Credicorp Ltd (BAP) 2017 Q4 法說會逐字稿

Excuse me, everyone, we now have our speaker in conference. (Operator Instructions) It is now my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Fernando Dasso. Mr. Dasso, you may begin.

Good morning, and welcome to Credicorp's conference call on our earnings results for the fourth quarter and full year 2017. Before we review Credicorp's performance, I would like to take a few minutes to look at the Peruvian macro environment.

2017 registered slower growth due to the El Niño phenomenon, the Lava Jato case and political noise. We estimate that real GDP growth will situate at 2.4% while domestic demand will only expand 1.3% in 2017. Looking at 2018, we decided to reduce our GDP growth forecast from 4.2% to 3.5%, mainly due to political uncertainty and risks in the construction sector. Nonetheless, 2018 will be better than 2017, as we expect GDP and domestic demand would grow around 3.5%.

Our forecast for 2018 is driven by the following factors. First, a favorable international environment. As you can see in Chart 1, the IMF recently made an upward revision to world's GDP growth forecast for 2018 from 3.7% to 3.9%, which is the highest spring in 7 years. Second, as Chart 2 shows, the price of copper stands around USD 3.2 per pound and have increased around 60% compared to 2 years ago. Moreover, the price of zinc currently stands near maximum level for the last 10 years.

Third, as you can see on Chart 3, financial conditions are positive as demand for Peruvian debt has remained strong and sovereign yields have fallen considerably this last year. On the local front, countercyclical monetary and fiscal policies will boost economic activity. The Central Bank lowered its reference rate 100 basis points in 2017 and an additional 25 bps reduction was taken in January 2018. We expect another 25 basis points rate cut in 2018, and then inflation is likely to gradually increase, and we foresee end-of-the-period inflation near 2.5%.

In addition, public investment is expected to grow around 10% this year after 10% year-over-year contraction during the first semester of 2017. All in all, as you can see in Chart 4, economic growth in Peru will outperform the main economies of the region. These new wants and risks do not materialize.

Finally, in 2018, we expect the exchange rate to close between USDPEN 3.2 and USDPEN 3.25 per U.S. dollars, as this year the surplus in our trade balance will reach its highest sprint in 6 years.

Let's review Credicorp's financial performance. Next page, please. Regarding our quarterly financial figures, in the fourth quarter of 2017, Credicorp reported net income of PEN 1,064 million. That includes the gain for the sale of an equity position, which amounted to PEN 164 million. This led to a return on average equity and average assets of 19.5% (sic) [19.8%] and 2.5%, respectively.

Credicorp's performance in the fourth quarter was driven by: First, nominal loan growth of 2.8% quarter-over-quarter and 3% year-over-year in average daily balances, which represent the highest quarterly growth rates posted in 2017. Second, net provisions for loan losses increased 16.7% Q-over-Q after reaching their lowest level in the previous quarter. As a result, the cost of risk increased 17 basis points.

Third, net interest income increased but at a lower rate than average daily loan balances because loan growth was led by Wholesale Banking. In this context, the net interest margin contracted 4 basis points Q-over-Q and 30 basis points year-over-year. All of the aforementioned, together with a normalized cost of risk, translated into an increase of 17 basis points Q-over-Q and year-over-year in the risk-adjusted net interest margin.

Fourth, the efficiency ratio increased by 160 basis points Q-over-Q and 180 basis points year-over-year due to a seasonality in operating expenses every fourth quarter as well as to an increase in expenses for the strategic project, Transformation. Finally, in terms of capital ratios at BCP Stand-alone, the common equity Tier 1 ratio fell 10 basis points Q-over-Q, mainly due to higher growth rate in quarter-end loan balances.

Next slide, please. Let's review Credicorp's annual results. As you can see in the graph, Credicorp has managed to grow steadily in a scenario marked by a much slower pace of growth in the Peruvian economy and by aggressive competition. In this context, we have managed to leverage the different capabilities that we have strengthened over time to reserve our profitability. Significant improvement in risk management as well as discipline on governance and costs have been the most important drivers of 2017's results. All of this allowed Credicorp to post the record high in net income of PEN 4.1 billion in 2017. These results show Credicorp's resilience and represent an ROE (sic) [ROAE] of 19.8% and an ROAA of 2.5% for 2017.

The results in 2017 are explained by the following. First, the expansion of 1.9% in the total loan portfolio in average daily balances. This was led by Mibanco, SME-Pyme and Mortgage, primarily in local currency. Nonetheless, the loan book measured in quarter-end balances grew 6% due to gradual recovery at year-end, driven by Wholesale Banking. Second, low loan growth in average daily balances coupled with the loan mix and the contraction in margins within Wholesale Banking led to a contraction of 14 bps in NIM with regard to a level posted in 2016.

Third, the cost of risk fell 10 basis points and situated at 1.78%, which is the lowest level since 2012. This contraction accentuated the drop in risk-adjusted NIM. Fourth, control and governance over operating expenses allows Credicorp to maintain its efficiency ratio relatively stable in 2017. Finally, BCP Stand-alone comfortably reached a common equity Tier 1 ratio of 11.8% at the end of 2017. This was mainly attributable to a higher level of credit risk weighted assets, in line with loan expansion at the end of 2017.

Let's review these results in more detail. Next page, please. On this page, you can see the evolution in the fourth quarter of the loan book, which is the most important interest-earning asset and the key driver of net interest income and NIM. First, as you can see in the chart at the top of the left-hand side, loan expansion Q-over-Q was mainly driven by Wholesale Banking followed by SME-Pyme and Mibanco. The year-over-year analysis shown in the chart at the bottom of the left-hand side was led by Middle Market Banking, SME-Pyme and Mortgage within BCP Stand-alone and by Mibanco and BCP Bolivia. Second, the dynamic of loan growth has changed the loan mix. As you can see in the bar chart on the right-hand side, higher-margin business segments increased their share of total loans by 0.8 percentage points year-over-year.

Finally, it is important to note that after the decision to resume growth in the Consumer and Credit Card segments, these portfolios reported growth rates of 2.4% and 2.3%, respectively. The aforementioned represents a substantial improvement in the dynamic event that these segments reported either contraction or very low growth in previous quarters of 2017.

Next page, please. On this slide, you can see the year-over-year evolution of loan dollarization. It is important to highlight that, first, the current level of foreign currency loans is not a concern. Second, the higher level of foreign currency loans at Credicorp and BCP is mainly due to loan growth in Wholesale Banking, which in turn is related to clients that generate income in dollars. Third, as is shown in the chart at the bottom on the right-hand side, the level of clients that are highly exposed to foreign exchange risk is nearly 0. This type of exposure has reached its lowest level at the end of December 2017.

Next page, please. Credicorp's funding structure has changed throughout 2017 to stabilize the funding cost, which had begun increasing in 2015. It is important to note the increase in the share of total deposits, which is the funding source with the lowest cost. Moreover, bonds and subordinated debt also grew at the end of 2017. All the aforementioned allowed the group to replace BCRP instruments and Due to banks which have fallen in 2017.

In the chart, we can also see that Credicorp's cost of funding maintained at a relatively stable level in 2017 and posted an increase of only 2 basis points. It is important to note that funding costs stabilized in the second half of the year. Finally, the loan-to-deposit ratio maintained a downward trend throughout 2017 and reached a level below that posted at the end of 2016.

Next page, please. With regard to risk quality, this has been a successful year after 3 years of comprehensive efforts to enhance Credicorp's commercial and risk management capabilities. As you can see in the chart at the top, Credicorp's cost of risk reached a level of 1.78%, which is the lowest level reported since 2012, a year prior to the acquisition of Mibanco and to Peru's economic slowdown. This result is even more noteworthy if we consider the provisions made in 2017, including those made for the El Niño phenomenon and the Lava Jato case.

As such, the cost of risk for the underlying portfolio, which excludes the one-off provisions, dropped from 188% (sic) [1.88%] in 2016 to 166% (sic) [1.66%] in 2017, as depicted by the dotted light-blue line. The drop in the cost of risk was in turn due to an improvement in risk quality in most business segments. Finally, as we mentioned in our last 2 conference calls, we have room to increase the speed of growth in the Consumer and Credit Card sectors, which will allow us to maximize portfolio profitability while keeping the book within the organization's risk appetite.

Next page, please. On this page, you can see the evolution of net interest income and NIM. Considering that there is loan seasonality in our banking business, let's focus on the full year analysis. As we explained earlier, average daily loan balances expanded 1.9% in 2017, which translated into an increase of 2.5% in net interest income. This result was due to: First, the positive effect of a different mix in the portfolio where high-margin business segments increased their share of total loans; and second, more active management of the investment portfolio in the context of low loan growth that allowed us to maximize profitability of investments.

All of the aforementioned offset the effect of low loan growth and the contraction in margins in Wholesale Banking due to aggressive competition. However, average interest-earning assets expanded 5.2%, toping growth in net interest income. The former was attributable to an improvement in loan growth towards the end of the year. Thus, Credicorp's NIM contracted 14 bps in 2017. In this context, the reduction of provisions for loan losses led to a smaller contraction of risk-adjusted NIM, which fell only 8 basis points.

Next page, please. In terms of operating efficiency, Credicorp's efficiency ratio increased 160 bps Q-over-Q and 180 bps year-over-year, which was mainly attributable to the seasonality in operating expenses every fourth quarter and to higher expenses for the strategic project, Transformation, at BCP.

On an annual basis, the efficiency ratio increased 20 basis points and situated at 43.7%. This was attributable to low loan expansion, which led operating income to grow below expectations. This scenario was, nonetheless, partially offset by adequate control of operating expenses, which were pressured by increasing operating expenses for the strategic project, Transformation, mainly at BCP Stand-alone. It is important to note the improvement that Mibanco has posted in efficiency, which was due to a better-than-expected result in earnings generation that offsets slight deterioration at our subsidiaries.

Next page, please. On this page, you can see our guidance for full year 2018. We are introducing a more structured and former process to provide guidance about Credicorp's main indicators, which we will present during the conference call every fourth quarter and review on a quarterly basis going forward. The first part of the table shows our estimates for macroeconomic indicators in 2018 that we discussed at the beginning of this call.

The second part of the table shows Credicorp's estimates for the main business indicators. Loan growth for full year 2018 measured in average daily balances should be between 6% and 8%. This growth will come from: First, Mibanco and SME-Pyme segments that we expect to expand at a higher rate than the total portfolio. This is in line with our recovery expected in domestic demand, which started posting better dynamics at the end of last year. Second, the Mortgage consumer financing and SME-Business segment should grow at a similar rates to that of our total portfolio.

With regard to consumer financing, which include consumer loans and credit cards, we have identified growth pockets as we mentioned in our second and third quarter conference calls. Also, after fine-tuning of our risk models, we feel prepared to increase the speed of growth in these segments to maximize the portfolio's profitability, while maintaining this loan book within the organization's risk appetite.

Finally, it is important to highlight that every -- that even though we expect Wholesale Banking to grow at a lower rate than the portfolio, this growth is quite noteworthy after a year of contraction in a scenario of aggressive competition and low demand for credit. Regarding the cost of risk for 2018, we expect it to be between 1.6% and 1.7%. This is in line with the level posted for the underlying portfolio in 2017 and a scenario with better loan growth in 2018.

Moving on to the net interest margin. In 2018, we believe it would be between 5.3% and 5.5%. This means a slight increase with regard to a level of 5.28% posted in 2017. Our future reflects a higher pace of growth in high-margin business segments. It is important to note that considering estimates for cost of risk and NIM then risk-adjusted NIM should recover from the level of 4.11% posted in 2017.

In terms of operating efficiency, we expect the efficiency ratio to maintain the level reached last year. Even though we believe income generation will recover and that will improve efficiency, we have decided to speed up the execution of the Transformation project, which will require more expenses and investments. However, we believe these strategic projects, although not focused on efficiency, will give us capabilities to improve efficiency as a byproduct in the medium, long term.

Regarding the common equity Tier 1 ratio for BCP Stand-alone, we have set a minimum of 10.5% for the first quarter every year, after we declare dividends from BCP to Credicorp. Finally, we expect ROE for year 2018 to situate between 17.5% and 18.5%. This reflects our decision to speed up the Transformation project in a scenario where the loan book is expected to expand below potential due to some business segments. Nonetheless, we continue to believe that Credicorp's sustainable ROE will situate around 19%. To achieve this, investment in Transformation is key.

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

(Operator Instructions) Our first question comes from Jason Mollin with Scotiabank.

My first question is on the profitability trend that we saw in the fourth quarter. We saw very good bottom line and very strong return on equity. But if we strip out the gain from the sale of Enel in quarter on the back of the higher provisions in lower NIM, we saw the recurring, I would call it, ROE declined to 16.5%. I just want to see if you can give us some color here. Clearly, you had a good bottom line. You had this gain. You made some provisions in the fourth quarter, and you're talking about a sustainable ROE in well, at least in 2018 in the 18% range and even higher following your investments. If you can just give us some color on that. And secondly, if you can talk about potential regulatory changes for Peruvian banks, if there's some expectations that the bank has for this year, or next, that would be interesting to hear.

Thank you, Jason. First, on your second question on the regulatory changes, we actually don't foresee anything important coming, not only in terms of banking regulation but financial services regulation as a whole. As we have talked many times, we have a very close relationship with the regulators, with everyone, the Central Bank, the Superintendency. We are all the time rules, and they have lots of information of ours. We have a very constructive relationship. We don't see something important coming in terms of regulation. Then on your first question, yes, we had a onetime item in our fourth quarter. In general, we believe that the numbers for our fourth quarter are recurring numbers are more or less where we should be next year. As we mentioned, the tailwinds are really what is happening to the loan book. We begin to see some more appetite for investment in the business community, both foreign and local. So that is good. Then in terms of our loan portfolio, I think, that our underlying trends show that we are doing much better in terms of the health of it. And we will continue to stress our efficiency with the exception, as we mentioned, of this Transformation project, which we can discuss later on. So we see a better year in 2018. That's at least our forecast for BCP, and you should expect that.

Our next question comes from Philip Finch with UBS.

My question first of all is regarding your capital position. Given your assumptions on loan growth and ROEs, how much capital would you think you could generate this year in 2018 through retained earnings? And linked to that, given your common equity Tier 1 ratio was 11.78% in Q4 last year, how much scope do you have to return more capital to shareholders? And my second question is linked to all of this. You just gave ROE guidance for 2018 at 17.5% to 18.5%. What capital levels are you assuming behind this guidance?

As we mentioned, when we talk about capital, we need to talk about basically BCP. And as we mentioned, we plan to be early March actually at the end of our first quarter at 10.5% common equity Tier 1. What we have decided also is that within our risk appetite, we will let all the subsidiaries provide dividends to the holding companies in March. We won't keep any excess capital at the subsidiaries level. All the capital will go -- as I mentioned, after we comply with all our risk appetite rules, internal rules, we will provide that capital to the holding companies. And then, as we mentioned, at the holding company's level, we will keep a fund, as we have called it our warchest, of around 10% of total capital, and above that, we will pay dividends to our shareholders. That's what has -- that has been already decided in our board. I don't know if I answered your question with that answer.

Okay. And what about the ROE guidance, please, Fernando?

Which guidance? ROE?

The ROE guidance you gave, 17.5% to 18.5%.

Yes. As I said, our ROE guidance for the year is between 17.5% and 18.5%. However, we think that our sustainable ROE after we finish with project Transformation effort, which is a huge one, to roughly hover around 19%.

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

A couple of questions from my side. Maybe this is a follow-up in terms of the results. When I look to the bottom line that it was favored by the sale of the Enel shares and by the reversal of excess provisions related to the improvement of your ATMs process, what could be the level, the recurring level of net income in 2017? Also, in terms of your cost of risk, I think you're guiding 1.6%, 1.7%. And I think you stood at 1.7% in 2017. So what are the reasons behind to expect a lower cost of risk, even with a strategy to expand the portfolio into higher yield products? And also, a follow-up with your ROE guidance. Why is it lower than the reported in 2017?

Thank you, Ernesto. I didn't get your last question, but I will be answering the cost of risk one. As we have mentioned many times, we have been working extensively in terms of managing risk, especially recur risk. We have worked along the whole process, meaning all the admission pieces, all the other (inaudible) scores, all the policies, back and forth assessments and experiments with what we've done there. We've also worked on the collections part extensively, and this has been done for many years already, bringing not only people from abroad that is helping us there but actually strengthening all our models, which we feel we'll never finish with this, but we already feel very comfortable of the tools and the processes we have. So we probably think to expand a little bit on the risk that we are willing to take, and that is proving not only interesting but fruitful. So we will probably continue to do that in the near future, and this is trial and error, learning to learn. Therefore, we will continue doing (inaudible) subsidiaries we've been working also with this, especially Mibanco, where things are improving both in the as you can see in the numbers Mibanco in our report, and we will continue to do that. So that's why we feel that the underlying trends are indeed improving day by day. (inaudible) considering that the economic situation (inaudible) presentation. Then (inaudible)

My last question was about the ROE guidance of 17.5%, 18.5%. I think it's a little bit lower than the reported in 2017.

Ernesto, I'm sorry, but I'm not getting -- we'll cut for a few seconds and try to (inaudible). Thank you.

(technical difficulty)

Ladies and gentlemen, we will continue with the teleconference in just one moment. Please continue to hold.

Ladies and gentlemen, we now have our speaker back in conference. Mr. Dasso, you may continue.

Yes. Ernesto, I'm waiting for your last question.

Yes, sure. A follow-up in your ROE guidance, which was 17.5% to 18.5%. I think it's a little bit lower than the reported in 2017. So I just want to know the assumptions behind.

So as we mentioned, we have -- actually, we are working this Transformation project. What is really a Transformation? Our client really need us to serve them differently. This is not only in terms of the channels that they approach but in terms of all the whole service that we provide to them. This is changing very fast. We are investing importantly on that. We've last year invested around PEN 71 million. And this year, we will probably invest double of that figure. That should be happening during the next 2, 3 years. It has to be done at the BCP level, but it will continue at the other subsidiaries level. We need to do that. This is the moment to do it, and we have very low efficiency ratio numbers, and that's why we are receiving that pressure for this year, 2017 and 2018. But then we should after finishing the bulk of this project, we should continue, we should resume the ROE numbers that will hover probably around 19%, but definitely with better service provided to our clients. That's really our goal.

Okay, understood. And so with this project, how will be the amount in 2018 and what should be the OpEx throughout this year?

Well, the amount for this strategic project should hover around PEN 160 million, PEN 180 million, and it will have definitely -- I don't have it calculated, but an impact on the operating expenses.

Our next question comes from Carlos Macedo with Goldman Sachs.

Fernando, one first question -- a quick clarification, then a question. One, your guidance for average balance outstanding 6% to 8%, is that the average balance for the year or is the average balance for fourth quarter over fourth quarter?

It is for the year.

So basically you're saying the average balance for 2018 will be 6% to 8% higher than the average balance for 2017. And in fact, when you look at end to end, you might have much stronger growth if you're basically doing a lot faster -- growing a lot faster at the end of the year. And would that be the right read?

You're right.

Okay. So within that range, could -- I know you gave some color that retail should grow faster than wholesale. Could you give us a little bit more color? I mean, are we talking double digits? Maybe in the past, retail loans have grown, I think, 3x GDP and you have 3.5% for GDP. Is that something that is in the realm of possibilities?

We feel that the engine should probably be Mibanco, SME-Pyme, and those should be around, say, 11%, 12%. We don't see those 20% figure that we saw in the past. So those will be the engines. I mean, SME, Mibanco mainly a little bit on the Consumer part that could be around 9%. Then Bolivia should continue growing. Bolivia will probably have a good year because the election is in 2019, so year before elections usually are better in terms of what the government does to try to become reelected. So that should improve numbers in Bolivia. And then, basically, in Wholesale, what we really need is investment. And for investment, to resume growth, we really need to have better situation, better business sentiments for people to invest. And I'm not only talking about the huge project, the huge mining infrastructure or whatever projects, but also all the projects undertaken by middle market companies on these type of entities.

Our next question comes from Tito Labarta with Deutsche Bank.

Couple of questions also. First, maybe can you just give an update on the political environment? You mentioned you did lower your GDP growth forecast for this year because of that. Do you think the worst is behind it? Do you think there's going to be more noise and...

Tito, if you could hold your questions for just one moment?

Okay.

Ladies and gentlemen, please continue to hold. Our speakers will rejoin momentarily.

Ladies and gentlemen, we now have our speaker reconnected. Mr. Dasso?

Yes, listening.

Okay. Tito, go ahead and continue with your question.

Okay. I'll just start again, just to be sure. My first question was on the -- just so if you can give an update on the political environment. You mentioned in the beginning that you did lower your GDP growth forecast for this year. Do you think the worst is behind it? Could it be more noise? Could it be more impact on growth and infrastructure projects? If you can just give an update on that would be helpful. And then my second question, just looking at the efficiency ratio, which in the base -- at the lower end of the base scenario, you just liked it to be stable. Just want to get some of the assumptions behind that. Given loan growth of 6% at that level and roughly stable margin, does that mean expenses should grow around 6% this year? What about fee income? Fees were good in the quarter, but only up 4% of the full year. What kind of expectations should we expect for fees in that guidance that you're giving?

Tito, I didn't get exactly last question, but I'll begin with the political environment. In the political arena, we expect more turbulence. We expect more noise. We talk about very important tailwinds on the economy because the world is doing better. I mean, there is some volatility now in the stock exchanges, but the underlying numbers are telling us that the world, especially Gulf countries are doing better. That is what the IMF is telling us also. That is the common view. So that really helps. The commodity prices are doing well. They are supposed to even improve a little bit during this year. So our macro numbers are doing well. If we talk about the trade balance, if we talk about our current account balance, if we talk about our reserve inflation, I won't go one by one, but all of them are doing well. So the economy is there prepared for growth. Unfortunately, the political side is not helping. We have lots of friction between Congress and the administration. We have a very weak government right now. And we don't know exactly what's going to happen in the next months. But yes, the business sentiment is receiving some bad influence from what is happening on the political side. I think that this is not behind that it will stay for a while, some months, while these politicians get their act together. That's what we can say until now. Then on the efficiency ratio, as I mentioned, I didn't get exactly the question. But what I can tell you is that we have realized that we are -- we still need to go further down in terms of efficiency. And we have a clear commitment inside our management and inside the company -- not only BCP but all the other companies that we should continue pressing, pushing further in terms of efficiency. Things are changing importantly on the financial services...

(technical difficulty)

to have better numbers to be able to compete in the future. We will continue pressing further. We still have important projects to undertake what's going to happen with IT. We're planning it. We will probably rebuild all our IT In the coming 3, 5 years. We are actually understanding what should we do with our branch network, not only at BCP but at other subsidiaries. So there are plans there, and we should probably go further down. I will note these 2 particular next years will be those years because of what we talked about the Transformation effort, but we will continue to shift further down in terms of [the decisions].

That's helpful. Just a couple of follow-ups. I was -- and part of my question was also trying to understand some of the assumptions behind the stable efficiency. So just given the 6% loan growth and roughly stable margin, does that -- is it safe to assume that expenses should grow around 6%? And what about -- what does that mean for fee income? Fee has grown on 4% last year. Is that the kind of growth we should continue to expect in fees?

(inaudible) to mention grow in our loan book by 6% to 8%. And in terms of the other income, we should probably be hover around between 4% or 5%. I didn't get your question completely because the communication is very bad. But if that is what you asked, maybe those are the answers.

So -- almost. I'll try to ask here one more time, if I can. So the 4% to 5%, I think that's for the fee income or -- and other income which makes sense. And then does that imply roughly 6% expense growth, given you expect stable efficiency on the lower end of your guidance?

Yes, that is accurate.

Our next question comes from Carlos Rivera with Citigroup.

My first question is regarding the competitive outlook, particularly towards the end of the year. Loan growth, we didn't see much acceleration in terms of the average daily balance. But if we look at the end-of-year balance, there was significant quarter-over-quarter growth. So just wondering if this was the result of the market growing faster towards the end of the year? Or it was more probably Credicorp being more aggressive and trying to regain that market share? That is my first question. My second question is related to the outlook for the cost of risk. I understand all the improvements that you have made. But did you see any risk for higher cost of risk related to the construction companies? I mean, we've shared some articles that there was an interview from one of your peers saying that banks have stopped issuing guarantees for many construction companies, given the risks related to corruption investigations that could affect their liquidity. So are you concerned at all at this point? And if you could share with us your exposure to construction companies?

Thank you. On your first question, Carlos, competitive outlook, yes, as you know, this year has been a year of low growth. And when that happens, competition gets stronger. And we have endured that during the year. The good thing was that at the end of the year, things began to improve. The business sentiment began to move faster. And yes, the market began to grow faster, especially in Wholesale. But on the other hand, we also decided in Wholesale that we wanted to be more competitive, more aggressive (technical difficulty) for the year. So it was really both instances, the market moving faster and we being more aggressive. Then in terms of cost of risk on construction companies, we have -- that problem is not behind. It is far from being behind. We are in the middle of it. Unfortunately, it also deals with political issues. So we -- I mean, this is not only our bank but all the other competitors are working together to try to see what could be a solution for this. But that won't happen fast, and we will continue, I mean, assessing the situation day by day, trying to understand what could be the way out, but I don't see things happening soon. We still need the Congress and many institutions trying to get out of this problematic situation.

Okay. Any exposure level you could share with us? Or given that it is not an immediate impact, you don't see major risk for this year?

We don't share these figures with the market. What I can tell you is that we've been working extensively on this exposure for years. And now we feel comfortable with the (inaudible) and with the provisions will narrow -- what unravels in the next -- in the coming months.

Our next question comes from Yuri Fernandes with JPMorgan.

Fernando, this is actually Domingos here for the question. I noticed a significant change in speech in the press release, more constructive tone towards growth. So my question is, what exactly is driving that and also the loan acceleration? More specifically, what kind of approval rate did you have most of 2017 or in the first half? And what's the kind of approval rate for new loan applications you're having now or in early 2018? And if it's not the approval rate that changed, what exactly -- what's the strategy that -- that's basically driving some of this change in view?

Thank you, Domingos. We talk about loan acceleration. We need to go piece by piece. We see what is happening in Wholesale. As I mentioned, business sentiment improved during the second half of the year, and that -- and we also were more aggressive on lending. The situation got a little better. That helped. Then if we go to retail, as you know, the last counting of the year is very important in retail, especially in SME but also in consumer, and we took advantage of that. And we also took advantage of that with that multiplier effect for improving our approval rate. I will not be talking about approval rates here, its towards the future maybe we can talk verticals in the future. But yes, we feel much more comfortable with the (inaudible) with the way of managing risk that we have engaged of understanding our clients, taking advantage of that. And that is what we can tell you for Retail portfolio. Then Mibanco, Mibanco has been doing fine during the whole year. It has grown by around 10% in 2017. We continue to see good figures there. They really understand the market and really are in a best position to continue growing. Bolivia also had a good year. So in general, we see fee mix improving. That's why we are talking about that 6% to 8% growth in that portfolio next year.

Our next question comes from Alonso García with Crédit Suisse.

First, just to clarify, is the time frame for this plan -- engagement plan to be concluded at the next couple of years, I mean, 2018 and 2019? Or can it extend to 2020 or further? And also related to this, I was wondering how do you feel in terms of the current digital capabilities of BCP vis-à-vis the market? I mean, is this investment plan intended to put you ahead of peers? Or is the hidden plan just the catch up with the rest of the peers?

Thanks Alonso. On your second question, on our competitive position against the market, I continue to think that we have a very good position, a leading position to try to actually lead the market. We have at one point because of the market contraction, we were not aware of how to realign compete or not compete in terms of pricing. But we continue to feel that we have a very good understanding now of the market and of our clients. We have been working on price, working on data analyses on ways of really approaching options and competition weaken without this very strong in terms of our competitive capabilities, and much stronger than in the past. We've been talking about modeling in terms of risk, but we are also modeling in terms of pricing. We are also very much aware of how should we approach and reach our clients with better offers. So I think that our position is really very strong intact. We are actually willing to take advantage of that in the coming months.

Perfect. And sorry, again, the time frame for this investment plan to conclude, is it next year? Or can it extend to 2020 as well?

I don't get you. I'm sorry, Alonso.

Would you...

Are you asking about how many years will the transformation take further on?

Exactly.

Okay. I think that you never finish with these processes, but I think that the bulk of it will take the next 2 years at BCP and then maybe 1 or 2 more years in all the other subsidiaries. It's a very comprehensive process, and as it, it is titled a very transformational one. We are learning day by day. It's not really that we know exactly where should we be heading. But we are learning, and our clients are telling us, I like this, don't like the other. So that's a complete process. Two years for the bulk of it we undertaken.

Our next question comes from Sergey Dubin with Harding Loevner.

Just couple of questions. The first one on the interest rate trajectory in Peru as well as your net interest margins. If I heard you correctly, you said that you expect another 25 basis point cut in 2018. Could you just outline what's driving the Central Bank thinking there, given that the economy seems to be recovering in a kind of stimulus measure or what was driving that? And then related question with that as in the back of that sort of rate decrease, you still -- and your NIM has compressed, obviously, in the last quarter of this year, but you're forecasting an expansion. And part of it would be due to business mix. But would that be enough -- your business mix change, would that be enough to offset the competition in Wholesale as well as rate decrease? That's the first question. The second one is, which I'm surprised you didn't mention is, is there anything on IFRS 9 that you guys see in terms of cost of risk and capital? And is IFRS 9 even being implemented in Peru, I guess, the first question? And if so how would it impact Credicorp?

Thank you, Sergey. If we talk our larger trajectory of the reference rate in soles, yes, it has come down since April by 125 basis points already. It now sits at 3%. We plan the Central Bank to bring it down. Again, we don't know if it will be February, but basically probably March by another 25 basis points. They are doing this, we feel, especially because the inflation is under control. Now our inflation is 1.3%. That is really below the target of the Central Bank, which is 2%.

(technical difficulty)

the base, I mean, February, March, April last year were months of high inflation. So the base is really high. So it'll probably be lower than 1% in March or April, and then it will soon grow, the inflation, and it will probably end the year at 2.5%. So there is room in terms of inflation to bring it down. And also because we all feel that growth is not -- GDP growth is not what it should be. And if they could bring some more stimulus there, monetary stimulus, it will definitely help. And we feel that that's really on their minds now as well, but we'll see. Then if that's going to affect our NIM, we don't feel that it will affect our NIM importantly, it's probably around 25 bps. We are in the competition especially than last year, I think (inaudible) near where they are. And then on your third question, the IFRS 9 impact, that impact is really for this year. As you know, it is actually for that specific hit will be actually the first day of this year. We've already calculated. As you know, we are a very conservative institution, and we have our provisions very strong before it. So we don't feel that it will move the needle. We already have the numbers. We cannot really disclose those numbers yet. But you should keep in mind that it won't be an important effect on our balance sheet this year. (inaudible) the balance sheet because it goes directly into our capital. It doesn't go to the P&L.

Right. But in terms of the cost of risk guidance that you gave, which is 1.6% to 1.7%, does that incorporate the IFRS 9-set of adjustments? Or is it fully baked in the expected loss model that they require?

It includes those calculations already.

Our next question comes from Carlos Gomez with HSBC New York.

A very specific question. I wanted to know the level of tax that you paid in your sale of Enel shares -- tax on Enel shares? Second, could you tell us what impact, if any, the U.S. tax reform is going to have on you and what your expected tax rate is going to be for the future? And finally, if I may ask, can you give us some details about what the Transformation project involves? 3, 4 years ago, you already went through an extensive review of your expenses. You have done so much in the past. What is it exactly that you're focusing on right now? What actions are you taking? What is changing at the bank?

First, on your tax question, you ask around the tax on which shares?

Enel.

Enel shares. On the Enel construction, we didn't have to pay any taxes because of the regulations. If those shares are traded at the New York Stock Exchange and provided there are 1 or 2 more pieces, we need to pay any taxes. So that was the case for those shares.

(inaudible)

Yes, yes. And then on tax reforms -- U.S. tax reforms, I (inaudible). We are assessing what could happen, but I don't see any important influence on that regulation, on that tax reform in our business. And the third one was the Transformation project. It involves changing the way not only in which we approach and serve our clients in many ways, meaning what are the channels that we will provide to them and the different mixture of channels that we will provide to them, what are the products that we will provide to them, how are we going to approach them. Imagine, our clients are not comparing us to our neighbor environment, to our competitor. They are actually comparing us with the service they receive from the Amazons or the Tencents of the world. And that's really what financial institutions should be concentrated and faring, and that's a complete change of mind here. It involves a very comprehensive effort in terms of culture of how should we, at BCP and our subsidiaries, behave towards our clients and towards our teamwork. It's a complete change that I have to tell you. So (inaudible) as we mentioned before.

Okay. (inaudible) I guess at some point, you probably want to expand...

What?

I said at some point you probably want to expand as to what has changed, how you would think before and how you do that now. Can I go back to the taxes and ask you once more with your long-term expected tax rate will be, if you can confirm?

Our tax rate -- indeed our income tax rate in Peru is 29.5%. Depending on the instruments we have and the way we manage our business, we hover around 26%, 27% every year. We expect that to continue as it is.

Our next question comes from Joswilb Vega with Integra.

I would like to know about the exposure to the construction sector here in Peru and the companies involved in the construction scandal? How difficult and expensive is to get the bank letter for these companies so that they can participate in the bidding process? I mean, are you tightening the credit lines for these companies or making the loans more expensive?

As you know, this has been recent news, these construction companies club. We are assessing the position that we have with these clients. And yes, we are trying to understand what is really the way forward with all the (inaudible) institutions, with all the (inaudible) institutions as well. I cannot be really specific or detail in terms of this because we are in the middle of the problem. But what I can tell you is that we are putting all our efforts with the authorities and the (inaudible) institutions to try to understand what is the way out to make it the best effort in terms of the country because we really need construction to be an engine for our economy.

Okay. And about the condition of the credit lines to these companies, I mean, what is going to be your position? Are you going to help them to win more business? Or are you going to make more -- tighten the credit lines?

Our approach is always to try to help our clients. On this particular situation, we will always go case-by-case -- on a case-by-case basis, understanding what is the new project, why should they need the credit facility, and we will make decisions as we have done in the past.

It is now my pleasure to turn the call over to over to Credicorp's CEO, Mr. Walter Bayly, for closing remarks.

Good morning to all of you, and thank you very much for joining us in this call. 2017 was quite a disappointing year. We started the year with a very positive outlook to the extent that we had a new administration that had a series of good initiatives and a view of where to take the country, which was not dissimilar to what the main opposition party had in mind as well. Unfortunately, all these failed to materialize and political infighting amongst the political forces really did not create a very positive scenario for growth.

On top of that, we started this year with El Niño. And then, quite rapidly, the Lava Jato case came up, which paralyzed and rendered useless a quite detailed plan that the new administration had guarding infrastructure investments. So it was quite a disappointing year from that point of view.

Nevertheless, we have not been idle. We've been working diligently inside organizations. We continue with our transformation process at the bank, at the insurance company and at the bank, obviously, the bank is slightly ahead but the other institutions are equally going with their own programs. And we specifically decided that we did not want to stop investing or doing this transformation, knowing quite well that in the short run this would affect profitability, return on equity and cost-to-income ratios. But in the long run, we thought that the wise decision was to continue going forward with our long-term plans.

Not only have we been working on the transformation, but a lot of our management practices, streamlining, risk management, particularly on the Retail side, which has had given us good results, our collection process, credit card, which Fernando mentioned, and pricing techniques. So we have been working on improving our management skills quite diligently.

We are also very focused on looking at new sources of efficiency. As Fernando also mentioned, the current level of efficiencies is not where we want to be. We think that there's more room, but it requires a lot work -- a lot more work. We're reviewing our footprint, our branches, our centers, our ATMs and, in general, how we interact with our customers. And of course, we, as everybody else, reviewing our IT architecture, robotics and artificial intelligence. So yes, we have to keep pushing forward the current levels of efficiency. Even though we have advanced a lot, it's not the end result.

Furthermore, we have been also working reorganizing all of the (inaudible), aligning the different functions and the different subsidiaries to be more organized and prepare this new Creditcorp for the next 10 to 15 years. Certainly even though it has been a disappointing year in terms of results, market activity all of that, I would say that we have been (inaudible) give guidance.

It doesn't make sense for a country with the level of penetration of the banking industry that we have to continue growing at 6% to 8% in terms of (inaudible) assets. The potential obviously is there for more, and we try to be very conservative because we have, as I mentioned, these 2 forces growing against each other: A good macroeconomic scenario, particularly worldwide and a complicated political scenario in the short run. But be reassured that we are working diligently. And whenever that growth comes, we will be to more than prepared to capture it with all our different businesses, be that BCP, Mibanco, the insurance, the pension funds and all of our subsidiaries.

So again, thank you very much. It's been a disappointing year, but nevertheless, I think we continue to be very focused on providing long-term profitability, both to our shareholders and to our customers. So again, thank you very much. And with this, we conclude our full year 2017 conference call. Thank you and goodbye.

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