Credicorp Ltd (BAP) 2015 Q3 法說會逐字稿

Excuse me everyone. We now have all of our speakers in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. At that time instructions will be given as to the procedure to follow, if you would like to ask a question.

Thank you, I would now like to turn the conference over to Mr. Fernando Dasso. Mr. Dasso, you may begin.

Good morning and welcome to Credicorp's Conference Call on our Earnings Results for the Third Quarter of 2015. For the third consecutive quarter, Credicorp posted a solid result with net income of PEN807 million, which represented and ROAE and ROAA with 21.6% and 2.2% respectively. Despite the macroeconomic scenario and market volatility, net recurring income totaled PEN746 million, which indicated a slight increase of 0.5% quarter-over-quarter and 6.8% year-over-year. In this context, recurrent ROAE and ROAA reached levels of 20.1% and 2% respectively.

The main drivers of Credicorp's results were first, loan expansion of 5.2% quarter-over-quarter and 16.1% year-over-year in quarter-end balances. This represents real loan growth of 4.6% quarter-over-quarter and 11.4% year-over-year, in line with our guidelines for this year. Second, a slight increase of 2.9% quarter-on-quarter and 2.6% year-over-year in net provisions for loan losses. This reflects the improved risk quality of new vintages, which helped reduce the cost of risk by 5 basis points quarter-over-quarter and 55 basis points year-over-year. Thus, the cost of risk in the third quarter of 2015 was 2.02%, which is in line with Credicorp's guidance and more importantly represents the lowest level reported in the last two years.

Third, net interest income growth of 1.6% quarter-over-quarter and 10.7% year-over-year. This result was mainly due to higher interest income on loans followed by an increase in income from derivatives, all of which helped offset the increase in interest expense. Fourth, a solid NIM of 5.49%. Nevertheless, this indicator dropped 21 basis points quarter-over-quarter mainly due poor drivers. More use BCRP instruments, higher loan disbursements toward the end of the quarter, expansion of total loans led by the low margin business segments and a slight increase in funding costs as we will explain later. Fifth and last, income expansion on lower operating expenses improved operating efficiency. In this context, the efficiency ratio contracted 60 basis points quarter-over-quarter. Let's review of profitability by subsidiary in the next slide please. Credicorp's solid performance reflects relatively stable ROEs at the main subsidiary as shown in that table. The increase in profitability is more evident if we look at the last two columns of the chart, which show ROE's year-to-date for 2015 [up for] the same period in 2014. The improvement posted in Credicorp's recurring ROE is based on better performance of BCP, Mibanco, Grupo Pacifico, and Credicorp Capital.

In the particular case of Grupo Pacifico, recurring ROE year-to-date is 13.3%, which was above 2014's figure. All of the aforementioned will present the strength and resilience of our business in a context of low economic growth in local and international market. Next slide please. The graphs on this slide show the evolution of Credicorp’s total loans in average daily balances, which better reflects interest income generation. Loan book expanded 3.3% quarter-over-quarter and 16.8% year-over-year. All this represented real growth 2.6% QoverQ and 11.9% year-over-year. As was the case last year and so far this year, loan expansion continued to be led by wholesale banking. In retail banking, loan growth was slightly higher quarter-over-quarter than the figure registered in the second quarter of 2015. Mibanco posted loan expansion for the first time since the acquisition.

Next slide please. The year-over-year analysis offers a better snapshot of the de-dollarization process underway and of the nature and control risk of Credicorp's foreign currency loan book. In the chart at the top of slide, it is clear that segments with [characterization] have also de-dollarized the most. This is case of the wholesale banking, SME business, and mortgage portfolio, which we believe have now levels of dollarization that do not represent material foreign exchange risk and credit risk. In the particular case of the mortgage portfolio, it is important to note that the foreign currency stock has a very low loan to value of approximately 51%, which is lower than the portfolio average of 58%. With regard to the Central Bank de-dollarization plan, it is important to highlight that by the end of September, BCP standalone had fully complied with December's targets. As such, the total foreign currency loan book decreased 25%, which far outpaced the 10% reduction required by the Central Bank.

There were additional level of a foreign currency mortgage and car loan books was reduced by 26% while December's target [regard] only 15%. All of the aforementioned is reflected in the sensitivity analysis of BCP's loan book, which is shown in the chart at the bottom on the right hand side. As of September 2015, in a stress scenario with an exchange rate shock, 86% of BCP's loan book posed no exposure to foreign exchange risk or credit risk. This percentage continues to increase as the dollarization level falls. Next slide please.

The chart on this slide presents the evolution of Credicorp's funding structure. It is evident that in 2015, the share of BCRP instrument in total funding continued to increase due to improvements in their condition particularly in terms of tenure, which rose to five years in the third quarter. These instruments are considered the most stable funding of (inaudible) to strengthen our long-term funding at a convenient low funding cost. The funding cost at Credicorp and at BCP standalone increased 2 basis points and 3 basis points quarter-over-quarter respectively. This was due primarily to the increase in the volume and cost of BCRP instruments as well as to higher interest expenses on bonds and subordinated debts.

The loan to the deposit ratio at Credicorp that are 160 basis points quarter-over-quarter. The same trend was seen at the banking subsidiaries BCP standalone, Mibanco and ASB. The improvement in the loan to deposit ratio was in line with the 6.8% quarter-over-quarter increase in total deposits versus lower growth in total loans of 5.2% QoverQ. Nevertheless, it is important to know that most expansion in total deposit was due to an increase in short term deposits toward the end of the quarter.

The year-over-year evolution shows a slight increase of 50 basis points in the loan-to-deposit ratio which was in line with local currency loan expansion and its dynamism in the second half of the year, while funding came mainly for more expensive use of BCRP instruments. The chart at the bottom left-hand side shows the breakdown of our funding by tenure, were its evident the larger participation of long-term funds.

Next slide, Credicorp's net interest income increased 1.6% QoverQ and 10.7% year-over-year. This was due primarily to growth in interest income on loans followed by income from derivatives, which in turn was related to forwards made with institutional and international clients and the Central Bank. With regards to net interest margin, as it is shown in the chart at the top on the left-hand side, it decreased 21 basis points quarter-over-quarter to reach 5.49%.

Year-over-year NIM dropped 26 basis points. However a low increase in provisions accelerated the contraction of NIM after provisions, which dropped 14 basis points quarter-over-quarter and 5 basis points year-over-year. NIM on loans reflects the change in the mix of loan book towards higher share of low margin businesses. Thus the reduction of NIM is explained by, first; more use of BCRP instruments, which overstated interest earning assets because of the restricted deposits that are required for funding. Second; higher loan disbursements towards the end of the quarter that resulted in higher growth in average ROAE, -- the interest earning assets -- average daily balances of the interest earning assets which are related to net interest income generate. Third; low-margin business segments continue to lead the expansion of total loans. Four, the slight increase in funding cost. The first element has a material effect as it is shown in the chart at the top on the right hand side. As you can see in the graph, NIM adjusted by eliminating from interest earning assets, the amount of restricted deposit we acquired in the Central Bank repo trade, dropped 13 basis points quarter-over-quarter versus the reported drop of 21 basis points. The reduction of the adjusted NIM is reflecting mainly growth in wholesale banking and mortgages loan books that have low margins and in a lesser extent, the slight increase in funding cost.

Next slide please, net provisions for loan losses increased only 2.9% quarter-over-quarter due to continuous improvement in the risk-quality of new vintages and general (inaudible) and credit card consumer, SME-Pyme and mortgages in particularly as we will see later on. Low growth in provisions and a more dynamic loan expansion resulted in a reduction of the cost of risk which fell 5 basis points quarter-over-quarter and 27 basis points year-over-year.

In a cumulative terms, the cost of risk year-to-date reached a level of 2.09% which is lower than the level posted in 2014 and well in line with our guidance. Traditional delinquency ratios for PL and NPLs fell 15 basis points and 16 basis points quarter-over-quarter due to, first; loan expansion, which is in line with seasonality in retail banking and Mibanco business. Second; a higher level of charge off in particular at Mibanco.

It is important to note that even if we adjust the NPL ratio by adding back the amount of charge-off, the adjusted NPL ratio also posted a reduction of 8 basis points quarter-over-quarter. The year-over-year evolution shows an increase in both the ratios mentioned above due to the extortion created by these type of loans that are provisioned but cannot be written off due to the existence of real estate production.

Next slide please. The chart in this slide shows improvement in the PDL ratios at each of BCP's different segments as well as at Mibanco due to the aforementioned factors. Nevertheless, for businesses such as SME-Pyme, mortgage, credit card and consumer segment. The most appropriate delinquency analysis and just looking at earlier delinquency ratios that we will see in the next slide.

Next slide. In this slide, we can see the evolution of the earlier delinquency ratios which is highly correlated with the cost of risk in businesses as such SME-Pyme, mortgage consumer and credit card. It is also important to remember that the year-over-year analysis is the most appropriate way of looking at this scenario because it eliminate the effect of the seasonality that characterizes this figure.

In the case of SME- Pyme, yearly delinquency cost follow a downward trend year-over-year every quarter since the second half of last year. This is in line with the adjustments that were made to the business model in November 2013 and 2014. In this context, the yearly delinquency ratio was situated at 279% at the end of the third quarter of this year, which represent a drop of 9 basis points year-over-year. It is even more important to know that the level reported in this third quarter is very close what registered in the third quarter of 2013. Thus, the costs of risk improved for the fourth consecutive quarter year-over-year.

In the mortgage book, the yearly delinquency ratio remains at a low level that is around 0.8% plus or minus 10 basis points. As you saw earlier that this ratio register certain volatility, but it remains within the organization's risk capital. The cost of risk of this segment is very low and was situated at 0.68% at the end of third quarter 2015. The yearly delinquency [indicator], where the consumer portfolio remains low and is situated around 2%. An improvement in the segment delinquency is also reflected in a 33 basis points drop year-over-year in the cost of goods, which is in line with a higher share of good risk profile client and the origination of consumer loans.

In the credit card segment, the year-over-year analysis of early delinquency ratio and the cost of it continue to show a downward trend that began in the first quarter of 2014. This was attributable to our efforts to control delinquency issues associated with the change in the calculation of minimum payment toward 2013 as well as the continuous fine tuning of risk models and policies to increase the participation of clients with good risk profiles.

Next slide, please. The PDL ratio at Mibanco fell 108 basis points, as expected, [going] from 6.5% at the end of the second quarter of 2015 to 5.42% at the end of the third quarter of 2015. These were due primarily to a contraction in the PDL portfolio, which were associated with an improvement in the risk profile of new vintages and with an increasing charge-offs in the third quarter after year-long efforts to clean up the portfolio. The aforementioned was reflected in the evolution of the cost of risk, which fell 95 basis points quarter-over-quarter. It is important to know that even the adjusted NPL ratio, which includes charge-offs posted a reduction of 19 basis points quarter-over-year. Next slide.

Non-financial income grew 3% QoverQ due primarily to an increase of 17.6% quarter-over-quarter in net gains on foreign exchange transactions followed by growth in net gains from subsidiaries. The latter posted the net result for Credicorp of PEN3.2 million from the JV with Banmedica. The aforementioned offset a contraction of 2% QoverQ in [fee income]. With regard to fee income, it is important to know that banking fee income increased quarter-over-quarter as shown in the chart at the bottom of this slide. Nevertheless, in the financial statement consolidation process, the Bank [assurance] business generated Pacifico, BCP, and Mibanco results in a decrease in fee income reported at BCP standalone and Mibanco and a reduction of the acquisition costs within the insurance underwriting. Next slide please.

The insurance underwriting result increased 4.1% QoverQ. This was mainly due to a decrease in the acquisition costs in property and casualty and an increase in net earned premiums in the life insurance business. This effect offset a higher level of claims in property and causality in particular in the car and private health insurance business line. The acquisition costs, which is composed of net fees and net underwriting expenses decreased 18.4% QoverQ due to a decrease in net fees that offset the slight increase in net underwriting expenses. The reduction of net fees was mainly explained at a regularization of elimination from transaction among affiliates in the financial consolidation process. The slight increase in net underwriting expenses came from the life insurance business, in both individual life and group life. In the year-over-year analysis, it is important to mention the results in corporate, the accounting effect of the joint venture with [America]. However the underwriting result increased 6.5% mainly due to a decrease in claim and in the acquisition costs, which offset lower net earned premiums.

Next slide please. The efficiency ratio, I am sorry -- the efficiency ratio was situated at 41.7%, which registers a reduction of 60 basis point quarter-over-quarter. This was in line with the efforts made through the efficiency program at BCP. The aforementioned was attributable to lower expenses and salaries and employees benefit and an increase in operating income. The latter was mainly associated with the [dynamism] in the second half of the year. Year-over-year, the efficiency ratio increased only 20 basis points. This was due to a decrease in non-financial income this quarter. Year-to-date, the efficiency ratio fell 30 basis points, in line with a higher operating.

Next slide please. Credicorp and its subsidiaries have maintained comfortable capitalization levels that are well above regulatory limits. The common equity Tier 1 ratio, which is the most rigorous measure of capitalization registered a significant QoverQ improvement. The aforementioned is a result of first, growth in retained earnings due to an increase in quarterly revenue of which [approximately 40 bps] is associated with the sale of BCI shares to Credicorp. And second, a correction in the calculation of common equity Tier 1 ratio given that in the past, the calculation incorrectly included a reduction of deferred taxes that were related to VAT, deferred taxes from our leasing business.

However, Basel III only requires deductions of deferred taxes related to income taxes. In the third quarter of this year, this adjustment in the methodology released [30 bps] for these actions, which totaled 40 basis points in 2015. Accordingly, the evolution of the corrected ratio is shown in the dotted blue line. As such, the ratio went up from [8% in the second quarter to 9% in the third quarter of this year]. With these comments, I would like to open the Q&A session. Thank you.

(Operator Instructions) Thiago Batista, Itau BBA.

I have two questions. The first one is about the outlook for the next year Probably, I imagine that you are in the middle of the budget process but could you indicate for us the main trends you see for 2016. So in terms of loan growth, margins, and asset quality. I know that it is very difficult to make forecasts in the current market scenario but could you indicate for us the main trends you see in those lines. And the second one is about the profitability of Mibanco. In the last quarter, the profitability of Mibanco achieved almost 24%. So this is almost the same level of BCP. Do you want to achieve (inaudible) or we could see a further improvement in 2016 or 2017?

We'll try to address the question on the outlook for next year. Yes, we are currently in the budget process. What we see in terms of what's going on with Peru, next year we have still some question marks open. First is if we're going to have a modest nino phenomenon or a severe nino phenomenon and that has to be answered in our summer, which is January and February and second is we have a Presidential election, the first round is in April. We will see what happens in terms of that election and there are the questions arising mostly from the world what's going to happen with the commodity prices, which are very much related to China and its development and what's going to happen in general to interest rates in the States and in the world. They are the typical open questions that we have every year.

However, we feel that we are prepared to have a very good year especially through [that's well]. Growth in Peru this year is probably going to reach 2.8%. Next year, the experts are saying that we will probably reach 3.2% if [na nino] is a moderate one. So we will reach that 3.2%. We continue to believe that our results will be in a good place, meaning what we always tell you about in terms of ROEs we are, always started in the 20% for credit cards, and if we talk about growth it will probably be around 10% and 15% for the year.

Okay, and asset quality?

In asset quality, as you know we have been working especially in the retail banking arena in terms of asset quality for many years and now we feel that results are beginning to show better than in the past. We have taken important decisions in terms of which segments we want to really address and we are being more conservative than we were in the past and those decisions are beginning to show as well. We feel that we will continue to improve in terms of asset quality. I believed that that cost of risk around 2% is a safe bet for next year.

Okay. In the Mibanco …

And then I think you asked about Mibanco. yes, Mibanco as you know was recently merged in March and it went through a typical merger with all its challenges. We are now, I won't say that those challenges are behind, but we are addressing them and results are beginning to show better than in the past. The Company in terms of loans is beginning to grow again, and so our feeling is that Mibanco will continue improving.

There are still challenges in relation to the merger, although it's working now as one entity in terms of accounting, in terms of their systems, in terms of the company itself, but there are still some challenges in terms of culture and bringing all these team of people together, but we will address those challenges also.

We will probably reach the high-teens next year in terms of ROE and that's really our target. It also depends on the segment where Mibanco is really working, which is the SME-Pyme and micro lending, this segment has not being growing for the last three years, this has been really flat because all the [exclusions] are on a very conservative decision and stand decided to stay where they were unchanged and improve the risk approach and the risk systems to address better this segment. So that's really where we feel -- we have high hopes on Mibanco. The next year will definitely be much better than this one.

Marcelo Telles, Credit Suisse.

Hi good morning, gentlemen. Congratulations on the results. I think the trends we've seen on asset quality, I'd say is pretty remarkable considering that some of your competitors have been pointing in the other direction right, with someone receive some deterioration there. So what measures have been taken and do you think this is something more specific to you or I think this could be more like an overall trend for Peruvian banks in general or this has a lot to do with the execution and the risk of your own portfolio?

And my second question is regarding your loan to deposit ratio, in local currency which has exceeded a 150%. I totally agree with you regarding that this is really not so much of an issue, given the long duration of these instruments that the commitment of the Central Bank to continue to de-dollarize. But my point to you is, I guess some people see margin risk arising from that, right in the future? It will take a long time but that concern is out there.

And just to do some math here, if you were to replace that funding, theoretically speaking with market funding, how much you think you'd pay in excess of what you are paying today with the Central Bank? My guess is that, this should not be that meaningful, from your bottom line. But if you can share that with us, I'd appreciate it. I believe probably the denominator to be around PEN11 billion, which is pretty much what you have in funding with the Central Bank. So I was wondering what sort of incremental spread, we should work. It's just to try to dimension what is this real margin risk that like so many people have been talking about, but I have a hard time finding that very meaningful, thank you.

Thank you, Marcelo. I see that you run very much in detail with this loan to deposit ratio in local currency. What I can tell you is that this loan to deposit ratio is a system issue in Peru. It's not only BCP that has a local loan to deposit ratio of around 150, but all of our competitors, especially the most important ones. So we are working very closely with the Central Bank in terms of what's going to happen with these loans. They are very much aware of how the system is working, but they are very keen on de-dollarizing the asset side of our balance sheet.

So we continue to be in this program. We believe that it is a very sensible program because it reduces a lot the risk of foreign exchange in our portfolios. So we will continue to do that. However, the Central Bank is very much aware that they need to continue to provide this liquidity in Sol for us to continue de-dollarizing, because of the current stage of the market I mean the dollars are probably going to get stronger against every currency, not only the Sol but every currency and that will continue to be the case next year.

And the Central Bank knows that they need to continue to provide the Sol because otherwise their monetary policy wouldn't work. We need those Sols to continue lending and to make the country continue to advance and grow. So you have to understand that this is something that we are working together all the time talking to them every week about this and they are gearing new measures and new ways to try to handle the situation.

When is this going to change? We feel that it is going to change when the Sol stabilize, but we don't think that the Sol will stabilize pretty soon. It will take a while because of the events that are happening in government.

Then you asked about, what could happen to the margins if this funding is not provided and we will have to go to the market to ask for funding in Sol. Yes, we will receive a hit in terms of our funding cost. It won't be an important one, but until now, these repos from the Central Bank, which are really three, four, five years in term are the most important instrument and the most convenient instrument for us to take.

What else? Asset quality, your first question. Yes, we've been working in asset quality, especially in retail banking for many years. I know we have a very important set of measures of analysis that we do not only in term of admission of loans but also in terms of behavioral scores, in terms of what we do with collections. It's a really closed set of things that we have -- tools that we have in place that make us understand retail risk better. It also has some consequences. For example, we had decided to get out of some segments, which are riskier than others and it's also showing in our books and we'll continue to do so. We don't know what the other institutions are doing, you asked us about a comparison with them, we don't know exactly what they are doing. What we know is that we continue to have new measures to be taken -- we are still analyzing what we are doing and we feel that we definitely see the light at the end of the tunnel and will continue following that light.

Tito Labarta, Deutsche Bank.

My question is in terms of loan growth. We saw a good pickup in the quarter, but just want to sense of how you're thinking about it, I mean I think you saw the nice improvement in terms of asset quality, so I assume that made you more comfortable to grow a bit faster. Also, we continue to see corporate loans growing faster than retail. How do you think about that particularly as you saw some improvement in asset quality or do you think retail lending is going to pick up and given all that, how you see that impacting your margins because you saw some pressure on the margins this quarter I think partially due to the mix, but how you are thinking about loan growth by segment and then how that will impact your margins going forward? Thank you.

Well, you know that loan growth is a multiple of that [function] of the GDP growth as it has been in the past. The country is growing less as you know from the experience we had three, four years ago. Hopefully next year, we will grow a little faster around 3.2%, especially if we get a good result in the election in terms of a moderate President being elected. Loan growth will depend on how the country is growing and on investment. Investment is still important although it has subdued. It is subdued compared to the past. We feel that our wholesale book will continue growing as it did last year, this year I mean, which was a really good year and it will definitely be the leading segment in our growth, but yes, as you mentioned, we feel that lending in retail banking could begin improving compared to last year. We are seeing some figures already especially in SME, which was well flat for many months beginning to pick up and especially in Mibanco, which has been flat for a year.

We have to take into account that at the end of the year we have the most important sales campaign, but in spite of that, we feel that it's beginning to pick up a little bit in terms of retail and if we talk a lot of consumer, we are, as you know, focusing, especially in the high and medium-end of the market and that market continues to be in a way a very good turf to grow. So in general, we feel that loan growth will probably resemble what we will have this 2015, which would be a very, very good result for next year as well.

And in terms of the impact on margins?

If the retail segment and Mibanco grows faster than this year, margins will get impacted by that positively and that's really our hope and that's why we are now discussing in terms of the budget.

So the expectation is that that you would grow faster in retail next year?

Than we did this year, yes.

How about compared to corporates?

We feel that corporates or wholesale in general will grow faster than retail next year still, but retail will grow faster this 2016 than in 2015.

Great. So for next year, do you think margins could still feel a little bit of pressure because of the mix or do you think they begin to stabilize a bit because retail picks up a bit?

I think that it will tend to stabilize a bit because of this different growth [batch in the second] as I mentioned.

Saul Martinez, JPMorgan.

I have two questions in there and first is, it's a very basic question on the LDR in local currency. Is there a ratio at which you start to get uncomfortable with from an asset liability management standpoint and obviously or is that a non-issue for you provided your view that Central Bank will continue to provide exceptional liquidities for banks but do you feel like there is a ratio or there is a level at which you start to get uncomfortable that may leave you vulnerable down the road to a scenario where the Central Bank stops providing exceptional liquidity to the banking system. Secondly, I wanted to get your views on asset quality in a scenario where you see the sharp depreciation in the currency, because there seems to me to be a little bit of a disconnect between what the Central Bank is doing in terms of their policy measures that they obviously they are concerned about financial stability and they're taking a number of measures including measures announced last night to continue to de-dollarize the economy for obvious reasons, but at the same time, some of those measures actually run contrary to the other measures -- other policy goals like price stability and trying to moderate the depreciation of the currency.

So how do you -- it seems like they're concerned about it yet when you speak and you gave the sensitivity analysis saying that losses wouldn't be big in a scenario where you see share deterioration, how do I connect the dots between what you're saying you're 30-40% of the banking system and the Central Bank being aggressive in de-dollarizing on the concern that the depreciation of the currency would have significant impact on asset quality, how do I square those two together?

Let's talk a bit about asset quality in relation to the depreciation of the currency. What we see is that we are depreciating very fast our loan book and that will give us a better coverage if there is an abrupt depreciation of the currency. We feel that we will endure an abrupt depreciation, we've already depreciated by around 25%, 26% in the last two years and the Sol is reaching now a level which was probably closer to its high. Its high has been [PEN3.6 for the dollar like 10 years ago and now we are at around PEN3.32]. So we can continue to devaluate, but we don't feel that it will be abrupt. Yes, the Central Bank intervenes in the exchange rate all the time. However, they are more and more intervening less because now they feel much comfortable about the loan dollarization of our balances. If we see our balance sheet and we the segments in terms of loans, we don't feel that we have a very high risk. We see almost every segment in the retail banking having a very low penetration of dollar loss with the exception of mortgage loans, which is now around 30%; a year-ago it was around 36% and it's growing very, very fast toward soles. And loan to deposit, meaning loan to value ratios there are really comfortable.

What else can I tell you? In our wholesale banking segment, we are almost 47% only in soles. This has never happened to our bank in the past and will continuing [Sol-rising] or de-dollarizing. Although continuous – or deceleration. We don't feel that we have a huge problem there with the depreciation. We feel the losses will be weak. We've been working extensively with our clients and some of our clients have produced revenues in dollars. They are exporters or they are linked to exporters, so we feel that we are reaching an equilibrium and we feel very safe about it.

Now, your first question in terms of loan to deposit. Yes, we do have a limit, an internal limit in loan to deposit, but it is an internal limit for the combined loan to deposit, which is 120%. We are right now at a 106% or 107%, so we are not approaching our limit. If we talk about the loan to deposit in local currency, we don't have a limit because we believe that we are a dual currency economy and we really need to match our dollar portfolio and our soles portfolio and both are part of the same balance sheet.

And also, there is a third factor which is very important, which is that the Central Bank has not only the monopoly of soles and they provide them in a very ample fashion, but also that it concentrate as we talk some weeks ago with you, a very important part of the deposit of their own institutions, which are the Central Bank, which is a huge amount. They are providing those soles. Really, they are not producing new soles. It is not an inorganic issuance, they are really funding or really sending those soles to a market via repos because those soles already exists.

Okay, that's helpful. But in an environment where the Central Bank is now tightening and wanting to still limit the magnitude of the depreciation of the currency. Isn't it somewhat contradictory to provide -- and to enhance the liquidity and to provide exceptional liquidity either via repos, via public bank or public institutions being auctioning deposits to the banking system and taking measures to enhance liquidity in the financial system at the same time you're taking other measures that are more contractionary monetary policy, i.e. limiting the depreciation of the currency and trying to tighten monetary policy to limit inflation. Those things seem a bit contradictory in terms of the policy world.

Yes, but you have to understand that, yes they are tightening with the [reference] rate. But when they provide liquidity in soles, it's because we are providing them liquidity in dollar. So the liquidity is still the same. We bring them the dollars as collateral and then they give us the soles. So we are not really issuing new currency in the market. It's one in exchange for the other. So that's really what they are doing.

Victor Galliano, Barclays.

Yes, I have a couple questions. Firstly on the capital and I just want to come back to that slide 15 and that lower evaluation of the main capital ratios where you show the corrected Common Equity Tier 1 progression. Is there any particular reason why we've only seen an additional 22 bps of capital added in the last quarter, because when you look at the previous two quarters, it's 36 bps in Q1, 42 bps in Q2. That's my first question really like why such a low increase in Q3?

And the other one is coming back to the issue of loans and foreign currency loans. Do you have a range or target range of where you would want to be and where you would be comfortable and I understand that you have probably more loans to large corporate that have a natural hedge through dollar exports sector on the revenue side, but do you have a sense of a sort of a range overall in terms of your portfolio, where you'd like to be in terms of dollar loans, is it 35%, is it 40% if you can give us some guidance on that, that would be helpful. Thank you.

Thank you, Victor. I will address first your capital question. When we talk about capital, we need to talk about BCP now, which is the most (inaudible). Yes, last quarter, we ended up with 8.38% and this quarter, we ended up with 9%, If you see page 15 of our presentation, you can see that the most important source of new capital was retained earnings definitely, and then there was a change that we talked to the superintended after analyzing in very detail Basel III standards. But we realized the deferred taxes related to VAT taxes shouldn't be deducted from our capital. as we did in the past.

We were too conservative. You should only deduct the deferred taxes related to the income tax, not to VAT taxes. So we actually stopped decocting that from our capital and that gave us a push of 0.3% in common equity Tier 1 this quarter, that's why we should probably have ended up around 8.7%, but we ended up at 9%, that's the whole explanation. Then and we talk about the range, do you have a final question?

Just I understand that you bumped up the base there because you've taken out the VAT, the VAT deferred taxes, but I'm just questioning the kind of margin, because there is a much bigger margin there between the uncorrected common equity Tier 1 or maybe actually -- that seems to be similar, it's 22 bps, why is it only 22 bps. It there a bigger dividend payment in Q3? I'm just comparing it to the previous quarter where you've seen steadily more like around 40 bps increase in your capital base?

It is not a particular factor affecting this quarter. We feel that our dividends in March will be around, as we usually say 25% for Credicorp. That will be a better ratio, nothing in particular.

And then you had another one in terms of the range. Range in donor loans as a proportion of the total portfolio. We don't have a particular one, we really bend on the needs of our clients. However, we'll about this ratio sometimes and we feel that the system would probably be on equilibrium when it reaches around 25%. It is right now 30%. So it's very close to that equilibrium, which is something we don't know exactly. We will probably be higher than that 25%, we have an important concentration in wholesale and especially in the corporate segment. We are probably approaching that equilibrium, which will probably come during next year. This morning, the Central Bank has released new objectives for de-dollarization, which we feel very comfortable that we will reach and the whole system will continue going in that direction during the whole next year.

Philip Finch, UBS.

Hi Fernando, apologies if my questions were asked earlier, I joined the call slightly late. Could you talk about the cost of risk. We're seeing great improvements coming down to 2% in the third quarter, the lowest level since I think 2013. Were there any exceptional items that resulted in this low cost of risk in the quarter and going forward, what should we assume as a sustainable level for cost of risk. And my second question is regarding your efficiency program where we're seeing very good results coming through with further improvements in your efficiency ratio. Can you remind us what your efficiency ratio target is for this year and whether you're on track to achieving this and looking forward is there scope for further improvements in 2016? Thank you.

NA

Your first question in terms of cost of risk, there is not a particular item related to the drop in the cost of risk this year. It's really a consequence of many factors that have come into place as we mentioned in the presentation. In terms of cost of risk for the future, what I can tell you is that we will probably stay around that 2% area next year if nothing special happens especially the nino phenomenon on a more severe stance than it is projected now. Until now, it's supposedly be a moderate one, a moderate phenomenon. (inaudible). If it is moderate, we feel that we will be in that 2% neighborhood for cost of risk. In terms of efficiency for Credicorp. Well, it mainly depends on efficiency of BCP but it also has some influence from the subsidiaries. In BCP, we'll continue pushing further with efficiency, but what I have to tell you is that now it's not so easy to continue going down. We came down from the low 50s to the low 40s. We are around 42% in BCP but the next step basis points will not be as easy. We are now acknowledging that but we will continue pushing further. There are still some things to be done at the BCP level and also in the other subsidiaries there are still things to be done. If we talk about Mibanco, it recently went through a merger, there are opportunities there and the other subsidiaries have also some opportunities although they are less important than at the BCP level. As you know, we feel that in the next three years say we will try to reach that 40% level. We are around 41.0%-41.5% and that's our target. We will continue pushing further in that sense in terms of efficiency.

Actually I have another question if that's possible. Since on Mibanco, you talked a little bit about it just know. Obviously the ROE's are improving very nicely I think 23.7% in the third quarter. Now, during previous earnings calls, you were talking about ROE from Mibanco reaching 25% by the end of 2016. So, clearly, it seems as though we're well on track for that. So is there scope for that ROE figure to be higher?

I'll remain more conservative. We feel as we answered in a prior question that next year Mibanco will probably be around the very high-teens or the very low 20s. Not really the [25s or 26] that you're talking about?

Boris Molina, Santander.

Yes, I would like to see if you could add some value or color to the through the mark-to-market of your available for sale securities portfolio? There's been three consecutive quarters of negative mark-to-market and year-to-date the total mark-to-market represents a loss that consumes around 40% of your reported net income. So this is probably the longest streak of negative mark-to-market and I would like to get some color on what the drivers for this are and are you realizing gains to sustain your trading result because if you look at you're -- now seeing your financial statements I don't see any color. So we appreciate if you when you publish in (inaudible) -- the SMV your financial statements and before you add some color or more extensive notes because this is the pretty weak but I would like to get some color on this and whether this is driven by the bank securities portfolio, is the stakes in BCI or AliCorp or is it related to insurance operations et cetera. Thank you.

Boris, what I can tell you and you know this already is that we've had a very challenging year in terms of markets and yes, we do have investments in most of our subsidiaries meaning BCP, Pacifico, ASB and we had not a great year, not a good year really in terms of investments in those two subsidiaries have. Some of those investments are in LATAM instruments especially in bonds and not really in equity but we've suffered from the challenging markets this year. We will continue to depend partly on what happens to those markets. We will see what happens next year and that's really what I can tell you.

Are there any measures to try to reduce a little bit this kind of like this market risk because if you look at in the region probably a bank like (inaudible) is pretty notorious also the market risk and Credicorp is right there and then if you look at our your consolidated group capital requirement, it seems to be weakening at the consolidated level and maybe this is one of the drivers. So this is a source of concern?

What happens to the market is an area of concern to us not only in terms of what happens to Credicorp Capital, which is really working in those markets but also in other investments and the investments of our clients and what I can tell you is that we are following those very closely. Yes, we are taking measures in terms of risk, in terms of appetite, in terms of what is our outlook for next year. We will see where the results are next year but we hope that those will improve.

Okay thank you

This is Alvaro Correa from Pacifico. We had last quarter a relevant write-off or impairment really of a couple of specific equities that we hold in our portfolio. And basically what we did there was applying the rules accruing to critical path for impairments that is related to how -- the losses related to the market value. It doesn't necessarily mean that this is that big or relevant for the portfolio that Pacifico has, but compared to the results of the Company, it definitely has an impact. It's just focused, as I said, on couple of stocks. We were holding those stocks because we see value there, those are Peruvian stocks and as you know the Peruvian Stock Exchange is really affected by what is happening, but the fundamentals of those two equities are there.

Santiago Petri, Templeton

Apologies if this question is rather naive but I understand the behavior of depositors in the perception of a depreciation of Peruvian Sol. They seek to dollarize the deposit. I understand the Central Bank's intention to de-dollarize the loans in order to try to incentivize the local currency lending. But I feel that the banks are squeezing this position because they face a dollarization of their liabilities and local currency movement of the loans. So how is the banks hedge in this situation that is being protected by this two conflicting movements?

Yes, our asset side of the balance sheet is de-dollarizing and our deposits are dollarizing a bit especially the institutional ones which run faster than the other typical core deposits like savings and demand deposits (inaudible). We have to live with this situation. We are really -- we're in these situations many years because we have a dual economy. If you go to an ATM here, you can withdraw dollar and soles bills and people are used to living in soles and dollars. That's how we manage ourselves and we have to live with it and we take advantage of all the instruments available, both from the Central Bank and from the market.

But, yes, we also compete with our competitors and we have to give our clients the products and services in the currency that they want. So that's how we have to live and handle the situation. The only thing that I can tell you is that we are very used to it, that we work very closely with the Central Bank in regards to this and we will continue to do so.

Carlos Macedo, Goldman Sachs.

Hi, good morning gentlemen. Sorry I dialed in late, so this question might have been asked or even in your presentation. If you could give us some color on loan growth, I mean historically you always consider, always tie up loan growth to real GDP, I think general consensus expectation is that real GDP will accelerate for Peru next year already at 16% loan growth and that's even considering that basically the contraction in the dollar portfolio. I was wondering if you could give us some color what should we expect for loan growth next year, if we should really expect it to accelerate together with GDP growth or are you already running at a level that you will -- that you're comfortable with going into the cycle? Thank you.

Well Carlos, as you know GDP this year will probably reach 2.8% growth. Next year, it's supposedly going to reach 3.2%. So it's basically very close. We feel that loan growth next year will probably resemble, the one we have experienced this year. This year, we will probably be around 13% and I am always talk in soles as our functional currency, around 13%. Next year we'll probably be in that same neighborhood.

Thank you. What about Mibanco once that starts accelerating, which we already started seeing this quarter? How much will that contribute to loan growth overall?

We feel Mibanco is beginning to grow, but it is not as fast as BCP. As you know, this particular segment has been flat in terms of growth for many years. We feel that Mibanco will probably grow between 5% and 10% next year. So it will not contribute to the -- it will contribute, but not so significantly to the growth in BCP. We hope that 2017 with a better and a clear outlook of what's going to happen in the future, will be a better year in terms of growth for Mibanco.

Okay and in between the lines, very strong growth in corporate, you're catching up in consumer, do you think the mix will remain that way next year or should we expect the mix to shift more to the consumer at this point?

We feel that wholesale will continue to lead growth in BCP, in Credicorp really. However, retail is beginning to pick up and hopefully will continue to grow faster than it did this year during next year.

Carlos Gomez, HSBC.

Good morning, and also I joined the call late and I may repeat some questions, so my apologies for that. The first one refers to the exchange rate. I mean the realizations happening because everybody knows that the Sol is depreciating, what do you consider the equilibrium level of the Sol, the point at which you would no longer have to switch from Sol to dollars and from dollars to Sols in the deposits and the loans?

The second would be, what is the limit to de-dollarization? What percentage of loans do you think is the minimum that should still remain in foreign currency after the process is complete? And my third question refers to capital, given that you have essentially found 30 basis points of Tier 1 capital because of this clarification of the pretax assets, should we understand that your target has now increased from 10% to 10.3%? Thank you.

Hello, Carlos, I'm going to address the capital question first. Our target for the end of next year continues to be 10% for common equity Tier 1 and we feel now much more comfortable that we will reach it with no problem, but the target is the same.

Then on the exchange rate question, [I can leave] you on exchange rate that really for experts, but what I can tell you is that the Sol is -- Peru is not such an important country in the world, so we depend on many other factors, really what's going to happen with the reference rate in the United States, what's going to happen with our trading partners, especially China.

We feel that this year, we'll probably approach the [PEN3.35 level and next year our target is PEN3.45] and that's also what the experts are saying. What's going to happen exactly, we don't know. We feel that the exchange rate will stabilize compared to what it did this year and last year, but it will also depend on what happens to the world, what happens to our exports, what happens to our current account deficit, it is around 3.5% now, which is a very comfortable area for us, but we'll see.

And then you talked about what would be our level or our limit in terms of the proportion of loans in soles and dollars. As you know now, we are in the [40s area 45, 42, 43] depending on the month. We feel that we with another effort will probably reach the high 30s, but we won't be able to roll, you know to go to the low 30s really. The high 30s will probably be the area, which we will feel very safe with.

All right. And that is high 30s for you because you have more corporate lending presumably for this [system, it would be a lower number than that?

I didn't understand your question. Can you repeat it please.

The higher 30s would be the number for Credicorp, presumably the financial system as a whole, which is already at a lower level would also be perhaps below 30%?

Yes, when I am talking about this 30%, it's really Mibanco and BCP because Credicorp has also a bank in Bolivia and a bank in the Cayman Islands and those are in dollars or in Bolivian pesos. When I'm talking about these high 30s its really BCP and Mibanco.

[Michael Bert, M&G]

Couple of questions if I may. With the continued de-dollarization, what should we expect to see with regard to loan yields and the corporate segment as loans, I see that presumably yields start to come down especially for large corporates. Should we expect to see that carry on as the whole system starts to bring try de-dollarize. That's my first question, second question if I may if you mind elaborating a little bit on your related party lending specifically to the Romero family group and/or the large deposits from related entities. Thank you.

In terms of your second question related party lending, I have nothing important to talk about. We have very specific lending, I mean internal regulations, internal standards for lending to these related parties. I've been in many meetings where we actually discuss a lot about what those limits should stand, how should we go about lending to these people, what are the collateral. Actually these clients are like any other clients and that's deposits we have internally. And in terms of de-dollarization on loan yields. What I can tell you is that yes the wholesale especially the wholesale area of bank is de-dollarizing and yields are higher in soles than in dollars. Margins depend on really the funding that we get at that time of the year, but in general tend to be wider than in dollars, but that's really where we are. Nothing special to tell you these companies are taking -- they continue to take dollars for their important projects but sometimes they take soles for the working capital and we are providing the currency that they need especially if they make parts of their revenues in dollars.

Just a follow-up. Does that mean as the system de-dollarizes that [large go] without seeing downward pressure on loan yields in soles especially for larger corporates?

We haven't seen that pressure on yields because of the de-dollarization. There is always an important competition and that competition will continue to be in place and the country continues to grow, but it's really not related to de-dollarization as we related specially in wholesale, which is the secondary we are talking about in terms of competition. Competition is driving margins and we will continue do so in the future. The only thing I have to add there is that in the past we had many foreign entities lending to these companies in dollars. Now these entities are not so keen on lending to these companies in dollars and these companies are also discovering that sometimes it's better to borrow in soles. So we have less competition from these foreign entities with our last client [base].

At this time, we have no further questions. I'd now like to turn the call over to Mr. Walter Bayly for closing remarks.

Thank you all for joining us on the call. Before I make my closing remarks, there a couple of issues that came in the question that I wanted to address. One is the transactions with related parties. Not only do we have very strict limits on what the overall amount of lending to related parties, but there is very, very strict regulation in this country as to what is a related party, what is the amount and what are the rates that should be charged to related party lending. We do publish those numbers. I think it's on the 20-F on a yearly basis if I'm correct and yes, we do control them quite carefully and related parties go further than just the Romero, we do have other related parties as well, but again, that is publicly available. It is a very strict regulation both by our regulator and internally.

The second, there was a question to unrealized gain. The largest portion of the unrealized gains in the balance sheet of Credicorp comes from the life insurance companies and they are related to that much funding of the annuities. From an accounting point of view, we do have to mark to market the assets but we do not mark to market the liabilities. Thus this is a mark-to-market, it producers unrealized gains that really do not concern us because in reality they [must] fund the liabilities.

So that is the largest portion of the unrealized gains and they have zero impact on our capitalization levels particularly on the banking side. And again, it's just an accounting side. From the local accounting point of view from the insurance company, which is how the capital is regulated, those unrealized gains do not impact capital efficient levels. We take the point and we will disclose that a bit further in our future [quarterly] results so that people have comfort related to that point.

Number three, just one quick comment on the loan-to-deposit ratio. The key issue going forward is what is the unwind. I think we will continue receiving this funding from the Central Bank for the next two to three years. I do not see those funding to separate in the next two to three years. At a point in time, it will peak and start to come down. But I would expect that we will live with this for the next two to three years.

That is why precisely the Central Bank has been given this funding from periods that go to three, four even five years. Now, what is the unwind. How will we repay that funding provided by the Central Bank. There is only one source of repayment, which is that at the end of the day, the dollar deposits will become local currency deposits. And for that to happen, we need a combination that the domestic interest rate has to be high enough to compensate the depositors for the perceived devaluation risk. If we were to give you an extreme example, if we were to pay today 20% domestic interest rate on local currency deposits, obviously we'll capture a huge amount and people will switch from dollars to soles.

So at the end of the day what happens -- what needs to happen is the domestic interest rate has to compensate the economic agents for the perceived devaluation. So when would this happen? There will be two movements in my mind. One is that there will be less perceived devaluation as our currency stabilizes, the world stabilizes, the expectations of devaluations will come down. And on the other side, domestic interest rates will and arguably start to increase. The Central Bank has been with an expansive monetary policy, they started to increase the rate once and I have no doubt in the next two to three years, the domestic interest rates will continue to increase.

At a point in time, we will have the situation where there will be a sufficient interest rate to compensate economic agents for them to want to maintain local currency deposit rather than dollars and thus the switch will come. It's very important to understand what the end role of this is and where it is coming from.

Now, in terms of my closing remarks. We have had very good results in our operating subsidiaries, the trends in asset quality are good. In terms of risk appetite, all the new vintages in every different products are within our risk parameters, our risk appetite. The overall for the full year is not within the risk appetite as it relates to Pyme consumer, but that takes a while to turn around. These are portfolios that in terms of the revolving Pyme have a duration of maybe two to three year. So, we will see gradual improvements overtime, but our focus is that the new vintages are well within our risk parameters and we should start to see -- we will continue to see gradual improvements overtime in the overall portfolio. Efficiency has been a key factor, we will continue working on that but as Fernando rightly mentioned the first 400 or 500 basis point decrease in the efficiency ratio are easier than the ones going forward. Very important for us to maintain the discipline, the control and continue pushing to try to gain additional efficiencies.

All our subsidiaries are working on their key indicators, we feel very comfortable. It's been a good quarter where we have produced solid results and going forward, I would expect that to be the trend. We do have in the short term to watch very closely the phenomena of El Nino. We think we are prepared, both our employees, our own infrastructure and working with our customers, both at the bank and the insurance company level. I am impressed by the level of preparedness of both our government and the private sector has in the country. So I have the expectation that even if there were a relatively strong El Nino, the level of preparedness is good and we will not hopefully have such a serious impact, but nevertheless this is something we do not control and we are very much focused on being prepared if there should be a deterioration of portfolio, we have hired additional people to be able to roll over, refinance, et cetera, et cetera.

So, we are getting ready and we're very much focused on that in the short terms. In the long run, again focusing on each of the subsidiaries, on the key indicators we think we're doing a good job very focused on what needs to work properly in each subsidiary to continue having the 20%-plus return on equity which we aim to have and we are comfortable, we can achieve.

With this, I finish my closing remarks. Again we thank you all very much for joining us in this conference call and look forward to seeing you by the year-end conference call early next year. Thank you very much.

Thank you. Ladies and gentleman, this concludes today's teleconference. You may now disconnect.