Credicorp Ltd (BAP) 2014 Q4 法說會逐字稿

Hello and welcome to the Fourth Quarter 2014 Credicorp Earnings Conference Call.

My name is [Tilda] 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 Mr. Fernando Dasso, Chief Financial Officer.

Mr. Dasso, you may begin.

Good morning and welcome to Credicorp's fourth quarter and year-end earnings results conference call for 2014.

The year 2014 has been a challenging one.

Not only for us giving the multiple fronts, we're actively working on such as the acquisition of Mibanco, but for a country as a whole given the country's economic performance and drastic drop in GDP growth, which persisted throughout the quarter and resulted in the lowest annual GDP growth number for our country in years, 2.4%.

We have (inaudible) Credicorp to see our business growing consistently despite this scenario.

On the last fourth quarter was [not an] exception with the lending business further growth.

However, the fourth quarter has also been a period to cleanup the house and a decision was taken to account for a series of valuation adjustments in extraordinary costs in order to (inaudible) for future growth.

Those one-off costs represented at significant amount accumulated in the fourth quarter and strongly affected reported results for the quarter.

In the aggregrate for a year, these got however compensated by some extraordinary income we are able to generate in previous quarters.

So the effect for the whole year (inaudible) up as we will see further (inaudible).

But before talking about Credicorp, we saw it's appropriate to start with two charts on that proven economy, which has been the source of sewage concern in the market this last month.

Next page please, the proven economy became subject of concern due to constant revisions to reduce expected GDP growth numbers for the year following surprising and disappointing data.

Not only was the ROAE affected by the LatAm's worst growth year in the last 12 years, but also by the deteriorating terms of trade as copper and gold prices drop.

In addition, ROAEs primary sectors suffered as we experienced the worse fishing year since 1998.

(inaudible) sufferred under an aggressive plague and technical problems delayed or (inaudible) production of copper.

Furthermore, besides all these which our total yield side our span of control internal political mismanagement led to a segment following investment activity in the last year.

This lack of investments and actions from all -- from municipal to regional to the central government to promote investment, we saw that in our vacuum of government investment leadership on consequent loss in business confidence, leading to control in GDP growth we have seen.

Throughout the year, the increase was a constant disappointing data that Ministry of Economy to (inaudible) and begin an active promoter of investments giving a significant push to the approval of (inaudible), which will improve investment regulation through Congress which peaked with the approval -- with the approved gradual reduction in corporate taxes by 4% down to 26% by 2019, a measure by far unique in the region.

The central banks reported these measures and focused on maintaining a stable financial market, introducing regulation to further safeguard the strength to strength for the financial system and provided the liquidity instruments necessary to fund growth, focus in [depolarizing] further the economy.

The resource of these measures can be seen in the next slide.

Next page please.

Our pension points 2 and 4 of this chart are direct consequences of the actions taken by the Peru's Ministry of Economy and the central banks last year, and that of course continued on a positive dialog with the business community and the financial player is now in place.

The impace of such seamless is expected to add an estimated 2.2% to GDP growth this year.

In addition, primary sectors are expected to have significantly better performance.

Most technical obstacles that affected the main mining projects have been taken care of and corporate production is projected to start an expansion pace this year to almost double volumes up to by 2017.

And lastly, the normalization of the financial system, which was somewhat nervous and cautious in the previous year, continuing to slow down as grade standards were tightened [slowly] increases the availability of players (inaudible) with better grade standards, which in turn helps boost economic activity.

Though everything moving towards a gradual recovery on acceleration in economic activity, timing, these are biggest uncertainties that we are cautiously optimistic and see as a threat (inaudible) in the pick up of economic activity.

And if you expect political noise of the 2015 elections in the second half of this year, we will have a stronger dampening input in GDP growth if the economy doesn't reach some momentum before that.

Next page.

Moving on now to Credicorp's performance.

Credicorp reported net income for the fourth quarter of 2015 of soles 495.6 million, which compared to soles 645.4 million in the previous quarter.

This represents a drop of 23%, leading to a depressed ROE of 14.5% for the quarter.

For the year 2014, total net income reported reached soles (inaudible) million, reflecting an ROE of 18.5%.

Toward (inaudible) failed to reach the expected performance, core business results tell a different story and showed a strength of the business on strong results.

Despite the costs of the learning curve, which translated into higher cost of risk (inaudible) retail business.

Loan growth what strong at 5.6% quarter-over-quarter, portfolio quality continued improving showing a growth in (inaudible) of 8 basis points and (inaudible) of 10 basis points.

Also, the insurance business was able to staying, results close to improved performance over the third quarter.

For the year, loan expansion reached 24.3% that shows the cost of a learning curve (inaudible) competition to our moderate increase of 27 basis points in that (inaudible) and 22 basis points higher cost of risk which reached 2.15% provisions over total loans.

Furthermore, the efficiency ratio shows a seasonality duration in the quarter with an improvement of almost 1% in the year.

And the insurance business reported a significant improvement with underwriting resource of 10% and make a resource of 53%.

This performance especially remarkable given the economic slowdown.

However, this positive core results especially fourth quarter results were, however, affected by substantial extraordinary costs incurred and reported mainly in this fourth quarter.

Related to the Mibanco position and orientation of the BCP's business strategy and focus to take better advantage of the acquisition.

And a substantial impairment and great investment in (inaudible) market operation.

Extraordinary high risk for a year, however, includes also substantial non-core income reported previously that reduce the negative impact of the year.

As we will see in detail in the next slide, next page please.

The largest one of the expense is related to Mibanco position and includes merger charges on business model implementation charges, which accounted Soles $40 million in the fourth quarter.

And another amount for the year of Soles $78 million, this amount in both charges, such as systems migration and charge of both redundant and (inaudible) systems.

Closer of some braches stuff mail costs a modification of intangibles, etcetera.

Another relevant source of one-off charges has (inaudible) acquisition of IMS (inaudible).

The operation was acquired in 2012, at time when markets were bullish on valuations high compared to the rate environment.

The acquisition invoked a few weeks of puts and calls with our partners would generate valuation adjustments using a contractual formula as a function of the business resource, that has work against us and explain an extraordinary charge-offs Soles $52 million.

In addition value adjustments to the good will embedded in the price due to a change in market conditions and no results have generated an environment of an additional Soles $67 million.

Most of these costs affect the fourth quarter, more recent one of charge of Soles $24 million is related to a reversal of expected tax grade, which will not be re-allied due to the corporate tax reduction, we can introduce on death to higher tax positions.

The last relevant one of charge Soles $ 706 million is related to a closure of (inaudible).

A Greenfield investment that show some profitable at that time we decided to withdraw from to the give the market for such low income (inaudible) business.

On the other hand Credicorp was in a position to also realign some extraordinary gains or a gain on the sale of process on non-strategic investments, such are the Alicorp shares so in the first quarter of last year, which generated PEN62 million extraordinary.

The sale of some part of corporate shares PEN28 million, corporate bonds PEN15 million and real estate PEN8 million.

In addition, Credicorp was successful in a lawsuit and won a claim related to the losses incurred during the 2008 crisis in connection to the Madoff scandal and recovered PEN41 million in respective quarter of last year.

Such extraordinary items, as shown in the previous tables, accounted for a total net expense after extraordinary income of PEN77 million in aggregate for the year 2014, which includes a net non-recurrent expense of PEN131 million in the last quarter, which strongly affected fourth quarter reported results.

For convenience and to facilitate your analysis, in this chart we have also excluded the translation gains of 2013 and 2014, and excluded the Mibanco operation and impact of this acquisition of the 2014 results to make these numbers comparable with the 2013 numbers, net of the extraordinary items of the year, isolating this way core business performance of both years to evaluate its evolution.

Therefore, excluding the net impact of extraordinary items after tax adjustments, core business evolution showed an excellent performance, revealing recurrent net income for the fourth quarter of PEN626 million, and PEN2,461 million for the year 2014, and adjusted ROAE of 18.2% in the fourth quarter and 18.6% for the full year.

This compares extremely well with adjusted ROAE of 2013 of 17.3% for the previous year and improvement of 1.3% in ROAE.

Furthermore, what becomes also evident in this chart is that without the Mibanco acquisition Credicorp delivers a close to 19.1% ROAE apart that a) fact determine the real impact of the SME-business learning curve and general market slowdown on the total of Credicorp's business, and quantify the real cost for the reality of [Verianco] position, which appears to be a small cost to incur for hiring acquired that has become the fifth largest financial institution in the Bermuda Financial System, specialized in the most attractive and fastest growing segment, the low SME and high for lending sectors.

As mentioned before despite of persistent economic slodown in the last quarter of the year, total loans continue expanding over significant 4.4% quarter-over-quarter measured in average daily balances or 5.6% growth from the third quarter into a fourth quarter.

When (inaudible) prices there are important expansion reached high 31% growth in average daily balances, which includes an inorganic (inaudible) under evaluations, that are denominated portfolio, which still got accounts over (inaudible) for the total.

Therefore we're getting hold reaching above 15% (inaudible) and adjusting for the foreignt exchange operation, real organic growth is closer to 12% for the year, which we expect to a full dynamic portfolio even the slowdown in GDP expansion, experience in this period.

As we can see in this chart, this year the wholesale banking sector play a relevant role, 31% of the total expansion for the year, whereas the retail book was way behind with 13%.

This is the consequence by improved risk management and this is in the sector where lending standards were changed.

More cautious methods we are taking and it gives any (inaudible) experienced in the part of the year.

Furthermore, non-organic growth represent 29% for the expansion and even the dual currency nature of our portfolio and the strong portion of about 49% of US dollar denominated loans, the move the exchange rate represented 16% for the reported expansion.

Nevertheless an important expansion in a context was a slowdown of our (inaudible).

With regards to portfolio quality, these charts clearly shows a controlled situation with basically all sectors improvement, event on Mibanco portfolio.

Therefore, Credicorp reported a PDL ratio of 2.51%, 8 basis points lower than the previous quarter.

Cost of risk was improved 10 basis points this quarter to reach 2.19%.

For the year 2014, cost of risk does reflect the cost of the learning curve and the acquisition of Mibanco was reported at 2.15% for the year versus 1.93% for 2013.

Still, this is not too expensive learning curve on acquisition and acquisition cost of 22 basis points for the total portfolio.

Next page, given the mix of the portfolio expansion, we just reported the fourth quarter which was concentrated in the low margin wholesale business and the timing of good portion of disbursements towards the end of the quarter.

Net interest income improved, but was away behind portfolio growth, which in a significantly lower 1.5% quarter-over-quarter expansion, that affected net interest margin negatively.

A more detail breakdown to show NIM evolution what we shown in the following chart.

At this point, it is important to point at extremely proactive approach for the Central Bank to provide the necessary liquidity and solids to the financial system through low cost Central Bank instruments and promote this way a de-dollarization process that is becoming evident.

The availability of liquidity has allowed for the portfolios to grow according to demand and risk appetite without constraints and/or tangible pressure on margins.

Furthermore, it's interesting to see the charts at the right hand side that showed net interest income contribution like subsidiary, which reveals that the combined net interest income of Edyficar and Mibanco, which will soon be the new merged Mibanco, which is over 25% of the total net interest income contribution of BCP 18% or above net interest income of Credicorp.

The fact that makes the new Mibanco a very important subsidiary of Credicorp.

Next page please.

This chart provides some more detailed explanation of the NIMs within the Credicorp Group.

As a consequence for the portfolio evolution, NIMs showed a contraction of 10 basis points to 5.65% over the fourth quarter, which is spread out towards the different portfolios without any being especially responsible.

This chart also helps see that for the whole year the significantly increase of 161 basis points to reach 5.65%.

Then on BCP, up 37 basis points and helped by Mibanco after results the price corrections introduced in the course of the year and good cost of funds management.

Next page please.

Fee income expanded 11.5% for the quarter, explained by better lending on capital market activity and gains for foreign exchange transactions expanded also 14.5%, helped by the increase in the volatility of the Nuevo Sol/USD exchange rate.

However, the drop into our non-financial income reflects the absence this quarter of revenues from the sale of non-strategic investments or other securities, which were realized in previous quarter and the impairment of the IM Trust good work.

On a yearly basis, non-financial income as a whole expands 17.5% with full elements showing a strong expansion on the overall.

It is worth noting that fee income contributed by Prima represents 15.2% of total non-financial income of Credicorp, while Credicorp Capital contributes 13.1%.

On the expense side and excluding our operating expenses which in complex most of the extraordinary growth reported the (inaudible) is evident in the administrative expenses, which increased at year-end and reflected in the efficiency ratio, which deteriorates for the quarter.

Please flip to the next slide to see our composition of the efficiency ratio in more detail.

As we have stated in the past, the process and improved efficiencies is never a straight line and the fourth quarter is certainly a proof of debt.

We always have a seasonal increase in the administrative expenses in the fourth quarter, and this year, there is no exception.

So efficiency improvements are better measured for the year.

And in that comparison, a clear success of the process becomes evident.

In the year 2014, BCP standalone reduces efficiency ratio from 47.1% to 42.2%.

The important effort of particular insurance in this front is also evident within an almost 1% improvement of -- if you wish.

All this leads to an improvement of 90 basis points, and the efficiency ratio of Creditcorp, which was from a starting the objective around 1% point per year.

Next page.

Though we are focusing, this report is on Creditcorp global number, it is still worthwhile to individually and too (inaudible) for very different reasons.

Our recently acquired Mibanco from Pacifico, which is undergoing important changes.

Mibanco has got a very good first quarter and end of the year, which has shown further improvement in the process to control the situation of our portfolio.

There are lots of clients and a sales force turnover.

All these metrics show leveling out, and most importantly (inaudible) portfolio that should allow Mibanco to go through a merger process next month with less baggage, and well prepared to team up with (inaudible) and start the growth process to recover all lost market share.

The significant non-recurrent charges made these fourth quarter undertaken to precisely give a new Mibanco Corporation without the burden of all such costs, and focus from start and real profitability for the business.

Next page.

Pacifico (inaudible) we released made great advances in the year, has shown an important turnaround to our adjustment in business strategy, and important decisions that are reshaping its business.

With regards to the property and casualty business, results are dominated by the car insurance business business, a factor that became a serious loss making operation and required drastic changes and adjustments to small and pricing structure.

Given more intelligent pricing, more selected underwriting need to less casualties, so prefered workshops, less structural and the provinces, favoring profitability of growth, (inaudible) achieved the important improvement in net earnings report.

Further cost structures, changes, such as those related to the distribution channels, sales force reduction, and increasing (inaudible) computed such recovery.

In the life insurance business, good growth in the annuity business and good results in the investments and sales of securities makes this a very profitable sector in the health business, our focus on capitalizing on infrastructure investments of the previous years was the first step followed by the decision to shorten the learning curve might give me up with the leader in health services in the region America.

A joint venture, we'll talk about shortly.

All of the business value adjustments were accompanied by a disciplined cost control applied across the organization with significant success.

Total results and earnings contributions revealed by increasing Pacifico's contribution to Credicorp to Credicorp's bottom line by over 80% from $108 million to $199 million within the year.

Next page please.

Before closing up, I'd like to take advantage of this conference call to give you some additional information on two transactions that have been already announced and completed.

However, subsequent to the close of the year 2014.

But our part of the (inaudible) decisions taken in that course for the past year.

The joint venture with America, Chile and the re-allocation of that BCI shares.

With regard to a joint venture with Banmedica teaming up in a 50/50 joint venture for the medical & healthcare and insurance business with a leader in Andean region whether it's sort of careful business evaluation and loan negotiations.

The partnership reflects Credicorp's strategy to capitilize on Pacifico's in-depth knowledge of the Peruvian market, and Banmedica's extensive know-how and successful experience in the health care business both in Chile and Coulumbia.

Credicorp has been exploring opportunities to develop associations and/or joint ventures with regional leaders in this business.

Banmedica was identified as a sophisticated and important player in the Latin American market and is therefore a valuable partner for our strategy to offer increasingly higher standards of quality service and efficiency, satisfying the growing demand for health services and insurance nationwide.

Banmedica acquires 50% share of the referred business through the contribution of its Peruvian assets, a High-end Clinic and Laboratory network, plus a cash portion of US$ 57 million, an amount that will be used to fund future joint operations in the healthcare market of Peru transaction closed on January 1, 2015.

We reviewed this partnership as a milestone in the development of the insurance and sales (inaudible) business improved on believe ES value to the corporation, more so in light of our future plans to capture the growth potential of this (inaudible).

Now we're going to cover reallocation of the BCI shares from BCP to Credicorp.

(inaudible) market transaction at the Stock Exchange of Chile approximately 4.2 million shares of (inaudible) Chile BCI (inaudible) though a subsidiary in Chile were transferred to Credicorp Limited for a price of US $189 million.

The true purpose of this transaction was to realize and capitalize the gain on this investment and BCP to reinforce capital and at the same time, also improve the capitalization, ratios of BCP, eliminating an investment, there has to these upsets that have to be erupted from BCP's capital base.

The realized gain in BCP reaches solace 260 million, as a result of these transactions BCP's come on Tier 1 ratio based on the application of fully compliant (inaudible) I will resume the conference with the last page of the presentation, it is page 17.

Looking at total results in our contribution chart, the total net income attributable to Credicorp for the quarter shows contractions due to extra organized, we have extensively explained the significant improvement for the year-to-date reached at 12% increase net income to bring it close to close to solid PEN2.4 billion.

Furthermore, I stated in my opening the year 2014 has been challenging, but at the same time extremely successful.

In this year, we've been able to digest the costs of an impact of the economic problems added to the learning curve of the SME business.

Improving the business model (inaudible).

Second; consolidated our stratergies closing up unprofitable ventures and focusing in profitability over the core business.

Third, improve the results (inaudible) cost structures, (inaudible) in the insurance and medical business partnering with the leading health services provider in region Chile and America.

Fourth, better allocate capital and improve capitalization ratios with some shift of investment.

Fifth, clean the house meaning adjusting the evaluation of adjusting of certain investments to todays market conditions, as well as realizing gains, non-strategic investment compensate for the larger.

Lastly, acquired the most important and needing and Micro-lending (inaudible) order of which was achieved without (inaudible) pricing market profitability and reported (inaudible) delivered to our shareholders for the year with 8.5% (inaudible) good result within microeconomic environment.

It will be above advancements on the -- we certainly feel better prepared with all contingencies out, a fewer business (inaudible) and the house ready to start the pace of expansion in the core businesses with significantly more solid and mature business strategies to take advantage of the expected reactivation for economic growth in our markets.

We have great expectations about the expected contribution of the (inaudible) in the coming years, and the effect of the most structural efficiency improvements there to come.

We also have great expectations about our new joint venture with America and realignment of the insurance business.

Therefore if the economy pace alone as we hoped, we believe potential for growth and better ROE's significant.

With this comment, 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)

Our first question comes from Thiago Batista from Itau.

Hi, everyone.

Thanks for the opportunity.

I have two questions.

The first one related to the asset quality.

We saw during this Q some contraction in the overall delinquency ratio, it was the second quarter in a row that the PDL declined it.

Do you believe this trend will be continued or are you expecting any impact of the slowdown of the economy in the asset quality trend?

And my second question is about the bank's margins.

We saw some contraction in the margins of Credicorp during this quarter even considering an increase in the loan to deposit ratio.

So my question is what is our expectation in terms of the margins and also loan to deposit ratio in coming quarters?

Firstly, we're going with your first question about the PDL ratio.

You should probably go to page eight and you can see the trends in ratios.

We believe that ratios are improving -- have been improving for the third and fourth quarter, and we also believe that next year they will continue to improve.

We've worked extensively and not SME segment.

With new models, collections, admission, the PDL scores and -- I think the results are beginning to show.

You can see the lines are really -- we can see pretty safe lines the PDL arena.

I know, (inaudible) answered your question.

And then coming to -- in terms of margins this year is going to be a different year because as we said in the presentation.

The Central Bank is really fostering that balance really flip or shift their balances from dollar to [solid] the banks in this country come around, you kind of do a currency and I mean, in reality to achieve 50% solid and 50% in dollars.

Now the Central Bank is really bringing us all the advantages to foster the -- our loans become solid loans rather than dollar loans and they will bring comfortable funding to do that.

And now the [humble] funding, but also debt funding will be very good conditions, meaning the tenure are no to the interest rates.

So up believe is the margins can winding a little bit this years compared to 2014.

Yes, yes.

And then coming to -- in terms of margins this year is going to be a different year because as we said in the presentation.

The Central Bank is really fostering that balance really flip or shift their balances from dollar to solid.

The banks in this country come around, you kind of do a currency and I mean, in reality to achieve 50% solid and 50% in dollars.

Now the Central Bank is really bringing us all the advantages to foster that our loans become solid loans rather than dollar loans and they will bring ample funding to do that.

Not only ample funding, but also debt funding will be very good conditions, meaning the tenure are known to the interest rates.

So up believe is the margins can winding a little bit this years compared to 2014.

Okay.

And your view on the loan to deposit ratio?

In terms of loan to deposits, yes we have some strees there, especially in solids and we believe that we will continue to experience some strees in solids.

Though on the other hand in dollar, our loans to deposits will be pretty safe.

We're working we will probably reach 110% loan to deposit for the aggregate balance sheet.

And we're to think about bringing some mortgages out of the balance sheet.

We are working on that project and we will -- we have results, we will definitely talk to you further on.

Hey Thiago.

This is Walter Bayly.

This -- the rotation of the loan to deposit ratio which is conferrable is really a consequences of the government's position that all public sector deposits and up at the Central Bank and at the Central Bank that feeds the private banks that necessarily feeds political goals.

So in reality, a huge portion of the deposits, of the Peruvian economy, are withdrawn from the system.

And thus, as a system as a whole we have a loan-to-deposit ratio, which doesn't appear to be very healthy but it is direct consequence of the decision as to how to manage monetary policy in the country.

We don't nenecessarily like it, but it is what it is.

But again, it reflects the fact that the whole banking system, private sector banking system does not have the benefit of receiving deposits that come from the public sector companies.

Philip Finch, UBS.

Thank you for the presentation.

And couple of questions please, so some regarding your expenses.

You showed a sizable increase year-on-year in terms of operating expenses.

Now, obviously you've got Mibanco included in that year-on-year growth of 17.5%.

So, could you tell us, first of all, how much it would be without Mibanco, and then obviously there are number of non-recurring items that you mentioned in the presentation.

So, going forward looking to 2015, what sort of growth in expenses should or could we assume for the group in 2015.

And the second question is a more broader question regarding an update on Mibanco.

You talked about how 2014 was very much in terms of trying to cleaning it out ahead of the merger.

What was 2015 about, what would you expect to happen for Mibanco.

Some color on when you think the merger will happen, how much more provisions will be build at Mibanco, when can we expect the Mibanco itself to return to profits, and the -- in that in the previous conference call, also I think you talked about a turnaround ROE potential of 25% or so.

When can we envisage that going forward.

Let me tackle the Mibanco side and I'll leave for (inaudible) the another piece.

The merger of Mibanco is expected to take place 1st of March.

We're working diligently in making this happen, which involves of course systems, salesforce integration, shutdown of branches et cetera, et cetera.

We expect this year Mibanco to be the second most -- the second largest contributor to profits to Credicorp and that target of 25% for the merge entity would probably be half way that will probably be around 15% return on equity for the combined operation including all the groups we've involved.

So this will be a year in which we will start to see very positive results in terms of earnings contribution to the record from the combined entity again becoming most likely the second most important contributor to profits with an estimate or general equity of around 15%, for a number of (inaudible).

In regard to cost and then the efficiency ratio, what I can tell you is that BCP will continue with our program of efficiency.

We hope [refinery] in this forum for around 15 months and would done to achieve 100 basis points per year more or less, this is the BCP standalone.

As Walter said, (inaudible) will no longer an engaged in great expenses.

They have endured a (inaudible) year last year, and this year will be a year -- still a challenge, but most of the synergy is cooperating into advantage by our house.

When we got a lot of numbers that typical what I can tell you is that they have also gone through a very important efficiency program last year and they will reach the benefits from that program during the whole 2015.

So those are the most important companies of series at Creditcorp and we believe that efficiency ratios in the future should reflect defect force.

We planned at the end these decades to reach the low '40s, around 40% efficiency and that's be the trend that we want to achieve.

It's important that on the efficiency ratio at the bank level, we have already finished consolidating all the different initiatives to plan work forward with timelines et cetera, et cetera.

And our target as Fernando was saying is 40% cost efficiency ratio at the bank on consolidated by 2018, and we think that can achievable target.

We have moved substantially forward, if I recall correctly, at the end of 2012 we were close 49% were down to almost 42%, 43% and clearly the first tranche of that reduction was easiest parts, but again our target is 40% cost ratio at the bank level unconsolidated for 2018.

Carlos Macedo from Goldman Sachs.

Good morning, Walter and Fernando.

Thanks for taking questions.

I have a question with loan growth, you've mentioned in the beginning how we expect economy to pick up two percentage points potentially stronger than this year.

And then historically we've given guidance that loan growth is three times real GDP growth.

This year the loan growth 12%, if you take away the dollar and (inaudible).

Could you give us some color on what you expect for loan growth in 2015, where they're going to come from and what kind of mix are you going to generate and how that could affect your margins?

This year, the last year we the country grew 2.4%, this year we are supposed to roll around say 3.5% to 4% for the country.

Therefore, we believe that we will continue to grow at the same pace that we did last year around 12%, 13%.

We are beginning to see that in our numbers even this month.

The segment that will grow better, as we said last year wholesales grew by 30% and retail grew by around 13%.

We feel that this year refill will pick up a little bit, especially on the (inaudible) arena.

So we will see that growth happening.

But on the other hand, we have to say that at the beginning of next year, we have general elections here in Peru.

So from the middle -- second half of this year will be pre-electrol period.

And then there can be some volatility and typically investments lower a little bit during that period.

So with did that we will achieve that 13%.

There are some clouds that we will have to go win the fight against.

Thanks.

Just following-up then it would be reasonable to say them because you're moving into retail growing faster than wholesale and presumably that the mix will continue to shift over due to saw that you will see margins improve during the year as a result of the mix shift?

Yes, it will be solid.

We know -- we not only have better margins, but that we have talked about it in the past.

We mismatched a little bit the balance sheet.

So that mismatch between funding and lending gives us our further margin.

And engage us in more risk, but it gives us a wider margin.

Okay, thank you.

The next question comes from Saul Martinez, JP Morgan.

Hi, good morning guys.

I hope this question doesn't come across as antagonistic or confrontational.

And I realized that the economic backdrop has been troubling, but if I go back even to 2008, there have been various missteps, whether it's made off of corporate bond write-downs.

For example, your SME book deteriorated more than some of your peers -- your credit card book deteriorated more than some of your peers couple of years ago.

The IM Trust write downs have been meaningfully greater than I would have thought.

Insurance has taken a while to turnaround.

Obviously, it's better now, but it took a while to turn around and get better underwriting margins.

My question is there a risk issue as the Company and how do you respond to questions about whether you're properly assessing how to get good risk -- return risk adjusted returns on your investment, whether it be from credit activity or from M&A activity?

And my second question is on the loan to deposit ratio.

I know it's been mentioned and you guys have talked about the funding coming from the Central Bank.

But in local currency, it's 115% to 116%, and I get the de-dollarization policy.

But does that leave you vulnerable.

For example, in a situation where the Fed starts to raise rates leading to currency weakness and even leading to a lesser propensity of depositors to provide funding in local currency.

And in a related question, does that leave you vulnerable in that situation to liquidity issues, and related question is how much of your funding actually does come now from the Central Bank and how much can that go to in going forward?

Okay.

Good questions.

Let me tackle that.

First of the second piece needed to the cost of income ratio.

I think you already mentioned in a prior question, why we are here, and it's the decision of the Central Bank of which we've (inaudible) to say about.

We have conversations about it, but they're very firm and they believe that allows them to keep control and try to force people out of station of the portfolios, which impacting that they worry about a low.

So yes, we don't like it, but that is life.

This is a problem -- no it's not.

We believe that it will be absolutely counter to the Central Bank's intentions to allow the private sector banks all the banking system in reality not to have access to funding to continue growing.

One of the drivers of the Central Bank policy is growth and clearly providing enough liquidity is a necessary element.

So do we like it.

Now can we do something about it.

We've talked to the Central Bank about it.

But that's about as far as we we think it's a problem -- sustainable problem in the future?

No, we do not.

At a certain point in time, all the funds deposited from the public sector into the Central Bank will -- other elements starts to (inaudible) start to flow back into the economy and we will have a more normalized loan to income -- loan to income ratio, loan to deposit ratio for the whole banking system.

So that it is what it is.

Regarding the other question, yes, we have had a lot of -- we have had our share of mistakes, but we have had our share of successes.

At the end of the day, the return on equities of Credicorp has been quite healthy for the first 15 years.

The evaluation of the stock has proven to be quite interesting.

So, as I would say, the proof is in the [pudding] or something in the eating or something.

So, yes, we have had our share of mistakes, but we have had more than our share of successes and the end result is probably a positive one.

Okay, fair enough.

What proportion of your funding is coming from the Central Bank, do you share that?

Yes, I can eloberate a little bit on that, one the question.

We were looking at our numbers, yesterday and consolidated the (inaudible) funding in dollars.

At the end of this year, we'd probably be on 8% funding from the Central Bank and deposit ratio, we are on 70%.

All the other piece will be borrowing from (inaudible) bonds.

Okay, 70% of the local currency deposits, is that okay?

Yes, yes, we also have a local currency now, because that's where, where the Central Bank operates.

Okay.

And then final quick question, you had a small loss on Petrobras exposure at Atlantic Security, is that the only exposure that you have for Petrobras related suppliers of Petrobras related issues, whether it'd be at BCP or at Atlantic?

Does that something that we should be aware of?

We had a little bit more solid (inaudible) and the maturities were in two weeks ago, that's the breakdown.

I think we've got a little bit more, nothing material -- nothing material.

Nothing material.

Okay, thank you very much.

Jose Barria, Bank of America.

Thank you for taking my question.

Actually I have two, the first one is on asset quality, looking at your NPL ratio, which includes PDL's post restructure and finance, that ratio has increased in the quarter and looking at the stock refinance loans, it's gone up by about 28% in the quarter, can you tell us what is driving such a high level of refinance activity at BCB?

(inaudible)

But I see tier in the P&L ratio chart -- number eight.

You'll see the number there, and I don't see or what I see actually is an improvement.

Yes, I'm talking about the NPL ratio, which includes the restructuring of finance it went from 2.9% at the end of 2013 to 3.4%.

So -- and it looks like there's been a lot of refinancing or restructuring activity in the fourth quarter.

So I'm wondering if that is, I guess a result of you guys being more active and why that's the case, sort of if it's marking some sort of tier ratio that you guys are fixing by refinancing and restructured loans?

Yes, there we need two factors here.

First, yes we have refinanced a little bit more, nothing special.

But also we've got being slower on charging of loans these quarters, so that's why it shows in a ratio.

If we need to refinance, it will only refinancing.

I see, so you wouldn't say that this is a trend that shows maybe some deterioration in the portfolio?

What we've been seeing is that, on the other hand up to the country, our portfolio is really improving, especially in the retail segment.

Now, I'm talking about SME and consumer.

It is significantly improved (inaudible).

Okay.

I thought you were going to say something.

Okay.

That's fine, that's clear on the asset quality.

When I'm looking at the operating expense line, obviously there is a big increase in the quarter, some of that is seasonal, some of that is non-recurring.

I want to get, if you can, because it wasn't clear from the release, maybe an idea of what exactly is the recurring level of expenses that we should see on a quarterly basis, because just giving the amount of one-offs that we saw in the quarter, I couldn't really make that out?

What happened in the last quarter, I think that's usual.

Just for example, we receive invoices from our suppliers and we receive them after a month.

But in December, we received the invoices of November and December at the same time.

So that's typical and it's also typical to make some more expenses by the end of the year, but that's really what happens in terms of an accretive expenses.

Now, there is a flip side to it, which is that in the first quarter they are usually low.

(inaudible) more reporting numbers if you focus on the first quarter and multiply that's where (inaudible) growth and that's probably what we'll have this year.

Okay, perfect.

And lastly, going back to your slide on efficiency, which is slide 12 of the presentation.

Just wondering what is happening Edyficar, which is the only -- first of all congratulations on the trend on improving efficiency here.

The only one that's not really improving Edyficar and I guess my question is, is this because of any nonrecurring items in 2014 or is that something else happening there that is leading to rising efficiency ratio.

No, it's basically non-recurring items that we've to incur because we were preparing Edyficar for the merger that is going to take place in few weeks.

So it's nothing special with the operations by itself.

Okay, thank you very much.

It is around PEN25 million in one-time items.

Okay, got it.

And that's included here in the expenses?

Okay.

Thank you.

Carlos Gomez, HSBC.

I have two questions.

The first one refers to capital.

We saw the capital increase and we went on the (inaudible) first there was a change in the goodwill of Mibanco I see in the reports.

We were trying to see to know how much effect that had on the capitalization.

Second, we had (inaudible) 745, we're going to have another 47 basis points from the BCI sale.

Do you have any additional plans and do you still stick to your target to reach a 10% core equity tier 1 ratio by the end of 2016?

Yes, that's our target.

And that's a target for BCP, which is -- as you know it's a regulated entity.

We have not reached around 8% in core equity tier 1 for BCP we still plan to reach 10% by the end of 2016 and that's in our plan.

And you heard another question in terms of the goodwill Mibanco, that we have to get back to you because we haven't made any change in Mibanco and (inaudible).

I think from the press release, you got some of the (inaudible).

I think, you got the Mibanco brand considering asset and therefore is no longer part of the intangible and it may not be deducted from Capital.

(inaudible) to get back to you, I've a more detailed conversation about this.

What we've done in Mibanco, you have charged systems and there also wee have incurring cost, one-time cost of (inaudible) branches that we are closing, but (inaudible) in terms of the goodwill.

What we have amortized is the Mibanco (inaudible).

Not the Mibanco brand (inaudible) entity will call, will be called Mibanco, the (inaudible) was written off the last quarter last year.

And this is in the books of BCP because BCP is the overall (inaudible).

Yes.

Going back to the target and the 10% target.

Do you expect to get to it organically or are there any other ways in which you are going to achieve it because when you look at your returns and your expected growth, there isn't a lot of room for capital acquisition, if my numbers are correct.

Well, the return on equity at the bank level should be around 54, 55.

We will be conservative in the dividends we pay out of the bank and we will have a 12% growth approximately in assets, so yet there is a space for accretion.

Last question, dividends at the (inaudible) what's your expectation for the coming years?

We have not taken that to our board yet.

We expect some marginal growth.

Thank you very much

Thank you.

The next question comes from Boris Molina from Santander

Could you please give us little bit idea of by how much you expect your ROE to expand in 2015 and what the big drivers would be.

I would suppose that given that you have gone through the process of riding off and restructuring the intimation of Mibanco et cetera, you should see a significant pickup given that Mibanco is always going to be 50%.

So what would be affected the consulated level.

What do we expect in terms of earnings growth for the year, what are you thinking about?

(inaudible) return on equity for Creditcorp has always been our target and we should get there this year.

Only 20, okay.

We will retain more equity as we mentioned at debt level.

Okay.

Thank you.

Jordan Hymowitz, Philadelphia Financial.

Thanks so much.

I was wondering if you can help me understand how you think about loan loss reserves, especially as a percent of non-performing loans including restructured loans because the reserve coverage has been coming down after several years and I was just wondering is there a line in the sand where you don't want that reserve coverage to go any lower?

We got the reserves to stay at that basically the same levels, due to that last year, we have remained at the same levels.

We don't see any further spreads with our PDLs or NPLs for next year.

So we will continue with a conservative mission that we have had for many years.

Do you look at the reserve level when you use that ratio, excluding or not excluding restructured loans?

Yes, the PDL is without the restructured loans and the NPL includes the restricted loans.

Right, so if you look at on just the PDLs, the numbers stayed flat, but with the restructured loans, the coverage keeps coming down to a certain extent, you know what I'm saying?

I don't understood what the question is, maybe we can get the first of charts and give you call and give you a detail how the regulatory and the IFRS provisions are calculated in our policies on the chart, quite understand the question sir.

Okay, that would be great maybe we can do it offline, but basically my question is the level of loan loss reserve coverage ratio, should we be considering restructured loans in that ratio in this net NPLs and why and why not?

Okay, great.

We will prepare something and send it over to you.

We do calculate both, (inaudible) ratio with restructured loans and without restructured loans.

So I'm not exactly sure which is the one you're looking at and which charts because we do publish both.

Okay.

Thank you.

You are welcome.

This is just to give you number from sample dates, coverage of NPLs, the last quarter of 2013, were 125% and this last quarter was 134% so without the NPL coverage.

Okay.

We'll get back to you.

Thank you.

Amit Mehta from PIMCO.

Hi, afternoon.

Thank you very much for the call.

I wanted to ask a question just to understand your dollar exposure and how you hedge for rising dollar risk against currency, I mean you mentioned briefly how you're running a mismatch position and that obviously gives you better margin, but can you just kind of talk us through how you manage that risk going forward?

And what kind of exposures or exposures you're running?

What we do is -- saying in previous question, without the reality to our sheets, one is in dollars and one is in Soles where we do the mismatch is in Soles in our Soles balance sheet, in the dollar ballance sheet we match (inaudible) because people want to really run what you're talking about.

So in essence, what we have is combined partnership in which currently, we have a long dollar precision equivalent of about $200 million.

We have established today a minimum of $150 million long dollar precision -- the other way around.

So we kind of take a view on where we think the exchange rate is moving and based on maximum amount to -- but also be able to take some profits we play the position.

As I mentioned today, we have a 150 long dollar.

I see, your (inaudible) tax and then can you just, the mismatch in the is the LDR ratio that you referred to basically?

Well what we do is actually we lend on a long term basis.

(inaudible) we lend on a long term basis.

Right, okay.

And what's the mismatch in terms of tenant?

What kind of duration mismatch are you running?

In dollar terms, we are matched (inaudible) and in local currency we're matched a long assets not being on average duration of two, three years and liabilities must be very short -- 180 days.

And I mean how far are you comfortable stretching that 10 mismatch from here?

Well, we do have some measures, which are by our Board as to how much risk we can take internal.

So it's a certain come out, which is obviously smaller (inaudible) to measure the amount of risk you can take in duration.

We do on the right local currency mortgages that will have an average life of seven years and we don't necessarily much fund them, but the overall duration of our assets in local currency is closer to three years and the average duration of our liabilities currency is closer to 90 days to 180 days.

Okay, thank you very much.

And can I just one last quick -- one quick follow-up question.

In terms of the capital build, how you balance the growth rate versus the capital build.

I mean, which one do you think about?

Is there a minimum capital accumulation you want to year that caps your growth rate in terms of asset growth for, how do you strike that balance?

Well, no.

We will not sacrifice growth for capitalization.

If we have (inaudible) we want to reach a core equity Tier 1 of 10% in 2016 and I'll give or take a couple of months.

And if we are unable to reach that with our own resources, which we think we can, we would find capital from other sources, but we would not sacrifice market share growth, because of lack of capital.

Okay, many thanks.

Thank you.

You're welcome.

We have no further questions at this time.

I would like to turn the call over to Mr. Walter Bayly, Chief Operating Officer of Creditcorp for final remarks.

Sure.

Thank you very much for your patience and for joining us on this call.

Just a quick summary, in about the middle of 2013, it became obvious to us that there were a couple of elements that required are asked to change or to address our policies.

it became very clear that the country was going to grow less and the financial system was going to grow less.

The country was -- it's going to grow less because of the reasons we know, and also it's important to think if you account at the level of bankarization or penetration of the banking system in Peru has increased in the past decade.

We are now at levels close to Mexico and almost reaching Colombia.

So even though there is still root to grow, we have advanced a lot in level of penetration of the banking system.

Throughout this period, we have gone through very, very large growth periods in which year-after-year, our assets were growing 25%, 20%, and it's clear that that would not be the case going forward.

Thus, in 2013 we decided to adjust and refocus the banking Credicorp through several initiatives.

Throughout this period of growth, we had being very focused in capturing all the growth that is happening making sure we have presence in every market, in every product, in every nitche.

We decided to take a step back and look at all those different initiatives that we have started and re-evaluate each of those initiatives, market segments and products and we have (inaudible) to scale down what that have been less profitable.

Clearly (inaudible) is one of them.

We also have the brokerage Willis which we are in the process of finalizing the sale.

We had an agreement (inaudible) for low-income population, which we have scaled back.

We decided to do the joint venture with Banmedica to faster -- the management skills required to run sales, services.

There was a learning curve that was not going to be fast for us.

So we have scaled backed lending and sub-segments, for instance in the low income non payroll, below a 1000 solids we have scaled back our efforts.

So we're in the process of readjusting the bank and Creditcorp for this new reality.

Throughout the period of growth, we have not paid a lot of attention to efficiency, and we have lost some competitiveness vis-a-vis our competitors.

We have started our initiative, which has proven to be very successful.

So we are refocusing the bank to be successful in this new environment as it was in the past environment.

This is way into the second year of adjustments.

We think we will start to see a lot of benefits for this year, particularly as efficiency starts to materialize, as our risk management tools become more better utilized in the day-to-day operations.

So we have had a big effort in cleaning up our balance sheet throughout last year and we're focusing our organization.

We think we are very well positioned to capture this new area of more subdued growth, but we are very confident that we can maintain the 20 plus return on equity at the Creditcorp level and that 24 plus return on equity at the BCP level.

Those are the two drivers that we think are within our reach and we have been working diligently to achieve those objectives.

Again, we thank you very much for your patience and for joining us in the conference call.

And with this, we say goodbye.

Thank you, ladies and gentleman.

With this, we conclude today's conference.

We thank you for your participation, you may now disconnect.