Credicorp Ltd (BAP) 2015 Q1 法說會逐字稿

Welcome to the Q1 2015 Credicorp Earnings Conference Call.

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

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

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

Please note that this conference is being recorded.

I will now turn the call over to Mr. Fernando Dasso, Chief Financial Officer, you may begin.

Good morning and welcome to Credicorp's conference on our earnings results for the first quarter of 2015.

In 2014, we focused our efforts on various fronts, including the acquisition of the Mibanco and its preparation for the merger with Edyficar.

The turnaround of our SME business model, the improvement of our operating efficiencies, the restructuring of Grupo Pacifico and the consolidation of the Investment Banking business.

As a result, Credicorp reported net income of PEN805 million in the first quarter of 2015, which reflects good performance in the main business lines.

The aforementioned translated in turn ROE and ROA of 22.8% and 2.3% respectively.

Although our result in the first quarter includes extraordinary and non-recurring income of $107 million after tax due to the joint venture signed between Grupo Pacifico and America.

Credicorp's profitability, excluding this effect, also translate into a solid ROE and ROA of 19.9% and 2% respectively.

This result was line with the organization's objectives despite the weak results posted by the proven economy in the first quarter when the recovery expected at the end of 2014 did not materialize.

Given concerns about the slowdown of the present economy, I would like to look at some of the more relevant macroeconomic indicators before examining Credicorp's first quarter results in greater depth.

Next slide please.

Although our medium and long-term outlook remains optimistic, we have revised our forecast for real GDP growth in 2015 downward from 4% to 3.5%.

The reduction in our estimate was based mainly on three factors.

First, the global economy performed below expectations in first quarter of 2015, in particular in China where growth came in at 7%, the country's weakest growth rate in the last six years.

Second, our Investment Company has ended as well as other confidence indicators continued to decline according to the latest survey of macroeconomic expectations conducted by the Peruvian Central Bank as the business community wait to see more effective [coordinant] action.

And third, public investment fell 29% year-over-year in the first quarter, mainly as a result of a larger-than-expected decline in sub-national investment.

Nevertheless, there are still positive factors that we will need to consider like the better performance in this year of the primary sectors where mining would probably expand 5.1% due to an increase in copper production and agriculture and fishing will expand 1.2% and 16% respectively, despite the El Nino phenomenon and the current positive effects of expansionary fiscal and monetary stimulus.

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It is very important to remember that Peru still has significant potential when compared to its peers.

Over the last decade, Peru's GDP has outperformed those of fellow LatAm five countries mainly Brazil, Chile, Colombia, and Mexico in nine out of the last 15 years.

The IMF expects that Peru to outperform this year once again.

Economic governance has strengthened over the last 15 years, leading to stable inflation and low public debt.

The former has usually been within the Central Bank's target range of 1% to 3% while the latter has represented around 20% of GDP.

Moreover, the country currently has growth of 15% of GDP in fiscal savings.

Furthermore, the Central Bank lowered its inflation target range from 1.5% to 3.5% to 1% to 3% in 2016-2017, implementing one of the most demanding targets in the region.

In addition, fiscal responsibility rules led to surpluses in years of high growth.

Let's now review Credicorp's performance in this first quarter.

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Credicorp's main performance indicators have evolved well and have begun to reflect the real potential of the organization's different business lines.

Profitability was excellent, even if we exclude non-recurring income, as it is reflected in, first, loan book growth of 2.2% quarter-over-quarter and 15.9% year-over-year, that represented real growth of 0.5% quarter-over-quarter and 10.7% year-over-year.

Despite a sluggish economic scenario, loan book expansion is in line with our estimate for the first quarter considering the seasonality of loans that typically reach the best growth dynamics in the second half of each year.

Second, an increase of 4.6% quarter-over-quarter and 27.8% year-over-year in net interest income, despite a low growth in interest income from loans.

Third, a solid net interest margin that reached 5.75%, 9 basis points higher than the 5.66% reported in the fourth quarter of last year.

And 55 basis points above the 5.2% observed in the first quarter of last year.

Fourth, regarding non-financial income, the significant increase reported in this slide, which was not only a result of the non-recurring income from the JV with America, but also of growth of 6.7% quarter-over-quarter and 51.6% year-over-year in gains from foreign exchange transactions, which represents our core income items that compensated for the loan increase --.

Fifth, progress the operating efficiency, which was reflected in an efficiency ratio of 40.7%, this level which was in line with expectations, fell below the 43.3% posted in the fourth quarter of last year and was similar to the 40.8% registered in the first quarter of last year.

Sixth, improved performance of the insurance business as shown in its growth ratios that decreased from 63.6% in the fourth quarter of last year to 56.6% in this first quarter.

Seventh, the income generation was more than enough to compensate the higher cost of risk that increased from 2.19% in the fourth quarter of last year to 2.46% in this first quarter, due to a more conservative approach in an economic scenario that was less dynamic than what we anticipated.

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Credicorp's total loans expanded 2.2% and 3.9% in quarter-end and average daily balances respectively.

Both quarter end and average daily balances could close to 16% year-over-year.

The aforementioned represented real growth excluding the effect of exchange rate of 0.5% quarter-over-quarter and 11% year-over-year.

And quarter-end balances at 2.4% quarter-over-quarter and 11% year-over-year in average daily balances.

[Mild] growth quarter-over-quarter was due to seasonality, which characterizes fourth quarter that registered the positive impact on loan expansion of Christmas campaigns and first quarters which incorporate the effect of payment for amortization of loans originated in those four quarters.

The analysis by business segment shows that wholesale banking continued to meet loan expansion with an increase of 4.8% quarter-over-quarter and 20.4% year-over-year, which was due primarily to medium and long-term financing.

On the other hand, (technical difficulty) the quarter and 11.8% year-over-year, that was attributable to loan expansion (technical difficulty) and credit card segments, which offset the contraction in the SME-Pyme segment.

The latter reflected the payment and amortization of loans granted in the year-end campaigns.

Mibanco's consolidated loan portfolio measured in average daily balances posted growth of 1.4% quarter-over-quarter and 5.2% year-over-year.

The relative low growth rate include the effect of, first, the transfer to BCP of leasing loans; second, the seasonality explained above for the SME-Pyme segment; and third, the merger process that experienced the Company.

The analysis by currency showed that local currency loans grew 6% quarter-over-quarter, and 20% year-over-year, which was in line with higher demand for local currency norms and proactive efforts to de-dollarize our loan book that we began at the end of 2014.

The aforementioned offset the decrease of 3.5% quarter-over-quarter in foreign currency loans that remained flat year-over-year.

The chart at the bottom of this slide shows that [the allocation] of the loan book by business lines on an annual basis.

As you can see, we've managed to reduce foreign currency loans across the board, which in turn decreases foreign exchange risk from credits.

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In terms of portfolio quality, the PDL ratio increased 7 basis points to situate at 2.58% at the end of the first quarter.

It was mainly attributable to an increase in the PEL portfolio in SME-Pyme and SME business segments with BCP, as well as Mibanco and BCP Bolivia, as we will explain later on.

In the year-over-year evolution, the PEL ratio remained almost flat, with a reduction of 1 basis points.

The NPL ratio increased 7 basis points quarter-over-quarter to situate at 3.40%.

This was due to the fact that we continued to refinance loans mainly of SME-Pyme clients.

Nevertheless, NPLs grew by 4.6% quarter-over-quarter versus 7.6% in the fourth quarter of last year which shows a deterioration in the pace of growth.

Despite the sluggish recovery of economic activity, the coverage ratio for PDL and NPLs remain stable at 165% and 125% respectively, due to a 15% increase in net provisions for loan losses, which in turn is explained by the increase in delinquency for the segment aforementioned as well as the higher provisioning required in line with deterioration in the debt service capacity of a few isolated borrowers in corporate banking related to the cash and to the Brazilian case that involve construction cost.

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This chart shows the evolution of PDL ratios by business lines.

As you can see, the increase in Credicorp PDL ratio comes from the [duration] of, first, SME-Pyme's PDL ratio reflects not only the maturity of your finance loans quantity in the second half of 2014 but also the construction in its loan book which exacerbated the deterioration of this ratio.

Second, SME business PDL ratio show the impact of few large clients that we represent isolated cases with the higher level of coverage in terms of collateral.

Third, mortgage loans also registered an increase in the PDL ratio, in line with a maturity of loan book.

We end up government supported mortgages.

It's important to note that the increase of basis points quarter-over-quarter is smaller than the 12 basis points growth for the fourth quarter.

The Mibanco consolidated PDL ratio shows high delinquency of old vintages that you reach a peak by the end of next quarter that our low growth rate of the loan portfolio, as we explained before.

Fifth, in the case of BCP Bolivia, the higher PDL ratio is explained by some deterioration of the SME-Pyme on consumer loans.

It is important to highlight that BCP Bolivia's PDL ratio is still below the Bolivian system's ratio of 1.79%.

On the other hand, some business segments have shown further improvements in delinquencies such as; wholesale banking, whose PDL ratio fell 6 basis points quarter-over-quarter, even though the PDL portfolio of corporate clients grew.

It was offset by a significant loan expansion resulting in a net reduction of PDL ratio.

Second, the risk profile of the consumer portfolio also improved quarter-over-quarter due to an increase in PDLs and the good growth phase of the loan book.

The low delinquency reflects the fine tuning of fixed models and policies implemented in 2014.

Third, the credit card segment also continued to improve its PDL ratio and reflects a 14 basis points decline quarter-over-quarter, even as loan growth outpaced the slight expansion of the PLD portfolio.

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As we mentioned before, our cost of risks increased above the level we expected.

As a result of the significant increase of 14.8% quarter-over-quarter of net provisions for loan losses.

That outpaced the expansion of 2.2% quarter-over-quarter in total loans.

The higher level of provisions is explained by; first, the increase in delinquency of the segments aforementioned; second, the higher provision requirements in line with the deterioration in the debt service capacity for few isolated borrowers in corporate banking related to the gas and oil sector and to a Brazilian case that involve construction company; and third, the weak growth of the proven economy in the first quarter of 2015 led to the significant slowdown experimented in 2014.

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Net interest income grew 4.6% quarter-over-quarter and 27.8% year-over-year, which was mainly due to higher interest income from derivatives and securities, and to a lesser extent from interest income on loans, and a decrease in the pace of growth of interest expenses due to the increasing use of central bank instruments as funding not only to expand loan book but also to de-dollarize it at a lower funding cost and that of time deposits.

This evolution led net interest margin to increase from 5.66% in the fourth quarter to 5.75% in this first quarter.

Nevertheless, it is important to note that the slight expansion in NIM is derived from difficult to sustain sources [such as compensation], low interest income, and loans which is attributable to a seasonality that affects the expansion of the loan book as explained before.

And the fact that the growth reported this quarter is mainly concentrated in lower-margin loan books.

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On the funding side, Credicorp's banking business slightly decreased its funding cost from 2.10% to 2.03% quarter-over-quarter.

This in turn [spread] the strategy of the Peruvian banking subsidiaries, BCP and Mibanco, which have reduced their funding cost by first, increasing the use of federal bank instruments to finance not only loan own expansion, but also to the dollar rates and the loan book.

And second is the positive evolution of low cost demands and saving deposits.

Third, low cost funding sources have partially replaced term deposits in the last quarter.

In terms of the loan to deposit ratio for the banking business, it was slightly better than the level registered in the fourth quarter of last year.

This was due to the higher growth rate of deposits as compared to that of total loans.

In the particular case of BCP, its total loan to deposit ratio also reduced slightly, but the local currency ratio deteriorated from 115% at the end of last quarter to 119% at the end of this first quarter.

The latter was explained by the significant expansion of the local currency loan book as compared to the increase in local currency deposits.

Local currency loan growth reflects not only the higher demand for local currency loans, but also the stronger emphasis put on the de-dollarization process in the first quarter aimed at minimizing the foreign exchange risks on credits.

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This slide shows the evolution of credit costs, non-financial income, which registered a significant increase, not only as a resource of an non-recurring income from the JV with Banmedica, but also due to the growth of 7% quarter-over-quarter or 52% year-over-year in gains of foreign exchange transactions, a core income item that compensated for the low increase in fee income.

In terms of fee income, which is a key component, it remained stable quarter-over-quarter.

The fee income from the asset management business for (inaudible) ASV and ASV increased, but it was offset by a decrease in BCP's income level, which in turn was due primarily to seasonal factors at year-end when the transaction [level peaks].

In the year-over-year comparison, fee income grew 12.6% due to ongoing income generation at the different costs for peers.

Non-financial income also includes PEN147 million solid gain from the joint venture between Grupo Pacifico and Banmedica.

That is registered under net gains from subsidiaries.

We can break down this income in three items, which are non-recurrent income due to a positive impact of the transaction, which revalues the Company's network of solid PEN144.2 million, the contribution of 50% of net income generated by EPS, which amounted to PEN5 million in the first quarter, and a reduction of 50% from net income generated by medical services or less PEN2.4 million for this quarter.

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On the insurance business, before we explain its performance, it is important to note that financial figures mainly reason reflect the accounting impact of that JV with America.

In terms of net earned premiums that increased quarter-over-quarter is completely explained where the reductions of EPS, net earned premiums due to that JV.

This effect was accelerated by the expansion of Pacifico Vida net earned premiums and the slight increase of property and casualties.

The improvement in Pacifico Vida's net earned premiums was a result of higher level of individual annuities and due to the financial gain from the standard of disability and survivorship insurance or pension.

On the other hand, net claims also fell quarter-over-quarter as a result of EPS effect and the reduction of net gains of the P&C business, in particular car insurance.

However, Pacifico Vida registered higher claims as a result of the reserve required for the disability and survivorship insurance business.

An analysis of the underwriting results by subsidiaries reveals that the life business results declined due to a need to higher claims that outpaced net earned premiums, as explained before.

Conversely, property and casualty achieved a better underwriting result that showed the positive impact of the strategies implemented in 2014 in terms of pricing, risk assessment and underwriting.

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On the operating efficiency front, this quarter results show a significant decrease due to lower administrative and general expenses, which was mainly attributable to a seasonality of this item in comparison to fourth quarter when it reached its peak and a high level of non-recurring expenses registered in the last quarter of 2014.

Consequently, the efficiency ratio fell to 40.7%, which represented a significant contraction quarter-over-quarter.

In year-over-year terms, the efficiency ratio was flat despite a 14.9% increase in operating expenses.

Hello.

We'll resume in page 15.

On 2014, we were focused on preparing Mibanco and Edyficar for the merger that took place in March of this year.

The chart of this slide show some figures for the consolidated entity that represents today the fifth banking institution in Peru with a market share of 20.9% in the SME-Pyme segment as of February 2015.

Its loan book accounts for PEN7.5 billion which stands for close to 10% of Credicorp's total loans at the end of this first quarter.

In the first quarter of this year, Mibanco's net income reached PEN41.5 million, which reflects a better performance [up to the height] non-recurring expenses of last quarter related to the efforts to implement Edyficar's business model in the Mibanco and to capture the synergies between both institutions.

This translated into an ROE of 14.4% for this first quarter.

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The contributions chart of this slide shows a better performance at least our cost for most of our subsidiaries whose ROEs start reflecting a level of profitability that the businesses should maintain and in some cases, such as Mibanco (inaudible) improve in the following quarters.

Finally, if the economic scenario performs as we expect, we believe the potential for growth will materialize (inaudible) for profitability for recurring net income.

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

Thank you.

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

(Operator Instructions) [Gian Costa], Itau BBA.

Good morning, guys.

Congratulations on the results.

I have two questions.

First, do you expect to see any improvement in the EBITDA ratio of the SME segment going forward?

And second, we observed that the loan to deposit ratio in regular service increased to 122% in first Q 2015.

Do you believe that the essential bank could stop providing local funding through repos and swaps or you could face an increase in the cost of funding?

Okay.

First, we will address the PDL ratio question.

We just hardly believe that we approximated last year, both in terms of the morals, the whole system, elections in the SME arena will begin to bring results.

We are already looking at those results.

However, part of those delinquencies are really old delinquencies and they are all of the loans, while we are seeing how is the delinquency ratios in what we call the near delinquencies.

So that will probably show in the next month.

Second, you were talking about the Central Bank and funding in service, the Central Bank is, on the one hand, providing ample resources of funding financial institutions, but on the other restricting liquidity in storage because of their own policies towards especially the exchange rate.

What they have already told us is that they got a very important set of deposits from foreign institutions, some state-owned institutions that they will begin to auction to the market.

Those funds are around PEN30,000 million and those who would definitely bring newly created soles to the market, we will begin since this whole temporary situation.

Okay.

Perfect.

Thank you.

Carlos Macedo, Goldman Sachs.

Good morning, Fernando; good morning, gentlemen.

A couple of questions, first question on the Mibanco Edyficar merger, we're seeing here PEN40 million in the first quarter, that's stronger than the first quarter last year, certainly stronger than the fourth quarter of 2014.

14% ROE, still increasing NPLs.

What is the outlook for this business?

Where do you expect it can get in terms of the NPL ratio, ROE going forward and how quickly do you think you can get there?

Second question, going back to the capital ratio, we saw that the fully loaded common equity Tier 1 after the transfer of the BCI shares is now at 7.8%, are there other actions that you can take to raise that ratio without issuing capital?

We understand that you're still not under Basel III in Peru, but is there anything you can do there to address that capital ratio, which is lower than peers in the region?

Okay, Carlos.

Probably we will begin our question, the first question.

As you know, Mibanco -- actually the new Mibanco is in a process of transition.

On the one hand, it is already one institution, it has only one system, it has only one brand.

It operates like one institution, but on the other hand, we are still putting together two different cultures of competitors for the last ten years, ten, 20 years.

So there is still a transition period, but what we are looking at is better results month by month.

We are actually putting as you can say our (inaudible) in the Company and it will be really functioning as one institution very strong in terms of commercial, in terms of collections, in terms of working as one Company and that will definitely ROEs to better levels.

However, I cannot promise ROEs, but we believe that they will come to very healthy levels in the near future.

So I know you cannot promise, do you think it can go back to the levels where Edyficar was before the merger?

Well, Edyficar was around 30% before the merger.

Those levels we [can] probably reach those levels, we have taken into account overall the synergies, but that will take awhile.

It will probably some months to reach levels or the mid-20s, I think.

Okay.

And then, on the contribution, in other words, could increase from PEN40 million a quarter to something much -- sorry?

I didn't listen to the question.

Sorry.

So the contribution could increase from something like PEN40 million a quarter to, if you go to 25% ROE level, there is something like PEN60 million or PEN70 million a quarter.

Yes.

Those are the mathematics, yes.

Okay.

Thank you.

And now on the capital, please.

Common equity Tier 1, yes, we have now reached a level of 7.8% after selling package we had in BCI, our subsidiary; that package was in BCP and it was sold to Credicorp.

So now, probably however renewals are doing better and we have reached that 7.8%.

As you probably know, our BIH ratio is a regulatory ratio in Peru, in the Basel II and we are fully compliant with that.

But now you have to talk about Basel III standards.

That's an internal ratio under and we plan to reach that 10% level in common equity Tier 1 at the end of next year, the end of 2016.

We feel that we will be able to reach it with internal sources, because we will continue to grow faster.

This year, we will probably grow by loans and interest margins will grow by 13%, 14%.

We will attain an ROE of around say 20%.

So we will be able to reach that common equity Tier 1 with internal process.

Okay.

Just can you give us, is there an update on the timetable for Basel III in Peru?

There is not really a timetable yet.

We are actively talking on very constructive mood which the regulators and they are very aware of possibly any differences with Basel II, but there is really no timetable yet.

As you know, we had that the end of this Peru Government Superior potential period.

We believe that will probably change in the next period.

Okay, thank you.

(Operator Instructions) Philip Finch, UBS.

Hi, Fernando.

Thank you very much for the presentation.

A couple of questions from me as well.

First is the dollarization, the percentage of loan books in dollars.

In the presentation slide 6, you give a very helpful breakdown by the various segments.

What is it for the whole bank or for a whole loan book, the percentage of loans in dollars and specifically how much of that book is supported by dollar revenues for the borrower as opposed to those may have local currency income.

So i.e., where is that potential FX credit risk?

The second question is regarding your cost of risk which you said was higher than expected in the quarter.

Just going forward, should we assume it to be at this current level at 2.46% or is that artificially high?

Thank you very much.

First, I am going to address your first question on dollarization or de-dollarization which is if you go back to chart 6 -- 8, sorry, what can I tell you here?

There are different segments and it's hard in such a situation in corporate and middle market.

We have many companies, you have to acknowledge that this economy is simply a dual economy and companies and people cooperate both in [colors] and soles of local currencies, that effect is more evident in corporate and middle-market.

We probably have the corporate and middle market around 30% of companies that produce income in dollars rather than the soles.

And that is the case.

And also, in the mortgage arena, we have some individuals, especially the high net worth individuals that have income and savings in dollars.

So if you look at this chart at the bottom part of the chart where we really have changed things a bit, especially in what we call the SME business segment, because those are small companies, more fragile because of these smaller and we have really to turn those portfolios into dollars faster.

On the other hand, if you look into soles part, I'm sorry, on the other hand, if you look at the other portfolios, we don't worry about the mortgage portfolio, it's already two-thirds soles and those in dollars are old loans, were loan to values are really low and especially given to high net worth individuals.

So that's not a problem.

It will continue to de-dollarize but our most important segment will only change in the SME business.

Corporate and middle market, if the dollar continues to strengthen against the sol, they have the pressures.

If you noted, they know (inaudible) and they will turn slower but will begin to turn soles in their norms.

That's in regards to the first question.

Okay.

Can I just follow up on that, please?

So just on that basis, looking at your chart, is it fair to say that around 40% of your loans are in dollars and maybe 15% of total loans are unsecured in the sense that you don't have dollar revenues backing that?

Yes, that is true.

But some of those loans, if you talk about Credicorp, [already made] in dollars we consider them to be foreign currency, but they are in (inaudible).

If you look at BCP standalone, it's probably around 39% dollars and 61% soles already.

And we are in (inaudible) these loans.

However, I have tell you that [SME] corporate and middle market, many of these loans have collateral.

We are a very conservative institution and ask for collateral, a high collateral I would say, land or even other types of collateral.

And that gives us some more confidence (inaudible).

Okay, thank you.

And you're going to answer that second question.

Second question on the cost of risk.

As you know, we are in the process of extending our business into more risky segment.

We were in the past a very traditional used to work, especially in the corporate arena.

And now, we are extending our business into retail.

These last quarters have not been a reflection of that, the first quarter has grown more than retail.

But we feel that in the future, we will need to get more into retail and that will involve probably [creating] more cost of risk.

But that part of the business we are in.

Second, we have a very important emerging population, and consumer loans, anatomy loans is concept continues to grow will be more important in our portfolio.

So overall, I mean at the end what we are looking at, is if we generate income and ROE' however, in that process, cost of risk may improve a bit.

Thank you very much, Fernando.

Saul Martinez, JPMorgan.

Thank you.

I have two questions.

first, I wanted to follow up on your response on the auctions.

I believe you said PEN30 billion, can you elaborate on that?

Has that been decided what is the timing?

Do you expect to gain your fair share of that.

What do you expect in terms of prices?

Will it increase cost of funding or not?

Just it seems like a very relevant point.

So I just want to get more color as to whether this is actual public policy at this point or whether this is something that is being discussed and still in the process of occurring.

So that's my first question.

Secondly, on your cost of -- it's just a follow-up.

I'm sorry for following up, maybe I didn't hear it very well, but when I look at your cost of risk, it did increase a bit this quarter as you've mentioned, for the reasons you've mentioned, but that was in spite of very high loan loss recoveries.

Your recoveries more than doubled quarter-on-quarter and in fact gross loan loss provisions grew 26% sequentially and 54% year-on-year.

Can you comment on that, what's the sustainable level of recoveries were, but also what you expect for your cost of risk in the coming quarters?

Given the high level of recoveries I may have without those high level of recoveries, your customers would have gone up even further.

Should we expect your cost of risk to at least stay at these levels, improve, go up a little bit?

Just, I apologize if you answered it, in the previous question, but I had a hard time really following what exactly was the point.

Okay.

I will begin with (inaudible) I have to make some shifts sorted out like 80 years and how the and decided that were in place at that time decided the funds from the state-owned companies hard to be reported at the Central Bank for many different political reasons before those funds were released in the different financial institutions.

So what is the problem now?

The problem now is that its financial situations need more soles funding because loans are [given] in soles while the deposits are beginning to grow in dollars.

It is because of the exchange rate dynamics that (inaudible).

Central Bank, once this exchange rate that much to be controlled this exchange rate.

So, what it's doing is really bringing solid liquidity to the market bit by bit.

So there is scarcity of liquidity and solidity in the market and that's why we are having this situation in our balance sheet.

However, many of these financial institutions are in customary talks with Central Bank.

As I said, we have a very constructive relationship with them and they have acknowledged that they need to send some more solid funds into the market.

My belief is that they have already decided that and they are putting together the logistics to make the auctions.

What we feel is that at the end of this month, by the end of May, these auctions will begin to be put in place.

But that's really what we have.

Those funds will really be important for the systems and also for the government and the Central Bank because they are trying to bring in an expansionary and monetary policy and this is really the way to do it so we should be confident that they will do it.

Has this been announced or have you just gotten strong signals that this will occur very soon?

We feel very strongly that it will occur soon.

And the PEN30 billion that you mentioned, is that based on -- because I think in the release you said there's PEN80 billion in the system, the PEN30 billion that you mentioned?

Yes, but part of it is in dollar currency.

So we believe that while it is around PEN30 billion, a little more than that; but we want to be conservative and sit and talk about PEN30 billion.

Okay.

And you would expect to gain some share of the PEN30 billion based on your market share or you said it would be an auction process.

How would that auction process work do you think?

Our natural share in this market is around the curve of maybe 30% and we probably would try to get that share.

Okay.

That's very helpful.

On the cost of risk if you could just elaborate on your views there in light of the high gross loan loss provisions that you had this quarter?

In terms of cost of risk, we believe that we will continue to improve in some segments.

However, as I said, we are extending our business and being more focused in retail and retail requires more risk.

However, when we look at the vintages and especially to the very early vintages in the different retail segments, we see better numbers.

I don't know if I'm answering your question, but what we see is that in the next months, in the next quarters this will really begin to show the numbers.

What is the more normalized level of recoveries because it seems like you had a very big number this quarter of about PEN122 million?

We feel that if you see our provisions, loan loss recoveries were like PEN57 million and PEN122 million this first quarter.

We believe that the PEN122 million is an outlier.

It was I would say a great quarter basically because as we say here there is more money in the streets in fourth quarter especially because in December people receive more money taking their payrolls and their payments and that happens also in March when people (inaudible).

However, we feel that Peru will be around say from PEN60 million to PEN70 million rather than PEN122 million.

Great.

Thank you so much.

Tito Labarta, Deutsche Bank.

First on your net interest margin, saw a spike because of some derivatives income that you mentioned.

Just want to get a little bit more color on that?

And also the loan margins which fell in the quarter, you mentioned I think it's a little bit because of the loan mix.

But if you could just give a little bit some more color on how you see that evolving going forward because it seems to have fallen about 30 basis points, 40 basis points?

Is it just the mix or are you seeing some pressure on spreads?

If you can give a little more color on the margin, what happened with the derivatives, the loan margins, and how you see that evolving?

And then my second question I guess just following up on the asset quality and provision.

With SME [NPL] we've begun to see some stabilization there the last couple of quarters so I was a bit surprised that that picked up again.

Was that just some seasonality or what really makes you feel comfortable that this time is the peak?

I mean we've heard that before so just want to get a little bit more comfort that going forward?

And then an up provisions, you mentioned there were some provisions I guess with some Brazil corporates improve so could you quantify how much of the provisions this quarter were related to that and is it safe to assume those are like one times and we wouldn't expect those going forward?

Thank you.

Let's talk about net interest margins and the derivative income.

In reality the derivative income is [credit] income.

I will tell you how to meet our (inaudible).

This is potentially because some of our investors especially foreign investors that have derivative papers with soles make forwards to follow those papers.

We actually sell those foreign contracts and we want to cover those foreign contracts and to cover that the Central Bank because of the quality of trying to control the exchange rate is selling what they call exchange swaps.

This is a word in Spanish called swaps cambiarios or exchange swaps and those exchange swaps recover our position, but we recover them with the margin because they sell those like 200 basis points, 250 basis points less than what we sell to our clients.

So, that's really a risk.

We have a window there, we are taking advantage of that window, but it's really not a speculative derivative business, but rather a coverage business which we do with our clients and with the Central Bank.

That's really what we're doing in derivatives.

Then your question was really talking about net interest margins, the interest income.

The first quarter of each year is not a great quarter compared to the others in terms of interest income especially because it's summertime here and also because those loans that we gave in the fourth quarter last year; Christmas campaign or this campaign at the end of the year for many companies; are paid during this first quarter.

So, this is not a great quarter to talk about interest income, we should definitely improve this next quarter.

Okay.

So then would you expect the derivatives income will go away, but the loan interest income will come back so should we assume stable margins from this quarter going forward, is that a fair assumption?

At one point, derivatives income will diminish; we don't know when, it will be when things change especially in terms of the exchange rates.

We don't know yet what's going to happen there.

Interest income on loans should continue to improve especially if the country grows a little better than we have expected, however that's not the situation now.

Last year we grew by 2.4% the GDP of this country and this year will probably have GDP growth to 3.5%.

This first quarter has only had 1.5% which will improve a little bit in the following quarters.

So then the derivative income may not completely go away in the next couple of quarters so margin can actually expand at least in the short term?

Yes, the risk should be changing in the next quarter.

Okay.

Fair enough.

And then the second which I don't think you heard that well you mentioned was in terms of the SME NPLs because we have begun to see some stabilization and you had mentioned this is a segment you've been working on.

Was the deterioration this quarter mainly due to seasonality or how comfortable you are that this is the peak trend because we've heard that before and it hasn't happened so could there be more surprises there?

And then on the provisions, how much were related to the Brazilian corporates in Peru because I imagine that would be sort of a one-time provision and can go away?

What can I say?

First, we have to divide between wholesale and retail.

In the wholesale banking, we have some isolated cases, some of them are improving now.

We feel very comfortable that that portfolio will perform well.

In terms of retail, what we are looking at is better and better numbers.

We have to be aware that this country is not growing as it should and also that we will begin to (inaudible).

So, we [expect] certified investments in Peru to diminish a bit.

We feel pretty confident.

We've worked for many months now in this area with all the different segments and numbers are beginning to show.

We don't want to promise anything especially in a very transitional year in terms of events that have happened.

Okay, fair enough.

Thank you.

(Operator Instructions) Boris Molina, Santander.

I would like to go back to the issue of capital because there is this perception about this headline 7% Tier 1 capital ratio being low.

Now when you try to make an estimation of your capital under fully loaded Basel III, your capital ratio is obviously not that low.

But you mentioned you'd have an internal number that your target is to achieve around if I'm not wrong you said 10.5% by the end of next year.

What is the current number now because we think that there is no capital deficit that it's the Peruvian regulator that imposes additional capital ratios that increases risk weighted assets to almost 100% of total assets and this is obviously not the case or will not be the case if the country goes to Basel III.

So our experience tells us that regulators are overly keen in being very conservative, it's very difficult to see them changing their policy and going to an environment where your capital ratio's not 7%, but closer to 10% right now.

So what is the current level of your estimate of a fully loaded common equity Tier 1 under Basel III and do you really expect that the Central Bank is going to -- the regulator is going to go into this type of environment basically which is more relaxed than what they have today?

We are following as I say internally Basel III fully loaded ratios.

As you know for 2015, Basel III only required 40%.

But [we expect] to be fully loaded 100% loaded in 2018.

If you look at our number on a fully loaded basis, we look at said 7.84% now.

But if you look at it in the [40% low] industry loan as a whole, it will be around 8.41%.

So we feel pretty comfortable that we'll be able to reach that 10% as fully loaded by the end of next year or maybe at that beginning of 2017.

Okay.

Sorry, there was some noise in the line and I couldn't hear those two numbers that you mentioned.

Could you please repeat it?

First of all, we are really working under Basel III fully loaded standard internally and that number right now for us is 7.84%.

But if we would be working under a partially loaded and the current load is around 40%, with reductions our number would be 8.41% right now.

Does that answer your question?

Yes.

And what about the regulator because at the end of the day the tool that they would have if they were to scrap their current policy, they would have to go to a maximum of around 200 basis points or 250 basis points for you as a domestic CC institution.

So that would take the target probably towards closer to -- and it's the minimum for you guys closer to 11% or something more.

So is this something that you think is probably going to be the case or how do you think about it?

We feel that the regulator, as I said in a prior question, won't change regulation during this government.

As you probably know, this government is changing in July next year so things won't change until that time.

However, they are fully aware of Basel III and its difference with Basel II and they are working with us.

They will probably issue some secondary regulation to bring all the financial institutions closer to Basel III.

But if they want to change to Basel III standard, they will need to change the banking law and that implies going to Congress and we feel that this is not a political time to do it.

And one follow-up on these auctions that you mentioned on these funds.

What would you expect would be the relative cost of these trade lines that you're getting from the Central Bank versus the expected rate that you would get with these funds?

Is that going to be something that is going to expand your margins meaning that it is actually going to be lowering your cost of funds or do you expect that competition is going to take these costs higher than the current rate what you're financing from the Central Bank?

Let me tell you.

The reference rate, which is an overnight rate as you know, is 3.25%.

We are actually right now getting some funding from the Central Bank three years, even four years that rate of around 3.50% to 4% with the repos we are working out with them.

So, that's really the current state of the market.

We believe that they will be willing to because they are in this expansion policy so they would be willing to give financial institutions rate that really is less than the implemented policy.

I cannot talk about this specifically on numbers here because auctions are (inaudible) right now.

Okay.

I understand.

Thank you so much.

Carlos Gomez, HSBC.

The first refers to the joint venture with Banmedica.

This has taken care of one of the life insurance.

Are there any plans to consider joint ventures or disposals in the other lines of insurance as part of the restructuring of the business and is there a timeline for that?

The second, going back to the capital question, you mentioned that you are sticking to your target of reaching 10% by the end of 2016.

I have to say you do the numbers and it's not easy to get to that number.

Is there something inorganic that we are not considering, disposals or any other measure, and why does it have (inaudible) why not take more time if you require more time to do it organically?

Thank you.

I'll begin with the second question and I'll let (inaudible) our head of insurance and health business talk to you later.

On the first question, as you know it's internal.

If we don't reach that 10% at the end of next year, we will reach it at the beginning of 2017.

We will have some flexibility there.

On the other hand, how will we reach it?

Our ROE in BCP is around say 20% to 25% while our growth in loans so the growth in capital that we'll need to support those loans will be around 12% to 13%.

So you can figure out that we'll have some excess capital if we continue to have that ROE in the coming months.

And that will be the funds that we will need to raise our capital to those standards.

On the second question, maybe if you can repeat it a bit because I don't hear (inaudible) to answer you.

It's very simple, you have reached an agreement with Banmedica for the health insurance business.

We know that as part of the restructuring of the insurance business you are considering changes and would you consider taking partners in other parts of the insurance business?

Okay.

Currently the only area we were looking for a partner was in the health insurance business and basically because we have got into the provider side of the business, which is a business in which Credicorp had little or no experience.

The other lines of business we've been running them for a while, actually in that regard, we bought the partner we had, the original partner was AIG during the crisis and we took advantage of that and we'll continue to run this business as part of Credicorp.

Thank you.

At this time, I see we have no further questions in queue.

I would now like to turn the call over to Mr. Walter Bayly, COO, for any closing remarks.

Thank you all very much for joining us in this conference call.

I just wanted to go over some of the recurring things that we have heard from you and unfortunately, the quality of the communication is quite poor.

So, I hope we have appropriately understood your questions and you have been able to understand our responses and if that has not been the case, please do contact us so we can pursue your inquires.

And again, I apologize for the quality of the communication.

There are a couple of subjects, as I mentioned, that have been recurrent that I would like to comment on.

One is the loan to deposit issue.

The loan to deposit at the bank has improved.

The loan to deposit in local currency has deteriorated.

That is something we do not like and something we are watching very closely, but that is something that really does not keep me awake at night.

Actually the situation a couple of years ago in my mind was more destabilized.

What I mean is that a couple of years ago, our loans in dollars were growing and we had to fund those in the international capital markets.

Today the situation is that our local currency loans are growing and we have to fund them today through the Central Bank.

I would rather depend on the Central Bank to give me local currency than depend on the international capital markets to give me dollars.

So clearly, as I mentioned again, this is something we do not like.

It does not keep me awake at night and this is something that is less worse than where we were a couple of years ago.

The Central Bank has given us very clear indicative signs through several channels that they are going to embark on this auction process that Fernando has mentioned.

Clearly, they would not do all at one time.

They will slowly fit liquidity into the system and we expect to start seeing this in the next couple of weeks.

The prices of which those funds will be auctioned obviously will depend on supply and demand, but clearly the Central Bank having an inflation targeting policy and a reference rate of 3.25%, it is obvious that they will manage liquidity so as to keep the short-term cost of funds relatively close to the reference rate otherwise inflation targeting does not make sense.

The second topic I wanted to mention is Mibanco.

We are working well with the merger.

This is a year of transition.

The target return on entity for that new entity, as Fernando has obviously mentioned, is in the mid 20%s and we expect to be there next year.

We are very enthusiastic about this investment and we expect it to become the second most important subsidiary of Credicorp next year.

This year we still expect some volatility on results as the portfolio continues to adjust, as we start slowly growing, and as we start to digest some of the costs of the mergers, the shutting down of branches, personnel reductions, et cetera.

So, this year will still be a year of transition.

We're very satisfied that we are ahead of our own budget, but really this is still a year of transition.

We expect to provide more stable results maybe in the latter months of this year and clearly next year.

The third issue is cost of risk and quality of the portfolio.

As Fernando rightly mentioned, we see the the bank to launch the new loans that we are providing and they are clearly of a much better quality.

What has happened in this first quarter -- and let me take a step back, how do we manage provisions?

Provisions, you can imagine, is a control panel in which you have several indicators.

One, we do have to comply with the provision requirements established by the local regulator.

We feel that the provisions required by the local regulator by the way are more than what are required on the wholesale part of the portfolio, but less than what should be provision on the retail side of the portfolio.

In balance it does not affect us because we have a balanced portfolio.

But again regardless of that, we do have to comply with what the local regulator requires us to do and that is a bare minimum that we have to keep.

Second, we utilize the provision methodologies stipulated under the National Financial Reporting Standards.

Both provision requirements do not provide a number, but a range and we have for a couple of years been in the middle of the range, which both methodologies allow you to do.

The third is we do look at expected losses, which is a forward-looking provision; but again as an indicator because accounting standards today still do not allow for forward-looking measures to be incorporated, but nevertheless, that is something that we too keep in our our control panel.

And finally, we compare ourselves with our competition.

What has happened in the first quarter are several things.

One is the asset quality of the retail portfolios continued to improve and requiring the regulatory provisions and the quality of the wholesale portfolio was hurt by some very specific wholesale loans because of what has been mentioned.

Most of those we expect would not be [lost] and most likely some of that could even start to reverse in the next couple of months because these are related to short-term exposures.

What we did in the first quarter is that as we were seeing regulatory provisions coming down, we decided to move the International Financial Reporting Standards level of provisions from the mid-range to the Top 10.

Why did we decide to do that?

It explains a couple of points that could affect the quality of our portfolio.

One, the devaluation of local currency; two, the deceleration of the economy; and potential equity impact from El Nino.

So we decided to do more provisions than we would have otherwise, still within the range of what is accepted under National Financial Reporting Standards, but take a little bit more conservative stand.

We will see provisions probably coming down in the next quarter.

The issue with Tier 1. Again, local regulation as Fernando mentioned will most likely not change in the short term.

But we are more concerned and we are [recommissioning] ourselves with more international standards to the extent that rating agencies now focus not exclusively on local reserve capital which we will be (inaudible) but more on international quality capital.

And again, the issue where we do have some lag is on the core equity Tier 1. We haven't (inaudible) it, we still have some assets that we can move along within our corporation as we did with the BCI shares that will give us another boost and having a 20% plus return on equity at the bank level growing risk weighted assets at 12% still give us the margin.

We are confident that we will reach the numbers that we have stipulated [30%] at the end of 2015 or the middle of 2016 without having to issue new shares.

We have been very [thorough]about this, we mention in every call that pricing continues to be there.

Again we are very confident and have not seen the quality of our portfolio and the fundamentals of our business related to risk and cost as in good shape for many years.

Our subsidiaries are providing very good results and we continue to see upside there.

Again, we are very confident that this will be a very good year for Credicorp and we hope that we'll be able to demonstrate that in the quarters coming forward.

Again, we thank you all very much for joining us for this call and we will hopefully see you at the end of the next quarter.

Thank you very much.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.