Credicorp Ltd (BAP) 2016 Q3 法說會逐字稿

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

I would now like to turn the conference over to Credicorp's Chief Financial Officer, Mr. Fernando Dasso. Mr. Dasso, please begin.

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

Overall, we believe that the macroeconomic environment will be better in the coming year compared to a year ago. The balance of risk has improved, certain risks have dissipated. First, the Nino phenomenon was not really disruptive. Second, the outcome of the presidential elections has boosted business and consumer optimism. Third, experts estimate that in 2017 export prices could increase for the first time in six years. Fourth, the FED rate is expected to increase only [moderately]. And finally, after three years, cost-adjustment is not the main priority for firms in the real sector improvement.

Nonetheless, we remain vigilant of the challenges that the new government has to face. Regarding economic growth, recently the government established a legal limit on spending of the Ministry with the objective of reaching the fiscal deficit target of 3% of GDP. This adjustment could affect domestic demand, which is still weak.

In this context, Congress granted legislative powers to Executive branch for a legal period of 90 days. The most important measures will involve VAT and Corporate Income Tax changes among others. Between January and August, the trade balance posted a trade deficit of $217 million, which was considerably below the $2,600 million deficit registered for the same period last year.

The solid performance of traditional products led by copper exports and more sluggish than expected imports of raw materials and (inaudible) explain these results. Hence in 2017, we expect a trade balance slight surplus, the first since 2013. As you can see in the chart at the bottom of this page, on the right hand side, the market shares our optimism and as a result, five year Peruvian CDS are closing in on CDS from Chile. The spread between both is narrow in the history, despite Chile's higher credit rating. In sum, some risks have dissipated and we remain cautiously optimistic about next year.

Next page please; regarding our quarterly financial performance, in this third quarter, Credicorp posted a historical record for quarterly net income, which totaled PEN949 million. After deducting the translation loss of PEN2 million, recurring net income was PEN952 million. This figure represented recurring ROAE and ROAA of 20.8% and 2.4% respectively. The Group's excellent performance this quarter is even more noteworthy in the context of a slowdown in loan growth.

Credicorp results have begun to reflect the benefits of the strategic projects in which we have been highly focused, particularly those related to improved risk quality of our loan book. Even though we will continue working on these points, we feel better prepared to capture the potential that exists in the Peruvian market as soon as the economy fully recovers its pace of growth, particularly in terms of investment and internal demand.

The third quarter's result showed, first, quarter-end loan balances expanded 2.9% Q-over-Q and 7.4% year-over-year. Currency adjusted growth rates were 1.5% Q-over-Q and 5.1% year-over-year. This evolution shows better dynamic sales in middle market banking, BCP Bolivia, mortgage, SME-Business, SME-Pyme and Mibanco.

Second, net provision for loan losses decreased 19.6% Q-over-Q and 12.5% year-over-year. These were due to a contraction in gross provisions for loan losses, which internally reflect an improvement in the portfolio's risk quality and an increase in the level of recoveries and reversals. As a result, the cost of risk fell 46 basis points Q-over-Q reaching 1.65%, which is the lowest level reported in the last three years.

Third, net interest income grew 2.9% Q-over-Q and 5% year-over-year. The increase this quarter was mainly generated by better interest income on loans, and to a lesser extent, interest income in trading securities. As a result, NIM recovered 18 bps quarter-over-quarter, which reduced the contraction year-over-year to only 12 bps. The improvement in net interest income and the lower level of provisions allowed NIM, after provisions, to recover even more.

As such this ratio increased 43 basis points Q-over-Q and 11 basis points year-over-year. Fourth, the efficiency ratio was situated at 43.8%, which represented a decrease of 10 basis points Q-over-Q, but an increase of 80 basis points year-over-year.

Let's review all these financial figures in more detail. Next page please. On this page, you can see the evolution of the loan book in quarter-end and average daily balances. It is better to focus the analysis on average daily balances because they are an important driver for net interest income, and NIM. The Q-over-Q analysis shows that average daily balances expanded only 1%. Nevertheless, we posted a slight contraction of 0.1% in currency adjusted terms, but the loan book continues reflecting a low growth scenario this year.

In this context, some business segments posted slightly better dynamics in such as middle-market banking, BCP Bolivia and mortgage and to a lesser extent Mibanco, SME-Business and SME-Pyme. It is worth noting that middle-market banking's loan book expanded 3.8% after having contracted two consecutive quarters. Along the same lines, the mortgage segment grew 1.8% Q-over-Q, after registering virtually no growth in the previous quarter. On the contrary, corporate banking's loan book contracted 2.9% Q-over-Q, due to lower grade demand and more competition.

The year-over-year analysis reveals that nominal and currency-adjusted growth rates were 7.9% and 5.9% respectively. These rates reflect the slowdown in loan growth, which is even clearer when we compare to a year-over-year growth rates of 16.8% and 9.8% posted in the first and second quarters of this year respectively. Low loan expansion is even clearer in the year-to-date analysis. Average daily balances posted nominal and currency-adjusted growth rates of 3% and 3.4% respectively.

In terms of loan mix, the evolution of the loan book this quarter shows slightly higher growth rates in business segments with higher margins, which in turn have released downward pressure on NIM as we'll explain later on. Next page please.

The de-dollarization process continued but at a slower pace at BCP. In the case of Credicorp, as you can see in the chart at the top, as of September 2016, 39.8% of its loan book was denominated in foreign currency, a level lower than the 42.2% posted in the third quarter of 2015, but slightly higher than the 38.6% reported in the previous quarter. The latter is mainly a result of higher loan growth in BCP Bolivia.

BCP stand-alone recorded an even lower dollar authorization, which was 36.9% at the end of September, slightly above the 35.6% at the end of June, but below 40.2% in the third 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 for the past few quarters, falling 1% in the third quarter of this year.

Next page please. As you see in the table at the top of this page, net interest income increased 2.9% Q-over-Q and 5% year-over-year, due to growth in interest income that offset our increase in interest expenses. On the income side, interest income on loans was the most important driver and to a lesser extent, interest income on trading securities. The former is attributable to better dynamism in some business segments and the seasonality in others.

The aforementioned translated into a recovery of 18 basis points Q-over-Q in NIM. This meant that the year-over-year decline was only 12 basis points, which is lower than the 51 basis point reduction reported last quarter. The most significant improvement was posted in NIM after provisions, which after a year of dropping continuously increased 43 basis points and 11 basis points Q-over-Q and year-over-year respectively.

Next page please. On this page, you can see Credicorp's funding structure and some important indicators related to it. Credicorp's funding cost increased 13 bps Q-over-Q due to higher funding costs in the banking subsidiaries and at BCP stand-alone and Mibanco in particular. BCP stand-alone accounts for more of the increase.

The increase in BCP's funding cost is due mainly to, first, an increase in local currency funding's share of total funding. As you can see in the bar charts, local currency funding represented 48% of total funding at the end of September compared to 45% in the previous quarter.

Second, the reduction in volumes in foreign currency funding is explained by the contraction of foreign currency deposits, which have the lowest funding costs of all foreign currency funding sources. In fact, the costs associated with foreign currency deposits are even lower than those associated with local currency funding sources. Thus, although the funding costs increased because of a re-composition this quarter, even though the funding cost by source remains stable, (inaudible) sources.

Finally, the overall loan to deposit ratio increased and reached 106%. This was a result of a contraction in deposits, which is in turn associated with a drop in deposits from institutional and corporate clients, mainly in foreign currency. The local currency loan-to-deposit ratio continued to grow and situated at 144%, which is lower than the 152% posted the previous quarter.

Next page please. In terms of portfolio quality in the third quarter, all risk quality ratios improved. The cost of risk declined 46 bps, reaching 165%, the lowest level recorded in the last three years. The internal overdue ratio and non-performing ratio decreased 6 basis points and 3 basis points respectively.

The exceptional improvement in the cost of risk was due mainly to a decrease in provisions for loan losses, net of recoveries and reversals, which fell 19.6% Q-over-Q. This in turn was due primarily to; first, lower gross provisions at BCP, BCP Bolivia and Mibanco, due mainly to an improvement in portfolio quality; and second, an increase in the level of recoveries and reversals at BCP.

Let's review in more detail the evolution of the cost of risk by business segment. Next page please. As you can see in the chart, all business segments with the exception of SME business posted a reduction in their cost of risk, which led to a significant drop in the overall cost of risk at Credicorp, despite a context of low loan growth. [Wholesale] banking's cost of risk fell due to reversals of provisions in corporate banking and to a recovery in the written-off portfolio in middle-market banking.

BCP Bolivia posted a reduction of cost of risk that was mainly driven by lower provisions and high loan growth rate. The former is related to better risk quality of new [vintages] after a leadership problem that started in 2014, due to a change in regulation that we have explained at point in time.

With regard to retail banking business segment; first, mortgage portfolio posted a lower cost of risk, not only because of loan growth, but also because of less provisions required. The loss rate is due to a lower level of provisions related to the duration of clients in our financial institutions, and the delinquency showed in our BCP stocks, which in the various quarters explains most of our provisions that we made.

Furthermore, the (inaudible) program has required a lower level of loan losses provisions than they registered in previous quarters. It is important to keep in mind that the existence of collateral that's now lower can show the improvement just described. In the delinquency ratios, because we cannot write-off the provision loans until we finish the foreclosure process.

Second, SME-Pyme also reduced its cost of risk as a result of better risk quality of new vintages. In this business segment, cost of risk fell 53 bps year-over-year, which is almost appropriate analysis to eliminate the synergy effect. A positive trend is also showed in the lower early delinquency ratio, that is already low for this type of business that we reduce 3 bps year-over-year.

Third, SME-Business is the only segment where cost of risk went up. Nevertheless, it is important to know that this indicator is already relatively low and reached a very low and unusual level in the previous quarter. Finally, let me give you in more detail the risk indicators for the credit card and consumer loans segments, where we are diligently working to manage the increase in delinquency reported in the last quarter of 2016.

Next page, please. 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 an upward trend since the last quarter of 2015. In the case of credit cards, delinquency ratios and the cost of risk fell. In this segment, we have made significant changes in the risk policy and have been posting positive results, although loan originations have slowed down significantly. We remain cautiously optimistic about this first positive sign, although, a downward trend, as we have told you. In the case of consumer loans, delinquency ratios continued going up but at a slower pace. However, cost of risk fell significantly.

Next page, please. Non-financial income contracted Q-over-Q due to the effect of our non-recurring gain on the sale of 50% of the investment in BCI, which was reported in the previous quarter. In recurring terms, non-financial income grew 8% Q-over-Q, due to an increase in earnings generation in all categories. The year-over-year evolution shows an increase of 13.4% that was mainly attributable to higher levels of gains on sales of securities and fee income, which offset the contraction in gains on foreign exchange transactions.

Next page, please. The insurance underwriting result fell only 1% Q-over-Q, due to higher acquisition costs and an increase in claims for life insurance, which offset the increase in net earned premiums. Year-over-year, the underwriting result grew 6.6% due to an increase in net earned premiums mainly in property and casualty, which outpaced the slight increase in claims and in the acquisition costs. In this context, the combined ratio fell to 88%, while the loss ratio was stable at 57%.

Next page, please. In terms of operating efficiency, the efficiency ratio was situated at 43.8% which represented a decrease of 10 bps Q-over-Q. Although, our control over and governance of operating expenses continues to be highly efficient, income generation has been lower than expected. Thus, the cost of income, the cost-to-income ratio increased 80 bps year-over-year.

Next page, please. In terms of capital ratios at the end of September, we reached a level of 10.64% in the common equity Tier 1 ratio, as a result of a higher level of retained earnings which in turn reflects net income generated in the third quarter.

Next page, please. In the chart on this page, you can see all of our subsidiaries' contributions to Credicorp. In the third quarter, Credicorp posted a 20.8% recurring ROAE, which mainly reflects the excellent performance of BCP and Mibanco, and the stability of our subsidiaries. Furthermore, the results of this quarter allowed Credicorp to post a 10.9% increase in net income year-to-date, which represents an even higher growth rate of 16.1% in recurring net income. But recurring ROAE and ROAA reached 19.5% and 2.2% respectively. Finally, year-to-date recurring net income amounted to PEN2.5 billion, which represents a recurring ROAE of 19.5%.

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

(Operator Instructions) Carlos Macedo, Goldman Sachs.

Congrats on the solid results. The first question is on your cost of risk. Obviously, a lot stronger, a lot better, sequentially than I think most of us expected. And you went through a very thorough explanation during your presentation. A couple of questions -- one question there. It does seem there is some seasonality in the consumer side; obviously, the wholesale cost of risk was negative. We don't expect that to be sustained. What would you call your sustainable cost of risk going forward? I mean and looking back, I think you only posted a sub-2% cost of risk twice over the last three or four years. Is sub-2% something that we should grow accustomed to or is this going to migrate back to 2%, also considering there the recoveries, which are also very strong this quarter.

Second question on funding; the funding cost went up, you migrated more to local currency deposits. What's the outlook here, that was demand based or are you trying to push out more Sol based deposits or was that something your clients asked for more and then so as a result, we might see a bigger shift to that kind of deposit going forward. Thanks.

Thank you, Carlos. First, I'm going to address your second question in terms of deposits, what happened really is our currency is more stable compared to the dollar, so some deposits are shifting from dollars into Soles. And as you can imagine, our rates in Soles are higher than in dollars. So we are, in a way, paying a little more for Soles deposits than dollar deposits. But on the other hand, it is better to have those Soles deposits in some way, because we can balance a little better our balance sheet, because, as you know, we have more loans in Soles and deposit in Soles and that pattern is already shifting in the right way towards equilibrium. So those are good news.

And just a second follow up, if you don't mind, just a question there. Obviously, what we saw also was that the Central Bank instruments went down in the quarter and I suppose a migration to the deposits in Soles, which one is the more expensive, the instruments or the deposits?

No, the instruments are always more expensive. The instrument, the Central Bank instruments, which account for around PEN10 billion, most of them are in market terms, the range. However, in Soles, we see a whole set of deposits in Soles, most of them are demand and saving deposits that have a very, very favorable rate for us.

Okay, then addressing your first question in terms of seasonality, cost of risk and what should happen to our cost of risk? As you know in previous quarters we have always being giving (inaudible) signaling that our cost of risk should be from 2% to 2.2%. We are surprised where it is (inaudible) 1.65%, and we feel that it is the result of mainly two things. First, that we have been working thoroughly in terms of risk for many quarters now and we in a way feel that results are beginning to show and we are getting better results, because we have made important decisions in terms of risk, trying to choose the best clients in each segment, improving the way in which we underwrite and the way in which we collect and the whole risk process, especially in retail banking.

But again, we don't know what's going to happen in the future. We feel it's safer to say that we will probably be better than 2%, but we are not exactly -- we still need to see some quarters on that on what happens in the next quarters, we still need to see what happens to the competition, how it [shells] of the whole system because these good news are still very early news that we need to confirm in the coming months.

Okay. Thank you, Fernando.

Tito Labarta, Deutsche Bank.

Hi, good morning, Fernando. Thanks for the call. Couple of questions also, first on your margin, we saw some good margin expansion in the quarter, although your loan margin was kind of flattish. So I just want to understand, how you see your margin evolving going forward. We did see a pickup also in SME lending where wholesale lending was a bit slower, so I don't know if that helped at all, but just given the kind of the loan growth in the different segments that you're seeing and also with kind of better funding, how do you see your margin can evolve going forward, if there is any more upside?

And then my second question is in terms of capital. We've seen your core Tier 1 ratio rise significantly over the last couple of years, now at 10.6%. With this level of profitability and this level of loan growth, you're likely going to continue to generate more capital. So I just want to get a sense, what do you think about kind of the use of this capital, as well as something about a new dividend policy, do you think the dividend will be higher or can growth pick up or could you start looking for acquisitions? I just want to get a better sense of how you think about this capital ratio and your expectations for continuing to generate capital and how that will be deployed? Thank you.

Thank you, Tito, for your questions. First, in terms of what will happen with the expansion of the portfolio, as we have discussed many times, we think that this year is going to be a transitional year in many ways. It's been a year where we've dealt with the threat of El Nino phenomenon and with the presidential elections, those two things are really behind and we received good news in terms of both things.

Now, we feel that the country should regain growth, although, we are growing on (inaudible) approach, a GDP growth of 4%. Next year, the country should improve in many ways and we are still waiting for that investment, private investment, to come and the growth to regain momentum.

If that happens, we will continue growing on large insurance funds.

What is happening in wholesale; two things, first, the country is growing less, so there is less demand for those loans and when you see less demand, there is more competition for the best clients and that is showing, especially in our corporate banking segment. We feel that that should improve if the country regains its growth in the coming future.

In terms of the other segments, we feel that they should continue growing, but if you remember some years ago, we had growth rates of around 25% a year, 20% a year, when the GDP was growing by 6%, 7%. Now it's different. We feel that this year, the next year, we will probably grow by around 8%, 9%. In 2016, we'll probably be around 6%. And what should happen if that is the fact that the retail should regain some growth compared to wholesale. For the last three years, wholesale was really leading the growth, now retail should regain some growth and in a way balance the growth of the whole portfolio.

Then in terms of capital, yes, since our ROEE is around 20% and growth is around, say, 7%, 8% depending on if it is this year or next, yes, we will have some excess capital. And as you know, we are always actively looking for investment opportunities. But we have learned from the lessons of the past that we should, I mean, if we grow in different alternatives that open, we will be very cautious on how will we do it. So, if there is excess capital, I assume that our shareholders will plan to receive their dividends. And that's what we are looking for, we are actually deciding on what's going to happen at the end of this year, if we continue on this path. But our strength is that we will pay the dividends that we will have excess capital.

Thanks, Fernando. That's helpful. Just couple of quick follow-ups; so, first if I understood correctly, retail lending kind of looking to pick up a bit and more competition in wholesale, so that could mean that margins should expand given the loan mix shifting towards more higher yielding loans?

And then following up on the dividend; so, how should we think about the dividend? I think the new dividend policy that I saw recently says at least 25%. Is that a level of dividend or could it be even higher than that? I don't know 30%, 40% just kind of getting a sense of what the payout ratio could be, given the excess capital?

Okay, first on the dividends, I mean, as you know, during the last three years, we've been actually building capital at the BCP level. So the dividend rate at BCP has been for some years 20%, then last year it was already 42%, but at Credicorp we continue to reach 25% in the last three, four years.

Now, we are going to have to see what we'll reach at the end of this year, but we will probably be more than 25%, I mean, as you know, we have some buffers at the -- since we operate in a very volatile country or volatile countries really, we have some buffers of capital at the Credicorp level. We have around $280 million right now and we would probably bring that figure a little bit up, maybe a $100 million more. And then after that, if we don't find any important opportunities for growth, we will pay dividends. That's what I've been gathering from our Board.

Thanks, that's helpful. And just the follow-up on the margin, just the shift towards maybe more retail lending again, it does imply upside for margins, is that correct?

Yeah, there are some forces operating here. First is, yes, the margins on retail are larger than the margins on wholesale, definitely. But as you know, because of risk reasons we have been selecting more our clients in the retail arena. So we are actually trying to pick the best client in each segment. So in a way margins are reflecting that, definitely. But on the other hand, risk is being less and we can show that right now in our figures. So that's one thing happening.

The second one, especially in wholesale, is that if the market continues to grow faster, there will be less competition for the best clients and that will release or relieve, in a way, some pressure towards margins for the best clients. So there are some forces operating, we feel that, if we regain growth on margins, in a way, we'll show that being a little less stressed than they are now.

Great, thank you. Very helpful, Fernando.

Jason Mollin, Scotiabank.

Fernando, my question is on the top down, you talked about the better prospects for 2017 and looking for infrastructure projects to pick up. I mean, GDP growth has been quite strong, I think relative to some of the other countries in Latin America, because of the mining dynamics and Peru has definitely benefited from that.

Going forward, what should we be looking for? What is the Bank looking for, the Group looking for, in terms of signs that we are seeing a rebound in loan demand activity, economic activity, let's say, GDP ex-mining? What should we be looking at and is that really a first half event, or should we be expecting to see that in the second half?

And my second question is more of a follow-up on the lower cost of risk, net of recoveries. If you can provide some color on the recovery outlook, what happened in this quarter and if you could see these kinds of recoveries coming in upcoming quarters? Thanks.

Thank you, Jason. The first one, in terms of growth, yes, we are approaching 4% GDP growth this year in Peru. However, as we have said many times, it's a very tricky growth because internal demand is only growing by 1.3%, 1.4%. The other part of growth is really a result of mainly special mining projects coming into production during the last 18 month which improved production right now.

So, driven really by this primary sector rather than internal demand, we, [in order to present] more focus on what happens with internal demand. But, what experts are telling us is that internal demand should pick up its pace next year.

However, we see that things are still -- as we began this year with internal demand, however the government has important plans for growth, for investment, it's really putting into place better conditions. The business sentiment is improving, but as we said in our first page, we are still vigilant of what should growth be and we feel that right now, it should probably pick up in the second quarter, even second half of next year, given [America's] GDP as a whole.

Then, in terms of your second question, cost of risk and recovery, I have to tell you that we have been very positively surprised by the results in cost of risk this quarter, and we are talking to our risk people and asking them what has happened, and they tell us, we feel premature to tell the market that we are in a different pace, because this has two main reasons.

First is, all the measures in terms of risk that we've taken during the last six months, eight months, are probably showing up. And then on the other hand, what is really happening to the market itself? We still need to see some more months to understand what has really happened, is it ourselves or we see part of what is happening to the whole market. So, yes the results are good. We hope to keep them where they are, but we still need to see some more months coming to be able to tell you this is a trend or this is a blip.

Thank you very much. That's great. Thank you.

Ernesto Gabilondo, Bank of America.

Hi, good morning, Fernando, and congrats on your results. I have three questions; a follow-up in terms of your NIM, can we expect that your advance in high yield products should be able to offset soft lending growth and a slightly higher capital funding. So overall, should we expect stable or improving NIMs going forward?

Secondly, regarding to your loan delinquency ratio, when do you expect to write-down the loan portfolio with real estate collaterals? You have mentioned that this takes about [four months] to improve the fiscal stimulus, are you hearing something of a 1% reduction on the value-added tax to improve spending held in education? On the other hand, are you expecting something with public-private associations programs? Thank you.

Thank you. Three questions, the first one is on NIMs going forward. As we said, we feel that now we are under some pressure with margins, especially in the wholesale segment, because of competition, because we are not growing as we did in the past. We feel that if we regain some growth, the whole market there will be less pressure on NIMs. So NIMs should, in a way, improve. However, NIMs are a consequence of many factors.

First of all, we need to see what's going to happen with cost of funding. We feel that the rates in dollars will begin to come up in December, dependent on the decision of the Fed, but they should being gradually to come up and there will be some pressure there. In storage, we feel that the rates will stay where they are for a while unless inflation comes up.

Inflation, although, is a little higher than the Central Bank's range, it's still under control. That's in terms of cost of funding. And in terms of the rate that we can charge our customers, it will definitely depend on competition, it will definitely -- we will always try to reprice as fast as possible following the changes in the rate, in the funding rate, but it will definitely depend on competition, and now competition is a little bit stringent, especially because we are growing as far in our portfolio, the whole banking competitors.

Then, you talked about loan portfolio with collateral, what's going to happen? And you are probably aware that we have an important set of loans that have collateral in real estate, and it was a Peruvian regulation. Even when we have those loans provisioned by 100%, we cannot charge them all from our loan books.

Yes, we will continue to have that. We've said that the process takes, you need to go through a judicial process and that takes around three, four years, and that will continue to happen. I mean, we have loans that are now under that process, but some loans are getting into that process, beginning that process, so that's something that should continue to happen in the future.

When will it be stabilized? I feel that it will continue growing, and it will definitely grow at the same pace that our mortgage loan book grows and our SME loan book grows, because those are the main books that have collateral for the loans. So that should continue to happen, and that should be part of your measures. You should understand that. You should also try to always focus on early delinquencies in these particular two segments because there will be a few other sense or a leading sense of what's going to happen with the portfolio in the coming months or years.

Then, in terms of fiscal stimulus, now the government is really working on that package of measures that it will present, first to the Congress, and then try it to be approved by the Congress and that will happen in the coming 13, 14 days. Retailers, yes, the VAT tax will go down about 100 basis points. That will bring some stimulus. Yes, we feel that that will bring some stimulus, especially for some companies to begin formalizing part of their business because this is not companies that go from 100% informal to 100% formal. There is always a transition. And yes, in a way, in the coming months, they will begin formalizing part of their business.

In terms of stimulus, the business community is waiting for that stimulus, but the government doesn't have a lot of powder with them, especially because the fiscal deficit is around 3.4%. So fiscal stimulus should not be -- and they are planning to reach 3%, so fiscal stimulus will not be that important, we feel, in the coming months.

Very detailed, Fernando. Thank you very much.

Alonso Garcia, Credit Suisse.

You have mentioned 8% to 9% loan growth for next year. But I would like to ask you, if you see room for more optimistic expectations on loan growth next year if asset quality continues to improve in the following quarters. And my second question would be, is it possible for the Company to sustain an ROE above 20% as reported this quarter in the next quarters? Thank you.

Alonso, (technical difficulty) about that 8% to 9% growth, yes, we feel that that will be the pace in terms of our loan book. This year, as I said, we'll probably reach 5%, 6%. So it will be a pickup compared to each year. That growth should improve if domestic demand improves. But until we don't see that happening, we'll stick to that 8% to 9% growth. And the second part of your question was -- can you repeat it please?

Yes, on loan growth, and the first question was, if you could see room for more optimistic expectations if asset quality continues to improve? And my second question was, if the Company is able to sustain an ROE level above 20% as the one reported this quarter?

ROE, I think, we will try to stay around 20%, that's the guidance we make all the time. As you know this year, especially the second quarter was a little lower than that because of some reasons. Fortunately, we have regained that pace in the third quarter. We still plan to try to reach that 20% during 2016 and in the next year, those are really our plans and our guidance.

Neha Agarwala, HSBC.

Hi, thank you for taking my question. I want to ask on the capital ratio. You have been able to improve your core Tier I significantly, and you have exceeded your target of 10%. What is your target for the medium-term, say in the next three to five years? What is the internal minimum that you operate at? And what is the comfortable level that you see for the business? Thank you so much.

Thank you for your question. In terms of capital, we need to talk about BCP basically. In terms of, just a few words on Credicorp, we are above the capital we require at Credicorp. We are concerned [in return] of our per capital, but if we go to BCP, which is our most regulated entity, now as you know, for some amounts, we've been talking about common equity Tier 1. Three years ago, we were in the seventh, we were in the seventh level, and we decided to build our capital, we have already reached 10.64% in terms of common equity Tier 1.

We feel that at the end of the year, we will probably be approaching 11%. At our high point, which is February before we declare dividends, we will be above that 11% level. And we plan next year, I mean when we declare dividends in March, that we would probably bring it down to a little less than 10% and there we will begin, with our internal sources, with net income, continue to build that capital next year and that should probably be the pace.

In the end, we feel that, in March 2018, our capital should be at least 10%, and that's a low point. After that, we will continue building again, and that will happen year-on-year. That is our outlook right now.

Okay, thank you so much.

(Operator Instructions) Thiago Batista, Itau BBA.

Hi, Fernando. Thanks for the opportunity. I have one follow-up about tax rate. With this tax reform in Peru and if I'm not wrong, there we will see an increase in the corporate taxes and also a reduction in the tax on dividends. So with these two effects, what is the level of effective income tax that you are expecting for Credicorp in 2017? Are you expecting to see an increase in your corporate taxes?

The second point, second question on Mibanco. The ROAE of Mibanco already achieved 23.5%, more or less, this quarter. Is it possible to see a further improvement in this profitability for Mibanco?

Thank you, Thiago. First one is, in terms of tax rate, what we know or gathered until now is that, yes the VAT tax will come down from 19% to 18%, 100 basis points less, and corporate tax, they tell us that it will go up from 28% that we have now to 30%. But on the other hand, it will be balanced because the dividend tax rate, which is now around 6.8%, will come down to 4.1%. So in a way balance what our shareholders or every shareholder is getting into. And you know that's what we think will happen. We have already put those figures into our projections for next year, but we will know that for sure, as I said, in the coming 30 to 40 days.

Then in terms of Mibanco, again, we've been very positively surprised of their profitability, they are growing very -- not only fast in terms of their loan book compared to what is happening in the system, but they're also doing very good in terms of profitability. We feel that Mibanco in the coming two years should reach around 25% in ROE, it is already around 22% and you have to remember that it's been only merged since March last year. So it's been only around 18 months. So, it's doing very well.

As we have said many times, we feel that Mibanco has a world-class product, a world-class business approach to its clients and they are developing it. There is still ample room for growth for Mibanco. We are actually trying to keep the pace, but be very, again, vigilant and aware that we shouldn't go as fast as it might be because there is always risk and we have learned from many lessons over the past. So Mibanco, in very good pace, it should continue growing, and as I said ROE should reach around 25% in the coming two, three years.

Thanks and congratulations on the results.

Thank you. At this time, I am showing no further questions. I'd now like to turn it back over to Mr. Fernando Dasso for closing remarks.

Thank you very much. As I said previously, we are very positively surprised by the results. However, we are very much aware that we still have many things to do to continue with this good results in the future. As we have said many times, we are a reflection especially of what happens in the economy of Peru, also of Bolivia, Chile and Colombia in a way, but especially Peru. We have high hopes on this new government on what it can do in many ways for the country, and we will try to keep that pace.

We are prepared in many fronts for growth. As you know, we've been announcing a little bit more of the bank, of BCP, that we've been working on building our capital, we've been working in managing risk, and results are beginning to show there, especially in retail banking risk. We have been working on efficiency, and we still have many fronts in which we are still working and will continue working, I mean that are digital on some fronts that are still open for opportunities and improvements.

With that, I will just like to close the meeting, and thank you very much for being part of it.

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