Credicorp Ltd (BAP) 2015 Q4 法說會逐字稿

Excuse me, everyone, we now have 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 if you'd like to ask a question.

I would now like to turn the call 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 fourth quarter of 2015.

For the fourth consecutive quarter, Credicorp posted a solid result with net income of PEN731 million, which led to an ROAE and ROAA of 18.7% and 1.9%, respectively. After excluding the effect of non-recurring net expenses for PEN38.4 million, the result translates into net recurring income of PEN769.6 million and recurring ROAE and ROAA of [19.8%] and 2.0% respectively.

The main drivers of Credicorp's results were; first, loan expansion of 2.8% quarter-over-quarter and 13.1% year-over-year in quarter-end balances, which excluding the effect of the revaluation of US dollar turned into real loan growth of 0.5% quarter-over-quarter and 7.4% year-over-year. However, it is important to note that average daily balances reveal a much better performance of our loan book and show an expansion of 4.8% quarter-over-quarter and 16.8% year-over-year, which represents real growth in line with expectations of 3.1% QoverQ and 11.6% year-over-year.

Second, an increase of 13.1% quarter-over-quarter and 14.9% year-over-year in net provisions for loan losses. This led to a cost of risk of 2.23%, which represented an increase of 21 basis points QoverQ and only 4 basis points year-over-year. Third, significant net increase, net interest income growth of 5.8% quarter-over-quarter and 15.4% year-over-year which more than compensated the increase in provisions for loan losses. This result was mainly due to higher interest income on loans and represented the highest quarterly growth rate in 2015.

Four, a solid NIM of 5.55%, which represented an increase of 6 basis points QoverQ. This was attributable to a significant growth in net interest income, the highest quarterly level this year and a lower increase in average interest earning assets, which was due to a decrease in BCRP funding. On a year-over-year basis, NIM fell 11 basis points. This was primarily due to more use of BCRP instruments and to the increase in funding costs as we will explain later. Fifth, although the efficiency ratio increased 140 basis points quarter-over-quarter, we decreased 180 basis points year-over-year. This was well in line with expectations and the result of BCP's Efficiency Program.

Let's review the profitability by subsidiaries in next slide, please. Credicorp's solid performance reflects relatively stable or normalized ROEs at the main subsidiaries, as shown in the table. Nevertheless subsidiaries such as Credicorp Capital and Atlantic Security Bank posted [near-system] very low ROAEs respectively. The former reflect the impact of an impairment related to acquisition of the Chilean business and the latter shows the effect of a deterioration on (inaudible) asset management business, one of ASB's core business lines.

Let's review the most important drivers of Credicorp performance. Next slide, please.

The graphs on this slide show the evolution of Credicorp's total loans in average daily balance, which best reflects interest income generation. Loan book expanded 4.8% QoverQ and 16.8% year-over-year. All of these represented real growth of 3.1% QoverQ and 11.6% year-over-year. In general, the dynamic of past quarters change even the retail banking -- that retail bank accounted for the highest share of nominal and real growth in average daily balances, which differs from the scenario observed in previous quarters, while 2015 when Wholesale Banking led loan growth.

In the year-over-year evolution by business segments, the dynamic remained unchanged as Wholesale Banking continued to lead loan growth. It is important to note that Mibanco reported loan expansion for the second consecutive quarter, which reflects ongoing recovery in loan origination after the bank's acquisition, the subsequent clean-up process. Nevertheless, it is important to remember that the speed of origination is still below the segment's potential, which reflects the bank's focus on prioritizing portfolio quality over speeding after pace of loan growth because of the current macro context.

Next slide, please. The year-over-year analysis offers a better snapshot 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 the slide, it is clear that segment with higher dollarization couples with dedollarize the most. This is the case of Wholesale Banking, SME-Business, and Mortgage portfolios, which really at now levels of dollarization that do not represent material exchange risk. In the particular case of the Mortgage portfolio, it is important to note that the foreign currency stock at a very low loan to value of approximately 50%, which is lower than the portfolio average of 56%.

With regards to the central bank's dedollarization front, it is important to highlight that at the end of December, BCP stand-alone had fully complied with December's target for total foreign currency loan book and foreign currency mortgage and car loan books. All of 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 December 2015, in a stress scenario with an exchange rate shock, 88% of BCP's loan book posted no exposure to foreign exchange risk on credit risk. This percentage continues to increase as the dedollarization level falls.

Next slide, please. The chart at the top of this slide shows the evolution of Credicorp's funding structure. It is evidenced during 2015, BCRP instruments' share of flow of funding increased due to improvements in the conditions particularly in terms of tenure, which allows us to strengthen Credicorp's long-term funding. Nevertheless, it is important to note that for the first quarter, the share of BCRP instruments in total funding contracted from 8.7% at the end of September to 6% at the end of 2015.

In terms of funding costs in the table at the bottom left, you can see that the funding cost at Credicorp and BCP stand-alone increased for the second consecutive quarter by 4 basis points QoverQ. Year-over-year, the increase was 10 basis points at Credicorp and 9 basis points at BCP stand-alone. This growth was both gradual and in line with expectations. For the full-year 2015, BCP's funding cost increased 8 basis points while Credicorp's cost grew only 3 bps due to the limitation of Mibanco's fund, whose funding cost dropped 9 basis points.

Finally, with regards to our loan to deposit ratio in the table at the bottom right, we can see that Credicorp's ratio fell 190 bps QoverQ and 380 bps year-over-year. The same trend was seen at the banking subsidiaries, BCP sand-alone and Mibanco. The improvement in the loan to deposit ratio is mainly explained by; first, the growth rate of deposits outpaced that of loans in terms of QoverQ of quarter-end balances. It is important to note that Wholesale Banking loans posted significant cancellation level at the end of the quarter.

Second, the effect of high appreciation of the US dollar in the fourth quarter, this led deposits to expand more in loans because the [appreciation] is higher in the former than in the latter. Nevertheless, even after eliminating the effect of the appreciation of the US dollar, the loan to deposit ratio fell 80 basis points QoverQ and 120 basis points year-over-year.

Given the market concerns of our local currency liquidity under funding cost as well as the central bank's participation as a funding supplier, let's quickly review some aspects of the funding structure at BCP, the subsidiary that is the most exposed to these factors.

Next slide. The chart at the top of this slide show the breakdown of BCP's funding by funding source and tenure. As you can see in the chart on top left, deposits here represent the largest funding source by the share of the total local currency funding at 68% at the end of December. The chart on the top right shows the strength in long-term funding position and to more use of BCRP instruments throughout 2015. If we analyze in more detail, BCP's local currency funding, the chart at the bottom of the slide show the breakdown of BCP's funding by source and the average cost for the most important sources. It is noteworthy first, in the pie chart on the left it is important to highlight the high share of deposits. Moreover BCRP instruments represent 21% of total local currency funding and replace mainly other funding sources structure due to banks and bonds.

Second, in the table on the right, you can see that the only funding sources with higher cost in 2015 were deposits on BCRP instruments. Moreover, the latter posted the larger increase of 9 basis points as compared with December 2014's cost. The former posted an increase in its cost of only 4 bps in 2015. Finally, the same table, it is important to note that the cost of total deposit dropped 5 bps in 2015, because the lower cost of foreign currency deposits offset the higher cost of local currency deposits.

Next slide, please. Credicorp's net interest income increased 5.8% QoverQ and 15.4% year-over-year. This was due primarily to growth in interest income on loans. The chart on the top left shows that the net interest margin increased 6 bps quarter-over-quarter to situate at 5.55% at year-end. Year-over-year NIM dropped 11 basis points. NIM on loans increased 16 bps quarter-over-quarter, but dropped 27 bps year-over-year, which reflects a change in the mix of loan book towards higher share of low-margin business [expense] throughout 2015. NIM after provisions for loan losses dropped 5 bps QoverQ and 7 bps year-over-year due to a slightly higher pace of growth in provisions this quarter. This level is within expectations and in line with our risk appetite.

Thus, the increase of NIM is explained by; first, the level of BCRP instruments fell QoverQ which helped reduce the distortion created in interest earning assets, which expand due to a require restricted deposit. And second, higher-margin business segments led the expansion of total loans in the fourth quarter. Effect of these two factors was slightly diluted by the small increase in funding cost. The first element had some material effect as shown in the chart at the top right. As you can see in the graph, the adjusted NIM, which eliminates the amount of restricted deposits required in the central bank's repo rates from interest earning assets increased 5 bps QoverQ, 21 basis points year-over-year and 14 basis points in 2015. More than giving the precise estimated figure, this adjusted NIM gives a clear idea of the most important drivers of the slight reduction in NIM.

Next slide, please. Net provisions for loan losses increased 13.1% QoverQ and 14.9% year-over-year, but the cost of risk remained within expectations and more importantly within our risk appetite. The cost of risk may have increased 21 bps quarter-over-quarter, but in full-year terms fell from 2.15% in 2014 to 2.08% 2015 due to continuous improvement in the risk quality of new vintages in retail baking in general and in the SME-Pyme, Credit Card, Consumer and Mortgages in particular as we will see later on.

Traditional delinquency ratios such as internal overdue and NPL ratios remained fairly stable QoverQ has showed a slight increase year-over-year. Nevertheless it is important to remember that these ratios are impacted by the distortion created due to a stock of loans that are provisioned but cannot be written-off because of the existence of real estate collateral. It is a situation that characterizes mainly business segment, such as SME-Business, SME-Pyme and Mortgage portfolio.

Next slide, please. The chart on this slide shows improvement in the internal overdue ratios at each of BCP's different segment as well as at Mibanco due to the aforementioned factors. The drop in the internal overdue ratio of SME-Pyme, Mibanco and BCP Bolivia is particularly noteworthy. In the SME-Business segment, the deterioration shown in the delinquency ratios is attributable to particular cases and higher level of refinanced loans. The clients in question experienced a deterioration in their payment capacity due to poor sales performance on projects that were not related to their core business. For businesses such as SME-Pyme, Mortgage, Credit Card and Consumer segment on most appropriate delinquency analysis and sales looking at the yearly delinquency ratios, which we will see in the next slide.

Next slide, please. In this slide, we can see the evolution of the yearly delinquency ratio which is highly correlated with the cost of risk in businesses such as 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 these scenario, particularly in terms of SME-Pyme, Consumer and Credit Card, because it eliminates the effect of the seasonality that characterizes this business. In the case of SME-Pyme, early delinquency has followed a consistent downward trend year-over-year in 2015. Thus the cost of risk also improved consistently throughout the year. This represents a great achievement, because it reflects the comprehensive adjustment we have made in our business model over the past two years.

In the Mortgage book, yearly delinquency ratio remains low at around 0.8%, plus or minus 7 bps. It is also evident that this ratio registers [little bit volatility], but remains within the organization's risk appetite. The cost of risk in this segment increased 35 bps QoverQ. This increase was due to; first, the maturity cycle of the Mivivienda portfolio, which continued to account for approximately 15% of total Mortgage loans. Second, an operating error in the booking of provision for the Mivivienda program which will be reversed next quarter. Thus, the adjusted cost of risk should be situated at 0.73%. Third, a slight deterioration of risk quality in vintages of foreign currency mortgages, which were issued just before the sol started devaluation trend. And fourth and last, we identified deterioration in some clients' capacity to make payments to other financial entities and had to build provisions accordingly.

In the Consumer and Credit Card segments, after falling consistently in the first three quarters 2015 on a year-over-year basis, yearly delinquent indicators increased 13 bps and 15 bps year-over-year respectively in the fourth quarter. Nevertheless and in particular, in the Credit Card segment, all delinquency and the risk indicators are comfortably within our risk appetite. We are closely monitoring these events to make sure that we implement all measures to control the situation.

Next slide, please. Mibanco's Internal overdue ratio fell 66 bps QoverQ. This was mainly attributable to the contraction of the internal overdue portfolio, which was attributable to efforts to clean up this portfolio as well as the charge-offs. The cost of risk increased 34 bps due to a higher level of write-offs last quarter, which led to an atypical result for the cost of risk. In the year-over-year analysis, Mibanco continued to post improvement and showed stability, which is reflected in the 134 bps decline year-over-year in the cost of risk.

Next slide, please. Non-financial income grew QoverQ. This was due primarily to an increase in fee income and a net gain on foreign exchange transactions and to a lesser extent, the non-recurrent income (inaudible). The aforementioned offsets the loss on sales of securities and the loss on subsidiaries which was mainly linked to the cost adjustment of PEN10 million at Grupo Pacifico. In a year-over-year and on accumulated terms, non-financial income reported an increase of 9.5% and 8.7% respectively, due to higher gains on foreign exchange transactions and to an increase in fee income, which are the main sources of non-financial income.

Next slide, please. The insurance underwriting result increased 7.3% QoverQ. This was due primarily to a drop in the acquisition cost and to a slight increase in net premiums property and casualty and to a lesser extent, the decrease in the acquisition cost life insurance. The aforementioned mitigated an increase in property and casualty claims. In the year-over-year analysis, it is important to remember that our results incorporate the period-end effect of the joint venture with Banmedica. Nevertheless, the underwriting result increased 29.2%. This was due primarily to a decrease in the level of claims in the fourth quarter and to a drop in the acquisition cost, which offset a decline in the net earned premium related to the JV.

With regards to the main insurance ratios, it is important to highlight that the combined ratio of property and casualty fell from 100.2% and 92.2% in the fourth quarter of 2014 and the third quarter of 2015 respectively to 86.4% in the last fourth quarter. Moreover, loss ratio also dropped from 65.1% and 60.4% in the fourth quarter of 2014 and the third quarter of 2015 respectively to 59.7% in this last fourth quarter.

Next slide, please. The efficiency ratio increased quarter-on-quarter, which is mainly due to a seasonality that characterizes the fourth quarter every year. Nevertheless, Efficiency Program showed positive results which were reflected in the reduction of 180 basis points year-over-year and 200 basis points in accumulated terms.

Next slide, please. Credicorp and its subsidiaries have maintained comfortable capitalization ratios that are well above regulatory limit. The common equity tier I ratio, which is the most rigorous measure of capitalization, registered a significant QoverQ improvement of 33 basis points. This was mainly due to earnings generation. As a result in 2015, we managed to raise ratio from 8.01% at the end of 2014 to 9.34% at the year-end. The main drivers behind this were; first and most importantly, earnings generation. Second, the transfer of BCI equity investments Credicorp. And third, a correction in our methodology after having erroneously deducted deferred taxes related to the fast track of our leasing business.

Now, let's review Credicorp's results for the full year 2015. Next slide, please.

In 2015, Credicorp posted record high earnings which outpaced expectations. These results clearly reflect Credicorp's solid position which allow the organization to deliver extraordinary results despite low economic growth in Peru and volatility in the international market. Net income reached a solid PEN3,092.3 million, which led to an ROAE of 20.5% and to an ROAA of 2.1%. After excluding the effect of non-recurring net income of PEN141 million, the result translates into net recurring income of solid [PEN2,950 million]. This represents solid recurring ROAE and ROAA, 19.7% and 2.0% respectively.

In the chart on this slide, you can see the annual contribution of four subsidiaries as well as the ROAE and recurring ROAE. It is noteworthy the better performance of BCP, Mibanco, Pacifico and Prima. Even more, we see their recurring ROAEs which have improved dramatically benefited. Profitability, they just reduced in Credicorp Capital and Atlantic Security Bank due to the volatility and deterioration of international markets of business segments are linked to.

Next slide, please. The resilience of Credicorp's businesses is clearly reflected in our achievement, which were well in line with our guidance and did not change even when the local and international markets became more difficult to maneuver in 2015. First, loans expanded 13.1% in period-end balances and 16.8% in average daily balances. Second, cost of risk dropped 7 bps. Third, the funding cost was very well controlled and consequently increased only 3 basis points. Fourth, as expected NIM reached 5.60%, this represents a slight contraction of 8 bps. Fifth, NIM after provisions expanded 3 basis points. Sixth, efficiency ratio dropped 200 basis points, which was even better than we had expected. Seventh, common equity tier 1 ratio was situated at 9.34%, which is already very close to our target of 10% by the end of 2016. Eighth, internal overdue and NPL ratios increased only 5 basis points and 8 basis points respectively.

Although no guidance has been given to our market due to the distortion caused by the presence of collateral in some business segments, it is important to mention that these ratios are not showing the (inaudible) improvement in some businesses such as SME-Pyme and Mibanco. All the above translated into a recurring ROAE of 19.7% which was close to our 20% target.

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

Thank you, sir. At this time, we will open the floor for questions.

(Operator Instructions)

Tito Labarta, Deutsche Bank.

Just couple of questions. First, in terms of asset quality and provisions, we saw a nice improvement in terms of NPLs, but you did see a pickup in provisions, you mentioned some additional provisions for a particular corporate, also credit card provisions would be higher. But I guess, you want to get expectations going forward with somewhat slow growth, how do you see asset quality evolving in 2016 and also how should we think about the cost to risk and given it was a bit elevated, I think this quarter has that come down back closer to the 2% of loans, for this year we can maybe give some guidance on that? And then also just any impact from El Nino that you're seeing, I guess in the first quarter and any potential impact on asset quality because of that?

And then second question in terms of margins, also saw a bit of an improvement this quarter. Again, if you can maybe give some color for your expectations for this year, given what you're expecting for loan growth in the different segments, retail versus corporate and also your funding cost this year. So how do you see net interest margin evolving this year, can that improve further or does that remain relatively stable. You can give some color on that as well?

First, I want to address your first question. In terms of asset quality, we feel that until now the Nino is still on a very moderate stance. It will probably stay as it is, although it's raining a little bit in [rural] region, but nothing special has happened. Of course, we have compared our projections, with two scenarios, our base scenario is more than one and the other scenario is a different one with a serial Nino which could affect out loan quality. Until now, we feel that we are running under the moderate one and don't seem to feel that there nothing special will happen in terms of loan quality, it will probably stay as it is. That with regards to El Nino.

However, as you have seen in the numbers over the last quarter, Peru is in a way slow in a little bit economically and that subdued economy would affect a little bit especially in our Consumer portfolio. However, until now, we are very low and there our appetite and our risk appetite are not seem to be knowing anything special with a portfolio.

Then in terms of the expectations for the NIM and loan growth, we feel that, this is a very particular year because of what we talk about El Nino, because we have elections, the first one in April and the second in June. So that will bring some stability to the country, but we feel that last year we have probably grown by 2.8% and this year, we'll probably be around 3%. So as the country continues to grow by these -- in this particular pace, we feel that our loan portfolio will really resemble -- the growth of that portfolio will resemble the one we had last year which will be around say 13%, 15%. If this happens, we will see if any particular pressure on our margins, this is a very safe pace of growth, both in terms of risk, but also in terms of competition, there will be room for everyone to continue growing and we don't seem to feel a special pressure on our margins, so they will probably stay where they are right now.

All right, thanks. That's helpful. Just a follow-up. In terms of the cost of risk for this year and asset quality I guess just from your comments, is it safe to say you could see some modest deterioration just given the slowing economy and impact on the consumer portfolio, but in general, relatively stable, so stable to slight deterioration in NPLs and what does that imply for your cost of risk this year?

Cost of risk will probably stay between 2% and 2.2%, last quarter was a little bit higher than that 2.2% guidance we gave all the time. Yes, there has been some deterioration, but we are pretty confident that all the measures that have been taken during the past months especially in SME and Consumer arena will -- led us continue to be into that comfort level 2% to 2.2% cost of risk.

Saul Martinez, JP Morgan.

I have two questions. I've been worried about the LDR, especially the local currency LDR, any evolution there, the dedollarization of loans and the dedollarization of deposit? I realize it's premature perhaps to call a stabilization, but this was the first quarter in some time when the few quarters in the past few years where you actually saw a decline. Can you talk about this ratio a little bit more, what you see is the cross-current, how volatility in the markets, the expectation that currency makes so weaken impacts that or conversely are you seeing pension funds already swapped out of local currency deposits into dollar deposits. What are your expectations, are we near -- do you think we're near the end of this and is there a local currency LDR ratio that you feel uncomfortable with that would take you to be more aggressive in terms of raising funding cost?

The second question is a little bit more on the global backdrop and how we should think about, it's a broader question, especially given the ample market volatility we've seen concerns about China. How should we be thinking about the transmission mechanisms of a difficult macroeconomic backdrop in the Europe business, whether it be through confidence, exposure to specific sectors, impact on economic growth, how do you think about a difficult economic backdrop even a hard landing in China and what it means for your business and how you run it?

First on your dedollarization question, as we have talked now for some months, you have seen what happened during the last quarter, and we are -- in terms of the loan to deposit ratio, we have improved a little bit, we are around 103%. What I can tell you is that during the last 15 months, we have been around at 100% to 105% in the loan to deposit ratio in the combined one. We plan to stay just where we are, so we don't see any particular difference in the coming months. However, we talk about local currency loan to deposit ratio, yes, we are in the 140% to 150%. But as we have talked many times, we are under a very constructive relationship with the central bank and all the financial institutions of central bank are working out this project and we'll continue to do that. That's what we get from them.

If the exchange rate stabilizes a little bit and we don't know what's going to happen, we'll never know what's going to happen with exchange rate, but if it stabilizes a little bit, our feeling is that we will balance a little bit our loan to deposit ratio in local and foreign currency. So we don't see actually from what we talked some months ago, we see a much better situation in terms of that ratio and in terms of that particular situation.

Then on your question about China and what can happen in China, brings more volatility to the market, to the prices of commodities. Yes, we don't know what's going to happen with China, what we know is that when they say that they are going to grow 7%, they grow 6.9%. So we continue to really reach their targets, all the targets. Now, their target is that they will grow from 6.5% to 7%. If that happens, we are going to do fine. There are good things that have happened, improved in the last month, especially they're coming into production of many important copper mines. Our output of copper has doubled and it will double from what we had in 2014 to 2017.

So our trade balance -- and this December was the first month when our trade balance was a positive balance for many months, despite the prices of commodities, because of these projects have come into production. Those projects will reach full production at the end of this year. So we don't see anything special happening there in terms of our trade balance, in terms of our current account balance, and also really a hard part that we have to really follow. If that happens, I feel that our country will continue growing, this is still growth, I mean 3.2% is still growth, if it is better than that fantastic, but 3.2% is still growth in a traditional year with a presidential change. So we feel that the bank will continue growing, and there were important influence in the deterioration of loans.

Okay, great. Is there a local currency LDR ratio you feel uncomfortable crossing that precipitate higher funding cost?

I would like to give our guidance on that. What I can tell you is that on a combined basis, our roof, our ceiling is at 120%, and we are very comfortable because we're at 103%.

Ernesto Gabilondo, Bank of America.

Could you repeat your guidance in terms of loan growth and what are you expecting in terms of net earnings road in 2016? Secondly, I will appreciate if you can share your expectations related to the presidential elections, the currency devaluation, and the possible downgrade of Peru to frontier market. I think any details will be very helpful. And finally, although there are no investments in mining, what can we expect in other infrastructure projects such as the airport, metro, gas pipeline although that could support the growth of Peru's GDP? Do you think the presidential elections could be delaying infrastructure projects and consumption and then improving in the medium term?

In terms of guidance for loan growth, we will be at around 13% to 15%, which is nominal growth. In terms of net earnings, what I can tell you is that we -- our target continues to be 20% ROAE for Credicorp and that will be the guidance we use in terms of earnings.

In terms of presidential election, as typical in Peru, now we have a front-runner which is Keiko Fujimori, the daughter of former president Fujimori. She has around 35% of the vote. And then the second candidate will really have a second one, because they are like three candidates that share 10% each. But there in Peru, two months is a long time and the elections are in April 10, so which we are looking and what's going on, our feeling is that Keiko and somebody else would go into a second round of elections in June. But we don't know right now who is going to be the second one. What we feel is that the ones running are really market-oriented, ones are more market-oriented than others, but we'll have the typical populist candidate coming from the left, so we feel pretty safe that we will get a good president. A good president, someone that will be really market oriented.

What we feel and then Europe, a little bit of devaluation and frontier markets. In terms of devaluation, last year we had a devaluation of 14.5%. Each year is probably is going to be around I don't know 10%, 12% depending on what happens, especially now in the US because the US keen to come along pretty strong. Now we don't know, I mean, (inaudible) going to talk in the Congress tomorrow. We view that the pace of increase in the interest rate, in the fed's current interest rate would not be as fast as we thought three months ago. So we will see what happens to the dollar. I mean, the dollar appreciate against the other currencies last year 9% and against the sol only 14%. So we'll see it really depends more on the dollar than on the sol itself.

In terms of frontier market, as you know, there was a very important push both from the private sector and also from the government and we talk to the MSCI and are really close to them and are really trying to put power up together, also improve working with some other companies to let these companies increase really their pace and their importance and be able to have more than three companies in the emerging markets arena. We don't know exactly what's going to happen, but what I can tell you is that we are working -- we are doing our job to try to continue to be on emerging market rather than on frontier market.

Then on your last question in terms of infrastructure projects and the impact on GDP, right now, as you know, last year was not a great year in terms of public investment. However, the pace improved importantly in the last quarter there were some important infrastructure projects being under construction now, but we feel that this pace has to really speed up. We feel that the next government will come with an important package of reforms, of course in terms of political reforms and in terms of projects that should really come into construction and in place in the coming say three, four years.

They will really need to move the machinery much faster than it is moving now. Peru has important a lack of infrastructure in terms of roads, highway, ports, airports, the metro system in Lima. So there is ample room for improvement on construction and that will evidently have an impact in the GDP. What I can tell you is that now in terms of investment, private investment accounts for 80% of investment and it's very productive and 20% of the investment comes from payroll and the government issues, that should really increase its pace in the future.

Jason Mollin, Scotiabank.

My general questions have been asked, but maybe I could be a bit more specific. You did mention on the efficiency side, the improvement we saw in full year 2015, 200 basis points improvement in the efficiency ratio to 43.3%. What are you doing, what are you continuing to do to improve that ratio going forward, what should we expect this year?

And specifically on Credicorp's portfolio diversification, can you provide an update on what percentage of the loan book is with the largest borrower perhaps the largest five and 10 borrowers and how has its concentration changed, perhaps in terms of size and if there's been any material change in terms of sector exposure?

And maybe just lastly the general question, we've seen some proposed changes in regulation, particularly in the retirement -- in the pension sector, if you can give us an update there?

First, in terms of efficiency, what I can tell you is that we have really been concentrated most in BCP, in terms of (inaudible) our cost to income ratio in BCP has come down from the low 50s to the low 40s in three, four years. We think that we have reached already a position that is very safe, however we want to go further down and try to reach the 40 or even less than that in the coming three years. That in terms of BCP.

Now, what we plan to do is really, what we have learned at BCP and we have a very good group of people that understand what to do with efficiency. We will go into (inaudible) and subsidiaries of Credicorp. First, we will go into Pacifico, Prima and some of the subsidiaries and we will leave Mibanco maybe for 2017, because as you know Mibanco is under a very -- under a transition process, the merger took place only in March last year, it's only been a year really. And this year there are other things to do and to prioritize before going into efficiency thoroughly. But we have the lessons learned, we have the people prepared and we have the [contrary built] in the whole Credicorp to continue with this efficiency effort. So we feel pretty confident that we will reach the targets we plan to reach in that arena.

In terms of portfolio diversification, if you go to page 5 of the presentation, you can see now what our segments account for and you see that Wholesale Banking is 45% of loans, SME is business explore, and SME-Pyme (inaudible) segment. What we planned this year is to continue -- last year, the wholesale grew faster than the retail. And, but this year, we think there is going to be a more balanced growth in terms of -- and retail will pick up a little bit, Mibanco will also be growing faster, so it will be a more balanced growth. If we talk about concentration of -- what percentage is concentrated in our most important 10 clients, as there are no specifically the figures, but you can -- we are going to publish the 20-F in two months' time and you can go there for the last one we published and for the next one, and really go in detail in that particular point.

Then in terms of regulation, first we want to talk a little bit about banking regulation, nothing important is going to change in this year because the authorities are going to change at the middle of the year. The only thing that the superintendence is working on is a regulation that will resemble Basel III, especially in terms of capital requirements. They will probably publish it at the end of this quarter. We are really working with them. It will really resemble Basel III, but as you know, we are already working under Basel III standards, so we will be really no change in terms of what we are doing.

Then you asked a little bit at the pension funds regulation. Yes, there is, as you know, a very open discussion of what's going to happen with the pension funds. It is now really in the political arena to decide if it's going to be a pension system or is it going to be a savings system. Until now it is a pension system, because when you really become 65, you will begin to get your pension until you die. But because of saving system, you will get -- you will have a liquidity event at that time, we are really preparing all the -- all Credicorp, really the bank, ASB, and our insurance company to be able to be part of that insurer of the liquidity event that our clients will have when they become 65. But that is under a political roof now and we will see what happens. And that's really the answer for regulation.

Thank you for your detailed answer. Maybe just some color you mentioned the segment breakdown that we saw in the presentation. But what about in terms of sectors, mining, fishing have your largest exposures changed?

Not particularly. What I can tell you and this is a very precise question, is that in terms of El Nino, you are probably worried a little bit about if we are in agriculture or if we are in fishing, those are the two sectors that can become impacted by El Nino and we are really not that exposed. Agriculture is only 1% of our portfolio and fishing is even less than 1%. So we are really not exposed, we were preparing for many months and even years for this to happen and we expect there will be no problems (multiple speakers).

(Operator Instructions) Victor Galliano, Barclays.

Just a quick follow-up from me. My main questions have been answered, but just looking at the breakdown of the dollar loan book in your stock of dollar loans, I mean, clearly the segments have performed very differently over the last year in terms of growth of those stocks and what we see is in absolute terms, there are some of those that are not really coming down very much. And when you look in particular at SME-Business, although they only grew in dollar terms, I think it was 2% year-on-year, it's still growing SME-Pyme is coming down. And also we saw the Credit Card balance has increased, although that low in absolute terms, they were growing at about 22% annualized.

So can you give us some idea here of why these performances are so different, why the SME-Business balances continue to grow, SME-Pyme is coming down and why we also saw that, I think, big increase in the Credit Card balances as well, whereas the others tend to come down?

What I can tell you in terms of SME, it's a -- they are really two different segments. As you said SME-Pyme, which encompasses both SME and micro lending has been a really flat segment for the past 18 months. It's been flat for many reasons, but it was really a deliberate move by financial entities also, because there was risk in that segment. So we decided that we didn't want to grow as we did in the past and it was -- I think that was really a good decision. It's been flat, we've been working with our clients. We feel that it will pick up a little bit, but it won't be growing fast, I mean it's a -- I mean, it won't be growing by 15%, 20%, it will probably grow less than that and that will continue. If the economy picks up a little bit in terms of growth and instead of growing 3%, it grows 4%, we will see there a very positive influence in the SME-Pyme sector.

But if we talk about the SME-Business segment, which are companies that are a little larger and more formalized than the SME-Pyme companies, that segment has been growing faster and each of their segments that we like a lot. We've been investing in that segment for many months now in terms of understanding risk, in terms of the models to not only to underwrite, but also to collect in terms of data, in terms of getting very much more closer to our clients, we feel that, that particular segment is a very attractive one and we will continue to try to grow there.

I don't know if that answered your question?

I suppose let me ask my question in a different way, which is you still have in the SME-Business, you still have 56% of the loans in foreign currency. I mean, do these funds have that sort of a hedge naturally or are they exposed to the sol depreciation here?

To be really transparent, we would like that proportion to be much less than 44% and we've been working actively with our clients in those terms. The thing is that some of our clients continue to make their income in dollars, part of this economy is really hedged to the dollar and some of these clients make part of their income in dollars. So they don't want to change. And we are yes, some of them feel that the rates in dollar are lower than rates in soles and they in a way take their own risks. However, there is still room enough for [10] and room in terms of what's going to happen with regulation, bring these clients more into sol, that's really something we should continue to regulate.

Okay. So you're going to bring that level down from the 56% which is in foreign currency.

We're going to try. Remember we're working at competition. We're going to try, we are trying very hard, but these clients have other banks, there is a competitive arena here.

Saul Martinez, JP Morgan.

Just a couple of quick follow-ups on asset quality. It is something of a follow-up of the previous question, but from a different angle, you're growing very rapidly in credit card in a slow economic growth environment and NPLs did go up sequentially. I apologize if you addressed this during the presentation because you've posted a presentation a little bit late on the website, but how, should we be concerned about this, it does imply that NPL formation in this segment is increasing and why should we be comfortable that we don't see what we saw a few years ago when you did see more ample deterioration in your credit card book. And secondly, you know offhand how much of the increase in the NPLs came from the two cases you mentioned in Pyme business, how much were those two cases and how much did they impact the NPL ratio?

Can you elaborate on your second question that you asked?

You mentioned in your release that the Pyme business segment, there were two specific cases that impacted your NPLs. Do you know how much those specific cases where for, so we can kind of normalize or think about what the impact of those two cases were on the NPL ratio?

Yes, so first on your asset quality question, we learn from our lessons and yes, we have lessons that we learnt three, four years ago. We have put our best people, our best efforts to try to understand risk that we able to underwrite and to be able to collect better than others. So now we feel that if the country continuous as I said, if country continues to grow by 3% a year, we will have the same experience as we had some years ago. We're feeling a much better stance in terms of the models we have, not only the models going forward, scoring models, but also the collection models. So we are very much more preparing, we have a better culture in terms of people that work and risk that work with our clients in the commercial side. So we don't feel that we will have the same experience. Then those two specific cases account for 60%. [We will be] back to you with some more details, but that is around 60% of what happened in the SME-Business line for this quarter.

Okay. So in other words 60% of the increase in Pyme business came from those two specific cases?

Particular lines, yes.

Thank you. At this time, I'm showing no further questions and I'd like to turn the call back over to Mr. Walter Bayly, Credicorp's Chief Operating Officer for final remarks.

Good morning to all of you and thank you very much for being with us throughout the year and this particular call.

If we take a step back and look at the year, clearly we have seen, it's not that there appears to be contradictory, which is as the Peruvian economy slowing down, a lot of volatility of the world and nevertheless our record earnings for the quarter. And somehow what has happened this year is that we have benefited from initiatives that we started approximately two years ago. One is related to efficiency and we've talked about that quite a while in detail. And that is an effort that started two years ago, I had mentioned, we have had some very good results. Obviously, the first impact is faster now we have to do the hard things that take a little bit more time, but we're extremely focused on that.

And the second element that has benefitted our results this year is clearly risk management. We are comfortable with our risk management practices particularly, and they relate to the retail side. We have seen a good growth particularly in the consumer and credit card, the dynamic there was at the beginning of the year. One of our competitors, particularly Citibank started to sell its own portfolio. So we decided to rather than buy go up to some of those customers. Some of you know, we have a lot of publicly available information provided by the spread and this has to who the borrowers are and rather than paying a premium, we started a very aggressive campaign at the upper end of the -- the wealthiest customer that has a highest balance. We were extremely successful, obviously won't work at -- in companies such as that, the growth comes with that but it is all within the risk parameters that we had originally established. So again, we're benefiting from efficiency and risk management, which allow us to even grow in a year in which there was an economy that was slowing down and volatility.

Other good things worth mentioning from the year that just finished is the merger of Mibanco. Putting together two financial institutions always has complications not only in terms of systems, culture, sales, methods, methodologies, etcetera. Frankly, it was -- we're very comfortable with what we've done. The fact that it was not a very aggressive market and we did not push our sales force gave us a little bit more space to try to integrate and do things without a lot of competitive pressure. But nevertheless, we think we're in the right track and acquiring Mibanco and merging it with Edyficar, we think will become a very strong contributor to Credicorp's revenues going forward.

The association with Banmedica, very, very valuable to us in terms of realizing that we do not necessarily have the learning curve to be able to reach the required levels of profitability, it was a tough one for us and the association with Banmedica, who has proven to be a very good partner is probably going to help us achieve the required returns in a faster timeframe.

We are also comfortable with Credicorp Capital. We think it's gone through its inflection point. It's been a complicated journey so far. We acquired at the peak of the Latin American boom, if you will. We paid prices that clearly reflected a different perspective of what's going to happen in the future, which has some difficulties in integrating the companies. But we are very comfortable that the inflection point has way -- is way beyond us. And this last impairment which we did was, I think, mostly -- 80% driven by changes in the tax law in Chile that do not reflect the actual dynamics of the business. The business has gained market share, it's very well positioned in a period where our competitors are withdrawing. Some of the large international banks and even some of the regional banks have had difficulties and are withdrawing and also the spaces that we need to take now. When international players withdraw as we're -- asked that are committed to this region have the opportunity to capture some of those spaces. This is a highly strategic business for us.

Challenges in this year, the continued review of the portfolio of businesses of Credicorp, we have businesses that are still not performing or are under-performing, we have to work and do the strategic reviews and keep pushing those businesses to obtain the results that we wanted to.

And Mibanco we have a challenge there. Mibanco was merged into Edyficar with Edyficar and Edyficar has the culture of being a mono-line, a single product, it only offered microfinance loans to a single segment, microfinance. Mibanco is now a multi-segment bank that goes into small businesses, then microfinance and it offers a larger array of products in terms of deposits, transactional services etcetera, etcetera. So we have to beef-up that organization in order to fully capture the benefit of having built the fifth largest bank in the country.

As somebody mentioned there is a challenge related to regulation on the pension plus insurance business. We have had a test of what could happen which is that a few might know, the law was approved by Congress, observed or not approved by the executive branch and it's pending discussion in Congress in March. But there is already a high level of uncertainty and worry thus impact is on the annuities business where the volume has [dropped 60%] when it was prior to this regulation. So maybe that's a test of things to come on the annuity business.

Nevertheless, as Fernando mentioned, what we see going forward is that our customers when they reach the 65 years, they will have as Fernando described an event of liquidity. And clearly the only thing that is not going to happen is if they take the money in cash. We have to be able to put in front of our customers a set of products that suits their individual needs either mutual funds, time deposits, insurance products, health, life and/or all sorts of investment products from Credicorp. So we have the franchise to be able to capture those funds and offer services to our customers that suits their individual needs.

A lot has been mentioned throughout the year on the loan to deposit ratio, that is clearly something we are all watching. We have seen a improvement in the last quarter. My gut feeling is that it basically driven by the fact that the government started to spend some more money. As you might have recall, the government has a substantial amount of money deposited at the central bank to the extent that they are running deficit that money has to leave the central bank and flows into the system. We think that that dynamic will start to happen once we have a new president. We have been in meetings with all the candidates and the only thing they haven't comment or one of the few things they haven't comment is that they all want to beef-up or expedite the investments in infrastructure. So we think that thus money stays at the central bank will flow back into the system and we will see some more solid floating around.

We see going forward this year kind of two timeframes. One is the first six months in which volatility will continue because of China, interest rates, El Nino and elections. But the second half of the year, some momentum, we hope will start to kick in and we'll find a country that that's not have a serious inflation problem, deficit problem, financial system healthy, there is no over-leverage to other government or the private sector, and a lot of continued -- opportunities to continue to catch up. So we think that some momentum will start to kick in in the second half of the year and we will have a year in which we will grow at 3% which is a lower potential but nevertheless it is growth and of course, at that time Credicrop continues to be very well prepared to capture growth in the fundamentals in this economy.

Again, we thank you very much for your continuous support and attention and being with us throughout this year, and we hope to have to deliver -- we hope to deliver to you a solid first quarter for this current year. Thank you very much.

Thank you, ladies and gentlemen. This concludes today's conference, you may now disconnect.