the consumer and SME businesses recover their pace of growth and increase their participation in total loans.

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Operating results at BCP show very good trends.

Net interest income was up a solid 5.3% quarter-over-quarter, which was mainly driven by first, the significant interest income improvement and repricing became effective, and second, good control of interest expenses.

The latter was a result of using alternative funding sources that allow funding costs to remain stable quarter-over-quarter.

Consequently, NIM on loans increased 10 basis points quarter-over-quarter and 64 basis points year-over-year, which reveals the changes in the pricing structure of our portfolio.

The aforementioned also explains the evolution of overall NIM, which reached a high 6.02%.

The 12 basis points increase quarter-over-quarter and 69 basis points year-over-year in the overall NIM also includes the shift in asset structure in favor of more profitable interest-earning assets such as loans.

Non-financial income at BCP was up a strong 7.2% as a result of good fee income generation and higher gains in ForEx exchange transactions, which are important sources of core income generation.

Moreover, OpEx dropped 1.3% quarter-over-quarter, while income generation improved significantly, resulting in further improvement in the efficiency ratio that reached a low 44.9% for BBP.

The year-over-year evolution shows a decrease of 120 basis points.

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This chart provides a more detailed explanation of NIMs within the Credicorp group, which reveals the excellent improvements in the banking business of BCP stand-alone with NIM of 5.05% and contributions to improved NIMs from Edyficar and Mibanco, which are evident on significant and improved BCP consolidated NIM to 6.02% as well as a dilution of the banking business NIMs through the additional lower margins in the rest of the Credicorp group.

(Technical difficulty)

Please continue to hold, your conference will resume.

Thank you for your patience.

Please continue to hold, your conference will resume.

Thank you for your patience.

Mr. Dasso, you may proceed.

Hello, I believe that we stopped at the beginning of page nine, is that the case?

Yes, okay.

Well, we will begin at the beginning of page nine.

Even though sustaining a solid and efficient low funding costs seem to present a challenge in the last years, this was achieved through careful liability management with very moderate structural changes.

In fact, reported funding moved from 71% total funding in 2011 to 68%, then to 71% in the following years to reach again 67% this third quarter.

However, BCP's loan to deposit ratio increased significantly in the last year but as a result of an important change in the asset structure in favor of the higher yielding loan book on the one hand and on the other, a conscious decision to fund that local currency demand through lower cost Central Bank instruments instead of price sensitive time deposits, especially in our present environment of high solid demand which will put pressure on (inaudible).

Therefore, this quarter, about 4.5% of total funding was covered through these debt instruments as we decided to trade higher loan to deposit ratio against lower cost of funds.

Consequently, our loan to deposit ratio moved from 94.3% to 104% but our cost of funds dropped to 2.05%.

This strong shift (inaudible) demand for funding towards our local currency responded to increased preference for local currency denominated loans, which picked up in 2013 and has kept this trend then.

The result has been a better asset structure in payroll, mainly for the higher yielding local currency loan book and a shift in loan to deposit ratios by currency, which increased in the last year in Soles to reach today 110% and dropped in US dollars to reach 97% today.

It's important to mention that we do not perceive this to be a constraint for growth nor it is a real concern though it will be -- it will, in the long run, increase slightly our funding costs.

Local currency liquidity can be well sourced by the Peruvian market and the regulator and the Central Bank monitors and has plenty of ways to provide the necessary source.

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BCP Bolivia's contribution to Credicorp totaled PEN17.4 million in the third quarter, which represented an increase of 8.4% quarter-over-quarter.

In this context, ROE reached a level of 16.1%.

The aforementioned was reflected in slightly lower operating income due primarily to, first, a decrease in non-financial income from foreign exchange transactions and second, growth in operating expenses associated with BCP's Bolivia efforts to comply with government requirement.

It's important to highlight the positive evolution of loans, which expanded 6% quarter-over-quarter, along with a lower PDL ratio of 1.45%.

Edyficar continued to outperform the local economy and the SME sector, in particular.

This evolution is reflected in the bank's loan growth of 5.7% for the quarter and the fact that, its days portfolio quality ratios are the only ones in the system that have remained stable and at 4.02%, can be considered low for the sector.

In this context, total loans at the end of the third quarter reached over PEN3.2 billion, while operating income rose 25.7%.

These results, without including the Mibanco effect, help generate an ROE of 27.7%, resulting in a contribution to Credicorp of PEN37.2 million.

The reported numbers, however, incorporate effects of Mibanco and show net earnings of PEN20 million with an ROE of 7.1%.

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Even though these numbers are based on local prudent accounting since we only have IFRS numbers on a quarterly basis, which do not show trends yet, we decided to show you the graphs to give a first feel of the evolution and our recovery work being done in Mibanco to stabilize the business and turnaround the trends preparing Mibanco for the merger with Edyficar next year.

The chart of percentage of total loans reveals a slowdown in the contraction rate of total loans as well as a stabilization of the growth of past due loans, which kept increasing until August, 2014 and show our first contraction in September to 7% of our portfolio.

This timing is also seen in the chart of net provisions and cost of risk, both peaked in August and show first turnaround in September.

However, IFRS provisions, included in BCP consolidated numbers are slightly higher.

The work is being focused in first, better loan origination with new customers, more origination with returning customers and second, improved collection process done with Edyficar's model.

The chart, number of customers shows, first continuous reduction in the outflow of customers in line with retention efforts and second, higher increase in new and returning customers.

The chart turnover shows the work done with the employees of Mibanco, which reveals the high turnover in the industry, but especially in the previous year shows how understandably important increase in turnover with peak -- which peaks at the sale of Mibanco and as the business stabilizes, starts to come down.

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With regards to our insurance business, this has not been a particularly good growth year for the property and casualty business.

Nevertheless, new and more intelligent pricing, more selective underwriting leading to less underwriting on our books, less casualties, our higher commissions, favorable profitability over growth on (inaudible) achieved the important improvement in net earnings recorded.

The latter was helped this quarter by the recovery of an old reinsurance claim.

We have that leveraged provisions of about PEN12 million and the gains on the sale of securities which generated PEN13.2 million.

This better performance is also reflected in the significantly improved combined ratio of 94.6%.

In the life insurance business, good growth in the annuity business was recorded, which however affected negatively the results at the start due to the related upfront reserves, while some important casualties were also recorded.

Nevertheless, this continues being our very profitable sector with net earnings maintaining a good level though growth of the premium income shows the impact, especially year-over-year of the loss of the annuity business for the pension fund, which happened last year.

The health business shows good performance in EPS as well as further improvements in the medical services sector, which still needs more time to reach volumes that will allow good efficiency levels.

These good individual results combined are reflected in the significantly improved underwriting results, which rose 26% quarter-over-quarter and 33% year-over-year and also net earnings results, which is also expanded 30% quarter-over-quarter and 23% year-over-year.

Consequently, Pacifico Insurance Group reported net earnings before minority interest of PEN62 million at the end of the third quarter and have contribution to Credicorp of the same PEN60 million.

With this result, ROE was 14%.

With regards to our recent announcement about an agreement in principle about our joint operation of the health business with America, progress is being made in the negotiation of our shareholders agreement and design of future joint development plan.

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Atlantic Security Bank reported net income of $9.7 million in this third quarter.

The results of this quarter present a normal level of income generation of this business.

And last quarter's results included extraordinary income of $14.6 million, equivalent to PEN41 million relative to reimbursements from reinsurers for our claim on losses incurred during the financial crisis in 2008.

Earnings this quarter dropped to our reported ROE of 18%, which results from our 17.2% increase year-over-year in equity that reached $214 million due to the extraordinary income that was posted in the second quarter of this year.

The Bank's assets under management which includes client deposits, investments in funds and custody of financial instruments totaled $6 billion on marketed value in the third quarter.

This represents a sound 3% increase with regard to second quarter and a solid expansion of 17.5% in the year-over-year comparison.

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In the third quarter, net earnings at Prima AFP totaled PEN37.4 million, which reflects a drop of 8.4% quarter-over-quarter and an ROE dropping to still high 29%.

This drop is a result of the absence in this quarter of the extraordinary income recorded in the previous quarter related to some real estate sales on the reversal of income tax from 2013.

Prima's business is, in fact, performing well, showing improved fee income collections, which increased 6.4% quarter-over-quarter, reaching a high of PEN98 million.

Prima AFP's funds under management at the end of this third quarter totaled PEN36 billion.

This figure represents growth of 2.6% quarter-over-quarter.

I mean, the company managed 32% of the systems total funds at quarter-end.

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The third quarter has been a good quarter for Credicorp with an ROE of 19.9% including the deteriorated Mibanco and even stronger 21.7% ROE on the (inaudible) business.

Despite a complicated macroeconomic environment this year, Credicorp has achieved improvements in loans growth, NIMs, portfolio quality, cost of risk and efficiency in its banking business, as well as improvements in its insurance business and maintained its excellent pension fund and asset management business.

Looking at total results in our contributions chart.

Total net income attributable to Credicorp for the year-to-date is close to PEN1.9 billion.

However, the economic environment posted an important challenge as the economy's weakens threatens to persist throughout this year.

Nevertheless, we're certainly better prepared to take advantage of the expected reactivation of economic growth in our markets.

We have great expectations about the expected contribution of Mibanco Edyficar new venture in the coming years and the effects of the more structural efficiency improvements that are to come.

Therefore, if the economy plays along as we hope, we believe potential for growth and better ROE is significant.

With these comments, I would like to open the call for Q&A.

Thank you.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions) Thiago Batista, Itau BBA.

I have two questions, the first one is related to the asset quality.

We saw this quarter some contraction in the PDL ratio and more than that, most of the lines showed some improvement in asset quality.

So my question is, are you comfortable to say that the delinquency ratio will not deteriorate going forward.

Probably this is the inflection point, but at least not ratio to improve but at least we are not expecting further deterioration in the PR ratio.

And my second question is regarding the loan growth for next year, could you comment about how much do you believe the loan portfolio could expand the next year, and more than that, in which product or which segment you -- Credicorp will focus its expansion?

First, about deterioration or possible deterioration of the portfolio.

We believe -- although we don't know exactly what's going to happen this year or next.

This year, we are supposed to grow 2.8% and next year we'll probably grow around 4.5% to 5.0%.

If that is the case, we improve, we feel that the portfolio won't deteriorate any further.

That is the first question -- first answer.

And then on regards to the loan growth, first I want to talk a little bit about BCP.

This year, we're probably going to grow by about 12% to 13% in loans.

We feel that next year, being also our pre-electoral year, we will probably be around 11% to 12%, a little less than this year, and that's our main scenario for BCP.

In lieu to the other companies, we believe that Edyficar should continue growing as you probably know, we are going to merge Edyficar and Mibanco at the beginning of next year and they will probably grow at a very decent pace compared to what we have had in this year, especially because Mibanco is really stabilizing its operations during this month.

Thiago, this is Walter Bayly.

Let me give you a little bit more feeling on the different types of loans.

First to understand, this year was kind of unusual to the extent that the wholesale loans grew at a faster pace than retail.

And I don't recall for many, many years, haven't seen that before, but it's important to understand what were the dynamics behind that?

On the wholesale side, there were a couple of factors that one needs to understand.

One is that we continue disbursing long-term loans related to investment projects.

These were investment decisions made may be a year and a half or two and the disbursement just continued at the normal pace.

The second is that when you have a slight slowdown or a slowdown as we have seen this year, companies tend to have a slower turnaround in accounts receivable and inventory, and thus initially they tend to borrow a little bit more.

So that's another factor that helped wholesale loans grow at a faster pace than what we had expected.

And probably the last and probably the most important is due to the total currency volatility, there were a lot of tough corporates that we're borrowing from non-Peruvian banks and from offshore banks borrowing dollars -- cheap dollars.

And due to the currency volatility, those companies decided to shift their borrowings into local currency and into the Peruvian banking system.

Thus, it is not that there were new loans out there, they just came into the Peruvian banking system and obviously we captured our share of those.

So, those were the three factors that made the wholesale portfolio grow at a pace that we have not seen for a couple of years.

On the retail side, you have a couple of factors going against you, which is, there were some changes -- we started seeing some delinquencies in the lower end of the mortgage portfolio, Mivivienda.

Disbursements on that sector have come down by half or maybe by 40% and they are still at a low pace.

There are important changes that are being worked with Mivivienda with Ministry of Finance (inaudible) to try to reactivate lending in that sector.

Hopefully, those changes will come before year-end and we will have a little bit more dynamic growth in that sector.

The other is in the Pyme side, which -- the Pyme is the most volatile portion of our portfolio on the upside and on the downside, even though the country is still growing coming from 6% to 3% this year, that decrease has a lot of effect in the Pymes.

Thus they've been working in a very tough environment and we have not grown there.

So hopefully next year, all these factors will not be the same.

And we expect next year that the growth in the wholesale and retail should be more or less on the same percentage growth and the year after, we will return to more normal trends where we see more growth on the retail.

That's a long answer to a short question.

Just one point.

When you said that the overall growth of BCP will be slightly lower than this year, was it mainly because of the corporate segment or the wholesale segment?

Well, you know, future predictions are always complicated.

Our concern is really the GDP of the country.

If we have the numbers that everybody is expecting to see GDP in the country, they are not necessarily -- they do not necessarily imply a lot of activity in the internal demand side.

They are more related to the growth of a couple of large mining projects that should start production.

So we are bit cautious in terms of predicting how much the system will grow related to domestic demand, which is our retail and most of our businesses.

Carlos Macedo, Goldman Sachs.

First question, you mentioned in your release that there were expenses with discontinued operations in the quarter.

I don't really see the amount for that -- just for those expenses.

Just wanted to find out if they were relevant, I mean looking at your -- at the statements for the entire group, did see the other operating expenses almost double in the quarter.

So I just wanted to get an idea of that.

Second, you did talk a lot about how results were with and without Mibanco, obviously you are working in that restructuring.

If Mibanco does move to the level of profitability of Edyficar, you'd be talking about a positive contribution to ROE instead of a drag to ROE.

And ROE for the bank itself was already almost at 22%.

The question is, first, at what pace do you think you can turn around the Mibanco and when will it contribute something closer to what the bank now does now or even what if Edyficar does closer to the 25% to 27% range in ROE?

And on top of that, do you think you can get to that level to the 27% excluding the goodwill?

Carlos, let me tackle the Mibanco while Fernando gets numbers on the other operating expenses and discontinued operations.

We continue to be very enthusiastic and bullish about the acquisition of Mibanco.

Probably what you have seen so far and throughout the rest of the year, we are still struggling with even our models to adopt, to be able to have good provisions, models of Mibanco, we're struggling with some of the merger costs, we're struggling with reductions of personnel, the cleanup etcetera.

So this year, obviously, we do not expect any results.

Next year, my bet is that Mibanco will become the second most profitable subsidiary of Credicorp after BCP.

So yes, it will be an important contributor to profits at Credicorp.

It will be the fifth largest banking operation in Peru with a very focused business model.

We are now working a lot inside the company, transferring the business model, the operating model into Mibanco, that is working well.

We're doing transition, the integration of both companies well.

We are satisfied with the advances.

We were a little concerned at the beginning because the portfolio came down a little bit faster than what we had anticipated, but that has stopped in the past two months.

So it was an initial reduction, it is still within ranges of what we had anticipated.

The portfolio has stabilized.

So all the signals are good, we just need a little more time.

We haven't even finished the merger, but again my expectation is that, this new operation will become the second largest contributor of profits to Credicorp.

That's a very good answer.

Just trying to get a little bit more understanding on timing.

As you said, it's a gradual process.

Run rate wise, do you think it will be at the full run rate, say in the second quarter, the third quarter?

Second quarter.

But Carlos, do keep in mind that it will be a transition year, really 2015.

We will gain full speed in 2016, I feel.

You will see gradual improvements quarter-by-quarter and everything is looking as we had originally anticipated.

On the expenses?

On the expenses, with regards to expenses, we've got one timers there that you probably know.

We engage in this project with Tarjeta Naranja, and we decided to close because it wasn't successful.

So now we're now really charging off and cleaning up those expenses.

We will continue to charge them off from our books the next quarter and we will -- the Tarjeta Naranja venture will be ended in accounting terms.

And then we renewed -- as you probably know, we have our partners in Chile and Colombia in Credicorp Capital.

We made some renegotiations with them.

So we have a liability, we actually have -- we have a goal and we have a put on us that will be re-organized at the beginning of 2017.

That liability increased a little bit in its size and we're reflecting that change in this quarter and in the next one.

Can you give us an idea of the size of the impact of those two things?

Yes.

The first one -- the second, one the coals that we have will be around $25 million and we will reorganize in the second half of this year.

So there is still some to be recognized in the last quarter.

And in regards to Tarjeta Naranja, each are [around $4 million.

It's been around $4 million] and we still have to recognize around $7 million.

A couple of businesses have come to my mind.

One is that we are finalizing the amortization of the brand Edyficar.

We have the brand Edyficar in our books when acquired the company and we are not going to use that name going forward, thus we have to write it off.

The number for that is about --

It is around $10 million for the year and we are charging off around $1.1 million each month.

So there are couple of expenses related extraordinary expenses, which we hopefully will finish throughout the last quarter.

Tito Labarta, Deutsche Bank.

I have a couple of questions.

First, looking at net interest margin, you have a lot of moving parts.

So, just want to get a sense of how you see that evolving given -- seeing the wholesale loans growing faster, that's probably putting some pressure on margins, you mentioned your funding costs, you were able to keep stable and continue to see local currency loans very strongly while dollar loans are not growing as fast even though they picked up a little bit in the quarter, and that's kind of helped your margin over the last year.

So, I just want to get a sense, how do you think margin will evolve over the next year given all of those moving parts?

And then my second question is, if you look at your fee income, it's somewhat weak in the quarter and it didn't really grow and you saw a lot of your loan fees actually fell this quarter.

So, I just want to get a sense of what happened there that the fees aren't growing and what do you expect for that going forward?

Thank you.

First, we're going to talk about the NIM.

Going forward, we feel that there are good trends coming and also some trends that we've to keep in mind.

On the first trend, we feel that our portfolio will continue to shift towards Soles and as you probably know, we have better margins in Soles.

So, that is really a tailwind.

And as we said, we will also begin to roll faster in terms of retail, picking up a little bit and that also will bring better margins in terms of our NIM.

When we talk about the interest expense, we have to tell you that we are very much aware of what's going to happen with rate next year, especially when the Federal Reserve begins to increase the rate.

So, we feel it will come in the second half, but that will change a little bit the environment.

And also we have been funding, especially our Soles portfolio more and more with Central Bank borrowings but we feel that probably at the beginning of next year, we will need to go and get some funding, especially in Soles from the markets and that will also increase our funding costs.

With that, I think that I've answered the NIM part of the question and then we go to fee income.

Maybe, let me add something on the NIM.

I think the long-term trends are the ones that we have always seen, which are, there is pressure on every individual product due to competition from lower margin.

That is undoubtable.

There is pressure, competition in credit cards, there is competition on (inaudible), there's competition all over the place.

So we expect that every individual product will be under competitive pressure and margins will be tight.

This past quarter, because of -- we've been very aggressively pushing pricing to compensate for higher risk, once that starts to come down, we will start to see that competitive pressure again in the market.

But the forces going against that would be that, yes, this year we have seen wholesale growing at a faster pace than retail and that's unusual, that has obviously not helped, and we have seen -- we will continue to see more local currency mix in our portfolio.

So those are the two counter trends.

In the long run, I would say that the margins that we have today should be able to remain relatively stable.

I don't see -- I see the trends playing off one against each other.

Big question mark, what happens if the Central Bank lowers its borrowing rate, what will happen to us?

Usually, when that happens, there is very little transmission of that lower rate into retail.

There is immediate transmission into wholesale and on the funding.

It helps us on interest-bearing deposits.

But we also have a large deposit base that is practically close to zero.

So margins will be compressed (inaudible).

Hopefully, both effects again will neutralize itself.

So, in short, we expect that we will be able to maintain the (inaudible) we have seen in the past quarter going forward for at least one or two years.

Now in relation to fee income, there are many factors in both.

First of all, this quarter hasn't been a great one for Credicorp Capital, that is important in our fee income scenario.

Also, in our pension funds company, Prima AFP, following a change in the regulation, we decided that we cannot recognize income on a one-time basis but had to recognize it on a recurral basis, and that has been a change which we have implemented very recently and it will stay installed itself in the following months.

And third, when we rolled up to BCP, we feel that this year, we will probably grow by say 8%, 8.5% and that will be also the case next year, that's our feeling.

We have, as you probably know already, important pressure from the regulators in terms of fees and we are devising better ways to improve this business but that's really the scenario we don't know.

Just to clarify, so you expect margins relatively stable kind of going forward as kind of all the moving parts tends to offset each other and fees growing around 8%, 8.5% for this year and next year?

That is the case.

Just one quick follow-up then, in terms of the loan growth that you mentioned, you said 11%, 12% for BCP, but the DC cut this year is growing around 30%.

So overall for Credicorp, in terms of loan growth should be closer to like 13% or 15% is that fair to assume?

We believe that DC cut, I don't have a mixture of it, if you look at Mibanco, but I would say that it will be around the low 20s for the merged institution.

Philip Finch, UBS.

A couple questions from me as well, please.

First of all, we saw your cost of risk peak in the third quarter, which is great.

So going forward, what do you think the sustainable level we should assume for cost of risk?

And secondly, we saw the effective tax rate go up to 29.5% in the third quarter.

Can you explain what drove this?

You are saying you released higher income generation but what calls the higher effective tax rate?

And related to that, going forward, should we assume it goes back to around 26% or does it remain at this elevated level?

Regarding the cost of risk, we still expect some improvement of course, this is assuming that nothing extraordinary happens with the Peruvian economy, but I think we started to see improvements.

We have seen some improvements and those should continue a little bit more going forward.

I don't want to be a lot more precise because it is difficult, but I don't think that where we are today is where we want to be.

I would expect continued improvement in the cost of risk at least in the next two quarters obviously depended on what happens in the economy.

On the tax rate, Fernando?

On the tax rate, as I mentioned in a prior answer, we've had this one timers which involve Credicorp Limited, which involves Tarjeta Naranja.

Some of those are not deductible and they are one timers.

And that non-deduction characteristics has taken its effect in the effective cost rate.

We feel that we will return to a better effective cost rate next year.

So range of 25%, 27% rate next year would be reasonable?

We tend to think that it will be around 27%.

Fred Mariz, UBS.

Just one follow-up on the insurance.

We saw a good improvement in the quarter, which is in line with the turnaround you had announced.

Do you have any guidance or any feeling for where the ROE of the insurance could be for the end of this year and for next year?

We thought it was way above 10% already.

Could you just some feeling on the base of the turnaround at the insurance?

(inaudible) We feel that the business will continue to grow and we're working like it was mentioned during the call, very much on improving our claims ratio and in the end, our combined ratio.

We've been working a lot on controlling expenses also at the same time to get this positive effect.

There has been some extraordinary income this year that has helped us improve our earnings and obviously our ROE.

However, we do feel that we should, by the end of the year, end up and at these levels between 13% and 15%.

And hopefully by next year, we will improve that somewhat also with some improvement that we will probably see in the -- obviously in the property and casualty business and also in the provider side of the health business.

So probably next year aiming maybe in the 16%, 17% and end this year ending between 14% and 15% of the ROE.

Saul Martinez, JPMorgan.

I'll ask my first question then a follow up.

I wanted to delve a little bit deeper into your funding strategy and I know you guys have addressed this in the prepared remarks and in the answer to an earlier question.

But when I look at some of the numbers, they're pretty striking over the last several quarters.

Your local currency loan to deposit ratio has gone from 70% to over 110%.

This quarter, local currency deposits fell QonQ, your local currency loan book is growing well, you're asset yields are increasing, your funding costs are decreasing and that's all great.

But can you just talk about the sustainability of that strategy and whether you feel like you're compromising at all in terms of quality of the funding in order to meet demand for credit and to improve your financial margins.

And then specifically this quarter, obviously central bank borrowings were a big part of the incremental funding for your asset growth.

Can you just talk about whether that the sustainability of that strategy especially in an environment where next year as you mentioned, interest rates may go up, the fed tightening may occur, what it means for that for the sustainability of that strategy, your funding cost and your net interest margins.

Sure, Saul.

Did you have another question as well?

I do have another question, I'll ask, it's okay, I know it's a one question.

So, okay if you could answer and then I'll follow up with it.

First of all, if you take a step back, it doesn't seem very reasonable that the Central Bank will not provide enough liquidity, so that the Peruvian banking system can continue lending in local currency.

It just doesn't make sense.

Clearly, the Central Bank is keeping very tight control on monetary policy, because if there is excess liquidity, their concern is that that to flow into demand for dollars, So Central Bank is playing it very closely and keeping liquidity extremely tight to what we need.

But again, the basic promise one has to assume not assume it has been clearly stated by the President of the Central Bank that they will provide enough local currency liquidity for the country, the banking system to grow in a solid fashion.

Having said that, this past quarter, what we decided to do was rather than increase the rates in deposits, basically institutional deposits, we went over because we have this huge local currency portfolio of Central Bank short-term Central Bank CDs, we did REPOs with them.

We gave those CDs which are 90 days, 180 days max to the Central Bank and they gave liquidity.

That was the policy, the monetary tool which they utilized to inject liquidity into the system.

And we took advantage of that.

Will that be the case going forward?

It depends what tool of monetary policy the central bank decides to utilize.

But we have zero concern is that there will be a shortage of broker currency to lend.

Now, yes we do talk a lot about the loan to deposit ratio internally.

If you compare the loan to deposit ratio of the Peruvian banking system, Banco de Credito, whatever you want -- ratio you want to utilize, clearly, it has deteriorated.

And that is something that happens all over the world as economies start to evolve and more consumer finance starts to take place.

So are we in a period where we are seriously concerned?

No.

Is this something that we will watch very closely?

Yes.

What can we do going forward?

Clearly we are probably one of the few countries in the world where banks still hold 100% of the mortgages they underwrite.

So we've got a tremendous potential of selling those mortgages to the private pension funds.

We're working on this to find ways in which that sales can be has low cost of transaction, etcetera, etcetera., but clearly, we have a pent-up demand from the life insurance companies and from the private pension funds for long-term assets, which we today hold.

If we sell those assets, what we will do is reducing our loss and with the same deposit base the loan to deposit ratio would clearly be resolved.

So is it something that worries us?

No.

In the short run, this is something we look at?

Yes.

Are we doing something to solve that?

Yes.

But we don't see a need to do that in a very short term.

Do you feel like eventually you will have to increase your funding costs to sustain your growth?

It depends.

If you believe that the Central Bank's policy of inflation targeting and keeping the interbank rate at the rate at which they decide it does not make any sense that the interbank rate is above the reference rate.

If the interbank lending rate is above the reference rates that means the Central Bank is not injecting enough liquidity.

So if you tell me the Central Bank is going to increase the reference rate, at this stage I'm not sure, but I'm sure that our funding cost will be very close to that.

Secondly on capital, you had 25% ROE at BCP and your common equity Tier 1 basically was flat in spite of that in the quarter because of very rapid risk weighted asset growth essentially.

You do highlight obviously you have some liquid investments and some embedded gains, but can you talk a little bit about capital and how comfortable your generalized level of comfort with your capital position and do you feel like you need to pick measures to shore that up and I guess you did speak about loan growth slowing at BCP and I suppose that will help, but just if you can just give a little bit more color on how you're thinking about your capital position currently?

The main reason why after having 24%, 25% return on equity at the bank level not having increased the core equity Tier 1 is because we bought a bank.

In the last quarter, we made the second piece of the acquisition of Mibanco.

Therefore, that utilized a lot of the profits that were generated throughout the quarter.

We have been very skeptic that we at this stage feel very comfortable that BCP or Credicorp will not -- Credicorp to be very clear, Credicorp will not meet, raise capital in the market to be able to reach the 10% core equity Tier 1 by the middle of 2016 or shortly thereafter.

By the way, every time that comment is made, we get a flood of calls from investment bankers obviously selling their services to raise the equity.

But clearly, we feel very comfortable that that is not the case.

We see the bank growing at having return on equities of 24% going forward.

And clearly we do not intend to buy other banks.

Therefore, the bank should be able to, with a subdued dividend policy, be able to retain earnings and grow.

Furthermore, we do have the shares of BCI.

Those shares of BCI are both at the bank and we're in the process of transferring them from the bank to Credicorp.

The shares of BCI because they're a financial institution, they do not account as a risk-weighted asset, but rather they deduct directly from the base of capital by switching those assets, those shares of BCI into Credicorp not selling them out to the market, we will improve the core equity Tier 1 at the bank level which is what you are concerned about.

Furthermore, we continue to have large equity investments in Alicorp, in Edelnor which we feel we will not be able, we will not need to sell to which the core equity Tier 1. So again, let me be very emphatic, at this stage, we are very comfortable that we do not need to raise capital at Credicorp level to sustain and to reach the core equity Tier 1 that we have announced 10% by the year 2016.

While I'm certainly not pitching our investment bankers service for capital markets, but can you just give us a sense for what the capital benefit would be from transferring BCI to Credicorp?

I don't have the numbers in front of you, but we'll send them of course.

Marcelo Telles, Credit Suisse.

Most of my questions have been answered, just have one extra question.

Regarding the repricing you mentioned of your loan portfolio, have you been able to increase rates on a product basis and do you continue to increase rates, let's say in SMEs or some of the other segments.

Do you think this can continue in the coming quarters?

As Walter mentioned, we live in a very competitive environment here.

There are two factors to take into account here.

First is the Central Bank would probably, we don't know, but it will probably expand its monetary policy, shortening the rates, bringing down the reference rate this year or maybe next, maybe 25 basis points.

So that's something we should take into account.

And then we've raised our rates especially in the SME segment and also in consumer.

We don't feel that there is plenty of room to continue raising rates.

If there are opportunities, we will definitely take advantage of them.

But that is not what we think will happen next year.

Is it fair to say we're still left with the repricing of the back book related to increasing rates of some of these products?

We won't be increasing rates any further.

That's probably the case.

But some of the debt that is renewing this month comes with a better rate than last year's.

So we still see some effect of that change in the coming, say, quarter.

Jose Barria, Bank of America.

I have a question with regards to the risk of FX.

Most commonly, we are expecting the currency to devalue from here on to the end of 2015, and there on.

I just want to see from your perspective, I know that having changed your local currency reporting has reduced the translation impact on your results.

But what do you see are the biggest risks of this potential depreciation of the currency on our results?

This is something we struggle with a lot, it's complicated.

First of all, from a fundamental point of view, we are watching the quality of those -- that the risk quality of those customers who've asked to borrow in dollars and do not have a dollar inflow.

So first primary concern is the quality of our loan portfolio to see whether some deterioration could recur, if there were sudden devaluations.

And so far, we feel relatively comfortable, we'll review that regularly.

Every time we review the credit lines of customers, while we strive to find whether there is some risk of devaluation.

So the first element is what does the devaluation impact are, the quality of credit portfolio, that's concern number one.

And the other is translation losses at the Credicorp level because there's devaluation.

We struggle with this a lot as well and the end result that we have -- our position is that we operate in Peru, this is a country that's basically going towards local currency.

It is inherent in the risk of our equity that we are basically linked with the local currency.

And we have limited the amount of dollar position that we take, I think it's something like around $300 million to avoid volatilities.

In the past, we did have very large dollar possessions which did provide us with profits for a while and then provide us with losses at different points of time.

We have decided to minimize that volatility.

We believe that the market understands that we are a local currency player and that our results are better understood the underlying trend results viewed in local currency, and we only keep limited long dollar possessions as I mentioned, I think the limit is $300 million.

So did I answer your question?

Yes.

Just a follow-up on the portfolios.

Understanding the past, a lot of mortgage loans were issued in dollars, and I think that's changing with your preference for local currency.

First of all on that one, what is the breakdown of US versus local currency in that portfolio?

I mean, there are other segments where you would be more concerned given the comments you made on the quality of the portfolio.

The number I have in my mind is that all the new disbursements of mortgages 90% or more are local currency denominated.

Now, of the stock, I think we might be closer to 50-50, but what is happening is that the disbursements of dollar mortgages are lower than the amortization.

So that portfolio slowly started to come down.

We are not too concerned about that because they are the older mortgages where the loan-to-deposit ratio is very, very comfortable.

So, we're not concerned too much with the dollar portion of mortgage portfolio.

But we do have some areas of concern is there are some middle-market companies that continue to borrow in dollars where their businesses are not dollar denominated and those are the ones that I alluded that we watch very closely.

What happened in these companies for many years have like perfect incentives where the dollar was the weak currency against the Sol and it has the lowest coupon.

So that works like the CFO's paradise.

So, it's taken a while for them to realize that borrowing dollars does have some risk and we are working aggressively and we really try to watch those risks very closely.

Just to elaborate on your first question, the trend now is going towards Soles because our loans are going into Soles, companies are beginning to look more for Soles than dollars, we also have all the incentives from the Central Bank in terms of reserve requirements in Soles already 10%.

Two years ago, they were 30%, now they are at 10% and reserve requirements in dollars are roughly 3%.

So we have all the incentives under trend in the market is to grow in our asset side towards Soles on our liability side, towards dollars.

And on the other hand, we have more -- not in terms of risk, but in terms of our net income, we have more income in dollars.

The proportion of our income in dollars is larger than the proportion of our expenses in dollars and that also helps our margins.

Boris Molina, Santander.

I had a couple of follow-up questions regarding your funding and your capital position.

Is the situation that the banks are borrowing from Central Bank to sustain credit growth a general situation, I mean are there other banks in the system borrowing and how sustainable it is because at the end of the day you do have pressure from international flows and the Central Bank is setting reserve to sustain outflows and obviously this puts pressure on the met liquidity.

How do you view the coordination between the Central Bank and the regulator in order to beat somehow their resource pressure on the bank because obviously you are not finding attractive funding sources in the system and at the same time, the local regulator is imposing you, I'd have probably borrowed some reasonable capital ratios or capital requirements that if you look at your core consolidated core Tier 1, it is around 6.6%.

So you understand that, yes, there are ways to shift as part of those equity shareholders that you have from the bank to the holding company but this hasn't helped the group.

So, how should we think about this?

Because when you say about your capital ratio is improving, should we expect your payout ratio to decline from 25% to 15% or should we expect that the sustainable growth rate in terms of credit structurally lower now at 11% and this will help your capital ratios improve and this slower growth is going to ease the pressure on your funding sources, because at the end of the day, we think it's like an inflection point.

Commodity prices are declining, resources are declining, growth has to slow down or it has slowed down and probably would not recover.

So how do you think about this outlook and about this transition period where the Central Bank has to continue to fund the banks in the domestic system.

Is this something that has no end date, this policy or how could we think about this?

Let me try to give you some ideas on all the processes you've mentioned.

Let me start tackling, first, the issue of core equity Tier 1, which you just alluded.

The conversation we were having for about the core equity Tier 1, not having improved this year is at the bank level.

That is really where we measure the core equity Tier 1. The concept of core equity Tier 1 at Credicorp level, I'm not sure it means a lot because Credicorp is a holding company that consolidates an insurance company as pension fund, a couple of banks and so Credicorp as a holding company does have a capital requirement regulation issued by the superintendency, it is very complex, because you consolidate hospitals in that holding company.

So the capital calculations are different from that of the typical Basel III core equity Tier 1, Tier 2, etcetera.

And at the Credicorp level, we have ample regulatory capital, which we think is stable.

We do have ample regulatory capital.

Where we have more constraints is at the bank level.

And that is where the conversation we're having that even though we have had a 24% return on equity at the capital and a growth of loans of 13%, why hasn't the core equity Tier 1 improved?

And the reason behind that is what I mentioned that during that period, we acquired a bank, which is Mibanco.

Therefore, the accumulated profits did not contribute to increase the core equity Tier 1 but rather we increased a risk weighted assets, because we are quite non-strategic.

So that is in relation to core equity Tier 1. Let me stop there and make sure you have that Tier, is there any further questions on that.

But could we expect the impair to decline going forward, because you spoken about subdue dividend payment, I don't know if this implies a change in dividend policy?

No, what I meant is that the bank distributes profits dividends to Credicorp.

Credicorp has fixed dividends from the bank, from Atlantic, from Pacific or from everybody.

And then Credicorp distributes dividends to the ultimate shareholders of the Credicorp.

What I alluded was that the bank will pay less dividends to Credicorp, thus we are paying more than it had done in the past.

But at this stage, we do not envision any changes in our dividend policy of Credicorp.

We will keep them on the low end of our dividend policy to be on the safe side.

Is that clear?

So, we should expect the dividend policy to be between 20% and 25% going forward, more or less?

Keep it towards the low end.

That's what we do.

At the holding company at the low end, meaning closer to 20%?

That's correct.

In regards to the domestic market situation and how is the system coping with this situation with Central Bank?

The central bank managers hold the liquidity in the country and the way they operate is that once they have inflation targeted, one of the tools of inflation targeting is they decide where the reference rate is.

And the reference rate should be in the monetary policy is being properly applied at the reference rate.

So if there is a shortage of dollars in the interbank market, obviously, the interbank rate will be up of the reference rate.

What that means is that what the Central Banks has to do there is inject liquidity.

So they are always trying to target that the interbank lending rate is the equivalent of the reference rate.

So having had those two elements, the other element of monetary policy is that the Central Bank is always concerned about too much to the sudden dramatic changes in the FX rates, not because they have foreign exchange rates target, it is because they don't want the portfolios of the banks which continue to have a certain amount of dollarization as we have discussed before.

They do not want the credit quality of those dollar portfolios to be affected.

That is why they want to smooth out changes in the exchange rate.

Today, there is a pressure to devaluate the currency.

There is a constant demand for dollars.

And the Central Bank feels that if they were to be very loose with local currency, a lot of that local currency would flow into dollars putting more pressure.

So, they are keeping liquidity extremely tight.

But on the other hand, the third element of the imbalance is they clearly do not want the banks to stop lending because they don't have any local currency.

So they have debt balance in which they provide enough liquidity for the loan books of the banks to continue growing, but not more liquidity, so that it puts pressure on the dollar and they monitor that the interbank lending rate is at the level of reference rate.

So that is the balance the Central Bank does, and they've been doing that for many years quite successfully by the way.

So we are not concerned to the fact that there would not be enough Soles to go around.

And again, the Soles should never cost more than the reference rate.

We show no further questions.

At this time, I will turn the call over to Credicorp's Chief Operating Officer, Walter Bayly for any final remarks.

Thank you very much for joining us in this call for some very, very good questions and good conversation.

We are very satisfied with the results.

After several quarters of having indicators of our core businesses that were not good, we have seen, we have turned around and we believe that we're in a positive trend and the key indicators of our core business.

With this, I mean, margins, lower cost of risk and cost controls.

These increased margins are due to better pricing technique and work in our cost of funding.

And again, lower cost of risk and cost controls, those are the three core trends that would be working very closely which I think, we believe that at the end reflects the results of what we do here.

What are the challenges going forward?

Clearly, we have to consolidate the above.

We have to consolidate working on our margins, on our cost of risk and our cost controls.

At the Credicorp level, we have to keep working on Pacifico, the association with America we think is very powerful.

It will allow that business to go up the learning curve of management of hospitals, clinics and health services much faster than we would on our own.

So we think there is a lot of value to that association.

We have to continue working on the merger of Mibanco and Edyficar, working on the risk levels on the operating margin itself and this quarter, finishing again all the cleanup of the merger.

As I mentioned before, we believe that this will rather quickly become the second most profitable subsidy of Credicorp.

We obtained lot of attention to it and we're extremely excited with the opportunities it offers going forward.

And last but not least, we have to continue working on Credicorp Capital.

Credicorp Capital is now operating, but clearly it is not providing us with the return on equity than we had anticipated.

There are a lot of market factors including the devaluations in Chile.

And overall the lower level of growth than we had originally anticipated when we had brought these assets.

So those are the challenges that we are facing and where most of our management talent is dedicated and focused on.

Again, we want to thank you very much.

We are very enthusiastic about what would still have been a turnaround quarter and we have every expectation of continuing to delivering good returns for shareholders.

Thank you very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

We thank you for participating.

You may now disconnect.