Credicorp Ltd (BAP) 2016 Q4 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, if you would like to ask a question.

I would now like to turn the call over to Mr. Fernando Dasso, Credicorp's CFO. Sir, please begin.

Hello, thank you. Good morning and welcome to Credicorp's conference call on our earnings results for the fourth quarter of 2016. Before we review Credicorp's performance in the fourth quarter. I would like to take a few minutes to review the Peruvian macro environment. We estimate their near GDP growth will be between 3% and 3.5% this year. Our estimate is more conservative than those of the Central Bank and the Ministry of Finance.

That said, in 2017, Peru is expected to remain as one of the fastest growing economies in the region, operating in Colombia, Chile and Mexico. It is also important to know that Peru will only be in a county with a stable solid outlook from the three major (inaudible).

Even though GDP growth in 2017 will be similar to 2016, the drivers will be different. First, last year mining production explained almost 60% of GDP's expansion. Conversely, this year, mining production will only explain 20% of GDP growth. Second, domestic demand is expected to accelerate from 1% in 2016, something between 2.5% or 3% in 2017, as long as private investment recovers after declining for three consecutive years. It is important to know that prior investments will no longer be affected by the approximately 50% drop in mining investment registered in 2016, due to a completion of large-scale mining projects, in particular, the expansion of (inaudible).

Regarding inflation, we expect the rate to close near 3% in 2017, which is the average unit of Central Bank's target range. In terms of reference rate, we estimate the Central Bank will hold its policy rate at 4.25% in 2017.

On foreign exchange, we foresee an end-of-period exchange rate between S/3.40 and S/3.45 (inaudible) in 2017 due to international uncertainty.

That said, if copper prices remain at current levels, no negative factors appear in the international or local context, and (inaudible) surplus continues increasing. The exchange rate will remain at year-end level of 2016 or may even appreciate against the US dollar.

Let's review Credicorp's quarterly and annual results. Next slide please. Let's quickly review the quarterly results before we analyze full year performance. Regarding our quarterly financial figures, in the fourth quarter of last year, Credicorp reported recurring net income of S/896 million, which represented recurrent ROAE and ROAA of 18.6% and 2.3%, respectively. The fourth quarter results show, first, although the quarter posted the lowest loan growth rate of the year, these were driven by high margin business segments, such as retail banking, Mibanco, and BCP Bolivia, which led to a better mix in terms of the margin. Second, net provisions for loan losses increased 18% during QoQ after registering, in the third quarter, the lowest level in the past three years. In this context, the cost of risk rose to 1.94%, which is still below expectations. Third, all of the above allowed the net interest margin to recover 34 bps QoQ, while the net interest margin after provisions increased 16 bps QoQ. Fourth, the efficiency ratio decreased 13 bps QoQ and 19 bps year-over-year. This represented an extraordinary result considering seasonality and expenses every fourth quarter.

Let's review Credicorp annual results. Next slide please. In 2016, Credicorp posted a record high for recurring net income of PEN3.4 billion, which led to a 19.3 ROE and a 2.2% ROAA. These excellent results show Credicorp's resilience in the economic scenario marked by a much slower pace of growth in the Peruvian economy and a volatile international environment.

It is important to note that the significant expansion of 16.2% in recurring net income is reflected in the 20 bps increase in ROAA despite the aforementioned ROE fell 40 bps due to a significant increase of 31.9% in net shareholders' equity, which is in turn attributable to better income generation and high growth in unrealized gains from our proprietary investment portfolio.

The (inaudible) in 2016 are explained by. First, the loan book measured in average daily loan balances expanded 4.1%, which is well below expectations. Nonetheless, the loan portfolio mix favored NIM. As such, the local currency loan book expanded less than 6%, mainly in high-margin business segments, while US dollar-denominated loans only grew 1.4%. Second, the cost of risk fell 20 bps due to a contraction of 5.1% in provisions for loan losses. The (inaudible) was due to very low loan growth in gross provisions and a higher level of recoveries and reversals, in line with improvement in risk quality across most of the business segment.

Third, all the above offset the increase of 13 basis points in the funding cost and resulted in a relatively stable NIM after provisions, which increased 2 bps despite the fact that NIM contracted 16 basis points.

Fourth, the increase of 7.5% in the insurance underwriting result due to 8.8% growth in net earned premiums, this year, Pacifico posted a combined ratio of 91.3% and a net loss ratio on 58.4%, levels that were relatively stable with regard to those posted in 2016, which were situated at 90.1% and 58.9%, respectively.

Fifth, control over operating expenses kept growth at 4% in an environment in which income generation grew less-than-expected due to marginal growth in loans. In this context, the efficiency ratio at Credicorp was situated at 43.3% and remained stable with regard to 2015, which is outstanding considering that this ratio has posted year-to-date deterioration of 30 basis points in the first nine months of 2016.

Finally, BCP stand-alone (inaudible) achieved the target we said in terms of the fully loaded Basel III common equity Tier 1 ratio, which reached a level of 11.1% at the end of 2016. Income generation was the main driver of the improvement in this ratio, followed by deductions after return to BCP Bolivia and thirdly below loan growth.

Let's review the year results in more detail. Next slide please. On this page, you can see the evolution of the loan book and average daily balances, which are an important driver of net interest income and NIM. Throughout 2016, we saw a slowdown in loan growth. As you can see in the chart on this slide, the loan book expanded only 4.1% year-on-year.

The main highlights in terms of Credicorp's loan book are, first, Wholesale Banking faced a challenging environment, marked by an extremely low demand for credit and aggressive pricing competition. As such, and after three years of leading growth in the launch of credit card, Wholesale Banking's loans expanded only 0.4%. Nevertheless, the corporate loan book grew 1.8% where Middle Market loans contracted 0.2%, which resulted in a mix of loans within Wholesale Banking that put downward pressure on its margins.

Second, retail banking led loan book expansion in 2016. Loan growth was driven mainly by SME-business, SME-Pyme and mortgage, which helped improve Credicorp's loan mix. Consumer loans and credit cards posted the lowest growth rate in the past seven years in the context of our delinquency which began in 2015. This growth is, nonetheless, with expectations due to our risk capital.

Third, Mibanco had an excellent year and expanding its loan book by 10.1%, which increased share of total loans at Credicorp.

Fourth, loan expansion at BCP Bolivia and ASB also helped accumulate the impact of low growth. The aforementioned has led Credicorp's portfolio mix to post higher shares for segments with higher margins.

Next slide please. With regard to loan book dollarization, the foreign currency portfolio at Credicorp represented 40% of total loans at the end of 2016 versus 41% at the end of 2015. The level of BCP Stand-alone continues to be dollarized by a much slower pace than that's seen throughout 2015. In this context, BCP Stand-alone reported loan dollarization level of 37.1% in December 2016 versus 38.3% in December 2015.

Overall, as you can see in the chart on the bottom right hand side, the level of foreign exchange rates on credit risks has remained very low in the last two quarters of this year, (inaudible) had only 1%. Furthermore, the level of the inflation at BCP is well in line with the targets set by the Central Bank.

Next slide please. In this chart, let's review results of Credicorp's focus on risk quality in an environment marked by significantly slower loan growth and an increase in the funding costs. Although, the loan portfolio mix registered an increase in the participation of business segments, they offer higher margins, are also implying a higher cost of risk.

Thus, in the chart of this slide, it is important to know, first, the mix for the overall margin during the second half of the year after dropping 40 bps in the first half. In this context, the overall margin in 2016 contracted only 16 bps. Second, even though the business segments that led loan growth of higher cost of risk, lower cost of risk shown in the dark blue line from 20 bps in 2016, offsetting the contraction in the margins and generate a relatively stable NIM after provisions, as is shown in the light blue line of the chart. This result was achieved because of the risk quality of the business segments that led loan expansion, both Retail Banking and Unibanco, respectively.

Finally, Credicorp's efficiency ratio remained stable. Let's review the evolution of the cost of risk and delinquency ratios in some business segments in more detail. Next slide please. On the chart, at the top, you can see the risk quality performance of SME business. The portfolio shows a significant drop of 52 bps QoQ in the internal overdue loan ratio. This was attributable to increase in the level of internal overdue loans, which in turn was reinforced by loan growth.

However, the NPL ratio decreased less, 41 bps, of course, NPLs remain at the same level as the previous quarter due to an increase in refinanced loans. The cost of risk increased 133 basis points QoQ due to higher provisions in the fourth quarter, which was attributable to the fact that some clients, although reporting no provision in the past new loan levels, experienced a downgrade in the ratings. This led to an increase in provisions that have no effect on delinquency ratios. In general terms, the cost of risk shows great stability in 2016. Remaining are the same level posted in 2015.

In the chart, at the bottom, you can see the evolution of risk quality in a significant way. As you can see, since the beginning of the second half of 2014, early delinquency has registered a downward trend year-over-year, in line with ongoing improvements in the SME-Pyme business model.

It is important to note that early delinquency fell 14 bps year-over-year, reaching a level posted in the first quarter of 2013, before the delinquency program began. In line with the aforementioned, the cost of risk fell 105 bps year-over-year to register a record low for the past three years.

Next slide please. The figures on this slide show evolution of delinquency ratios and cost of risk in credit card and consumer segments, both of which have posted an upward trend since the last quarter of 2015. As you can see, delinquency ratios and cost of risk posted significant improvements in both business segments and quality adjustments introduced throughout 2016.

Next slide please. The chart on this slide shows the evolution of Mibanco's delinquency ratios and cost of risk. It is important to note that all delinquency ratios continue to follow a downward trend. This also applied to the most stringent ratio, adjusted NPL, which (inaudible). Excellent performance reflects the successful turnaround that begun in March 2014. In this context, the cost of risk increased slightly QoQ after having posted an atypical low in the previous quarter, but sales year-over-year in line with an improvement in the risk quality of the loan book.

Next slide please. Another important aspect of Credicorp's financial figures is the funding structure and cost. The chart at the top left hand side shows a slight contraction in total funding in 2016, which reflects a context mark by low loan growth. The reduction in total funding was due primarily for increasing the process which was accelerated by growth in Due to Banks and Correspondents and in this year the instruments. The latter was mainly due to more regular repos with the Central Bank instead of the expansion and substitution repos that we took in 2016 as part of that de-dollarization program.

Even though funding contracted, the funding cost increased from 1.97% in 2015 to 2.10% in 2016, which includes downward pressure on NIM. The increase in funding costs was mainly due to higher funding costs at BCP Stand-alone and Mibanco, which was attributable to, first, interest expenses on deposits grew 23.6% in 2016 due to 22% increase in average daily balances on deposits for the year at Mibanco and 8.6% at BCP Stand-alone. Second, the de-dollarization of deposits for the year, particularly in time deposits, which implies higher average cost for the remaining stock of time deposits. Third, the average cost of deposits on bonds and subordinated debt increased in 2016, as you can see in the bar chart at the top left hand side.

Finally, the contraction of total deposits increased the overall loan-to-deposit ratio, which reached a level of 110%. Although this level is still within our internal targets, it is important to mention the efforts we have made in 2015 to increase core deposits, such as savings, CTS and demand deposits, which is reflected in the increase posted in savings deposits.

Next slide please. In terms of operating efficiency, Credicorp's efficiency ratio remained stable with regard to 2015 level. This year's result was satisfactory given the excellent cost control and BCP Stand-alone offset lower than expected results for income generation. Furthermore, Mibanco reported a significant improvement in its operating efficiency due to a better-than-expected result for earnings generation. In the case of Pacifico, the deterioration in its efficiency ratio is due to non-recurring income from the association with Banmedica in 2015.

Next slide please. In the chart on this page, you can see all of our subsidiaries contribution to Credicorp. We are focused on maintaining the profitability of the business despite low loan growth and aggressive competition. As you saw in the previous slides, the excellent results reflect comprehensive efforts, mainly in risk management and efficiency. At a subsidiary level, it is important to highlight first the excellent performance of Mibanco, which is reflected in its 2.1% ROAE for 2016. Second, the relative stability of our subsidiary, such as BCP and Prima. Third, the improvement at BCP Bolivia and Credicorp Capital. And lastly, a drop in the ROE at Pacifico, which was attributable to two events in 2016. The existence of non-recurring income after a joint venture with (inaudible) and a significant increase in unrealized gains in its investment portfolio in life insurance.

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

Thank you, sir. At this time, we will open the floor for questions. (Operator Instructions) Jason Mollin, Scotiabank.

My question is really on the expectation for 2017. You talked about a different composition of real GDP growth this year and the increase in domestic demand, and you mentioned that loan growth has been weak for lack of a better term, and what are your expectations there, what's driving this increase in domestic demand and how can that translate into loan growth and what kind of expectation do you have as a multiple of this, let's say, nominal GDP growth? And maybe my second question is based on another one of your comments. I think you're mentioning how well the bank at the group has been able to do with this weak growth and competition. Can you talk about the competitive landscape and what's driving the change there, in which segments, and is this something that can impact your medium-term profitability? Thank you.

Thank you, Jason. On your first question, as you know GDP, group grew by 2.4% in 2015 and in 2016, it was 3.8%. We feel that each year, we will remain within our range of 3% to 3.5%. But as we said, it will be a different kind of growth. Last year, what really fostered by mining and the mining environment, mining projects, this year, we will probably be more really fostered by domestic demand. And when we talk about domestic demand, we'll feel that consumption will be more or less the same. But now it seems that investment will grow organic, faster than last year, especially prior investment. Although it will be a gradual improvement and the first half will be worse than the second of this year, we feel and we are beginning to see some signs of that growth in investment coming. However, we thought that we were going to grow more than four. Now, it seems that we will be around the low 3%, that range. In regards to loans, last year, as you know, we grew by only around 5%. This year, our best case scenarios is around 7%. And if things are better during the second half, we will probably be able to reach maybe 8% or a little more than that. That's really our focus. So, I mean, GDP, it's moving probably around 1.1, 1.3 times nominal GDP growth because inflation will be 3%, GDP will be 3% more or less, so we will be adding more on that. And then, your second question was on the competitive landscape. And yes, as you know, when growth diminishes, there is really more competition for the best clients, especially because all the competitors in this country begin to look more in detail towards their delinquency numbers, and they begin to pick and choose better the best clients in the system. So there is no competition for those clients, and that is what we are experiencing. We think that we will continue to experience that situation during mid-2017. Where is that competition more visible, in (inaudible), especially in the largest clients in Corporate Bank.

Thiago Batista, Itau BBA.

My first question is almost a follow-up on Jason questions, but my focus is on the margins. With this potential increase in the share of retail business, but with some more competition there in wholesales, how do you see your margins during 2017? And the second question is a more open question about the digitalization process. Could you comment on how do you see the (inaudible) of a branch in this digitalization process? Do you believe you could see a reduction in the number of branches in the couple of -- in the next few years with this process to become more and more digital? So these are my two questions.

Okay. Thank you, Thiago. On your first question regarding the margins, yes, we are seeing some pressure on margins. As I answered in my last answer, we feel that the country, especially a financial system, is going to grow on a higher base than last year, where we will still have some pressure on margins, but we will try to continue achieving the margins that we are gaining. It won't be easy. Our customers are very honest, but we feel that we have a very good group of client, a base of clients that would have good relationship with them and we will continue to try to maintain those margins. If you see the NIMs, the trajectory of the NIMs in the last quarters had been good. We will try to continue (inaudible).

Then on the second question, in terms of digital and branches, what I can tell you as one figure, is that for example, now we have more transactions in our mobile banking than our branches, meaning, in the tellers of our branches. So the trend is changing actually very fast. We have engaged in a very comprehensive program in terms of the digital approach that we want to incur in. We will -- we are putting -- a great team of people are working there, we are investing in the long term, we are beginning to see some -- we've sold there. We are already launching some new products and ways of actually interacting with our clients with this mini talk and we're convinced that, there is only a way to continue investing, so we will definitely continue in that trend.

Ernesto Gabilondo, Bank of America.

Hi, good morning and thanks for taking my call. And my first question is more related to guidance. I will appreciate your expectations in terms of net interest income growth and what should be its correlation with loan growth and also what are you expecting in terms of cost of risk?

My second question is, what are you expecting in terms of net earnings growth? I just want to know if you're still expecting double-digit growth and if you're evaluating to increase the dividend pay-out ratio above 25%. And finally, can you elaborate more on the tax measures that are in Congress? Thank you.

Ernesto, thank you for your questions. I didn't get them so clearly. I think the first one was on loan growth. If I'm correct, we told you that we expect loan growth to be around 7% last year, mainly -- next year, maybe a little higher than that. We will probably grow it faster Retail or in Wholesale.

Yes. I was trying to know about your net interest income growth and what should be the correlation with the loan growth?

Okay. Net interest income, as you've seen in our presentation, it has a good trend. If you see again after provisions -- even before provisions it's around 5.44%. We expect that number to continue in that range. Yes, funding costs will be a little higher, but we will try to reprice our loan growth (inaudible) especially in the segments where we have more cover. And also, we are working very thoroughly on after provisions. When you see that line of new after provisions in the chart in the seven, we expect to continue there in the 4% to 4.30%, 4.41%. We feel that it is feasible and that we will try to achieve that in the next month. Are there any other question, Ernesto?

Yes. In terms of cost of risk, what are you expecting in this year?

In terms of what, sorry?

Cost of risk.

Cost of risk, okay. As we have said many times before, we expect cost of risk to be around 2% to 2.2%. Now we are a bit surprised that in last quarter especially, the third quarter I mean, and then the fourth quarter because numbers are doing much better because of many measures that we've taken, especially in Retail Banking. We have worked all the way with our scores, with our collections, people. Our numbers are beginning to show, however we would like to be more on the conservative side, telling the market that we will be around 2% to 2.2% in terms of cost of risk.

Great. In terms of net earnings, should it be reasonable to expect double-digit growth in 2017?

In terms of net earnings, we will continue to -- I mean we usually don't give any guidance on net earnings specifically. What we can tell you is that, we will try to maintain our ROE around 18% to 19%.

And for that, are you expecting to increase the dividend payout ratio above 25%?

I mean, we still have to discuss that in our meeting, in our -- not only our Board meeting at the end of February when our shareholders meeting at the end of March, but if you go firmly into our numbers, you have to understand that clearly our [IEA's Group] have other stance than the ones we had last year.

Great. And finally, can you elaborate more on the tax measures that are in Congress?

The taxes, well as you know that the income tax has changed from 28% to 29.5% this year. But then the dividend tax rate has also come down from 6.8% to 5.5%. So, if you balance both taxes, I think that it is really like a wash. So, we will probably be around the same area of taxes.

And about the value-added tax rate. Are you expecting that will help in the (inaudible) to increase the consumption in 2017?

In terms of the VAT, again, if you -- VAT tax, as you mentioned, we feel that we will continue at the same range, at the same number, the same percentage this year, because the only way to change it and bring it down is if we achieve very aggressive targets that we've already set. So, we feel that we will be around the same range this year.

Tito Labarta, Deutsche Bank.

Hi, good morning, Fernando. Thanks for the call and taking my question. A couple questions, also, I guess first on expenses, you saw very good cost control over the year with expenses growing in the low single-digits. Just want to get maybe some color on the outlook for expenses this year. Do you think expense growth will continue to be that low, do you have more room to improve efficiency or what kind of growth should we expect on expenses?

And then, just another follow-up question. In your funding cost, you mentioned you expect them to go up. We did see deposits decline this quarter, the loan-to-deposit ratio is around 110% now. Did you see a lot of pressure there, will you have to increase prices to get to more deposits, just want to get a little bit more color on the funding side and the expected increase in funding costs?

And then just a last question, in terms of capital. I know you talked about the dividend a little bit, but you're above 11% now. Core Tier 1 Tier 1, you have excess capital at the holding company. Just wanted to get your thoughts on what -- I think in the past, you mentioned you want to be above 10%, so you're well above that now. In addition to potentially increasing the dividends, do you see any buybacks, potential acquisitions, what should be a comfortable level of capital and what should we expect with that excess capital? Thank you.

Thank you, Tito. Three questions. I'm going to address the third question first. In terms of, yes our capital levels, we have improved them consistently over the last three years and that our common equity Tier 1 was 7% three years ago. Now we are at around 11%. We think that in March when we (inaudible) dividends we will probably reach around 10% and that will be really the brain of that ratio. And yes, we will maybe keep some reserves because as you know, we operate (inaudible) a volatile country, we will probably keep some reserves and beyond that, it will be dividends basically. But then you ask a little bit about, buybacks or more investments, what I can tell you is that we're always open to (inaudible) new possibilities of acquisitions. But we have learnt so many lessons over the past to be very -- well I would say, sensible in deciding what to acquire or not. In terms of buybacks, we always be looking for ways to, if we have excess cash, bring it back to our shareholders. That's all I can say in terms of capital.

In terms of funding cost, it is always good when interest rates come up for financial institutions, because margins tend to widen. Yes, the funding cost can come up, but we will try to -- in a way, we price our stocks in our loan book. On the other hand since Retail is growing faster and hotter, it is also good for the margins. (inaudible) of growing faster than launching products which -- and margins are wider, it is also (technical difficult). So in a way we see interesting prospects in terms of the margin. Then you talked a little bit about long-term deposit ratios, we feel that, we talked many times to our shareholders and to you in particular about -- but most importantly we feel that we are in a good position now, basically because they are mainly deposits, a large chunk of deposits from state-owned companies that are really at the Central Bank, which brings a disruption in the system, just because it's really in the private financial sector.

So actually the Central Bank provides us with those deposits by the repos, with our loan-to-deposit ratio, for instance it's around 113% and with those deposits that reside at the Central Bank, being in the financial system, it will be 88%. So it's fairly stable. And as we have talked many times, the Central Bank is very constructive. They know what they are doing. So we feel very safe. We provide them with the excess dollar and they bring an assurance to the system.

That on your second question. Then on the first one, which dealt on cost control, what we are doing all the time is trying our income to grow faster than our cost. And that's what we are really achieving. In the past three years -- this year now, because we had a low hanging fruits, we said we took advantage of before. Now it's harder, but we are still, we do have many ways in which we can become more efficient.

And you can imagine, I mean our branch network is already at 450 branches. Do we need the 450 branches, maybe not, we are now I think, we can do on -- on the bill's budget, should be as large as they are now, also reach smaller. We do have many ways in which we can improve our efficiency, not only because of cost control, but because that ratio of income to cost, which is really at risk.

Great, thanks Fernando. That's helpful. Just one quick follow-up on the capital. You mentioned you expected to go back to around 10% after the dividend. Could that lead to some upside? You said ROE earlier around 18% to 19% for this year, but if Core Tier 1 goes to 10%, could there be some upside to that ROE?

We would like to remain more conservative and tell you that we expect our ROE to be between 18% and 19%. There are more opportunities and we will be very keen on taking advantage of those opportunities.

Okay.

Carlos Rivera, Citigroup.

Couple of questions from me. The first one is regarding the subsidiary Mibanco. I mean, in the past, you have guided for an ROE of around 25% to be achieved over the next two years, that was last quarter, but already this quarter 26% ROE. Does this mean that Mibanco have a capacity of higher ROE and probably 25% is a little bit conservative or do you see Mibanco now achieving the run rate that you feel comfortable with? And the second question would be regarding Credicorp Capital. This quarter, we didn't see any impairment as in prior years. So, I assume the test was conducted. And if you could clarify (inaudible) it is better-than-expected 2016 performance or basically because of prior write-offs in these acquisitions now, is that the new violation level and (inaudible) probably no more impairments in the future are coming from these acquisitions? Thank you.

First of all, thank you, Carlos. First of all, in terms of current Credicorp Capital, yes, we have no impairments this year. Actually, capital market in Chile, Peru and Colombia, we need to do better than previous years. So we feel that the future of Mibanco should become -- Credicorp Capital, sorry, should become better. In terms of impairment in the future, we don't foresee any more impairments in terms of Mibanco. And in terms of acquisitions, I mean, there are always possibilities -- of Credicorp Capital, sorry. In terms of acquisition there, they're always possibilities of acquiring new players in these three markets, actually improving Mibanco's -- Credicorp Capital's numbers. We will be very active looking for those possibilities. I'm very (inaudible) on the deciding what should we not acquire. Then, Mibanco, finally. You asked about ROE, yes, after only two years since we merged Mibanco and Edyficar, Mibanco numbers are looking rosy. Yes, we feel that there are a few more opportunities in terms of Mibanco regarding loan growth. There are still some synergies to be achieved. We still need to provide Mibanco with a better base of deposits because they also have a large number of branches, around 300 branches, and there is an opportunity to bring low-cost deposits from the public (inaudible) better in those terms. And also, there is opportunity, and we are working on segmentation. Before, we had one-side (inaudible) approach to the clients of Mibanco, and there is the opportunity to (inaudible) better and to address their needs, both on the ethics side and on the ability side of our clients better. We feel that the ROE -- I mean, Mibanco has now very important position in that market. They control around 22% of the market they play. They are the leading player. So there are many opportunities of improving Mibanco's numbers in the future.

So would you say that probably at something above 25% percent ROEs (inaudible), would you target a particular number, maybe 30% over the next few years once you achieve all the synergies, all the increase in deposits rates that you mentioned?

I mean, I wouldn't want to promise a number from the Mibanco, especially at 30% ROE number. Well, I can tell you that we are very focused on continuing ROE to improve the ROE at Mibanco, but to actually grow the net income of Mibanco, because we see many opportunities, we have a very solid model, we feel that we will have a world-class model for approaching microlending and similar lending, and we will try to continue to take advantage of that model, and we'll start (inaudible) we're trying on to keep our risk numbers where we want them to be, but growing as fast as possible.

Carlos Macedo, Goldman Sachs

Couple of questions. First, on loan growth, you said 7% to 8% potentially this year, more heavily in the second half of the year and more towards investments, which means corporate, does that mean you're also going to grow dollar-denominated loans more than loans in Solus given the natural preference for some of these corporate borrowers to borrow in dollars and what kind of impact do you think that could have on your margins? Second question, results for the insurance company for Pacifico weren't particularly good this quarter, loss ratios were up, can you give us a little bit of outlook for that, which we should think going out for Pacifico? Thanks.

Okay. First, I want to address the loan growth. One, yes, if those important projects, infrastructure, even mining begin to come in again, we will see growth low in dollars more than in sol. But remember that in these huge projects, we usually don't take an important part. What we actually do is participate in this consortia (inaudible) of the lending facility, but mostly try to lend more to all the suppliers on the ecosystem around these projects. So that's really how we improve in terms of loan growth if these huge projects come again. We will still see, yes, this year that de-dollarization has been really low, the Central Banks POs, that we have achieved a level in which we feel comfortable with. So, and that level for the system is around 30%, 39% in terms of dollar loans, for BCP around 37%, because we have more of a larger position in corporates. So we think that we will probably stay where we are in terms of dollarization. We also feel that the exchange rate will be pretty stable this year. Actually, it's coming down, the sol is actually revising against the dollar during this first 40 days of the year. We feel we will be pleased (inaudible) it won't a problem going from one currency to the other. Then, in terms of Pacifico, I'm going to answer a tiny bit and then we will (inaudible) from Pacifico continue with the answer. What I can tell you is that Pacifico has got a good year. There are many important projects that we will undertake this year, and they are already public. As you know, our property and casualty business will merge with our life business, that will probably take place in August, September, the third quarter, and that will bring new synergies to our table. That's already public, so I can't disclose that to you all. And then, I will let (inaudible) talk a little bit about Pacifico.

Yes. In terms of the loss ratio, we've been growing a little bit, and that is basically for various reasons. One, we have been very aggressive in the outdoor insurance business, which we had (inaudible) our prices, we had very good loan loss ratios of about 46% from around there. And we resilient on purpose to do that and there is a little bit of market share, but those were extremely aggressive loan loss ratio. Also, we come up from that to within, gaining a little bit of -- share this year and brought those strong ratios back up to our levels of 56% from around there. And that is what has obviously impacted in the loan loss ratio as a whole for the company. But I would say it's really nothing to worry about because those are perfectly manageable levels, and basically what we're trying to do is disclose a little of market share at those levels. We've also been hit a little bit in the loan loss ratio for life insurance company in which we did have some additional or increase in loan loss ratio on the insurance that we provide for the (inaudible) and it's a tranche, which we did not have in the previous year. We actually, we didn't have in 2015, we had -- markets those are annual, the situations that take place and we'll participate in that, obviously increases the -- loan loss ratio and we're participating this year and then you will see the change from 2015 to 2016. And then there other minor in individual life insurance that happened, marginally up from the previous year.

Okay, great. Just, for the quarter, was ROE was closer to 11% or 10% than it was the 14%, 15% that it was in prior quarters. What should we look out for ROE for the business is 15% a run rate or should we look for a lower run rate?

I didn't get your question. Could you please repeat it.

The 15%, this quarter, the ROE was closer to 10%, then 15% that was in the third quarter. What should we look for in terms of the run rate ROE for Pacifico?

I would say around the 15%.

Carlos Gomez , HSBC.

Two questions. First, also on insurance. In the past, you have commented on the restructuring process and how you might be willing to partner -- kind of people in -- of the business or sell the --. We would like to know if you can give us an update on that in particular on the property and casualty business. Second, on the capital. As I mentioned, were it be 11%, it will go to 10% after the different, again, what would you consider your ideal levels to-- we see US banks, European banks are at 11%, 12% -- as you operate in Peru. What do you think the ideal level for BCP should be? Thank you.

Carlos, I'm sorry to tell you that we didn't understand your questions, it wasn't clear. Can you repeat them more slowly please? The phone line is kind of -- it's not working as it should.

My apologies, can you hear me now?

Yes, please try to go slowly.

Sure. So the first question was on the insurance business, and we would like to have an update on the possible sale of part or entire lines of the business as you have commented in the past.

Okay. You are asking about if we are going to continue with (inaudible) line of business or we would like to do something different, acquire or selling lines of business, is that the question?

Well, you have commented you might get partners for some lines of business, for instance auto insurance. We would like to know where you are in that process?

Okay. What I can tell you is that in terms of healthcare and the health insurance business, we're very glad with partners that we have now, (inaudible) Chile. They are the leading providers of this insurance and healthcare services in Chile. We actually have knowledge that they really know their business. If you see how we're doing in that business, although the ROEs are only around 6%, but they are very, very flat. We're coming actually from zero to a 6%, 7% level. If you see all the healthcare entities that we control, you see that all the numbers are in blue already and all of them, with one exception, they're actually reaching our budget, which is a stringent budget. So we feel that we're improving there, we're learning about the business, we feel very comfortable with our partners. Then, I talked a little bit about the merger between a typical life insurance and probably and casualty business, that will be the target for this year, and it's an important undertaking for both companies, both in terms of the synergies that we can achieve and the cultural mix that we will have to bring together to the table. So that's the target and that's the project for this year. Next year, we will probably continue to assess what's the landscape and see what are the other opportunities.

Very clear. And on the capital, my question was whether 10% is the optimal capital level or you would consider going to 11% or 12% at BCP?

BCP, what we planned to have at the bottom part is the 10% level, and that point in time is really in March when we declare dividends, when BCP declares dividend. We will reach the 10%, and we will continue building common equity Tier 1 or capital during the year. And we will probably reach at the end of the year depending on how we are doing in terms of net income, but our projections at the end of this year will probably have the same level of common equity Tier 1 that we reached in December 2015.

Philip Finch, UBS.

Two questions from me as well. First, regarding your deposit growth in the fourth quarter where we saw a 4.9% contraction year-on-year, notably in time deposits. Can you elaborate a little bit on why we saw such a big contraction and what we should expect for 2017? My second question is regarding your strategy for rationalizing your branch network. Are you looking to close branches this year or reduce the size of branches and how does all this feed into your outlook target for your cost-income ratio? Thank you.

(Technical difficulty)

Excuse me speakers, we're having a little bit of interference coming from your line. We're going to switch over, one moment please.

(Technical difficulty)

No, sir. There's a little distortion coming from the line. So I'm going to disconnect the line, and we're going to transfer it back over. One moment please.

(technical difficulty)

Fernando, it's Philip Finch here. I can hear you, but I don't know whether the operator is ready to (inaudible) reply.

Gentlemen, you may now begin.

I'll try to answer first. Your second question in regards to the branch network, and then I'll ask you to repeat first one. In (inaudible) network -- okay. Yes, there are opportunities to bring it down to reduce it, but what we have decided here is to be very -- I mean, we've seen years when our business grew by 20%, 25%, and we don't know if we're going to accelerate, maybe not this year, but the next. So, we will be really behind the curve and actually being very gradual in (inaudible) whether we should reduce it or not. Here, there are some opportunities of -- actually, many of our branches are large -- I mean, reducing those, and then reducing the actual number, but we will be very, very gradual in making those decisions. Because we don't know if our country will begin and our financial system will begin growing again faster in the coming future. That's the first, and the second question? Yes?

Fernando, can I just follow up on that, please? So you are not planning to reduce the size of any branches, is that what you are saying?

I would say that -- I mean, we have 450 branches. I would say that it will be no surprise if we reduce it by five branches this year, seven branches this year, but nothing really more than that.

And lastly, linked to this question, do you have a target for your cost-to-income ratio, please?

For cost-to-income ratio, as a bank, we do have a target. At the bank, we are already at the 40.5%, 40.6% level. And if you remember conversations that we've had in the past, that was really our target when we begun this process three years ago. ,Now we feel that we can achieve -- especially as we begin to grow faster that we will be able to achieve lower numbers, but I mean, the best brands in the world that are our size are around 39%, 38%. So there is not a lot of room to continue improvement -- to continue with our improvement, but of course, we will try to go as down as we can -- as slow as we can.

But going back to my original question, your deposit growth was negative in the fourth quarter, minus 4.9% year-on-year, and it seems your time deposit contracted by 16% year-on-year. Can you just explain what's happening there and also what's the outlook for 2017 for deposit growth?

We feel that this year, we will -- I mean, those repos that the Central Bank issued like three years ago will begin to mature this year. This year and the next year are very important years in those terms. We feel that some, we will replace with different repos, meaning repos of -- currency repos, not the expansion or substitution repos that we already have, but we will also be more active in the markets looking for not only deposits, we have actually, for example, put there a new team of people that will be vote -- I mean, two or three people that will be vote to bring in more time deposits, but we also will be in the market looking for issuing new bonds that we have begun to (inaudible) rating last year and have continued actually this year. Mainly, low loans deposits growth that maybe also, I mean, in international markets.

Steve Ocampo, Habitat.

My question is regarding the recent problems in the construction sector in Peru with the Odebrecht scandal. Can we expect any increase in the NPLs 2017 because of this company's struggling for performance? And second, can you give us any detail of the exposure of the bank to this sector? Thank you.

Thank you, Steve. What I can tell you, we have put together some figures, especially in terms of our Brazilian companies, in the construction sector. What I can tell you is that loans that we cover up, actually, the first (inaudible), we basically provide them with standby letters of credit rather than direct loans -- performance loans, performance loans instead of direct loans. Those performance loans account for around 95% of the credit facilities that we provide to them, okay. Second is since this progress began some years ago, may be two years ago, our exposure to these companies has come down by two-thirds. We have already working on this and it has come down by two-thirds. Third, that exposure accounts for only 0.6% of our loan book -- of our total loan book. So, we feel pretty -- I mean, we are actually very active looking at what else can we do and looking for better collateral, but we are -- I mean, we feel that we are on a completely safe side, but we are fine. We feel that these companies have, although there are in problems now that we know, that they have substantial investments improved, that we can get substantial collaterals and conditions from them, we will follow them very closely.

At this time, I'm showing no further questions in the queue. I would now like to turn the call back over to Mr. Walter Bayly.

Thank you very much all of you for joining us at this year-end conference call. I wanted to give some forms, most with my -- forms that I will give have already been mentioned by Fernando, but let me give you my color on them. The first one is related to the fact that there is a certain potential downside to GDP with the effects of the corruptions, scandals that are taking place right now. The impact on the economy is two sides. One is that, of course, one of the drivers of growth this year of investment and growth this year were some of the large infrastructure projects that were going to get started or are in the process of getting done. And there is a risk that because of all the legal issues involved, there could be some parameters how the government (technical difficulty) in terms of taking decisions and moving forward with those projects. So there is a potential downside to growth in the economy coming from that front. As Fernando mentioned, even though our exposure is limited and controlled, nevertheless (technical difficulty) watching, that it could provide as well some downside initially in the first quarter, depending how these projects evolve.

Now moving out from that topic, one of the couple of key things that we are focused on, particularly comp level, number one by far is just a long-term transformation is everything related to digital. This is huge, this is big. All financial institutions in the world are growing. This involves changing processes, this involves technology and this involves people culture. These are very important transformations. And this is happening not only at BCPs level, but also at Pacifico, at Mibanco, Credicorp Capital and Bolivia. So this is investments that we are doing today, and we will continue to be doing in order to provide and make sure that these institutions remain competitive going forward. This is important, and this is one of the big focus of Credicorp.

Secondly, challenge this year, as again, Fernando already alluded to this, is the transformation that is taking place at Mibanco. Mibanco -- these are the process of executing -- implementing a resegmentation of its customer base and focusing on each of those subsegments of customers which they have and with a value proposition adequate for each of those customers. And by value proposition I mean product, prices and distribution channels. So it's a very important change in the way the company operates and to a certain extent, we are reinventing the way this company operates. Of course, this has been discussed a lot at the Board level because we have something that is working. So it's (inaudible), but on the other hand, we feel the precisely when things are going well, then you have to start preparing yourself for the future. So we are watching this very, very closely.

Another topic, which Fernando also measured, is the merger between Pacifico Peruano Suiza and Pacifico Vida. That of course has to be filled, taken to shareholders assembly. But nevertheless, we think that this will get approved. Then, there is always challenges putting two companies together, systems process reporting. There's a lot of details it has to do work, and we're watching that very closely.

On the upside, there are two elements worth mentioning. One is that Prima, last year, participated, and we're on the right to receive the new entrants to the private pension system for the next two years. This will start in June. We're preparing ourselves for that, and we hope to even exceed the numbers of new entrants into Prima that we have budgeted for ourselves. This, of course, will bring, in the next two years, a marginal decrease in profits because we did reduce the few charts to our customers. But nevertheless, in the long run, we think this is good increase in the number of customers and becoming extremely competitive in pricing, we think, is the way to go.

And the final comment is that Congress has recently approved a law through which Peruvians that have money offshore will, paying certain taxes, be able to repurchase the funds they have invested offshore. We think that this is an important opportunity for us, and we will be able to capture interesting amounts of funds, because we think we can be the recipient of choice of many customers that have offshore funds in many banks around the world. So this is an opportunity that we are very much focused on.

And finally, to remind you that, yes, we traditionally have our target return on equity on the 20% level. We are now -- because of the increased capitalization at the banks, both Mibanco and Banco de Credito, lowered the target to be between 18% and 20%. But I would include in this number all non-recurring items, because what I have learned from the past is that the only thing in common with all recurring items -- non-recurring items is that they are recovering. Every year, we do have something unusual and that is something that we have to live with and we have to manage.

So I guess, our medium-term expectations, our return on equity, because of the increased capitalization at the two banks, is now on the 18%, 20%, whereas we were in the 20% plus in the past.

So with these comments, I would like to finish my presentation. And again, thanking you all for joining us in this conference call, and we hope that we will have this 2017 period satisfactory as well as the last year. Thank you very much.

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