Credicorp Ltd (BAP) 2016 Q2 法說會逐字稿

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  • Operator

  • Welcome to the second quarter 2016 Credicorp conference call. 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 your 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'd now like to turn the conference over to Mr. Fernando Dasso, Chief Financial Officer for Credicorp. Sir, you may begin.

  • Fernando Dasso - CFO

  • Thank you. I am sorry for the delays we had because of the lines. I will be reading page two again.

  • Good morning and welcome to Credicorp's conference call on our earnings results for the second quarter of 2016. Before we review Credicorp's performance in the second quarter, I would like to take a few minutes to review the Peruvian macroeconomic environment.

  • After a close run-off, Pedro Pablo Kuczynski was elected president on June the 5th for the next five year period. The main economic proposals that aim to achieve GDP growth of around 5% a year are the following; first, unlocking the main infrastructure projects; second, cutting red tape; third, reducing the informal economy; fourth, introducing tax changes such as the reduction of VAT from 18% to 17% in 2017, and a special tax regime for SME enterprises, among others.

  • However, it is important to know that PPK holds a minority of seats in Congress, and political negotiation will be key to determining the post election actions that will actually be implemented. In this context, we still remain cautious and maintain our GDP growth estimate for 2016 at 3.7% and 4.2% for 2017.

  • With regard to inflation, our estimate suggests that it will close 2016 at around 3%, below our previous estimate of 3.5%. We expect the Central Bank to maintain its policy rate of 4.25% in the coming months. We have also revised our year-end exchange rate forecast from 3.50 to a range between 3.38 and 3.43 for the end of 2016.

  • In sum, the new president has spurred an improvement in business confidence, but we still need to wait to see which policy measures are actually implemented.

  • Next page, please? Credicorp reported net income of solid PEN874 million on the second quarter of 2016, which represented an ROAE and an ROAA of 20.4% and 2.2%, respectively. After extracting the translation loss of PEN42.7 million and the gain of PEN120.2 million from the sale of 50% of Credicorp's investment in BCI, the result shows net recurring income of PEN769 million.

  • This represented a reduction of 6.6% Q-over-Q and an increase of 3.6% year-over-year on recurring ROAE and ROAA of 18% and 1.9% respectively. Credicorp results are weaker than those of the first quarter because they show the impact of the macroeconomic scenario in which our businesses have operated over the last two and a half years, which are definitely more optimistic -- we are definitely more optimistic about the coming years because we expect the economic scenario to improve and, more importantly, because we have been highly engaged in fine-tuning business models in almost every business segment.

  • We feel better prepared to capture the potential that exists in the Peruvian market as soon as the economy fully recovers and stays afloat, particularly in terms of investment and in general transactions. The second quarter's result showed, first, quarter-end loan balances were almost flat Q-over-Q and expanded 9.8% year-over-year.

  • After excluding the effect of the depreciation of the US dollar Q-over-Q and the appreciation year-over-year, loan growth showed 0.6% growth Q-over-Q and 8.8% growth year-over-year.

  • Second, net provisions for loan losses increased 6.8% Q-over-Q and 12.1% year-over-year. This was due to an increase in gross provisions and a lower level of recoveries and reserves. The former came mainly from the increase in past due loans in the consumer, credit card, and mortgage segments. As a result, the cost of risk was situated at 2.11%. This was 13 BPS above the first quarter result, which was the lowest ever recorded in the past three years.

  • Third, net interest income contracted 2.2% Q-over-Q but grew 3.6% year-over-year. The contraction this quarter was mainly generated by lower income on forwards and a decrease in dividend income on investments. As a result, NIM contracted 14 BPS Q-over-Q and 51 BPS year-over-year.

  • The lower net interest income and the higher level of provisions put significant pressure on NIM after provisions, which fell 22 BPS Q-over-Q and 49 BPS year-over-year.

  • Fourth, the efficiency ratio was situated at 43.9%, which represented an increase of 170 BPS Q-over-Q but a reduction of 10 BPS year-over-year. The higher ratio this quarter was in line with expectations due to the seasonality of operating expenses, which are lowest in the first quarter of every year.

  • Let's review all these financial figures in more detail. Next slide, please? On this page, you can see the evolution of the loan book in average daily balances, which is an important driver of our NIM and, most importantly, of our NIM after provisions.

  • Overall, Credicorp's average daily loan balances expanded only 0.5% Q-over-Q and 10.4% year-over-year. Each rate showed that loan growth has slowed, considering that the previous quarter posted increases of 1.7% Q-over-Q and 14.3% year-over-year.

  • The slowdown in loan growth reflects the seasonality, but most importantly, first, lower loan growth because of banking, a segment that has led loan expansion at Credicorp for the last three years. This was due to the economic downturn and to the effects of the presidential elections, which led corporations to postpone investment decisions.

  • The aforementioned was accentuated by much stronger competition from local banks that are seeking our clients with good risk profiles, which characterize the majority of clients in this segment.

  • Second, loan growth in SME Pyme and Mibanco, which reflects our risk appetite and efforts to improve the portfolio's risk quality. This effect was further accentuated by the seasonality that characterizes these businesses, whose main financing campaigns take place in the second half of the year.

  • Third, the increase in delinquency in the consumer and credit card segment, which triggered an adjustment in admission and pricing models that has slowed loan growth.

  • Fourth, and to a much lesser extent, lower loan growth reflects the effect of the 1.2% Q-over-Q appreciation of the sol against the US dollar on the portfolio denominated in US dollars, which represented 38.4% of total loans at the end of June.

  • The analysis by currency, which excludes the effect of the exchange rate, shows that loan growth came mainly from our local currency loan book, which grew 2.7% Q-over-Q and 22% year-over-year. These levels were lower than the 3.3% and 29% posted in the previous quarter.

  • The foreign currency loan book recorded an increase of 0.8% Q-over-Q after contracting for the last five quarters, but contracted 9.5% year-over-year.

  • In terms of different segments, loan expansion continued to be led mainly by corporate banking, which puts downward pressure on our NIM. The slight increase in the pace of loan growth posted by Mibanco is still growing.

  • Next slide, please? The de-dollarization process continued. And as you can see in the chart at the top, as of June 2016 Credicorp reported that 38.6% of its loan book was denominated in US dollars, a level lower than the 39.7% posted last quarter and the 45% registered in the second quarter of 2015.

  • BCP standalone recorded an even lower level of dollarization, which was 36% at the end of June, below the 38% of last quarter and of 43% in the second quarter of 2015. Overall, as you can see in the chart on the bottom right-hand side, the level of foreign exchange risk on credit risk has remained stable.

  • Next page, please? As you can see in the table at the top of this page, net interest income contracted 2.2% Q-over-Q due to a decline of 1.9% in interest income that was not offset by the drop in interest expenses.

  • On the income side, even though interest income on loans expanded, this was not enough to offset the lower level of interest income from derivatives and the drop in dividend income from investments. The latter is attributable to seasonal effects that are present every year in the first quarter.

  • The aforementioned and an expected increase in provisions for loan losses resulted in a relatively large reduction in NIM and NIM after provisions, as is shown in the chart at the bottom of the page. Definitely NIM and NIM after provisions reflect the narrative effect of the slowdown in loan growth, stronger competition that pressures NIM, and higher delinquency in the consumer and credit card segments.

  • Next page, please? On this page, you can see Credicorp's funding structure and some important indicators related to the same. First, the funding costs in the banking business continue to increase, but at a slower pace. This expansion is mainly due to an increase in the average cost of deposits, bonds, and subordinated debt.

  • Furthermore, sources with higher funding costs increased their participation in the funding structure and, as such, put upward pressure on the total funding cost.

  • At the Credicorp level, the funding cost dropped 2 basis points Q-over-Q due to lower expenses from derivatives recorded in Credicorp Capital. Nevertheless, in the year-over-year analysis, Credicorp's funding cost grew 7 BPS due to growth of 12 BPS in the funding cost of the banking business.

  • Second, the low currency mismatch between assets and liabilities, which is approximately 0.9%. Third, the overall loans reported ratio increased and reached almost 102%. This was the result of a contraction of deposits, which in turn is explained by a drop in deposits from institutional clients and others, mainly foreign currency deposits.

  • Next page, please? In terms of portfolio quality, the cost of risk increased 13 BPS Q-over-Q and 4 BPS year-over-year, which was expected after this indicator reached its lower level in the past three years in the first quarter of 2016.

  • Higher provisions for loan losses came mainly from consumer, credit card, and mortgage segments, and to a much smaller extent from BCP Bolivia. Delinquency ratios deteriorated due to expansion in internal overdue loans and non-performing loans that were also mainly associated with consumer, credit card, and mortgage.

  • All this was exacerbated by almost nonexistent loan growth. You should also keep in mind that traditional delinquency ratios continue to reflect a distortion due to high levels of real estate collateral, which are particularly evident in the SME business, SME Pyme, and mortgage segments.

  • The analysis of cost of risk and delinquency ratios was -- by business segment shows improvement in wholesale banking and SME business. Furthermore, SME Pyme and Mibanco continue to show good results, as they did throughout 2015 and the first quarter of this year.

  • With regard to the business segments that posted higher delinquency ratios and therefore higher cost of risk, it is important to mention that in the case of mortgage the increase in internal overdue and non-performing loans is related to higher delinquency in the foreign currency vintages of 2013.

  • Nevertheless, we have seen a larger number of clients from this vintage taking advantage of the opportunity presented by an appreciation of the sol against the US dollar that have moved to convert their mortgages to local currency loans. In some cases, we have helped them by extending the term of the loan so they can adapt to their new level of debt service.

  • That should give you even more detail the evolution of delinquency ratios and cost of risk in credit cards and consumer segments. Next page?

  • The figures on this slide show the evolution of the delinquency ratios and cost of risk in the credit card and consumer credit segments, both of which have posted upward trends since the last quarter of 2015.

  • System-wide, an initial analysis shows that the main cause of higher ratios in this regard is the deterioration in the macroeconomic environment, which has been characterized by low economic growth for the past three years. This scenario was even more evident in the sectors such as manufacturing, construction, and services and consumer. The downturn occurred at the time when the [divisions] had already increased indebtedness levels.

  • In the case of credit cards, we made some decisions more than two years ago to set a new risk appetite, which helped us moderate the negative impact of the economic slowdown. As such, deterioration of our ratios began at the end of 2015, unlike the deterioration at our competitors, who experienced a downturn earlier.

  • At the beginning of this year, we began to apply strict measures in our risk admission policies to prevent risks that fall outside our risk appetite. Additionally, we have made adjustments to ensure that the pricing models remain aligned with our risk models.

  • In terms of portfolio management, our tools have allowed us to adjust credit lines according to our new risk appetite, in particular in the sub segments that have higher exposure into the level of indebtedness.

  • We believe that our risk is relatively controlled and that a gradual recovery in economic growth, job creation, and income levels will allow us to recover the profitability in this segment.

  • Next page, please? Nonfinancial income increased 18.2% Q-over-Q and 22% year-over-year. This was mainly due primarily to gains on sales of securities, which was attributable to the sale of 50% of the investment we had in BCI.

  • If we eliminate the effect of nonrecurring income, the result shows an increase of 4.8% Q-over-Q and 8% year-over-year due to an improvement in the evolution of fee income and gains from foreign exchange transactions. The former increased 1.8% Q-over-Q and 7.2% year-over-year.

  • Next page, please? The insurance underwriting result increased 13.3% Q-over-Q due to a decrease in the acquisition costs in the property and casualty and life insurance lines, while net earned premiums and claims remained at levels very similar to those posted in the previous quarter.

  • Year-over-year, the underwriting result increased 12% due to expansion in net earned premium and the fact that claims and acquisition costs posted much lower growth rates than that of net earned premiums. In this context, the combined ratio fell significantly to 88.8%, and the loss ratio posted a very stable level of 57.6%.

  • Next page, please? In terms of operating efficiency, the efficiency ratio was situated at 44%, which represented an increase of 170 BPS Q-over-Q. This was in line with expectations due to the seasonality of operating expenses, which registers a lower level every first quarter.

  • Furthermore, operating income posted a slight contraction, accentuating the deterioration of the efficiency ratio Q-over-Q and partially diluting the improvement year-over-year that represented the reduction of 10 BPS in this ratio.

  • Next page, please? In terms of capital ratios, at the end of June we reached a level of 10.2% in the common equity tier one ratio of BCP as a result of, first, a higher level of retained earnings, which in turn reflects the net income generated in the second quarter; second, the positive effect of transferring BCP Bolivia to Credicorp's Bolivian holding -- this reorganization has allowed us to reduce the deductions in common equity tier one for investment in subsidiaries and, in particular, in financial institutions; and third, the reduction of risk-weighted assets due to the lower level of credit risk-weighted assets, which in general reflects the slowdown in loan growth.

  • All the aforementioned allowed us to achieve the year-end target of 10% that we set for the common equity tier one ratio. Next page, please?

  • In the chart of this page, you see the contribution of Credicorp to Credicorp portfolio by subsidiaries. Overall, Credicorp posted a 20.4% ROAE and a recurring ROAE of 18% in the second quarter, largely the effect of significant slowdown in loan growth, which in turn is the result of the high level of uncertainty related to presidential elections that marked the first half of the year.

  • It is important to note the higher contributions from Pacifico, Atlantic Security Bank, and Credicorp Capital. The slight better performance of these subsidiaries accelerated BCB's overall contribution, which is the subsidiary affected by the slowdown in loan growth.

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

  • Operator

  • Thank you. At this time, we will open the floor for your questions. (Operator instructions.) Carlos Macedo, Goldman Sachs.

  • Carlos Macedo - Analyst

  • Thanks. Good morning, gentlemen, a couple of questions. The first question on our outlook for asset quality. As you said, it's been weak going in the macro sense, and that's hurting asset quality across the board. Just wanted to get a sense from you what you expect your cost of risk to be through the end of the year, given that it's still relatively low or was relatively low the beginning of this year, and if you have any views for how much that can improve next year if growth does resume.

  • Second question turning to capital. You mentioned that your capital is now, common equity tier one, at 10.2%, which is much better than where you were a few years back, the 7.2% two years ago, and you were guiding for something around that level. Removing BCB helped. Is removing Mibanco something you would consider around -- given the same -- the magnitude of the impact that it could have on your capital? And if that's the case, what kind of capital would you like to operate -- at what level? Because it's -- even with a slightly lower profitability, the low loan growth indicates you're probably going to accumulate more capital going forward. Thanks.

  • Fernando Dasso - CFO

  • Thank you, Carlos. On your first question regarding cost of risk, what we have detailed in the market for the last years is that we will be around approximately from 2% to 2.2%. Last quarter was particularly low at 1.98%. And we continue to foresee that we will remain in that range, 2% to 2.2%, for this year and for the next. That's really our target.

  • Then in terms of capital, yes, we have reached the level that we wanted before the end of the year. This is not yet official, but we have been talking with the Executive Committee and even the Board that probably the level will be around 10% in our low point, meaning our low point is usually in March when we declare dividends. And at that point, we probably want to reach 10% and then continue building capital through the year until the next March.

  • We don't feel that Mibanco will have a particular influence in this area of capital. They are producing very healthy returns, so that won't be a problem in the future.

  • Carlos Macedo - Analyst

  • Okay. But, so you do not consider the possibility of doing to Mibanco what you did to the bank in Bolivia, right, just putting it under the Group umbrella instead of the BCP umbrella and releasing capital of BCP in that way?

  • Fernando Dasso - CFO

  • Well, in case of Mibanco, we will keep Mibanco as a subsidiary of BCP. And that's not only because we want it but because there are some regulatory issues around it. And BCP has to be the owner of Mibanco because our banking business has to be one business in Group.

  • Carlos Macedo - Analyst

  • Okay, got it. Perfect. Thank you so much.

  • Fernando Dasso - CFO

  • Thank you.

  • Operator

  • Guilherme Costa, Itau BBA.

  • Guilherme Costa - Analyst

  • Hi. Good morning, everyone. Thank you for the opportunity. I have two questions. The first is on the loan to deposit ratio. We saw that it continued increasing quarter-over-quarter. Could you comment if you expect loan to deposit ratio to continue increasing in the coming quarters, and also, in your view, about the continuation of the funding from the Central Bank?

  • And my second question is about the asset quality. Regarding the past due loans, we saw that past due loans showed an increase in this quarter, mainly in the credit cards, consumer loans, and also midsize companies. Could you comment if the asset quality of these segments is expected to continue deteriorating going forward, and also about your risk appetite for those segments, thinking about loan growth in the coming quarter and also in 2017? Thank you.

  • Fernando Dasso - CFO

  • Thank you, Guilherme. First on your loan to deposit ratio question, what I can tell you after looking at the July figures is that now companies and individuals are beginning to change in their view towards what's going to happen with the exchange rate. And for the first month in many months -- and this is July, not June, and that's why you don't have the figures -- we have seen a return of this ratio.

  • We reached -- and now I'm talking a little bit more about BCP, but that's really the main subsidiary. It reached 160% in -- the one in sol has reached 160% in June, and now in July it is around 150%, because the thing is changing a little bit. And now the expectation for the exchange rate is to stay more stable in the coming months. So, we feel that that trend could continue during this third quarter.

  • Then on your asset quality question, yes, we are very much focused on what's happening in consumer and credit cards. We have been talking already many decisions in terms of admission, in terms of collections, in terms of what we are doing with this whole segment underwriting these loans.

  • And we feel that for this year we will begin to recover in terms of those figures. But especially next year, we expect a better recovery. And note that this will also depend on what happens in the macro. We feel that now the sentiment -- not only the sentiment of companies but of people towards the macro is much better than it was. And that should reflect in the growth of the economy and in the health, really financial health of these companies and individuals.

  • Guilherme Costa - Analyst

  • Okay, perfect. Very clear. Thank you.

  • Fernando Dasso - CFO

  • Thank you.

  • Operator

  • Ernesto Gabilondo, Merrill Lynch.

  • Ernesto Gabilondo - Analyst

  • Hi. Good morning, and thanks for taking my questions. On my first question, what can we expect in terms of loan growth considering that you are performing stricter lender to improve asset quality?

  • Secondly, regarding your loan portfolio mix, will you expect the macro will help you to enter into riskier products with higher margins? And when do you see the investments and infrastructure projects taking place?

  • And lastly, can you elaborate on how do you expect to get to a recurring ROE of 20% in this year? Thank you.

  • Fernando Dasso - CFO

  • Okay. I didn't get your second question. I got the one on loan growth and recurring ROE. I didn't get your second question. Can you repeat it, please?

  • Ernesto Gabilondo - Analyst

  • Yes. The second question is about the loan portfolio mix. I just want to know, given that Peru has a strong macro, I was wondering when do you expect to get into riskier products with higher margins and when you see the investments in infrastructure projects taking place.

  • Fernando Dasso - CFO

  • Okay. Thank you. First on loan growth, we feel, and we have been discussing about loan growth, it will definitely depend on what happens to the macro. Our guess now is that we will probably reach this year around 6% in loan growth. We were used to higher ratios of loan growth, but in this first half of the year we've around only 0% of tracked growth.

  • We feel that we can pick up in the second half not only because of the macro but because the second season is better than the first, and probably reach around 6% loan growth.

  • Then in terms of portfolio mix, we feel that -- because of mainly two reasons. First, the corporations will begin investing before the individuals begin to growth. And we feel that with this plan to increase in the large projects, to improve the large projects, to cut red tape, we will see -- and the sentiment, the business sentiment that is improving as well, we will see growth in that particular corporate segment before, and then we will see that coming into individuals when that begins to get through the economy.

  • So, first wholesale and then maybe retail will follow. This is one reason. And the other is that we have been very strict in the decisions we have taken in terms of underwriting to individuals and to small companies to improve the risk, and that will also show in the coming months.

  • Then in terms of ROE, we still give you the guidance of 20%. That's what we have in our expectations. So, we will still plan to have around 20% ROE as a guidance.

  • Ernesto Gabilondo - Analyst

  • Can you elaborate more on what are the rationales behind getting this ROE of 20%? I don't know. It's probably maintaining costs under control or improving the net interest margin in the second half, just to have a little color on that.

  • Fernando Dasso - CFO

  • We feel that in the case of BCP, the NIM should improve a little bit if we begin to grow again in terms of loans. Then we expect to have expenses controlled as they are now. And we feel that delinquencies should stay flat. So, that will probably give us a pick up in terms of BCP.

  • All the other subsidiaries are doing better. They are doing fine. As you can see, our insurance business is doing fine. Our pension funds business continues to bring above 30% ROE levels, and we see Credicorp Capital investment banking doing much better. So, we feel that we can reach that 20% I was talking about.

  • Ernesto Gabilondo - Analyst

  • Okay. Thank you very much.

  • Fernando Dasso - CFO

  • Thank you.

  • Operator

  • Jorge Kuri, Morgan Stanley.

  • Jorge Kuri - Analyst

  • Hi. Good morning, everyone. Could you provide a little bit more color on NIM performance? You mentioned, big picture, three things affecting margins this quarter, funding cost, a slowdown in growth, and stronger competition. Could you give us a bit more sense on what stronger competition means? Are you seeing loan prices come down? What was the impact of this during the quarter, to what extent the contraction in NIM was also a mix issue either between your different businesses as you reported in the past?

  • You actually had good disclosure of NIM by BCP standalone, Mibanco, BCP Bolivia, etc. I did not see this this quarter. And the funding cost, is this temporary? Is this going to remain the rest of the year? And what is the outlook for the second half? Are we going to continue to see sort of like 10, 20 BPS quarter-on-quarter decline, as we've seen over the last two quarters? Should we stabilize at this level? Overall, how do you see this evolving? Thank you.

  • Fernando Dasso - CFO

  • Thank you, Jorge. What I can tell you in terms of performance is that when I -- I mean when any -- and especially for BCP now. When the loan book is not growing, you see more competition coming from other institutions because they are also not growing. The system is really not growing. It hasn't been growing for the last six months. So, that's why we have more competition on prices.

  • We feel that if the book begins to -- if our books begin to grow again, we will see less competition. There will be more room for improvement in every institution. And that will bring a relief in terms of pricing and competition and let us at least improve a little bit our NIMs, our margins.

  • We see that interest expense would not grow. You see what is happening in the rates, in our local rates. We see that definitely continuing at 4.25% for many months, especially since inflation is coming down now. And you see that the Fed rate should be around -- or gradually increasing in the near future. So, we don't see an important change in that sense.

  • We also have to tell you that in June we had a special bet on derivatives that we did that didn't work because of many reasons but especially the Brexit, which went the other way around than we were looking forward to. So, that won't affect us this quarter. We have already covered that position, at least 80% of that position. So, we won't have that particular negative effect on our NIM, and we feel that we can improve our NIM in these coming quarters.

  • Jorge Kuri - Analyst

  • All right. Thank you very much.

  • Operator

  • Tito Labarta, Deutsche Bank.

  • Tito Labarta - Analyst

  • Hi. Good morning, Fernando. Thanks for the call. A question in terms of the loan growth. You said you think you can grow loans around 6% this year. I understand the first half was a bit challenging because you had the elections. But the 6% growth, the economy should grow by more than 3.5% this year with inflation around 3%, so you're barely growing in line with nominal GDP growth, which seems a bit low.

  • I understand some of the uncertainties, as I mentioned, you had in the first half and the competition. But it seems like you -- given the economy picking up in the second half, you could probably grow a bit faster. And also, in order to get to the 20% ROE, you would need to see a bit of improvement both on growth and margins, given you expect asset quality to be stable. So, just want to understand how you feel about that 6% growth and how fast maybe you can recover. If it doesn't happen the second half, do you expect faster growth in 2017? Just want to understand a little bit more the growth dynamics, because it does seem a little bit low given the economy is actually doing pretty well and there should be a pick up in the second half. Thanks.

  • Fernando Dasso - CFO

  • Thank you, Tito. There is a particular thing that is happening with the economy. Yes, we are growing at around 3.5%, but maybe the primary sectors, especially mining, account for more than half of that. In reality, the other part of the economy, which is the most important for us in terms of labor, in terms of business investment, is not growing as fast as we would like it to.

  • We have had these important mining projects, Las Bambas, Cerro Verde, coming into play during the last year and now reaching full production that are really leading the economy or leading that growth. We still want that secondary part of the economy, manufacturing, construction, services, commerce, to begin picking up. That should happen if this government is able to foster that growth.

  • If that happens, we will probably not be growing by the same token as the growth -- as the nominal growth of GDP that you mentioned, but we should really have a multiple of that. Say, I don't know, if next year the economy picks up and reaches around 4%, we should probably be growing by around 8%, 8% to 10%, in our loan book. And that will definitely change the whole scenario in terms of competition, in terms of NIMs, and in terms of the health of our clients -- the financial health of our clients.

  • Tito Labarta - Analyst

  • Okay, that's helpful. So, you think it still takes some time for that growth to kind of trickle down into the other segments. But even next year, you said GDP growth of 4% and loans growing 8% to 10%. I mean, the 4% is real. Is that 8% to 10% also real growth? Because that would still seem a bit low, because nominal growth would be closer to around 7%.

  • Fernando Dasso - CFO

  • I prefer to keep this moderate tone and see what really happens with the economy. And we will continue in looking for opportunities these coming months. But we still have that question mark on whether the economy should pick up or not.

  • Tito Labarta - Analyst

  • Okay. Thank you.

  • Operator

  • Carlos Rivera, Citi.

  • Carlos Rivera - Analyst

  • Hi. Good morning, everyone. And thanks, Fernando, for the presentation. My first question is regarding asset quality. Just wanted to dig a little bit deeper on the trends for the SME Pyme loan book. I mean, we continue to see an increase there in the NPL ratio and also in the cost of risk, so when do you see this peaking?

  • And my second question will be regarding your investment in BCI. Are you still -- you've reduced 50% of your investment there, so what's the outlook for this investment going forward? Thank you very much.

  • Fernando Dasso - CFO

  • Thank you, Carlos. First, in terms of BCI, as you know we had around 4% of the shares of that bank. Now we only have 2%, and we plan to continue having that holding for the future. There is no decision being made on that other than what I am telling you.

  • Then in terms of asset quality, if we go to Pyme, we have been looking at this very closely. And we really need to look at in terms of Pyme is the early delinquency. And when you see the early delinquency -- and this is because we have that important stock of all the loans that have been provisioned, 100% provisioned, but we still need to go to -- on a judicial process to get a foreclosure and to be able to bring those loans out of our books. This is because of regulation.

  • If we -- and that's why you see these lines coming up. And you see -- I don't know if you have the chart there, but you see that line at around -- the NPL ratio at around 16.37%. If we would be able to bring those old loans, which are 100% provisioned, from our book -- out of our books, that line, that number will be around 3%.

  • We are continually talking to the regulators to be able to do this, but that's still being regulated in Peru. So, we still need to account for that in our books.

  • Carlos Rivera - Analyst

  • Okay, I understand that.

  • Fernando Dasso - CFO

  • But if you see the early delinquencies, this is in page 28 of the report, and you see the June numbers -- because this is a very seasonal business. You see that in June 2014 you had 3.3% and in June 2015 you had 3%, and now in June of this year we have 2.91%. So, the business is healthy. It's doing fine. But we have that stock, as I mentioned.

  • Carlos Rivera - Analyst

  • Okay. Then if I understand correctly, the increase in the cost of risk is basically seasonal and you see the level at which it's now, which is around 6.2%, as the normal level for this business. Is this correct?

  • Fernando Dasso - CFO

  • Until now that's proven to be the number, yes.

  • Carlos Rivera - Analyst

  • Okay. All right. Thank you very much.

  • Fernando Dasso - CFO

  • Thank you.

  • Operator

  • Alonso Aramburu, BTG.

  • Alonso Aramburu - Analyst

  • Hi. Good morning. Thank you for the call, Fernando. I wanted to ask you about expenses. When we look at expenses, at BCB they grew almost 18% year-over-year. And it seems like your systems expenditures are growing faster than that, around 25%. That's much faster than the Credicorp level, which is closer to 3% or 4%. Just wondering if this is a one-off in this quarter, or is this the level of expenses that we should see growing this fast at BCB going forward?

  • Fernando Dasso - CFO

  • Okay. Thank you, Alonso. What I can tell you is that we are being very keen on controlling expenses. The first quarter of the year is usually when expenses -- and when people are late bringing their invoices. But we are still very, very, as I said, keen on controlling expenses.

  • If you see and you follow the efficiency ratio, it's really not only a matter of expenses but of income. And we have been talking about income during this whole session and know what's happening with income. We will continue to be very keen about running expenses.

  • We are now being -- focusing more on what's happening to the network. As you can imagine, channels as Internet, as mobile ranking are growing very fast. And so, we are looking at what should we do with the branches. Should we be growing less? Should we be closing branches? Should we be reducing the size of branches? There is room for improvement there as well, and also in systems and infrastructure. But we will continue to be very strict on expenses and try to be as efficient as possible.

  • Alonso Aramburu - Analyst

  • Okay, thank you. And maybe a follow up on that. You mentioned branches. I saw this quarter you closed more than 100 [Agentes]. Is that a change in strategy? Do you think the Agentes -- will you stop growing in that distribution network? How are you thinking about that?

  • Fernando Dasso - CFO

  • Well, we will -- I mean, 100 Agentes of 5,500 Agentes is not such an important number. We continue to all the time look for better Agentes than others. And some don't work. Some do work. So, that's not really a change in our strategy.

  • The low income base of the population is very -- are used now to working with Agentes and to be able to -- if the word is banker-ize these people, we still need the Agentes. So, there is no change in that particular strategy.

  • Alonso Aramburu - Analyst

  • Great. And one more question. Regarding the insurance business, there had been an assessment, I guess, of the property and casualty business for the past couple of years. I'm just wondering if you are still considering strategy options for that business, or is that a business that will definitely stay now inside of Credicorp in its current form?

  • Fernando Dasso - CFO

  • I'll let Alvaro Correa, the General Manager of Pacifico, to talk about this.

  • Alvaro Correa - Chief Insurance Officer

  • Alonso, basically what we're doing with Pacifico is continuing -- to continue incurring the business in all the lines we do. The balance sheet, which was monetized, is working very well in the health business. For the property and casualty, again, its efficiencies -- we need to get to a better level of efficiencies. And we are doing that. We are working a lot on that.

  • With regards to your question, there is no change on what we're doing. We're basically focused on improving everything we do and continuing having this company and this group of companies within Credicorp as a division for the time being.

  • Alonso Aramburu - Analyst

  • Okay. Thank you, Alvaro.

  • Operator

  • Domingos Falavina, J.P. Morgan.

  • Domingos Falavina - Analyst

  • Hello. Thank you very much for the opportunity too. My question is -- I understand you see about a 6% loan book growth and the margins marginally improving on the second half. My question is what should that do to NII, in your view? We basically saw about 9% growth year-on-year in the first Q decelerating to about 6% now. Do you believe in year-on-year still high single digits for NII growth this year, or should we imagine something closer to loan book growth?

  • Fernando Dasso - CFO

  • NII will definitely follow loan growth. However, I have to tell you that what we have been trying to do is to really select or focus on the best plans in each segment because of risk returns, future risk returns. So, it definitely will have some impact on the NII.

  • But we plan really to begin getting better results in terms of provisions, which will definitely be -- improve the whole line -- that whole line. So, NII should follow basically loan growth.

  • Domingos Falavina - Analyst

  • Very clear. Second question also, if I may, on the credit card NPL when provisioning expands, do you expect similar trends to continue? What's your view on that?

  • Fernando Dasso - CFO

  • Well, we talk to our risk people. They tell us. And this is -- I'm not -- I'm going to talk now about retail banking. In wholesale banking, we see not a particular problem. We will continue growing with the same very safe rates in terms of provisions and cost of risk.

  • When we talk about retail, what our experts tell us is that we will have this year still a year of improvement, but not that -- as important improvement. We still have some things that just need to go through our books. We definitely think that most of the decisions and measures that we took in the last 18 months will begin to show in our books in terms of better delinquency ratios.

  • Domingos Falavina - Analyst

  • Understood. Thank you very much.

  • Fernando Dasso - CFO

  • Now to finish, we will have our CEO, Walter Bayly, with his final remarks.

  • Walter Bayly - COO

  • Good morning to all of you. And first of all, thank you for joining us consistently over time in these conference calls.

  • If we go in the past two conference calls, we have been always mentioning that we continue -- we have been seeing a couple of clouds in our future. The two most important were related to, one, the elections we were having in this country and, second, the possibility that we would have a relatively strong or very strong El Nino.

  • Those two clouds, as we used to call them, are now behind us, but they have taken their toll. Economic agents, be they corporations, individuals, or even the government, have been relatively unable or unwilling to continue to invest because of the uncertainties in front of us.

  • We did not have El Nino, and fortunately the elections turned out with -- the right way. But, nevertheless, again this level of uncertainty has taken the toll on the economy. The slowdown in the domestic demand has been a lot stronger than what we had anticipated.

  • And even though the economy has grown, as Fernando mentioned before, that is basically the consequence of a couple of very large copper projects that started commercial production. Domestic demand has been relatively slow. And that is, again in the short run, the driver not only of loan growth but of the credit quality of our portfolio.

  • Throughout this period, we have been very cautious and closely monitoring our loan portfolio. We have seen deteriorations in the consumer side of the portfolio, slight in mortgages, much more visible in installment loans and credit cards.

  • The lack of growth and our lower risk appetite has taken its toll in the margins, as all of us banks have focused on the lower risk segments and competition has been very strong in those particular segments. So, that is -- has been the main dynamic that we have seen in the first half of this year.

  • We have managed to maintain very good control and efficiency, and that has allowed us to somewhat counter the effects of higher cost of risk and the lack of growth. We have had very positive results in all of our subsidiaries. Insurance has provided a very (inaudible -- technical difficulties). The merger of Mibanco and Edyficar has already given us, in a relatively short period of time, very good returns on equity.

  • Credicorp Capital has dramatically improved its results. Bolivia has been very solid. Atlantic has had a good second quarter after a relatively lousy first quarter, and Pyme always consistently giving us results. And all our subsidiaries have somewhat supported the relatively disappointing results at the Bank level.

  • Looking forward, the fundamentals continue to be very solid. The country will grow, though not at the rates that we had expected initially, namely 6%. It will be probably lower growth, between 3% and 4% consistent over the next couple of years.

  • There is a very positive mood that has started to appear amongst economic agents because of the way the election has turned around. We have the expectation of having a good year-end in terms of growth of our portfolio, and to see our quality of our portfolio stop deteriorating and hopefully maybe marginally improve as growth starts to take effect.

  • All our subsidiaries are well positioned. We are running our costs tightly. And again, we are ready to capture the growth whenever it happens in this economy. Hopefully we will start to see it towards year-end.

  • It has been not the first, but the most somewhat disappointing first half of the year. But again, it was to be expected. And again, we are very satisfied that, even with those challenging macroeconomic environments, our results continue to be acceptable.

  • Just to close, again, I want to thank you all for your continued support in joining us in this conference call. And hopefully in the next conference call we will have more positive results to tell you. Again, thank you very much, and goodbye.

  • Operator

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