Credicorp Ltd (BAP) 2017 Q2 法說會逐字稿

Excuse me, everyone.

We now have our speaker in conference.

(Operator Instructions) I would now like to turn the conference over to Walter Bayly.

Mr. Bayly, you may begin.

Thank you very much.

Good morning, and welcome to Credicorp's conference call on our earnings results for the second quarter 2017.

Before we review Credicorp's performance in the second quarter of 2017, I would like to take a few minutes to review the Peruvian macroeconomic environment.

The effects of El Niño and further delays on infrastructure projects have led us to maintain a real GDP growth forecast for this year between 2% and 2.5%.

Furthermore, for the second consecutive year, the domestic demand is expected to expand below 1%.

Regarding monetary policy, the Central Bank has lowered its reference rate by 25 basis points twice, in May and July, to reach a level of 3.75%.

We expect the economy to resume growth next year.

Economic recovery will be highly dependent on public investment.

As such, although domestic demand may rebound due to higher public spending, we expect private consumption and investment to recover at a slower pace.

We expect exchange rate to range between PEN 3.25 and PEN 3.3 per U.S. dollar during this year and next year.

This reflects significant trade balance surplus of about 2.5% of GDP and low current account deficit, which has hit an all-time low for the past 9 years.

Nonetheless, the Fed's policy could generate volatility in the exchange rates markets.

All in all, with sound macroeconomic fundamentals, such as high international reserves, low public debt, trade openness and a government that is friendly to private investment, Peru should remain one of the most dynamic economies within the region, both this year and in the next year.

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We have a chart that reflects the main indicators of the performance of Credicorp for this period.

Regarding profitability, we see net income at PEN 920 million, which is 3.4% quarter-over-quarter and 5.3% year-over-year.

Return on average equity at 18.2%, which is basically flat or marginally 10 basis points above where it was prior quarter but 220 basis points below year-over-year.

This, of course, is caused by the increased level of capitalization at both BCP and Mibanco.

Return on average equity has -- the average assets has remained flat compared to the previous quarter and marginally improved 10 basis points year-over-year.

The next block reflects the statistics regarding our loan portfolio, and we've got nominal growth quarter-end balances, foreign exchange adjusted growth rate in quarter-end balances and nominal growth rate in average daily balances.

All in all, these are very small numbers of growth, which reflect the macroeconomic environment in which we are currently operating.

So we see growth in nominal balances between 2% and 2.7%.

Growth, it is important to note, has been basically driven [under] Credicorp's portfolio by Bolivia and by Mibanco, and we will see a chart with this later on, and at BCP basically at the SME portfolios.

Top corporate's portfolio has not performed well in terms of growth this quarter.

Net provisions for loan losses, that's been the very positive results for this quarter.

We see 19.2% reduction in provisions quarter-over-quarter.

This, of course, grow, basically driven by the fact that in the previous quarter, we made important provisions related to El Niño and to the issue relating to the Brazilian construction companies.

But year-over-year, we also see a 10.5% reduction in the provisions for loan losses.

Cost of risk reflects the previous numbers, 47 basis points below the previous quarter and 28 basis points year-over-year.

Currently, our cost of risk is 1.85 basis points, well below the numbers we had been expecting, which were around 200 basis points.

Net interest income and NIM, the quarterly numbers reflect a downward trend, but this is caused by the fact that in the first quarter of every year, we do receive dividends from some of the equity holdings that we have.

But in the year-over-year numbers, we see in net interest income a 3.6% increase; and in the NIM, a 7 basis point improvement.

And more importantly, the NIM after provisions shows good development of 10 basis points quarter-over-quarter and 24 basis points year-over-year.

The efficiency ratio is up 43.8%.

And again, there is seasonality here.

The comparable number would be year-over-year, and we see an improvement of 30 basis points.

The quarterly numbers, we see a deterioration of 200 basis points.

And on the capital, as I mentioned, common equity Tier 1, we are 134 basis points increased in the level of common equity Tier 1 regarding the same period last year and 62 basis points against the prior quarter.

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On this slide, you can see the second quarter evolution of the loan book, which is the most important interest-earning asset and the key driver of net interest income and NIM.

It is worth mentioning, first, average daily loan balances posted lower growth rate than quarter-end balances.

This was due to the recovery of loan volumes toward the end of the quarter, which impacted quarter-end more than average daily balances.

Second, loan growth, as I mentioned before, was mainly driven by the loan expansion posted by Bolivia, Mibanco, Middle-Market and SME within the BCP standalone.

The aforementioned offset the contraction of Corporate Banking loans, which continued to reflect the low demand for credit as well as very aggressive competition.

Third, Credicorp's portfolio mix shows higher shares for Mibanco and BCP Bolivia and a reduction in share for the Wholesale Banking loan portfolio on a year-over-year basis, which eliminates the effect of loan seasonality.

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On this slide, we can see the year-over-year evolution of loan dollarization.

It is important to highlight that the current level of foreign currency loans is not a concern.

Furthermore, the de-dollarization process that began in 2015 may continue with a focus on Mortgage and SME business segments.

Nonetheless, we expect the process to take place at a much slower pace than that reported for the past 2 years.

Furthermore, there are 2 key aspects you should keep in mind when analyzing de-dollarization level.

First, the higher level of foreign currency loans at Credicorp and BCP is due to loan growth at BCP Bolivia, whose loans are in pesos bolivianos, and in Middle-Market Banking, whose loans are related to the financing for the first fishing season, which in turn is related to clients with U.S. dollar income generation.

Second, it is shown -- as it is shown in the chart at the bottom of the right-hand side, in terms of total loan share, loans to clients considered as highly exposed to foreign exchange risk fell close to 0 at the end of June 2017.

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Credicorp's net interest margin contracted 20 basis points quarter-over-quarter but increased 7 basis points year-over-year.

The quarter-over-quarter contraction, as I mentioned before, was mainly due to a drop in dividend income on investments, which is received only in the first quarter of every year and, to a lesser extent, to an increase in interest expense on deposits and a minor contraction in interest income on loans.

On the other hand, the year-over-year increase is the result of expansion in interest income on investments and on loans, which offset the increase in interest expense on deposits and on bonds.

All the above together, with the improvement in risk quality, led to an improvement in NIM after provisions, which rose 10 and 24 basis points quarter-over-quarter and year-over-year, respectively.

These results reflect the focus on risk quality over the past 3 years.

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As I mentioned, after more than 3 years of concentrated effort to improve risk management and the commercial strategy around it, Credicorp has posted a cost of risk below 2% for 4 consecutive quarters, excluding one-off provisions made in the previous quarter.

This is shown in the dotted light blue line of the chart at the top.

In the chart at the bottom, you can see the downward trend of the cost of risk in the segments that explain the overall reduction in Credicorp's cost of risk.

Finally, it is important to highlight that all business segments are currently within our risk appetite.

We feel comfortable and prepared to continue capturing the growth potential that the Peruvian market offers.

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The insurance underwriting results increased 3.4% quarter-over-quarter.

This was mainly due to the decrease of claims related to El Niño in a context of mild growth in net earned premiums.

Year-over-year, although net earned premiums expanded, the underwriting result contracted due to an increase in claims and in acquisition costs.

The former was related to Private Medical Assistance and life business lines.

Year-to-date, although net earned premiums also increased, the underwriting results contracted, mainly due to claims related to El Niño that totaled approximately PEN 22 million.

Finally, I would like to mention that last week, the merger between Credicorp's life and property casualty insurance subsidiary went into effect.

The merger aims to improve operating efficiency as well as capital allocation in the coming years.

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In terms of operating efficiency, Credicorp efficiency ratio improved 30 and 50 basis points year-over-year and year-to-date, respectively.

The improvement at the Credicorp level is attributable to an improvement in operating efficiency at Mibanco, BCP Bolivia, Atlantic Security Bank and Prima.

The improvement in efficiency in these subsidiaries offset the increase in BCP's cost to income ratio, which in turn reflects the cost of the Digital Transformation initiative in a year of relatively low income generation.

We believe that our Digital Transformation project is highly strategic, and as such, we will continue to invest in this effort in the coming years.

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On this slide, we summarize Credicorp results year-to-date, which show the resilience and strength of a business whose net income increased 8.4% in a year of mild loan growth due to low economic growth in Peru.

These results translated in return on average equity and return on average assets of 17.9% and 2.3%, respectively.

It is necessary to remember that the drop in return on average equity compared to the level of the previous year is mainly explained by the decisions made to strengthen the level of common equity Tier 1 at BCP Stand-alone.

The year-to-date performance is mainly the result of, first, better risk quality, even if we consider the impact of one-off provisions made in the first quarter; and second, continuous improvement in operating efficiency.

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

Thank you.

(Operator Instructions) Our first question comes from Carlos Macedo with Goldman Sachs.

First question.

I'd like to go back to growth.

Understand that internal demand in Peru is weak this year.

It, we'll certainly hope, improves next year.

But you're still doing around 2% loan growth.

Do you think there's an inflection?

I mean, it is -- it did accelerate from the first quarter level on a year-on-year growth.

Is this something that we can expect?

Much of the weakness is coming on the corporate side as the portfolio shifts back to foreign currency loans.

Where will this growth come from, if it does come through the end of the year?

And what's the strategy for the bank to capture it?

Sure.

Good question.

And actually, I will go into some of the comments I had left for my closing remarks.

But I guess this is an issue that is quite relevant.

I'll just step into it.

This past year has -- we have -- the domestic economy has been hit, as I mentioned, by 3 situations.

First, clearly, is El Niño, which impacted, as we all know, the evolution of GDP and the level of economic activity.

Second, the whole effect of the construction companies, the Brazilian companies, which not only had an effect in our portfolio but, clearly, did not allow for the large infrastructure projects to go ahead, which was going to be the driver of growth for this year and next in the Peruvian economy.

And the third is that we have had, in this first year of this new administration, a relatively high level of political noise, which did not contribute to private sector investment.

I'm very confident that the 3 effects are behind us.

First of all, regarding El Niño, not only have the effects on the portfolio not been as severe as we had expected, and we're already seeing that these effects are not going to be as dramatic as we had originally expected.

Second, on the Brazilian -- on the construction companies, the provisioning of that is behind us and, more importantly, we see that some of the large infrastructure projects that are going to drive growth are slowly getting into motion.

And third, on the political front, it appears that a certain level of maturity or understanding between both sides of the aisle has been reached, and we expect a much lower level of political noise going forward.

If one puts this together with 2 other circumstances, one is that the price of copper and zinc, some of the base metals, has really rebounded and those are key drivers of our trade business, of our investment business.

And the third is -- the other factor is that for the past 2, 3 years, we have been working very diligently because we had some problems in our Consumer portfolio and SME portfolio.

We have been with relatively tight credit standards, and we think that now it is a time that, going forward, with all these negative effects behind us, we think we can take a little bit more risk.

We've seen the cost of risk how it is at 1.85.

We think there's some space for us to continue and pursue some growth in the SME and, particularly in the Consumer, where we have been very restricted.

So putting all this together, I am relatively optimistic about our prospects going forward.

I think the worst of this slowdown is clearly behind us for all the things that I mentioned.

And I do expect some, in the next 12 months, to have growth in our portfolio for around 8% to 10%.

So I'm relatively optimistic about our scenario going forward.

I don't know if I answered the question.

You did, actually.

Just a little bit -- just a follow-up question then, if you'll allow me.

So for the remainder of the year, just so that we can capture what will happen this year, which is closely within your grasp, do you think you can get the 5% growth?

That only implies around, say, 8% annualized growth for the rest of the year?

Is that something that you can do?

And would it come from the corporate side, which is the one that's been lagging?

Yes.

I guess the guidance we have given is that on the upside this year, we'll be 5%, and that's feasible.

Yes, we do think that there is some space on the wholesale side, which will give us some volume and, of course, level of activity with our customers but not a lot of margins.

Frankly, the margins in the wholesale side are extremely tight because of competition.

But maybe we can pick up a little bit of margin and growth in the Consumer portfolios.

So yes, I think, the 5.5% or whatever number around that is achievable this year.

And maybe the full year next year, around 8% is a more optimistic number.

Our next question comes from Ernesto Gabilondo with Bank of America Merrill Lynch.

A couple of questions from my side.

The first one is a follow-up on the macro on loan growth, especially after the entrance of the new Minister of Finance, Fernando Zavala.

I would like to know your point of view on why we should expect an increase in public investment and a recovery in loan growth.

So far, you mentioned the 3 factors that affect the economy, El Niño, the construction companies and the political noise.

But what do you think has changed to foster productivity?

I don't know if there is a new infrastructure pipeline on its way.

And I would like to know what would be Credicorp's strategy against competition.

My second question is on asset quality.

Overall, we saw positive trends, a lower-than-expected impact from El Niño, no more provisions related to construction companies.

So for the next quarters, where do you see the cost of risk evolving?

Sure.

Peru does have a relatively large, well-established, clear, well-known set of projects related to infrastructure.

What has happened is that due to the effect of the construction companies, the corruption around it, it was extremely difficult for government officials and understandably so, for them to ask them to go around and sign contracts and move aggressively because every action a government official took was subject to review by the Contraloria, Congress, political forces, et cetera.

So the projects are there.

They are known.

They are relatively structured.

Particularly, we have the airport in Lima, which is already underway, and the line -- the [Linea Rose del] Metro of the subway system (inaudible) the public transportation system in Lima, which are already underway.

They've been clear and moving full ahead.

But on top of those, there's a whole bunch of list of projects.

So it's not a matter of change in the person of the Minister of Finance.

It is the fact that the system is now ready to start approving and getting these projects underway.

So yes, we think that, that is a driver for growth in the economy due to the multiplying effects and the size of those projects relative to the economy.

Our strategy regarding those is the same as it's always been.

We want to maintain the market share of our large customers or their borrowings and we will actively pursue those opportunities.

Regarding asset quality.

Yes, we are at a 1.85%, I believe is the number, which is below the guidance we have been given.

So I think there is space for us to take a little bit more risk, but I think that, that will be compensated at the top line.

The concept is now, of course, to increase the risk and maintain the top line, is that the NIM after provisions will increase, and that is where we're seeing we have some space for growth.

Did I answer your questions?

Yes.

Our next question comes from Thiago Batista from Itaú BBVA.

My first question is about the loan margins or the NIM.

We saw a big decline in the NIMs before provisions.

And in the press release, you mentioned a couple of times about aggressive competition in the corporate segment.

Could you mention your view about the evolution of the margins pre and after provisions?

And the second point about the refinanced loans that increased a bit this quarter.

My perception is that this increase was concentrated in the SME and also in the Consumer segment.

I only wanted to clarify if this increase in the SME and Consumer segment was caused by the effect of El Niño?

Yes.

Okay, I think I got your questions.

It was very clear.

On loan margins, yes, margins are very tight, particularly in the wholesale side.

And we see no reason why that should change.

So the overall margins will basically be affected by loan portfolio mix.

We do not expect margins to tighten a lot more than where they are today, nor for them to improve.

So if there will be an improvement in the overall percentage of margin will be because the portfolio mix changes, and that isn't clear.

We will -- it isn't clear how that will evolve.

We will take all the opportunities that we find.

If we find opportunities on the wholesale side because some of these larger projects get underway and there's a level of economic activity, we'll go for it.

If we find, and I think there are opportunities on the retail side, Consumer SMEs, we will go for it.

So individually, on each product, we do not expect any significant changes in margins.

Regarding the refinance.

I think what you are seeing, and I will check and get back to you this, is the fact that with an El Niño, what you have is that we have what we call the SKIPs.

Basically, when you have -- we have a mechanism, which is agreed or regulated by the local superintendency, where whenever we have natural disasters, earthquakes or El Niño particularly, we have the ability with or without the consent of the individual borrowers, because sometimes it's difficult for them to contact the bank, we just skip, what we call SKIP, so we just roll over for 90 days their maturities.

And over time, we have the opportunity to sit down individually with them and decide whether a refinancing is merited, warranted, required or not.

So what you see is the fact that we have done the SKIPs for all the portfolio affected by El Niño.

But we've already seen that most of those will not require additional refinancing.

Adding to what Walter had mentioned, I would say that of our total portfolio of PEN 1.2 billion in SKIPs, we expect only to refinance 15% of total portfolio.

And in June, you'll probably see a one-time effect of PEN 120 million due to the refinance of this SKIP portfolio.

So that is a one-time effect in terms of the refinance of the total portfolio.

Sorry, this was Reynaldo Llosa, our Chief Risk Officer.

In effect, what you see is the effect of El Niño, which will -- has been a one-time effect.

I think I've answered your questions.

Our next question comes from Tito Labarta with Deutsche Bank.

First, you talked a little bit about the investments in the digital initiative.

I just wanted to get how much you're investing there and what's that going to mean for expenses and efficiency, both in the short term and longer term?

And then my second question is more in terms of profitability.

You faced a rather challenging environment, particularly the first half of this year with everything going on, yet you've maintained a fairly healthy level of profitability at 18%.

In a more normalized environment, you've talked about growth coming back, provisions are down.

What kind of ROEs can we see?

I mean, if you look at the commercial bank, ROEs in the low 20 is below historical levels; the insurance business in the low teens, also below historical levels.

So in a more normalized environment, what do you think for ROEs for both of the different subsidiaries and also for Credicorp in total?

Sure.

Good questions, Tito.

Regarding digital, what we have -- the bulk, there are 2 sides.

One is the investments, and the other the expenses.

On the investment side, it's not huge.

It's not big.

It's mostly -- on the expense side, we tend to pass everything through the P&L directly.

If I worked -- I don't have the number in front of me, but this year, I would say it's around PEN 50 million that we have already done in expenses related to the Digital Transformation.

How much is it going to be going forward?

I wish I knew.

Frankly, it will probably increase, but that is the one level of expense that really does not worry us and which we will not cut back.

I think I like the things that we're doing.

They are starting to produce tangible results, and that is clearly the way to go.

So I -- the way I view it is that the cost-to-income ratio that I really watch and monitor is the cost-to-income ratio without expenses related to digital, because those expenses related to digital, in my mind, are more kind of investments rather than expenditures.

But they appear on the P&L line as expenditures.

So I watch very closely the cost-to-income ratio of the [ronda] bank, if you will.

How is this going to go forward?

I would not be surprised if that PEN 50 million next year could be double at least.

This is starting to produce results.

It is the future, and I think we would be unwise to cut that level of expenditure going forward.

Regarding profitability, I tend to agree with you that this 18% is kind of very much on the low side.

We continue to give guidance that probably between 19% and 20% for Credicorp is the number we should aim, and I really don't see a reason why that is -- should not be attainable and sustainable in the long run.

Regarding the individual subsidiaries, clearly, the bank above the 22% should be achievable and the rest basically where they are today.

That's helpful.

I guess maybe a couple of follow-ups, if you don't mind.

So first, on the expenses and the cost-to-income.

So if you exclude the investments for the Digital Transformation, should the cost-income remain somewhat stable?

Or is there still room for improvements, excluding those expenses?

And then on the profitability, I guess a little bit curious on the insurance, which seems to be a bit on the low side, but you said should remain around current levels.

Is that accurate?

Or is there still room to improve the insurance ROE?

Sure.

The insurance ROE this quarter, they were negatively affected by PEN 22 million related to El Niño.

And let us not forget that the reason -- one of the several reasons why we're doing the merger between the property, casualty, and life is because there will be some benefits that should accrue to return on equity.

These benefits, we've estimated at about 100, 150 basis points incremental return on equity over the next 1.5 years or 2 years, and they come from 3 sources.

One is some improvements in administrative costs; second, very importantly, efficiency and the use of capital; and third, not irrelevant but not the big driver, there's some tax efficiencies when you combine both companies.

So going forward, yes, because we will leave El Niño behind, and because of this merger, we do expect the return on equity on the insurance -- the combined insurance company to improve.

I have in front of me Alvaro Correa, and I will let him make some comments -- additional comments regarding this.

Yes, just one additional point is that those 2 effects that Walter is mentioning will probably compensate the pressure that we're feeling in the insurance rates that the market has today here in Peru as well as internationally.

Therefore, that's putting a lot of pressure on margins.

That, in addition to what we have seen in the Niño -- with the Niño effect, it's putting a lot of stress on the margins of the company today, but that should improve because the Niño is gone, and the merger will bring some benefits, would allow us to handle this market pressure.

We expect rates for insurance policies and reinsurance costs to basically stop falling down.

That's what most of the present players in the market are foreseeing.

But still, we see some rates going down.

So that's basically a trade-off of effects that will probably show a small improvement in the next quarters but not a huge one.

Regarding your first question, regarding the cost-to-income ratio, if we exclude digital, as is, I think there's only marginal room for improvement in the cost-to-income ratio.

Having said that, we continue to challenge ourselves, and we have to figure out new ways to stretch ourselves in order to continuously improve our cost-to-income ratio.

We are exploring things as robotics, artificial intelligence, obviously, cloud computing and dev ops in order to really take this cost-to-income ratio to a different level.

But the way to get there is not by marginal improvements but by doing things in a totally different fashion.

So it's -- in essence, we're not talking about quarterly marginal improvements that will take us there but mainly being on a steady state for a couple of years and then making some incremental jumps over time.

But again, this is a much longer propositions of improvement, which will require a lot more work.

Our next question comes from Jason Mollin with Scotiabank.

First question on competition, again.

I mean, you mentioned it in your presentation.

There were some questions about it.

What gives you confidence that we're not going to see it become more intense and maybe in other segments, maybe outside of the corporate side?

And what actually has been driving the increased competition, the more aggressive competition?

Is it the lack of growth in the market in this environment that's been provoking this in your view?

And my second question is on the outlook for management.

If you can provide an update if we should be expecting any kind of management changes at Credicorp or at the subsidiaries level?

Sure.

In terms of competition, the driver for this increased competition particularly related to price was probably 2-pronged.

On one hand, as you well mentioned, lack of growth is -- has been one of the drivers.

We're all pursuing the same borrowers and competing there.

But also there is particularly one financial institution that has been aggressively pursuing market share, and that has put a lot of pressure on the market and created this price competition, if you will.

So why should this not increase?

Because I think we expect to see some growth, and at the end of the day -- I've gone through these cycles many years.

At the end of the day, reason prevails, and people start realizing that pursuing market share at the cost of profitability is not necessarily a long-term, sustainable business proposition.

So it's a little bit in my -- based on my own experience that the combination of more growth and time will not take this level of competition into places where there is more risk.

Today, the price competition has been basically on the top corporate, where risk is quite controlled and is practically negligible, very small.

I know my competitors, and I think that they will not compete aggressively on price where there is risk assets involved.

So that is just my feeling.

Regarding changes at the Credicorp level, when there is anything important to communicate, you can be absolutely sure that we will adequately communicate those in a timely fashion, when and if there is anything.

And obviously, they will have to be well debated amongst the board before we can communicate anything, and I guess that's all I can say about it.

But I guess my question, I guess, to be more specific on the management, is, are there bylaws that are in place that would force some management changes, for instance, at the subsidiaries?

None at all.

Our next question comes from Carlos Rivera with Citi.

My first question is regarding the net interest margin.

You mentioned that the margins are very tight by product, although there was some upside, if I understood correctly, because of the loan mix next year.

So just wondering if you could help us quantify a little bit how much NIM expansion we could see because of the new change in the mix, let's say, by the end of 2018 considering that the NIM for this quarter was 5.3%.

And if you see any risk to that from funding pressures.

As you resume loan growth in soles, that loan to deposit ratio still above the 100 levels.

And my second question is regarding the capitalization levels.

(inaudible) I mean, a very strong common equity Tier 1 ratio 11.5.

What is your estimation for this ratio by the end of the year that will be the (inaudible) dividends?

And at what level do you think Credicorp will be overcapitalized?

Okay.

Let me -- I'll try to answer the questions.

I think there were a couple of them.

Regarding the NIM going forward, I think for your model, just keep them flat where they are today.

That will be the prudent thing.

If there is anything, there could be a little upside because of portfolio mix, but it's very difficult to give you a number.

Be conservative, keep them flat.

Regarding capitalization level, where we have reached a conclusion after analysis with our board is that where we want to keep BCP, and at this stage, I'm talking only about BCP, is that we want BCP that they have to pay dividends to be at minimum 10.5% common equity Tier 1. So that would be the low point.

And then throughout the year, we'll just accumulate the profits, and that'll take you to 11-something.

That is where -- what the agreement we have and we think it's a reasonable one.

How do we get there?

We produced a very credible stress test scenario, a scenario that was not dissimilar to what happened in Brazil in the past years, which is a 10% reduction of GDP over a 2-, 3-year period.

And we want -- if that scenario were to happen in Peru, we want at the end of that period to maintain -- to continue being investment level -- investment-grade level at the bank.

So that will take us to about an 8.5% at the bank.

So the scenario that we had cited is, given the stress test scenario, we want to be at a starting point so that at the end of this stress period, we want to remain being at investment-grade at BCP.

And that takes us to, at a low point, again, which is the day after we pay dividends, BCP should be 10.5% common equity Tier 1. And then throughout the year, we just accumulate profits because BCP only pays dividends once a year.

I don't know if I answered the 2 questions.

Or was there a third one?

Yes, just a follow-up on the first one regarding the NIM.

What would need to happen or what do you need to see to expect a little bit of NIM expansion?

Would it be in addition to the change in the loan mix?

Anything on the funding cost side?

What do you need to see to be confident that we could expect a little bit of NIM expansion for next year?

Basically, I would say it would be driven by loan mix.

If we were able to grow faster in our higher-margin portfolios, Consumer and SMEs, the loan mix would change, and that would be reflected in the overall margins.

Regarding funding costs, that is a slight upside to the effect that we do expect at least a 25% reduction in the Central Bank reference rate this year and maybe another 25 basis points in the next year.

So that could provide some cushion for, if there were to happen, any additional margins on products because our funding costs are -- would come down.

But I would leave that.

Again, assume for your models that you maintain the NIM and those are marginal upsides that could offset or provide some upside.

Our next question comes from Marcelo Telles with Crédit Suisse.

Two follow-up questions.

The first one, on the -- on your growth expectation of 8% for next year, just to understand a little bit, in the Consumer segment, if you can just give us a sense of which segments would drive that.

We could see already like Credit Cards bouncing back.

And if that would assume that would be -- you'd be growing your Consumer book, let's say, more in time with the market, I think this year, if I'm not mistaken, I think your Consumer book is up 1%, and the system is around 8%.

So that means that you'll probably be aligning your performance to the performance of the market.

Or do you think there's room for some market share gains in the Consumer segment?

And my second question is on -- is a follow-up on profitability and capital.

You mentioned 19%, 20% ROE target.

I just want to make sure if I understood correctly that, do you already consider like some, let's say, capital optimization at this point, let's say, a higher dividend payout to get to that number?

And how do you see acquisition opportunities to -- in order to -- as an alternative to deploy that excess capital you're going to probably continue to build?

Okay.

Growth, Consumer portfolios, yes.

Because we have been on a very tightening, if you will, policy of getting our Consumer portfolio back within our risk parameters, we have probably been more conservative than we should have or we have left some money on the table, if you will, just because we wanted to get the overall portfolio within our risk parameters.

We just had a long review yesterday, where we have identified that, yes, there could be some pockets of opportunity to grow, particularly, as you have mentioned, on the Credit Card side.

That similar concept applies to Consumer, consumer installment loans, where, again, we have lost -- based on a decision we made, we have lost some market share.

So we can probably do some pickup but particularly focused on the Credit Card side.

To be on the conservative side, yes, let's assume that we will go back to growing at the same rate at which the market grows and not shrinking our own portfolios.

So that growth, which was 8% the past year, if in an economy that is growing more, could probably be around 12% for the Consumer portfolio.

So that is a not unreasonable expectation I would have going forward.

But again, not gaining a lot of market share, just resuming the growth that the market takes.

Regarding return on equity, 19%, 20%, as I mentioned.

Yes, this assumes most likely an increase in the dividend payout.

As we have mentioned several times before, once we have reached the level of capitalization that we feel comfortable that, as I mentioned in the prior question, and assuming that we are unable to find position opportunities, we will obviously have to increase our dividend payout to the extent that we do not want to accumulate excess capital, which we cannot -- which will lower our return on equity and which we cannot profitably redeploy on the benefit of our shareholders.

We're constantly looking at acquisitions.

All the investment banks know that we are in -- with a possibility of acquiring things.

So but again, we are quite disciplined in terms of what we buy and the prices we are willing to offer for assets.

So yes, we're looking at opportunities and open to look at opportunities, but those are things that are very difficult to predict.

Did I answer the 3?

Yes, very well.

Our next question comes from Domingos Falavina with JPMorgan.

I have actually 2 questions.

The first one is on credit cost.

I mean, we notice -- I didn't hear many questions on that, but basically, it surprised me that coverage ratio was low and the credit cost was pretty low in this quarter too, in fact, below the ideal run rate of around 2% to 2.2% I believe you guys were saying.

So what do you think is reasonable for us to assume for credit cost this year and also for 2018?

I understand this year may be running exceptionally low.

And then I'll ask the second question.

Okay.

Regarding cost of risk, yes, we have been positively surprised to the extent of the way our portfolio has reaccommodated itself within our risk parameters.

We have always given the guidance that probably a 200 basis point cost of risk is where we expect it to be.

So we do have some space to take some incremental risk, obviously, assuming that, that incremental risk, as I mentioned before, is more than compensated by the margins it produced.

So again, we're very much focused on margins after cost of risk.

So we probably have some space to earn additional return for our shareholders by taking out some additional risk.

Again, fairly targeted pockets of customers that we have probably, in our interest of getting our portfolio back into our risk parameters, we've probably been leaving some growth opportunities on the table, which now we can probably go after, also considering the fact that we see that the economy has bottomed out.

so the combination of our portfolio and risk parameters where it is today and the macroeconomic scenario is probably a good sign for us that it is time to go into, if you will, a growth mode rather than a mode which has been focused on getting our portfolio where we want it to be while this economy was not performing adequate.

I don't know if I answered the cost of risk question.

Where do we see those numbers?

Never above the 200 basis points, so fluctuating between where we are today and 200 basis points.

Very clear.

So it adds your appetite a little bit -- no, it's perfect.

The second question is on the payout.

So if I understood this correctly, you're basically shooting to have around a 10.8% or 11% Tier 1 capital.

And if we assume -- my question is just to see if the math makes sense.

If we assume that you're going to have around an 18%, 19% ROE and your loans may grow 5%, 6%, it basically implies you could pay out 60% -- about 2/3 of your earnings in dividends, but that's excluding the shares that you have on Treasury.

If we adjust by the Treasury shares, which should obviously feed back into your capital, you would have to be 65% and above.

Does that makes sense?

Or when you say 50%, 60% payout, it includes the shares that you have on Treasury?

You've done your math well.

Indeed, what we think is that, even though -- let me take back.

So we are now very comfortable at what level of capitalization the bank should be, because we have done the stress test, et cetera, that I mentioned.

We still have to do that for each and every of the different subsidiaries.

Obviously, they would not have a major impact given the relative size of the bank versus the other subsidiaries.

But we still have to go through the scenario of putting each of the different subsidiaries through that stress test, and not only each of the different subsidiaries individually but then doing the combined Credicorp, because there could be effects that multiply or neutral each other.

So we haven't fully finished that exercise.

Again, it shouldn't have a dramatic effect but we just have to go through it.

So that's number one.

So we -- and the other is that we do want to keep some excess cash or capital at the holding company, because we want to be able to take opportunities when and if those appear.

How much money should that be?

That is something that we are debating amongst ourselves.

So assume for a point in time that, that -- those equity holdings that we have at the holding company, that is -- that aggregate amount is what we should hold until we finish the stress test scenarios at the different subsidiaries and because we want to have some excess capital to be able to capture opportunities when and if they arise.

But beyond the amount that we have, that will probably be too much.

So basically, what we're saying is, think that, that capital at the holding company for the time period stays there, and we'll just pay out the excess capital that we generate on a yearly basis.

Did I answer that?

Yes, very clear.

But what about the shares in Treasury?

If you don't consider those to be excess cash, does it make sense to cancel them or...

Yes, I mean, for all practical purposes, they -- from an accounting point of view, they do not exist.

They are not capital.

They could be canceled.

If for practical purposes, they're canceled, you were talking about the shares?

I thought you were referring to the fact that at the holding company, we hold about still, between shares of BCI, shares of (inaudible), shares of Centenario and of (inaudible) about $400 million or something.

I thought you were referring to those.

The other Treasury stock, which, in my mind, does not exist.

Yes, no.

I know, but it dilutes the dividend payout, because you declared like 30%, 40% and then the effective payout turns out to be smaller.

That's why I'm just like trying to figure out if you contemplate the shares and when (inaudible) the payout?

Yes.

You see, I do the math without that, because that dividend that we pay, we receive ourselves and we pay out again.

So the dividend payout calculated the net of that -- those Treasury stocks.

Our next question comes from Carlos Gomez-Lopez with HSBC.

Two questions.

The first one [the pursuit] growth in Bolivia, so 17.5%.

I guess I'm a bit surprised by your appetite in Bolivia.

Can you explain the level of growth and what we should expect going forward?

And second, going back to the plans for the company going forward.

Can I ask you your personal view how long do you want to be (inaudible).

Sure.

Regarding Bolivia, Bolivia is going through a quite unusual process of reallocating its portfolio.

What's happening there is -- and I don't know how familiar you are with this, Carlos, but there is a law whereby you have these packets that you have to comply with.

A certain portion of your portfolio has to be lent to a certain sector, which is called the productive sector, which includes mortgages.

So it's a kind of detailed, complicated law that forces you to direct your portfolio in a certain way.

So there are dynamics that are quite strange and not necessarily market-driven but regulatory-driven dynamics in the portfolio.

Yes, we're all surprised by the level of growth in the overall banking system and in the Bolivian system.

And yes, we do have a certain level of concern about whether -- probably that growth rate is not going to be sustainable over the long run.

We think that this year is probably going to be the last year in which the portfolio or at least our portfolio in the Bolivian market will grow at double-digit rates.

We expect that to be more subdued, because we are finding funding pressures and because I think that the dynamics that are playing in the market, as I mentioned, are not necessarily market-driven but can be pernicious, I don't know the word, because they are driven by regulations.

So I agree with you that we have to be a little bit more cautious and just -- and the market should expect single-digit growth in the portfolio, more in line with a realistic growth of what is the Bolivian economy growing at, which, by the way, is growing at about 4%, which is a big rate.

And the other question, I think it's a difficult for me to mention.

As I mentioned when somebody asked a prior question, when and if there are management changes in our institution, we will -- after discussing them with the board, we'll be very clear, transparent and adequately timed to inform so that the market fully understands what is going on.

And as you may understand, this is not appropriate for me to comment anything further.

(Operator Instructions) At this time, we have no further questions.

Mr. Walter Bayly?

Well, thank you all for joining us.

And really, this has been a very good set of questions.

As you know, I'm just covering because Fernando is away on vacation, but it's always a good exercise and very productive for me to hear the questions from some of our analyst and our shareholders.

As I mentioned briefly before, I do have -- I am somewhat optimistic as to going -- as to the months and the year ahead because of all the factors that I mentioned that are already behind us, which is El Niño, the paralysis in the government because of the construction companies and some of the political noise.

And this, coupled with the fact that we see some space for us to take risk and macroeconomic numbers related to the impact of our trade balance, I am fairly optimistic about the future going forward.

I think our institution is very well positioned to capture this growth.

All our subsidiaries are performing adequately, and we thank you for your continued support and for joining us continuously in these quarterly conference calls year-over-year.

I was very happy to hear some questions from some of very old friends and analysts that have, even though have changed banks, continue to follow Credicorp religiously over the past couple of years.

So again, thank you all very much for joining us, and goodbye.

Thank you, ladies and gentlemen.

This concludes today's teleconference.

You may now disconnect.