Credicorp Ltd (BAP) 2015 Q2 法說會逐字稿

(Operator Instructions).

I would now like to turn the conference over to Mr. Fernando Dasso.

Mr. Dasso, you may begin.

Morning.

Welcome to Credicorp's conference call on our earnings results for the second quarter of 2015.

For the second consecutive quarter, Credicorp posted a solid result with net income of PEN750 million for this quarter, which represents an ROAE and an ROAA of 20.7% and 2.1%, respectively.

It is important to note that these levels of profitability are associated with a recurring business, and represents a slight improvement as compared to first quarter 2015 ROAE of 19.9%, and ROAA of 2%.

Furthermore, these results are well consistent with our target for this year, as we have discussed.

Performance, not only in the second quarter, but also in the year-to-date results, are proof of the robust competitive advantages of Credicorp's businesses, and are result of all initiatives conducted over the past two years.

The main factors that explain Credicorp's results are loan expansion of 2.3% quarter over quarter, and 13.7% year over year, in quarter-end balances, which represents real growth of 1.2% quarter over quarter, and 11.1% year over year.

The latter represents a level of growth in line with our guidance for this year.

This growth continued to be driven by wholesale banking, where we lead the segment with a 40% share, which has allowed us to expand our portfolio with a healthy risk profile.

The significant reduction in net provisions for loan losses of 14% quarter over quarter, and 10.2% year over year, which helped reduce the cost of risk 39 basis points quarter over quarter, and 55 basis points year over year; well in line with Credicorp's guidance.

This was a result of the improvements made in the loan portfolio quality after total adjustments in the risk models of different business lines in retail banking, which have been implemented in the past two years.

Net interest income growth of 2.9% quarter over quarter, and 14.1% year over year, mainly due to higher interest income on loans follow an increase in income from derivatives.

A solid financial margin, net interest margin, of 5.7%.

Although this indicator dropped only 3 basis points quarter over quarter, it was within expectations of stable margin for 2015, and registered an increase of 3 basis points year over year.

Additionally, a low cost of risk allowed us to achieve better net interest margin after provisions, which grew 24 basis points quarter over quarter, and 38 basis points year over year.

[Interest] income generation, which was helped both by a recovery in fee income and better underwriting result, as you will see later on, was solid enough to compensate the decrease in non-financial income and to [help] generate the increase in operating expenses.

The latter led to a slight deterioration in the efficiency ratio, which rose 80 basis points quarter over quarter, as expected.

Nevertheless, the year-over-year evolution was favorable, given that non-financial income increased 9.4%, while the efficiency ratio improved after decreasing 230 basis points.

Let's review the profitability of our subsidiaries in the next slide.

Credicorp's solid performance reflects an upward trend in ROAE at the main subsidiaries, as shown in the table.

The increasing profitability is more evident if we look at the last two columns of the chart, which show ROAE for the first half of 2014 and 2015.

The improvement posted in Credicorp's recurring ROAE is noteworthy, as it is based on better performance of BCB; Grupo Pacifico; and Credicorp Capital.

In the particular case of Grupo Pacifico, recurring ROAE in the first half of 2015 was 13.5%, which does not include the extraordinary income from the JV with Banmedica that was reported in the first quarter of this year.

All of the aforementioned represents the strength and resilience of our business considering the scenario of low economic growth in local and international markets.

We would like to spend a few minutes reviewing the current macroeconomic scenario in the next three slides.

Overall, our medium- and long-term outlook remains optimistic.

We have revised our forecast for real GDP growth in 2015 downward, from 3.5% to a range between 2.5% and 3%.

The reduction of our estimate was based mainly on four factors.

First the global economy performed below expectations during 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 confidence index continued to decline as the business community waits for the upcoming change in government.

Third, public investment fell 19.4% year over year in the first half of 2015, mainly as a result of a larger-than-expected decline in [sub] national investment.

And fourth, non-primary sectors grew 1.9%, a lower-than-expected performance.

Nevertheless, there are still positive factors that we will need to consider, such as, first, the better performance in this year of the primary sectors, where mining will expand 5.1% due to an increasing copper production, as a result of new mining projects entering into production.

Agriculture and fishing will grow 1.2% and 16%, respectively, despite the El Nino phenomenon.

And second, the current positive effects of expansionary fiscal and monetary policies, which are equivalent to a 2.2% of GDP.

Next slide, please.

It is very important to remember that Peru's potential GDP is still the highest in the region and is expected to remain between 4% and 4.5% over the next years, as we see in the chart at the top of this slide.

Peru GDP growth is expected to outperform those of other LatAm countries, such as Colombia; Bolivia; Chile; and Ecuador.

The IMF expects that Peru will outperform this year, once again.

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

[Performance] has usually been within the Central Bank's target range between 1% and [3%], while the latter represented about 20% of GDP.

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

Finally, as you can see in the chart at the bottom-right hand of the page, it is important to consider that Peru has a favorable demographic structure, and by 2020 the total dependency ratio will be low, allowing the working population to increase their consumption and savings, which, in turn, will boost the economy.

Let's now review Peru's main macroeconomic risks in the next slide.

Even though Peru's macroeconomic fundamentals are good for the next year, there are some important risks that we have already taken into account.

The most important ones are the Presidential elections; China's performance; and the El Nino phenomenon.

Let's now review Credicorp's performance in this second quarter in the next slide.

Credicorp total loans expanded 2.3% quarter over quarter, and 13.7% year over year in a period-end balances, which represented a real growth of 1.2% quarter over quarter, and 11.1% year over year.

This was consistent with expectations and should improve in the second half of the year after large financing campaigns in retail banking and micro lending take effect.

The graph shows the evolution of average daily balances, which better reflect interest income generation.

Loans posted an increasing nominal [trend] of 3.8% quarter over quarter, and 17.2% year over year, which represents real expansion of 3% quarter over quarter, and 11.3% year over year.

It is important to note that loan growth continued to be led by wholesale banking.

With regards to retail banking, we registered slightly lower growth rate quarter over quarter than that posted in the first quarter of 2015, but posted a higher growth rate year over year.

In the following slides, we will analyze in more detail loan expansion by business line.

The table shows that Credicorp's loan expansion was derived from most of its -- each businesses, which posted good dynamics in nominal and real terms.

Wholesale banking's loan book expanded, mainly due to an increase in working capital and medium- and long-term financing, primarily in local currency.

Even though corporate and middle-market business lines continued to grow, the former was far more dynamic.

Retail banking portfolio grew in line with increases in the mortgage, credit card, consumer, and SME business segments.

Loan books for the first three segments expanded, mainly in local currency.

It is important to mention that the higher pace of growth posted in credit card and SME business lines was accompanied by enhanced risk controls, as expansion has been focused on clients with good risk profiles.

With regards to SME Pyme and Mibanco, the only two segments that contracted, it is critical to keep in mind that it is related to seasonality and to the adjustments made to risk models.

These adjustments focus on taking on loans with good risk profile, which is tough and even more challenging in the scenario of low economic growth.

In the case of Mibanco, the organization is still focused on the merger with Edyficar.

With regards to BCP Bolivia and SME, both continued to post good [guidance].

Now, let's review Credicorp's loan portfolio de-dollarization in the next slide.

The year-over-year analysis offers a better idea of the de-dollarization process underway, and the nature and control risk of Credicorp's foreign currency loan book.

In the chart at the top of this slide, it's clear that the segments with high dollarization are also those that have been dollarized the most.

This is the case of corporate, middle market, SME business, and mortgage portfolios, which, we believe, have now levels of dollarization that do not represent material foreign exchange risk on credit risk, as we will explain later on.

As you may know, the Central Bank has implemented a de-dollarization plan with specific targets.

In BCP's case, the efforts were rolled out mainly in two forms.

First, a program to manage foreign currency loan stock for our clients that are highly exposed to exchange-rate shock have been prioritized; and second, a series of measures implemented in [BRIC] policies for [resignation].

This second tranche has been the most important source of de-dollarization.

As a result, BCP standalone has achieved highest levels of compliance on both the loan portfolios that are subject to the de-dollarization program.

It is important to explain some of the characteristics of the portfolios that have the highest loan dollarization levels.

But before we [review] in specific features, it is essential to remember that the main reason that banks have taken on foreign currency loans is that these carry lower interest rates than local-currency loans.

This situation is still in play, although the gap is currently much smaller, going from a difference of 400 basis points to a maximum of 150 basis points to date.

The level of dollarization in wholesale banking is mainly attribute to financing for clients that generate income in foreign currency and, as such, are not exposed to foreign exchange risk.

A considerable amount of the loans that were taken in foreign currency due to lower interest rates, a decision that was enforced by the appreciation of the Nuevo sol at the beginning of 2013, having converted to local currency as customers take advantage of a decrease in rates that we offer after getting low-cost funding from the Central Bank.

In the case of the mortgage portfolio, it is important to note that the foreign currency stock registers a very low loan to value of approximately 51%, which is lower than the portfolio average of 58%; and [its worsement] since mid-2013 have been primarily in local currency, reaching levels of 100% most months.

In the case of SME business, the current level of dollarization also represents a limited risk, given that, first, a significant percentage of the foreign currency stock corresponds to clients that generate income in this currency.

Second, most of foreign currency loans have very short term of no more than 90 days, which means the clients continue to take advantage of the lower rates offered in foreign currency, meaning that in a (inaudible) significant high-speed abrupt devaluation these loans can be quickly converted.

Third, this segment has a high level of collateral of approximately 70% on average, which is mainly real estate.

And fourth, [81%] of foreign currency stock corresponds to clients with a good risk profile that fall within the [retention] risk appetite for this segment.

Also, the aforementioned is reflected in the [sensitivity] analysis of BCP's loan book, which is shown in the chart at the bottom right.

As of June 2015, in a stressed scenario, with an exchange rate shock, 86% of BCP's loan book is not exposed whatsoever to foreign exchange risk and credit risk.

This percentage has been quite favorable in the last year, and started increasing in June 2013.

Next slide, please.

Credit cards' net interest income increased 2.9% quarter over quarter, and 14.1% year over year, which was due primarily to growth in interest income on loans; and, to a lesser extent, to an increase in income from derivatives.

An improvement in interest income generation offset the increase in interest expenses.

All of the aforementioned translated into a slight reduction of only 3 basis points in NIM.

That was mainly due to loan expansion in lower-margin segments, such as wholesale banking and mortgages.

Nevertheless, NIM, after provisions, expanded 24 basis points quarter over quarter, and 38 basis points year over year.

As you can see in the table at the bottom of this page, the evolution of NIM by subsidiary shows that BCP standalone accounts for the slight reduction of Credicorp's NIM; whereas, the others here have posted relatively stable NIM.

Now, let's review Credicorp's funding in the next slide, please.

Credicorp's funding structure has allowed it to increase long-term funding share of total funding and has kept funding costs low.

Long-term funding has expanded, due to an increase in the use of Central Bank's instruments, which have three main characteristics that made them a better funding source than some deposits at this stage.

The first is related to their tenure, which is between two and four years.

In the first half of 2015, we significantly increased the share of instruments with a longer tenure.

In contrast, time deposits, which have an average tenure of 180 days, have decreased their share of total funding.

The second important aspect is the cost, which is very close to Central Bank's reference rate.

Conversely, these time deposits have a significant higher cost.

And the third feature is that the Central Bank instruments are much more stable than any kind of deposit, including time deposits.

Therefore, it is very important to keep in mind that a decrease in deposits, in particular, time deposits, has been more than compensated by an increase in the use of Central Bank instruments.

This strategy has maintained a healthy and comfortable level of liquidity to support loan growth, provided low-cost funding, and improved the quality and stability of Credicorp's funding.

The drawback of all the aforementioned was in increasing Credicorp's funding cost, and in its loan-to-deposit ratio.

The funding cost at Credicorp and BCP standalone remain at very low levels, posting only slight growth of 3 basis points, and 8 basis points quarter over quarter, respectively.

The loan-to-deposit ratio of Credicorp remained stable quarter over quarter, while BCP's standalone ratio increased 100 basis points quarter over quarter.

At BCP, this ratio increased still more in local currency, due to the current situation of loan expansion in local expansion and deposit growth in foreign currency.

We believe this is a temporary scenario that should revert when the Nuevo sol starts devaluating at a slower pace.

Therefore, we feel comfortable with the increase of BCP's loan-to-deposit ratio, because it is mitigated by funding optimization.

And BCP's solid and stable leadership in terms of deposits will give us access to this funding when we decide we need it.

This will come, nonetheless, at a higher cost; one is that still low, but higher than the current level.

Now, we will review all aspects related to provisions and risk.

Next slide, please.

Net provisions for loan losses fell 14% quarter over quarter, which was mainly attributable to improvements in risk quality for new vintages in the [representing] portfolio after the adjustments made to risk models in different segments; and a significant reduction in provisions for wholesale banking, given that in the first quarter of 2015 provisions were set aside to deteriorate -- due to deterioration in the situation of specific clients.

This requirement was not needed in this second quarter.

PDL and NPL ratios deteriorated, primarily due to the impact of three factors.

First, the maturity cycle of the refinanced loan portfolio; second, higher levels of collateral in some segments, which impedes writing off debt even if the loan is provisioned because a legal process is required; and third, the slow growth pace of new vintages.

Finally, the cost of risk posted a significant decrease of 39 basis points quarter over quarter, which was due, primarily, to a drop in net provisions while total loans maintained their pace of growth.

The 2.07% cost of risk reported in this second quarter represented the lowest level registered in the last three years, after the acquisition of Mibanco and the deterioration in the SME-Pyme portfolio in 2014.

Next page, please.

With regard to portfolio quality, the two charts show the evolution of our most important risk indicators, which should be analyzed together for a more appropriate risk analysis.

Wholesale banking's PDL ratio remains very low, despite a slight increase of only 2 basis points quarter over quarter, after some isolated cases entered the PDL portfolio this quarter.

These new entries, however, were re-dollarized at the beginning of July.

BCP Bolivia registered a slight increase in its PDL ratio at the end of the second quarter, due to improvements in the SME-Pyme and consumer portfolios.

It should be noted that BCP Bolivia's PDL ratio falls below that of the Bolivian financial system, which is situated at 1.8%.

Let's continue with the risk analysis for future banking's business side.

Next page, please.

The SME business portfolio registered an increase in its PDL ratio, due to the impact of isolated cases that were accentuated by their debt size.

It is important to highlight that these clients have a high coverage level, due to their collateral in place.

Furthermore, the segment posted slower growth in its ratio in comparison to the first quarter, which reflects the fact that this quarter more loans were concentrated in low-risk clients after several commercial initiatives were implemented.

The latter is reflected in the improvement in the cost of risk.

Next page, please.

Until 2014, Pyme was the retail banking segment that registered both the highest levels of growth and the best levels of profitability.

This segment also represented one of the main sources of future growth.

As such, at the beginning of 2013, as soon as signs of deterioration appeared, we decided to direct our resources to achieve two objectives; first, control the situation; the second, develop a competitive advantage.

In this context, we initiated a turnaround of the business model.

The most important adjustments were implemented in November 2013, and November 2014.

Today, we believe that we have control of the situation, and have made considerable progress in creating our competitive advantage.

Our efforts to achieve the first objective are reflected in a lower cost of risk.

Nevertheless, contrary to our previous guidance and expectations, traditional PDL and NPL ratios will continue to worsen, given that it is taking longer to assimilate the vintages originated primarily in 2012 and 2013.

SME-Pyme's cost of risk registered a downward trend from the second half of 2014, and on.

Although a significant portion of the current provision requirement comes from vintages of 2012 and 2013, both adjustments, vintages have a better risk total and have already begun to have a positive effect on the cost of risk.

Thus, cost of risk in the second quarter fell 126 basis points when compared to the second quarter of last year's figures.

It is important to look at the year-over-year analysis, given that it adequately incorporates the seasonality of this business, and provides a clearer indication of the business' evolution.

NPL and PDL ratios, as mentioned earlier, hide the improvement in the risk quality of [post] adjustment vintages, mainly due the effects of three factors.

First, the maturity cycle of refinanced loans granted in the second half of 2014, given that the effectiveness of refinancing companies for this type of business is very low.

For this reason, from the first quarter of 2015 and on, the PDL portfolio registered a number of reentries of non-viable clients.

Second, this segment's high level of collateral, mainly real estate, which is situated at approximately 55%.

This means that a large portion of the debt cannot be written off, even when provisions have been set aside, given the legal process, which takes an average of four years, must be initiated to liquidate the collateral.

And third, slight growth in loans registered during the period, which reflects the effect of stricter responses and seasonality in the second quarter of the year in terms of origination and amortization of loans.

Finally, yearly delinquency indicators excludes party loans that are more than 150 days overdue and less than 60 days overdue, which eliminates the effect of the two first factors mentioned previously.

As such, the indicator posted lower levels from the fourth quarter of 2014 and on, which represented decreases of at least 30 basis points on a year-over-year basis.

Next page, please.

The mortgage portfolio posted an increase of 9 basis points in its PDL ratio, mainly due the maturity cycle between three to four years of Mivivienda loans.

It is important to note that this product's share of total mortgage loans was situated at 15% at the end of the quarter.

Similar to the SME-Pyme segment, mortgage loans are backed by collateral that requires a legal process to execute foreclosure, which means that the effect of a better risk profile for new vintages is also diluted.

If we analyze the evolution of further delinquency, it is evident that it hit its peak in the third quarter of 2014; but after, it maintained normal levels, despite posting a slight increase last quarter.

The latter was mainly attributable to a decrease in loan growth with regard to that registered in the first quarter.

The cost of risk for this segment is extremely low, but still shows a degree of volatility.

Nonetheless, a lower level is evident in the year-over-year comparison.

Next page, please.

Delinquency problems at the end of 2013 in the credit card and consumer segment were mainly associated with a regulatory change in the calculation of credit cards' minimum payment.

This situation, first, triggered a delinquency problem in credit cards; and latter, affected the consumer portfolio as a significant portion of clients held both products.

Our portfolio quality in the credit card segment has maintained a downward trend in the last year, after hitting a peak in the first quarter of 2014 when debt was successfully refinanced to allow clients to adjust to a new level of debt service.

The cost of risk has increased in the last few quarters, but remains, nonetheless, within the range of the Bank's risk appetite, and is in line with the segment's profitability levels.

Quarter-over-quarter increase was primarily related to an increase in our clients' delinquency with [parent] institutions.

A similar trend can be seen in the consumer portfolio, however, with a certain lag, as delinquency problem hit the credit card segment first.

After reaching a peak in the second quarter of last year, the PDL ratio evolved favorably from the third quarter of last year to the first quarter of this year, due to debt refinancing.

The latter was reflected in the trend of the NPL ratio, which continued to grow, with the exception of the first quarter of this year when loan growth was relatively high, due to the purchase of our portfolio.

Next page, please.

Mibanco's PDL ratio increased 50 basis points, which was in line with our expectations, and situated at 6.5% at the end of the second quarter, versus 6% at the end of the first quarter.

These were due, primarily, to a maturity cycle of pre-acquisition vintages.

The aforementioned was accentuated by a low quarter-over-quarter increase in loans that, in turn, reflects the clean-up process and the loan origination in the middle of the merger.

It is important to note that the cost of risk is lower than previous quarters when provisions were required to align the coverage ratios at Mibanco with Credicorp's standards.

Next page, please.

Non-financial income fell 13.5% quarter over quarter, basically, due to the effect of extraordinary income registered last quarter on the joint venture between Pacifico and Banmedica in the health business.

The 9.4% year-over-year expansion was in line with expectations.

It is important to note that fee income, which is considered core for our business, moved 5.2% quarter over quarter, and 17.8% year over year.

This recovery [accelerated] the contraction in our [lines of] non-financial income.

Fee income represented 76% of non-financial income, and posted growth of 5.2% quarter over quarter.

This was primarily due to an increase in income at BCP, and to a lesser extent in Credicorp Capital.

Combined, the increase at these businesses represented almost 92% of the growth generated this quarter.

Prima AFP contributed with the rest; and its income generation continued to be stable, in line with the nature of this business.

With regards to net gain from subsidiaries, which comes from the JV between Grupo Pacifico and Banmedica, our health businesses, where it's all composed of the following elements.

First, a contribution of 50% of the net income generated by businesses managed by Banmedica, equivalent to PEN4.6 million; second, a 50% reduction of the net income generated by the business managed by Pacifico equivalent to PEN3.2 million; and third, an expense of PEN1.6 million associated with the renegotiation of an affiliation contract with John Hopkins.

Net gains on foreign exchange transactions fell 16% quarter over quarter, a drop due to a smaller volume of these transactions, accompanied by lower volatility of the exchange rate.

Net gains on sale of securities fell 16.6% quarter over quarter; in line with a strategic decision to reduce the level of security sales this quarter, which translated into lower realized gains.

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The insurance underwriting result increased, primarily due to the good performance in the P&C business.

In the year-over-year analysis, the decrease is due mainly to, first, the accounting effect of the joint venture with Banmedica; and, to a lesser extent, a decrease in the underwriting we saw posted by life insurance business.

Net earned premiums increased, mainly due to higher premium turnover in property and casualty, and private health insurance, which reflects the fact that expansion is [ruled] in the business' potential and in low levels of penetration.

Net claims rose, due to an increase in direct claims in both the P&C and life insurance businesses.

The former is related to two corporate gains in the marine hull segment.

Lower claims in private health and car insurance were in line with recent initiatives to improve the profitability of both businesses.

Next slide, please.

In line with the expectations we have shared with you, the efficiency ratio posted a slight increase of 80 basis points quarter over quarter.

I think I've explained this is in line with seasonality of the first quarter expenses when the ratio register it's lower level every year.

The most appropriate analysis appreciates the good results obtained from the efficiency initiatives in the year-over-year evolution.

In this scenario, the efficiency ratio improved 230 basis points and 120 basis points when comparing the first half of 2014 and the first half of 2015.

An analysis by subsidiary shows that most of the improvement year over year, in accumulated terms, was mainly driven by BCP standalone, Grupo Pacifico, and ASB.

Next page, please.

Credicorp and its subsidiaries maintained comfortable capitalization ratios that are well above regulatory limits.

With regards to common equity Tier 1 ratio, it is critical to note that the most appropriate calculation requires that the ratio be calculated at the BCP standalone level and in Peru GAAP accounting.

It is also essential to keep in mind that our calculation considers a fully loaded Basel III methodology, and applies reductions at 100% level.

As of today, there is no Basel III regulation in place in Peru, although we expect that it will be implemented in the near future.

It will provide a comfortable accommodation period.

The graph shows the evolution of [core] equity Tier 1 ratio this quarter.

The increase of 51 basis points quarter over quarter was primarily due to a high level of retained earnings, which contributed with 1,590 basis points (sic - see slide 22, "159 basis points").

Nevertheless, a series of reductions, which you can see in the large blue box, represented a decrease of [3,000] basis points in common equity Tier 1 ratio.

To realize this ratio, we have engaged in an initiative to optimize the use of capital allocated in BCP standalone.

First, we have considered moving investments in subsidiaries from BCP to Credicorp, which in this quarter represented 81 basis points of reduction.

Keep in mind that these do not include BCP's investment in Mibanco.

Second, we are also exploring the optimization of tax credits and goodwill on intangibles to further boost common equity Tier 1 ratio.

Therefore, we feel we are confident that we will be able to [realize] common equity Tier 1 ratio based on income generation, and without raising capital.

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

Thank you.

(Operator Instructions).

Carlos Macedo, Goldman Sachs.

Two questions.

First, could you give us a little more color on the Central Bank instruments?

I know you say that it's [safe], but just how -- is this a program that the Central Bank is putting out?

Is this something that's going to be consistent over the next six months, year, two years, three years?

Are the terms and maturities of these instruments set, or can they change?

Is this something that the Central Bank can decide to pull back from?

Just a little bit more understanding for us to, basically, try to forecast how sustainable this kind of funding is overall.

Second question, the reduction in the cost of risk was largely driven by a reduction in the cost of risk in the wholesale book that actually turned negative in the quarter.

How sustainable is that?

And if it's not sustainable at this level, which seems unlikely looking at the recent past, what should we expect for the cost of risk, going forward, for the whole Bank?

Should it be closer to the levels where it was in, say, maybe not the first quarter, but during the year last year?

Or is this a new benchmark, and we'll go from here?

Thank you.

Thank you, Carlos.

I'll address your first question.

The Central Bank, as you know, it is in the process of were the banks to de-dollarize our balance sheet, especially the asset side of our balance sheet, and the program is set until the end of this year.

However, we believe that it will probably continue with a lower pace during next year.

However, you have to keep in mind that the Central Bank authorities will change in the middle of next year, because [environment] will change.

Until now, we feel that there will be no differences in the plan.

However, as long as we continue to de-dollarize as fast as we are doing, it will probably, in a way, [disrepute] and the Central Bank will need to issue less of these instruments than it had this year.

We are closely monitoring the problem with them.

We have a very constructive relationship with them, so we will definitely know when will the time be, the right moment, to begin raising more time deposits than we are currently.

In terms of --

Sorry, Fernando, just to go back, but, again, these instruments are in soles.

And the time deposits, you have the whole issue with the foreign currency and the soles.

Would you consider this to be a medium-term risk with Election next year; or do you think that by that time devaluation will have moved back and you're going to have more demand for deposits in soles?

First of all, these instruments we have taken from the Central Bank, as we mentioned, are two to four years, have terms of two to four years.

So we have some space, in terms of time, to look for them in the future.

And second, we will definitely -- at one point, if we continue to grow our loan portfolio in local currency we will continue to have -- to need funding in soles.

If we don't find that funding in our market, we will have to go to foreign markets and swap those instruments into soles in the future.

Okay, thank you.

Second question?

And the second question, in terms of the cost of risk, we believe that the country's growing less, as you can see in the macro charts; and it will probably grow less this year.

There are some, as we mentioned, headwinds in terms of who's going to be the next President; in terms of what's going to happen with El Nino phenomenon, and its impact in infrastructure and its impact in agriculture and fishing.

So we feel that this second half of the year will be slower, and we think that the cost of risks will feel the impact of that pace in the economy.

We don't think that it will be a huge impact, but it will be impacted.

So we should expect that towards the end of the year we'll probably be closer to, say, where it was in the first quarter than the second quarter?

Would that be a reasonable assumption?

We are right now at 2.07%; we believe that it will probably be around the 2.20%, 2.25% level.

So, basically, the first half of the year was 2.25%, and we should expect the same thing going into the second?

Yes, but I was talking about the second quarter that was already 2.07%.

So it will probably be around that, yes, 2.20%, 2.25%.

Okay, right.

Thank you, Fernando.

Tito Labarta, Deutsche Bank.

I have one question, but a little loaded.

If you're looking at the loan growth, I guess, first, with a slightly lower GDP growth that you're expecting, any changes to your loan growth guidance for this year?

You still think in the low teens is achievable?

And then, maybe giving a little more color on that, we've been seeing strong growth on the corporate side, do you think that's going to continue?

When do you think maybe consumer can start to grow faster than corporate again?

And then also, just give your expectations for the loan mix for the rest of the year, how do you see that impacting both provisions, which you touched a little bit on just now; but also margin, risk-adjusted margin to increase this quarter?

If you continue to grow in corporate, is that sustainable?

Or do you expect consumer loans to pick up?

Could you see some expansion in margins?

And when could that happen?

So just loan growth, and how that's impacting both margins and provisions as well.

Thank you.

Thank you, Tito.

First of all, we talk about loan growth, we continue to feel that we will probably reach the low teens, as you mentioned, 12%, 13% growth a year.

What else?

In terms of the corporate loans, of the wholesale loans, they will continue to outpace the retail loans for the next, say, 10, 12 months.

We see this trend still continuing this month.

We feel that what is really happening is that some institutions that were lending to the most important clients in the country, foreign institutions, they don't have the funding in dollars, on the one hand; and second, maybe are not so interested as they were in the past to lend money in Peru.

So we are replacing those institutions in the [large seat] of our clients.

And that will probably continue to be the pace if we continue to see some uncertainty and volatility, due on political times in the next months.

We still feel that retail will not grow as it did in the past for the next months.

We need the country to enter into a different mood in terms of its economy, because confidence, both from companies and from consumers, is not as it should for our retail portfolio to grow as we would like it to.

So we will probably be in the same pace and below where we are growing in our wholesale portfolio.

Great, thanks, Fernando.

And how do you see that then impacting margins and provisions?

If you continue to grow more in corporates, could that put some pressure on margins, maybe offset by lower provisions?

Or if you can add some color to that as well.

If we talk about margins, yes, we are going, as you know, to less risky segments.

We are more concentrated in wholesale.

And if we look at retail, we have taken important measures.

For example, we are not lending consumer loans to people that are [less] PLN1,000, which we did in the past.

We are actually not lending to our most marginal clients in the SME arena; we used to do that in the past.

So we are concentrating our efforts in less risky segments.

So we do see some contraction of the margins.

But, on the other hand, we are also expecting that our risk profile will be lower than it was in the past, and to compensate those narrower margins with less delinquency.

Okay.

Thank you, Fernando.

Thiago Batista, Itau BBA.

Congratulations for the results.

I have two questions.

The first one is a follow up of Macedo's questions on the funding side.

Are you expecting to see some contraction in loan-to-deposit ratio in local currency with the auctions that the government is doing regarding the deposits of the state-owned companies, and if this is likely to increase your cost of funding?

And the second one, what is the ROE that you are expecting from Mibanco?

And what are the main drivers for this profit improvement in the ROE?

Your first question deals with funding.

As you know, Thiago, in the past we were growing faster in foreign currency in our loan portfolio than our deposits.

There is the opposite in this current situation.

This situation is a situation we like much better, and we feel much more comfortable, because we will also have the Central Bank, we feel, providing funding.

Because if banks slow their business because of low funding, the economy will probably suffer.

So we are talking to them all the time, and they really understand the situation.

They are, in a way, restricting liquidity in soles because they don't the foreign exchange rate to go up, as it did in the past.

But, on the other hand, they are providing ample instruments for banks to fund their balance sheets in soles.

We think that, that will continue to be the case in the coming months.

So we feel very confident that we will be able to continue growing, both in soles and in dollars.

That's on the funding question.

The second was about Mibanco.

We feel that Mibanco -- as you actually know, it has recently merged.

It was only in March that it merged.

Although we were preparing both institutions, Edyficar and Mibanco, for the merger for many months, it only merged three, four months ago.

And the merger was, in a way, an important merger because now Mibanco has, for example, 320 branches.

BCP has 450 branches.

So it's a large institution in infrastructure, in terms of the products it delivers to customers.

And here also, [in view] a process, because we had to change their IT completely, their core IT; that is already in place, but it took a toll to do it.

We feel now that the merger will endure much better results, and the months to come will probably be better.

Last month, and this was June, and also July, we experienced a growth in its portfolio.

Its portfolio was coming down for many months, six or seven, and now it's beginning to grow again.

So we feel that the most important part of the merger is already behind and better times should come for Mibanco.

However, its ROE is around 15%, 16%.

So it's really in shape.

Okay.

Thank you.

Philip Finch, UBS.

Fernando, thank you for the presentation.

A couple of questions, please.

First, just following up on the Mibanco question just now, we saw ROEs improving nicely in the quarter up to 16.5%.

In previous earnings calls, you've mentioned that Mibanco ROE could reach mid-20s-% by the end of next year.

Could you confirm is that still on track, given what we are seeing at the moment in terms of the improvements in ROE?

And secondly, another focus point -- focal point that emerged in the last couple of quarters is on your capital position, especially your fully loaded common equity Basel III capital ratios, where you've set a target of 10% by the end of next year.

Now, we saw a nice improvement in the quarter with your common equity ratio rising to 8.4%.

Two questions here: one, can you confirm that improvement was very much organically driven through retained earnings rather than switching investments out of the Bank into the holding company?

And secondly, can you just confirm that 10% target you feel is very much on track for the end of next year?

Thank you.

Philip, as we -- we were in Europe two months ago, and we mentioned that Mibanco will probably reach in the next 18 months an ROE of around 20%, 25%.

We still believe that, that is the case.

This will have to take into consideration that Peru continues to grow at a 3%, 3.5%, 4% GDP growth for a year.

We still think that, that is the case, although it will be a challenge.

Second, if we talk about core equity Tier 1, you've seen the jump this quarter.

We are now at 9.38% (sic - see slide 22, "8.38%").

That's really basically done through retained earnings, although we have sold the position we had in BCI from BCP to Credicorp.

And that has -- the effect of that was around 50 basis points.

But that was done last quarter.

So this quarter was mainly retained earnings.

We continue to believe that at the end of next year, or maybe at the beginning of 2017, we will reach that 10% common equity Tier 1 ratio with retained earnings.

However, we have a watch there.

And we are beginning to work, because we feel that we can also sell some of our investments in BCP, sell them to Credicorp, and that will give us an extra boost to that ratio.

Great.

Thank you very much, Fernando.

Saul Martinez, JPMorgan.

I have two questions.

Fernando, first, you mentioned in your prepared remarks that the increase in the local currency loan-to-deposit ratio, you guys view it the base case as that being temporary and it stops when currency depreciation moderates.

But you can also say that the sol has depreciated far less than other currencies of commodity exporters.

You can potentially argue the currency's overvalued.

You have the [Federal] hiking rates likely later this year; last night, China depreciating, a pretty big shock in terms of trade lately.

What gives you the confidence that there will be a smooth landing?

And is there a risk that if currency weakness persists longer, or is more substantial than expected, that it creates conditions where funding -- creates conditions for funding in the private sector that hurts for longer than expected; and don't lead to a situation where private sector funding can emerge again and your LDR ratio stabilizes?

Second question is somewhat related to that.

And you've kind of answered it a little bit, but I wanted a little bit more, and that -- it appears obviously that Central Bank's providing funding on favorable terms for banks to continue to lend in local currency.

That makes sense from a macro-Prudential standpoint; it makes sense for you to take advantage of that.

But is there a point at which it decides that the de-dollarization process has run its course, it stops providing such exceptional funding?

What's the thought process behind the Central Bank moderating its exceptional funding support, liquidity support?

Is it pressure on the currency, current account widening inflation?

What leads them to reconsider the exceptional liquidity support it's provided the banks?

There, as we probably mentioned before, they are very much aware of the risk incurred, specially from individuals, and small companies, that earn their income in soles and have borrowings in dollars.

So if they reach their targets, meaning that if the commercial banks reach the targets set by them, we feel that they will feel much more comfortable with a foreign exchange rate.

And they will let it float -- they will float the rate more freely than they have done in the past.

However, you have to take into account that the currency has devaluated around 25% in the last three years.

So it's already a devaluation.

However, the devaluation can go further, and we will have to adjust to that.

The Central Bank still has another [work], because it concentrates a very important part of the deposits from state-owned institutions; meaning the military, hospitals, those type of institutions.

They concentrate that money, and that money is important.

We have around -- in the system there are around PEN200 billion in deposits; PEN100 billion of them are in soles -- or maybe a little more than that, PEN120 billion of them are in soles, and the other part is in dollars.

And they concentrate around PEN30 billion soles.

So they will have to let those deposits come into the commercial system, into a commercial financing system, and that will definitely help us, in a way, balance our balance sheet.

Okay.

How is that auctioning process going for public institutions in terms of auctioning them to private banks?

It seems like there have been some auctions, but how is that going to cost, the magnitude, how quickly it's happening?

Could you provide an update on that?

It's happening.

They have already auctioned around PEN3 billion, both from the treasury and from the Banco de la Nacion, and they will continue to do so.

However, they don't want to make that [pace] more agile, because they are concerned that banks and institutions will get those soles and buy dollars, and in the way worsen the situation of foreign exchange.

So they will continue to do so, but at a very gradual pace.

Great, okay.

Okay, thanks a lot.

I appreciate it, Fernando.

Thank you.

Victor Galliano, Barclays.

A couple of questions from me.

I just wanted to get a better sense of your, or should I say BCP's, or Credicorp's appetite in these public-sector deposit auctions, going forward.

I don't know, I just want to get a better sense from that there's interest in that.

And also, related to that, at what level of loan-to-deposit ratio in local currency, and in BCP standalone you're at 135% in the quarter, do you start to think about taking remedial action to bring that loan-to-deposit ratio down?

Is it 150%, 140%, or -- that would be very helpful.

And my final question, sorry, I have three, is risk-weighted assets, and risk weighting for FX mortgages and consumer loans.

Can you just remind us what the risk weighting is for FX mortgages and consumer loans?

Thank you.

Okay, I'll begin with the appetite on the public auctions.

We are -- we have the appetite, as you can imagine, because we need the funding in soles.

We have taken our [one-third] part of those auctions, meaning around 30%, 35%, because all the other institutions also compete for that funding.

And we will continue to probably take that fair share of those auctions in the future.

We will be very keen on continuing funding our balance sheet in soles.

Then, in terms of loan-to-deposit ratios, what we follow really more closely is a complete or the total loan-to-deposit ratio which is around, in BCP, 105%, or 106%.

And it is, as you mentioned, 135% in dollars, but 82% in -- I'm sorry, 135% in soles, and 82% in dollars.

But the total one is around 105%, 106%.

And we don't (technical difficulty) feel a limit, meaning the 150% you mentioned, or 140% you mentioned.

We will continue to adapt.

In this market, the Central Bank is intervening in many ways.

And we will continue to adapt, and continue to build that relationship with them, understanding what they are trying to do, and adapt to the situation.

Of course, we'll feel completely comfortable having a 135% loan-to-deposit ratio in soles.

But we really need to adapt to the situation.

We feel that if the exchange rate begins to stabilize a little bit against the dollar, the efforts from the Central Bank will be subdued to the ones they are now.

We will continue to follow up these very closely.

That's really what I can tell you.

We don't have a limit set already.

And in terms of mortgage and consumer loans, you had a question on [this].

Can you repeat it?

Sorry, yes, just the risk weightings with regard to calculation of capital ratios, I think it's higher than 100%.

For the FX mortgages and consumer loans.

I don't have the numbers here with me, but we will get back to you in a few hours.

Yes, we can take that offline.

Thank you.

Carlos Gomez, HSBC.

Two questions.

First, to go back to the increase in CET1, it's 51 basis points in the quarter.

And actually, your other measures of capital actually declined, Tier 1 and Tier 2. So could you please clarify why the increase, which is positive, but we would like to understand where it comes from?

Second, in terms of the LDR, we tend to focus on the sol, and the fact that it's so high, but at the same time you're LDR in dollars has declined, is now 82%.

We have seen in other countries that when you have to switch the problem can actually be on the other side, what do you do with the dollars?

Thank you.

I will begin with the second question.

Yes, what we are doing, actually, because we have excess dollars, excess funding in dollars, as you mentioned, we are working with the Central Bank.

There are many instruments by which we provide them with the dollars, and they give us soles, and we doing that very keenly with them.

And we will probably continue to do that.

As long as we have the dollars, we will be very keen on exchanging those products for soles, providing those soles to our funding.

And they will probably continue to do so in the future.

Then, in terms of your first question, you should probably go to page 40 of the report that we issued yesterday.

If you go there, you will see that the most important source of the increase in common equity Tier 1 was retained earnings.

[I'm looking at the risk] -- actually, I have the page.

You show the calculation of CET1, but I don't think you show the evolution from one quarter to the other, not for CET1.

I think you show it for the other indicators.

I could be incorrect.

Right, we don't -- it is also retained earnings.

I believe we went from 7.80% to what we have now, 8.4%.

We will get back to you if you want to go into the detail of what it is, but that's essentially what [it was].

Okay, thank you very much.

(Operator Instructions).

Boris Molina, Santander.

The common equity Tier 1 ratio that you calculated for the Bank.

And you've been talking about measures to optimize the location of capital consumption in the Bank by shifting assets to Group holding companies.

However we, as shareholders, invest in the Group.

We know BCP is still in Peru, and the (inaudible) is still low.

So what would be the common equity Tier 1 fully loaded ratio for the Group, which is at the level that we invest?

Because shifting assets or tax credits from the Bank to the holding company doesn't really change the Group consolidated capital position.

So while this is interesting, the exercise obviously is necessary to sustain growth in Peru, we would like to know what is the common equity Tier 1 for the Group consolidated level.

My second question has to do with what is the debate going on in the economic circles, or economists in Peru, regarding the sustainability of the current exchange rate?

Because, at the end of the day, the current account deficit is widening.

There is a FDI component that finances this, but the world has changed.

And if this is FDI dries up it would be clear that the real exchange rate is overvalued and the sol has not depreciated as fast as other currencies in emerging markets, year to date.

So, it appears that this period of stability in the FX is going to be far away, so long as this debate is not settled.

Are people beginning to ask questions, the Central Bank's policies, whether this is sustainable or not; whether an exchange-rate adjustment is necessary?

Or is this something that is not really in the debate right now?

Because, at the end of the day, this situation appears to be heading towards the need for a real exchange adjustment in Peru.

I will begin with your second question.

As you know, although it is financed, in many ways, by foreign investment, the key problem is the current account deficit.

The current account deficit in the first quarter was 5.7%, which is high.

However, we have been very lucky because there are many mining projects coming into play.

Toromocho came in last year; it's an important copper mine.

And this year we have some other projects, [construction at Wamba].

So what I can tell you, and it's already in the news, is that in June our trade balance, which is a very important component of our current account balance, was positive; was positive after, I feel, 14 months.

It has been negative for many months, and now those projects are beginning to bring their output into the market.

And although imports are lower than they were, because the demand is lower, as you probably know if you look at the macro in Peru, exports are beginning to show.

And the trade balance is beginning to become positive, although in a very meager way positive.

We feel that if we continue to have a better trade balance our current account deficit will be around, not 5.7%, but (inaudible) 4%.

That's what the economists are saying.

We have endured many years with that type of current account deficit, 4%.

We feel that with a better government, with some improvement also in the world economy we will be able to live and continue to be a viable country with those type of numbers.

That's in terms of your second question.

In terms of your first question, you were asking for a common equity Tier?

1 ratio for Credicorp.

The methodology for reaching that number or estimating that number at a holding level is not in place.

The only methodology is in place for banks, not for holding companies, so we cannot measure that.

However, if you go to the last pages of our report, you will see we comply with all the regulatory capital necessary at the Credicorp levels.

I don't have it here, but that's in the last pages, page 38.

We are 20% -- 19% above the regulatory capital needed by regulators in Peru.

Okay, wonderful.

Thank you.

[Lara Saeed, Compass Group].

This is actually [Michael Sower,] Compass.

Just one question.

At the end of last year, the superintendency deactivated the cyclical generic provisions; and the question is how much of that is impacting positively on the cost of risk?

Do you still have stock from those freed provisions due to the deactivation of the generic [group]?

To answer your question, that was regulated by the superintendency.

But that's really for Peruvian GAAP accounting, for local accounting, and not in IFRS accounting, which is the accounting that we follow to report our numbers.

So it wouldn't be accounted in the first place, and it doesn't impact going forward?

Is that accurate?

Yes, that's really what we do.

We follow IFRS principles based on incurred losses, rather than forward-looking losses.

And that's really what is required by IFRS standards.

Okay, thank you.

If you want to go further into detail, we can get back to you later.

Okay, thanks.

Thank you.

This concludes our question-and-answer session.

I would now like to turn the conference over to Mr. Walter Bayly, Chief Operating Officer of Credicorp.

Sir?

Good morning to all of you.

And thank you, as usual, thank you very much, for joining us in this call.

The very good results that we have seen not only this quarter, but this first half of the year, are really the result of initiatives that we started a while back; namely three, working very hard on efficiency, improving our risk management on the retail side, and working on Pacifico, on the insurance side.

We have been working very hard and very diligently on these three fronts, and we have achieved the desired results.

We understand there are serious concerns, particularly on the funding side, and I would like to take maybe a minute to go a little bit into that.

We, obviously, do not like the deterioration of the loan-to-deposit ratio in local currency.

But, frankly, if you live here and operate and interact continuously with the Central Bank for the past 15 years, our level of comfort is obviously much larger than what you can develop probably not living domestically.

The Central Bank's initiatives have initially one objective: to de-dollarize the portfolio.

And to that extent, they have been providing relatively low cost two, three, four years funding to create an incentive to de-dollarize their portfolio.

That is a temporary initiative, and it will end when the Central Bank decides that the level of the dollarization is what is required, what can be achieved.

We do not have a 100% clear indication of what that moment will be.

But even if we were to be at that point where dollarization is no longer a concern, and that clearly would create an incentive for a currency that would float a bit more, the other question comes back is, is there going to be enough funding for the portfolio for the banks to grow?

And the question is there, it goes back whether one believes that the inflation targeting policy of the Central Bank that has been in place for the past 15, 18 years will continue.

If one believes that the Central Bank will be consistent, and has inflation targeting as [monetary] policy, the reference rate which is established by the Central Bank should equal the inter-bank short-term interest rate.

Therefore, one can anticipate what the overnight cost of funding, and, therefore, [building] the [year], would exist.

Even if we achieve the level of the dollarization that the Central Bank feels comfortable, it doesn't follow reason that the Central Bank will let short-term interest rates go above the reference rate.

So there are two elements.

And obviously, when one lives here and interacts for the past 15 years with a very consistent Central Bank, one feels comfortable that that is the way that they will continue to work.

Again, we don't like it, but we understand it, and it doesn't keep us awake at night.

Clearly, through this process, mostly likely, there will be some tightening of margins.

We think that, that will be marginal, but it is what it is.

In all segments, we will not be able to pass the marginal increased funding cost to the customers.

The other concern seems to be on the common equity Tier 1. We have been consistently letting the market know that our target is 10%.

With some efficiencies in where we have the assets and retained earnings, we are very comfortable that we will reach that target by year end next year.

We have shown the path that will take us there.

We will not raise equity, and we're comfortable that we will do it.

Hopefully, some day, that question will disappear from these conference calls.

On the short run, there are some clouds around this scenario.

Clearly, the US interest rates will increase shortly, and that will put additional more pressure on the devaluation; we have El Nino effect, which last time around was very negative; and we have elections.

All these are short-term elements of concern.

Nevertheless, we think that all of those will be out of the way, for one reason or the other, by the first quarter of next year, where, if one looks around, the fundamentals of the country and of our businesses continue to be extremely strong.

The positioning of our institutions are very well positioned in the market to continue the growth of this country, probably at a more subdued rate than we had in the past.

But nevertheless, there continues to be a substantial catch-up opportunity in this country, going forward.

Again, we are very comfortable that once we have cleared up these clouds regarding to interest rates, devaluation, El Nino, and elections, the path to solid growth will continue to be there.

We're fortunate that throughout this period we will continue to have the good returns, due to the initiatives that we start 1.5, or two years ago.

Again, we thank you very much for attending this conference call.

And goodbye.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may now disconnect.