Credicorp Ltd (BAP) 2018 Q4 法說會逐字稿

Good morning, everyone.

I would like to welcome all of you to Credicorp's Ltd, Fourth Quarter 2018 Conference Call.

We now have our speakers in conference.

(Operator Instructions)

With us today is: Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. César Ríos, Chief Financial Officer; Mr. Reynaldo Llosa, Chief Risk Officer; Miss.

Francesca Raffo, Head of Transformation at BCP.

Now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Mr. César Ríos.

Mr. Ríos, you may begin.

Thank you.

Good morning, and welcome to Credicorp's Conference Call on our Earnings Results for the Fourth Quarter 2018.

Before we review Credicorp's performance in the fourth quarter of 2018, I would like to highlight some important matters that characterize the scenario in which we have operated in the last few months, as tailwinds for our businesses.

First, we expected real GDP growth in the last quarter of 2018 to stand close to 5% year-over-year.

With these results, the economy will have grown around 4% in 2018, one of the best results in the region.

The fishing sector, public investment and private mining investment were the main drivers of growth in 2018.

Second, there were important investment announcements in 2018, one of the most notable was the Qullaveco mining project in Moquegua for $5 billion.

Third, the average price of copper is $2.96 per pound in 2018, which represented a 4-year peak.

The price ended at $2.7 per pound.

A headwind for our businesses.

First, global economy activity decelerated in the last quarter of 2018.

Second, through 2018, we observed an escalation of trade tensions between the U.S. and China.

This has implied risk for global economic growth.

Third, in 2018, we observed several episodes of financial volatility that impacted our trading-related activities.

On the local front, Peru registered a slight decrease in copper output during the second half of 2018.

Lastly, the Lava Jato scandal has had negative effect on economic activity through a paralysis of certain investment projects and political uncertainty.

With regard to the political environment, the referendum heard on December 9 had no material impact on the business environment.

Finally, the most important political event in 2018 was in March 2018, when President Vizcarra took office.

Please, let's move to the next page.

Here, I would like to discuss the evolution of the local economy in the fourth quarter.

In chart #1, you can see that GDP growth peaked in the last quarter in the year, as mentioned in the previous slide.

In chart #2, you can see that domestic demand is estimated to have recovered in 2018 and reach a 5-year peak.

In chart #3, you can see that local and international interest rates, which affect our funding costs and businesses, decreased in the last quarter of the year.

In parallel, the Peruvian Central Bank reference rate has remained stable at 2.75% since March, 2018.

Finally, in chart #4, the orange line shows that total loans in the Peruvian banking sector expanded 10.2% in 2018, which represents the highest growth rate in 3 years.

Consumer loans expended 12.6% in 2018, which represent a 3-year peak.

It is important to highlight that quarter-end loan balances at Credicorp grew 10.3% in 2018.

Please, next page.

Regarding the full-year performance, there are important aspects of our lines of businesses I would like to mention.

In the case of universal banking, BCP improved its pace of loan growth in all segments, after low loan expansion in 2017.

The loan mix in the first half of the year put downward pressure on NIM, but towards the end of the year retail banking accelerated the space of loan growth, leading towards a significant recovery in net interest margin.

Moreover, for the first -- for the fifth consecutive year, the cost of risk dropped, leading to a subsequent increase in Credicorp's risk-adjusted net interest margin.

However, although income generation improved, the cost-to-income ratio deteriorated due to the acceleration in the pace of growth of operating expenses, which was in turn registered particularly in the last quarter of the year and changed the decreasing trend of efficiency ratio observed in previous quarters.

We will explain this topic in detail later on.

BCP Bolivia reported a good level of loan growth and a reduction in provisions, however, the funding cost and operating expenses increased and accordingly, profitability fell.

With regard to microfinance.

Mibanco post a good level of loan growth, although loan origination slowed down in the third quarter.

The cost of risk was relatively stable in comparison to 2017 level, even though it deteriorated in the second and third quarter.

Mibanco improved its cost of risk during the last quarter.

Moreover, Mibanco has improved its funding structure by increasing retail deposit share of total funding.

After significantly improving its operational efficiency in 2017 and 2018, Mibanco has started building capability to sustain business growth, which translated in an acceleration of the pace of growth of its operating expenses.

Mibanco has started increasing its number of loan officers and building new channels leveraging its digital capabilities.

Regarding the challenges this subsidiary has faced, it is important to mention that the downward pressure in margins due to competition.

With regards to the insurance and pension funds.

The insurance business posted an increase in its contribution to Credicorp, due to an improvement in the underwriting result posted by the life insurance business and to a good result of health business from the association with America.

All the formation offset the deterioration in the underwriting results of the P&C business, as increasing net claims and acquisition costs were higher than the increase in net earned premiums.

The pension fund business also improved its performance after recovering the profitability of its funds under management on those [of its full-year] results.

However, the tender for new affiliates was held on December 2018 was not awarded to Prima.

In investment banking and wealth management.

In 2018, wealth management income grew in Peru and Chile, offsetting a decrease in income in Columbia.

Additionally, total expenses remained stable, although the cost-to-income ratio deteriorated due to a decrease in total income.

In the last quarter 2018, Credicorp Capital Chile posted an impairment in Goodwill for PEN 38 million, which was mainly due to the adjustment of the discount rate.

Finally, the mark-to-market of proprietary investments deteriorate, mainly due to the increase in interest rates.

Next slide, please.

In this chart, you can see the most important of figures of Credicorp's performance in the fourth quarter.

Credicorp reported net income of PEN 957 million, which was 5.4% below the third quarter results of the previous years -- from the previous quarter and 10% below of those registered in the fourth quarter of 2017.

The results represent a return on average equity and average assets of 16.3% and 2.2%, respectively.

The quarter-over-quarter evolution reflects the effect of a significant increase in operating expenses which help set the favorable evolution posted by the net income, [core defense] of nonfinancial income and provision for loan losses.

The year-over-year drop in net income is attributable to 3 factors: An acceleration in the pace of growth of operating expenses and an impairment of PEN 38 million of Credicorp Capital Chile, both reported in 2017, and the sale of ENEL shares in the fourth quarter of 2017, which generated income of PEN 163.7 million.

Finally, it is noteworthy, first, the acceleration in the pace of loan growth and its positive impact in net interest income, which posted the highest quarterly growth rate in 2018.

And second, the improvement in cost of risk.

Next page, please.

In this chart, you can see the full year results.

Net income reached a level of PEN 3.9 billion, which represented a return on average equity and average assets of 17.5% and 2.3%, respectively.

These results were 2.6% below those obtained in 2017, due to, first, the gain of PEN 440.47 million (sic) [PEN 444.7 million] from the sale of two loan trend equity investments, BCI and ENEL, registered in 2017.

And second, to a lesser extent, increasing operating expenses and impairment at Credicorp Capital Chile.

However, it is important to highlight the significant improvements in core items such as the acceleration in the pace of loan growth, the significant reduction in cost of risk on those, the recovery of risk-adjusted net interest margins and expansion of fee income and gains on FX transactions.

Finally, on terms of capital ratio and BCP Stand-alone.

The BIS, Tier 1 and Common Equity Tier 1 ratios decreased due to a strong growth in risk-weighted assets, in line with loan expansions.

It is important to remember that we keep at Credicorp's level a reserved fund of approximately net PEN 1.5 billion, which is invested in liquids low-risk assets.

These funds have the effect of reducing Credicorp's return on average equity by around 100 basis points.

Let's review the main figures and indicators in more detail.

As you can see in chart #1, first, interest-earning assets measured in quarter and balances remained relatively stable quarter-over-quarter and year-over-year.

Second, there was a change in the composition of interest-earning assets in favor of the most profitable assets, loans, which increased their share in total interest-earning assets.

This trend was observed throughout 2018.

For, as shown in chart #2, average daily loan balances expanded 9.2% in 2018.

Furthermore, in terms of loan mix by business segment, loan expansion was mainly driven by Wholesale Banking, followed by Retail Banking and [Mibanco].

It is important to note that loan expansion in Retail Banking was led by the mortgage loan book.

For, in chart #3, you can see the loan growth was posted in both local and foreign currency.

However, the expansion in local currency loans outpaced that of the foreign currency loans.

Next page, please.

In terms of funding.

First, as you can see in chart #1, the reports funding structure shows an increase in deposits shares of total funding, which is more evident in the year-over-year analysis.

This was the trend we observed throughout 2018.

Second, in chart 2, for deposits by type, you can see that initial deposit has also favorable funding even below core deposits such as savings and demand deposits increased their share.

The 13.8% year-over-year increase in saving deposits is now working and was driven mainly by the initial results posted by saving accounts opened at kiosks, which was the first program launched by BCP's strategic initiatives transformation.

Third, as shown in chart #3, Credicorp's funding costs has remained relatively stable despite the upward trend in international rates, mainly due to a more favorable funding mix, both by currency and by funding source.

Next page, please.

Net interest income grew 4.9% quarter-over-quarter, 8.6% year-over-year and 5.2% in 2018, which represents an improvement compared to the results posted in the previous quarter and in 2017.

Performance shows, first, the positive effect of loan growth on interest income, where all segments of BCP and Mibanco expanded their portfolios; second, the moderate increase in interest expenses, which was attributable to a more favorable funding structure while in previous years as we explained earlier.

Next page, please.

With regard to risk quality, in chart #1, you can see the quarter-over-quarter evolution of the total cost of risk, which decreased 20 basis points due to, first, the decrease in the provisions for quarter BCP due to the improvement of the risk quality of the portfolio and the reversal of provision due to the reduction in the exposure to clients related to the Lava Jato case.

Second, the decrease in the provision required Mibanco, after the adjustments made at the end of the second quarter of 2018 to recover risk quality.

The analysis of full year results are shown in chart #2.

The contraction of 40 basis points in the total cost of risk is now working and due mainly to, first, the reduction of BCP's provisions requirement due to the improvement in the risk quality of the portfolio, in particular, in the consumer and credit card segments and to the reversal of provisions from Lava Jato case clients.

And second, the effect of 2017 of the provisions requirement for the El Niño phenomenon and Lava Jato case.

It is important to remember that on January 1, 2018, Credicorp adopted the requirements of IFRS9 for loan provisions whose first effect was a one-off increase offer PEN 620 million loans and off-balance sheet exposures, due to methodology changes.

Next page, please.

As we discussed in previous slides, Credicorp's net interest margin was relatively stable in 2018, reaching a level of 5.26%.

Furthermore, for the fourth consecutive year, the cost of risk improved and reached a level of 1.38%, 44 points below the level positive, in 2012.

As a result, Credicorp's risk-adjusted net interest margins increased 20 basis points and reached a level of 4.31%, the highest in 6 years.

These results represent clear evidence of the efforts and resources that we have been roll out with trend, our risk management capability as well as pricing and commercial strategies.

After challenging years, in terms of risk quality and loan growth, risk adjusted NIM has reached a healthy level.

Next page, please.

On this page, we will discuss the evolution of nonfinancial income.

As you can see in chart #1, nonfinancial income expanded 6% quarter-over-quarter due to good performance for core items, fee income, net gains in foreign exchange transactions and the net gain from associates, which refer to the health business from association with America.

On a full year basis, as you can see in chart #2, the core items of nonfinancial income that we mentioned before also post good performance.

However, total nonfinancial income contracted 5.9% compared to the level in 2017.

This was mainly attributable to, first, the income of PEN 444.7 million [situated] in 2017 on the sale of equity investment, BCI and ENEL and, second, in a [list of understand] the effect of market volatility throughout the year that resulted in a decrease in the net gain sale of securities and net gain in derivatives.

Next page, please.

In the year-over-year analysis, of operating efficiency, which eliminate seasonality and in the full year analysis, you can see that the cost to income ratio deteriorated due to an acceleration in the pace of growth of operating expenses.

This was mainly due to an increase in salary and employee benefits, administrative and general expenses and acquisition costs of the insurance business.

In 2018, approximately, 50% of increase in operating expenses was registered in BCP Stand-alone, 30% in Pacifico and 10% in Mibanco.

If we start with Mibanco, the expansion in the operating expenses was mainly due to the developing of new capability to support the growth of our operational businesses, international expansion and the creation of digital products.

In the case of Pacifico, approximately 60% of its increase was mainly related to the expansion of sales in life insurance businesses, and the remaining 40% was mainly due to a change in the accounting of profit and cash [volatility] of underwriting fees that previously were booked upfront and from 2018 and on are accrued over the life on the insurance policy.

In case of BCP stand-alone, 1/3 of the increase is due to the strategic initiatives transformation whose budget execution was accelerated at the end of the year, the remaining 2/3 were mainly due to 3 different drivers.

First, expansion of transactional activities.

Second, the increasing incentive for productivity and valuable compensation, which were mainly explained due to sales volume above target and the outperformance in another KPIs such as customer satisfaction.

And third, at BCP stand-alone, net income surpassed budgets so we provisioned an additional profit sharing for employees.

Now, I would like to hand over this call to Francesca Raffo, Head of Transformation at BCP, who will talk about the strategic initiative transformation that we are executing at BCP.

Thank you.

I'd like to show -- let's start with slide -- the slide with the purpose and BCP's North Stars.

We have defined and established 2 North Star goals for 2021: one of them being the #1 in customer experience in Peru; and the next one, having the highest efficiency ratio in the region.

So despite how those look like in the more complete terms, we have set 6 key results for 2021, and we have really challenged ourselves significantly to define them.

And we know we might not achieve all of them, but the purpose is to inspire and give sight to our ambition and to move the organization towards the same goal.

The key results are: a cost-to-income ratio around mid-30s, to duplicate the cross-sell ratio for our customers, to be able to preapprove 50% of the economically active population, to be #1 in employee experience, to serve 70% of our sales digitally and also a non-disclosed net income goal.

The next slide shows the way we approach the Transformation.

We started some years ago, and we described it as we are onboard of a small -- of a large spaceship on our way to Planet XF, the planet of experience and efficiency.

Our program is clearly organized in 10 fronts.

These, we'll refer to as engines of the Transformation, and I will briefly comment on some of them.

The first one for digital journeys.

This is focused in improving our customer experience through digital innovation.

[We are tracking this, gaining access to digital] payment, and it has [grown significantly and we are really are] focused on increasing its use.

This helps us to build customer loyalty, reduce the use of cash, increase deposits, and [allow us to focus to serve customers] better.

We have [also price booked] digital [entities] and are [gaining] superior results in different parts of the business.

Digital risk is focused on transforming the [risk process] within [the bank] so that we are more prepared for a digital [offering].

Again, through [this system,] we have managed to approve [budget] for [bank] increase from [16% in 2017].

Data and analytics [remain somewhat] challenged [mainly inside] organization [where we have] data analytics.

[Accounting] for LATAM [for customer needs ongoing,] in this slide, we can see the first [effects].

We start again, looking at the key results.

Slide #16.

So our main achievement for 2018 is as follows: Looking at our digital results by the end of 2018, 31% of our customers are digital customers, growing from 21% 2 years ago.

Considering our customer base has grown 30% in the same period, it means that the number of digital customers has grown more than 90% in the last 2 years.

In terms of transactions, the transactions performed as a percentage of digital channels continues to grow, and the percentage [of other branches] decreases.

In December 2018, 48% of our transactions were done via digital channels.

That number turns into 59% when we include POS transactions.

And only 4% of the transactions are executed through branches.

Next slide is digital sales.

Regarding digital sales in 2018, [6%] of our digital sales [in units] were [included], and [33%] were served via digital and self-service channels.

And if we look at December alone, those numbers are [8.3%] and [34.6%], respectively.

With the 6% being from via digital channels, I expect our digital sales to continue to increase [but also continue to grow].

In terms of deposits, [we anticipate] savings account opening of the digital channel in December 2018, and from -- in the first month of operations, 2% of all the account openings were done via [digital] channel.

An addition of [39%] of accounts we opened via our self-service kit.

[Driving this 90%, 21% of them are now sold digitally.]

Finally, regarding the [loan portfolio], we launched credit applications via web in December of 2018.

And in the first month also, we have [consolidated] 2% of the credit -- of the total credit cards sold.

Regarding our payroll advance products, 1/3 of them are served digitally.

We continue to work on delivering new products via digital as we are convinced this brings both better experience for our customer and more efficiency.

The cost of opening a savings account is 9x lower than compared to that of physical channels.

The next slide, we look at satisfaction.

Finally, in terms of customer satisfaction, we remain as the market leader in our Private Banking, Enalta, affluent, small- and mid-price businesses, and middle-market, corporate banking and institutional segments.

And we have achieved to go from fourth to third place in our customer -- our consumer segment market, which is the biggest market in terms of customer -- number of customers.

Thank you.

Thank you, Francesca.

Finally, seeing Slide #19, we present our guidance 2019 for reference for what we expect in terms of results.

We perceive that the macroeconomic context will be relatively similar to that seen in 2017 and estimate that for loan growth will be in the range of 8% and 10%.

Second, the cost of risk should remain within the range of between 1.3% and 1.5%.

Third, net interest margin should post at levels between 5.4% and 5.7%, which represent a slight increase.

Fourth, risk-adjusted net interest margin should recover slightly.

Fifth, the efficiency ratio should remain stable in comparison to the level posted in 2018.

Sixth, the return on average equity should be between 17.5% and 18.5%.

Finally, it is important to mention that we are in the process in which we significantly build digital and self-service capabilities, and at the same time, we are very prudent preserving the traditional distribution capabilities while we transition from one predominant [way over to another].

Thank you.

Yes, we obviously ended the discussion.

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

(Operator Instructions) Our first question comes from Gabriel Morega (sic) [Gabriel da Nóbrega] with Citi.

I actually have a question on your loan growth guidance -- hello?

Are you listening?

[Push the mute,] okay?

So I'll just go on?

Yes.

And just very quickly.

I just want to understand here why you were expecting loan growth of around 8% to 10%, which is what you already delivered in 2018, given that the Peruvian economy could improve further during the year.

And also here, if you could maybe give us more color on what segments you are expecting to grow more.

That would be very helpful.

[Do you want to...]

[I don't think...]

Ladies and gentlemen, please hold on the line while we reconnect the speakers.

Again, please hold on the line.

Questioners, we will allow you to re-ask your question once the presenters have rejoined.

Please remain on the line.

Ladies and gentlemen, thank you for your patience.

We are reconnecting the speakers now.

It will be just a moment.

Please remain on the line.

Please, continue with the Q&A, we're [currently experiencing unclear] communication issues.

(Operator Instructions) Our first question is down the line.

Gabriel Morega (sic) [Gabriel da Nóbrega] with Citi.

I actually have a question regarding your loan growth guidance, I mean, to just pick your brains on what you're expecting and what are you seeing in terms of loan demand.

And why do you expect maybe loan growth to remain in the same levels, given that the Peruvian economy could improve further in 2019?

And also here, if I could ask, maybe some more color on what segments you expect to grow the most?

Yes.

First, we expect that economy grows at a similar pace in 2019 than in 2018 -- sorry, 2019 than 2018.

We expect that 2018, the growth is going to be around 4%.

And in 2019, we expect 3.7%.

That is very similar.

In terms of growth, our guidance is in sync at levels at the previous year, between 8% and 10%, but probably with a different composition.

During 2018, we have had a significant growth in Wholesale Banking, and we expect a slight difference in 2019, probably with higher levels of growth in consumer credit card, mid-market and probably not [same as] those in Wholesale Banking.

(Operator Instructions) Our next question comes from Philip Finch from UBS.

I've got 2 questions, but I'll ask one question at a time.

The first question is regarding your costs, your operating expenses.

So we saw this grow by around 11% year-on-year, which is significantly above inflation.

Now you've given us efficiency guidelines for 2019.

So really, what I'd like to ask is, what sort of cost growth should we assume for 2019?

The same level that we saw in 2018?

And what are the drivers for that?

So now I'll come back to my second question later.

Okay.

Probably, it will be more [wise] to review the drivers of the cost increase during 2018.

As we mentioned previously, around 50% of the increase was produced in BCP stand-alone.

In the case of BCP stand-alone, we have probably 1/3 of the cost increase due to the Transformation efforts.

The Transformation is investing heavily in people, advisory, IT and products [but is registered] as new asset, and now there are experiments that we charge in the P&L [periods].

2/3 of increase in BCP in stand-alone were in the traditional business.

And in this, we have 2 main drivers: one driver is due to the increased volumes and transactional levels, that [rise] of IT expenses, marketing, loyalty programs and so on.

And another important part is due to the variable compensation, that what linked to commissions and incentives [to pay] to the sales forces.

Through the year, the productivity of the sales forces increased.

And at -- especially in the last quarter, we sold well above targets, and this caused 2 different things: one is you have actually more volume than U.S. banks so the level of payments goes above the target level; and additionally, we improved in some key aspects, for example, customer satisfaction that triggered additional bonuses.

Down the road, we expect to have an increase in sales efficiency, but probably, we are going to recalibrate the payment in a shorter period of time, from quarterly to monthly, maintaining this campaign.

We see that as a positive result.

As a whole, at BCP stand-alone, we [extended] our budget so we set aside more funds for profit sharing.

Another important driver in the cost was in Pacifico.

In Pacifico, we grew significantly in terms of sales, in life insurance business, in the [product mix] and similar products to that.

And we paid significant commissions upfront because [finance pro] probably 60% of the increase in Pacifico, and the remaining is due to an accounting change that most -- mainly from the [in-time] recognition to accrue it throughout the life of the policy.

The rest of increase was in mainly the Mibanco, who is building capabilities also.

For the next year, we expect that the efficiency ratio, as a whole, is going to maintain similar levels than 2018 because we are going to have overlapping capabilities, increase in the Transformational efforts in BCP, more expenses in Mibanco and Pacifico.

And at the same time, we are very prudent by changing the distribution capabilities.

Later on, probably, we are going to reduce costs.

Probably, I could give you one example.

For example, in the reduction of branches that -- as Francesca mentioned, we reduced the number of branches [from 425], as she mentioned.

But the cost capture was only equivalent to 1/3 because we translate the selling and distribution people to other branches.

We are going monitor this very carefully, and we will -- when we feel comfortable that we are not going to sacrifice $1 of sales to save $0.20 of cost, we are going to manage this cost accordingly.

Our next question comes from Ernesto Gabilondo from Bank of America.

Two questions from my side.

The first one is a follow-up in terms of expenses.

So can you repeat the expenses growth for this year?

And given your Transformation process, should we expect OpEx [though] to start going down after 2021?

And my second question is, after incorporating your 2019 guidance, is it reasonable to expect net income to perform low to mid-teens growth?

We have a target based on cost-to-income.

What we expect down the road is that the income is going to grow faster than the cost, and a result of that, we're going to improve efficiency.

Yes, just to add on César -- [this is Gianfranco Ferrari].

Just to add on César's comment.

As he mentioned before, at this time, we're having sort of an overlap between disposition -- distribution strategy with a new distribution strategy, which Francesca mentioned early on.

So what we foresee going forward is that, at some point in time, the -- maybe expenses of the digital world will stay stable.

However, the cost -- the operating cost in the traditional way of distribution is going to decrease.

So overall, the aspiration we have at BCP [is centered on] the word aspiration is to have a cost to income in the mid-30s.

However, we do see that it's achievable to be below 40 in 3 more years.

(Operator Instructions) Our next question comes from Andres Soto with Santander.

My question is related to Mibanco's performance.

We saw a normalization in cost operating this quarter but ROE remained below historical levels.

This is due to weak in NII performance, increase in expenses and higher tax burden.

I would like to understand if these trends reflect a change at Mibanco's operating model as you're probably prioritizing growth in less profitable segments and employing people on the collecting -- collection stage of the process.

In the end, I would like to get a sense of what this like structural profitability that we can expect from Mibanco looking ahead?

Thank you for your question.

If you compare 2018 with 2017, with a few years as Mibanco improved, it's a matter of the last quarter.

And basically, Mibanco, the -- for the full-year quality deteriorated over the last, actually, 2 quarters.

However, what we've seen in the new vintages, all of them are within [risk capital].

Going forward, in 2019 -- sorry, going back to 2019 to -- as compared to '17, the cost to income with Mibanco has improved dramatically.

And if you compare that cost to income to Mibanco's main competitor, it's significantly better than those of our competitors.

Going forward, we do see slight deterioration in cost to income because you have to bear in mind that Mibanco's distribution model, which we are, by the way, we're not changing it yet, is based on people, on hiring people and training people.

And therefore, the vintage of bringing in new people costs you a lot at the beginning.

Since we expect to increase sales forces by 2019, there is going to be a short-term impact in this year.

Our next question comes from Jason Mollin with Scotiabank.

My first question is on the impairment charge that you mentioned, the Credicorp Capital.

We saw the subsidiary go from a gain to a large loss.

If you can quantify the charge.

And what this was attributed to.

And if we should see other charges like this in the future, if you're anticipating any others.

Yes.

The impairment was for PEN 438 million.

And as mentioned -- we mentioned during the presentation, a key factor in this impairment was the increase in the discount rate and then, in a lesser extent, adjustment in ROAE expectations.

We don't envision an additional charge-off, actually.

We are confident with a book volume levels at this point.

(Operator Instructions) Our next question comes from Carlos Gomez with HSBC.

I wonder if you could comment on the competitive landscape.

In the past, you have mentioned how, in particular, in corporate you were seeing increasing competition.

But now you are expecting higher margins for next year.

Should we understand that competition has lessened somewhat?

I mean, if not, which areas do you see under more pressure?

Yes.

Competition has been very harsh last year, especially in the corporate segment.

That, at some point in time brought margins very low.

However, the last quarter, margins in that segment picked up.

Having said that, I would say we do see that corporate business, not of a lending business but an overall business, where lending is the commodity side of the business.

We [made new] market share in that corporate business, in the lending side, at some point in time.

However, what we follow very tightly is our market share in terms of payments, savings, payrolls and things like that.

And now fee income, the fee income businesses where we still gain market share.

So we -- even though, we see that maybe -- as a matter of fact, today, we're seeing again competition in the corporate banking segment in terms of net interest margin.

We see the business in an overall sense.

And if we go to the next level towards a mid-sized -- mid-market, we gained market share [markedly] last year.

At the same time, we improved the NIM in that segment.

So in the overall wholesale business, we basically stay stable in terms of market share and, at the same time, improving NIM.

This approach, I think, is very important because we have the lending business, the reporting on the transactional services.

And the latter are gaining relative importance over time and [strengthened] their relationship.

(Operator Instructions) Our next question is from Jason Mollin with Scotia Bank.

I just wanted to understand better as a follow-up on the Credicorp Capital impairment.

You mentioned the increase in discount rate and growth -- and potentially lower growth projections.

What was this?

Was this a project?

Were these projects that you're analyzing?

Or was it just -- what kind of assets were these?

Or what kind of investment was this that you had to take the charge on?

If I understood well, now we have 2 different things in that.

One data -- the business that we -- both, we have goodwill in this business.

So each year, we measure the net present value with the current value.

And we have a significant project to develop the wealth management business.

The potential gains of this wealth management business have now been incorporated in the calculation that I had mentioned previously.

We see as 2 different effects for this regard.

Jason, this is Walter Bayly.

Very -- being very specific, what we have written down in the last quarter is related to the acquisition of IM Trust in Chile, with Trust [having remaining] goodwill attached to the valuation.

And we have completely eliminated any remaining goodwill of that acquisition.

As César mentioned, the main reason for that was an increase in the discount rate of the Chilean assets.

We do not any further goodwill that can be impaired in Chile anymore.

[With what the assets] that over the past couple of years have required a certain level of yearly review and [internals].

So this is done and over with and related specifically to one transaction, the acquisition of an investment bank, broker-dealer in Chile.

Our next question comes from the line of Alonso Aramburú with BTG.

I wanted to follow up on the expenses questions.

If we look at your guidance of loan growth, 8% to 10%, with margins improving between 15 and 45 basis points, and stable efficiency, it would seem that expenses will grow double digits in 2019?

So I'm just wondering if that's the ballpark figure that you have of expenses growth this year?

The expenses, when we consider the [minute we need], also, consider the other income -- fee income, that growth is slightly below the pace of the NIM.

So the expenses are going to grow similarly to the combined effect of the NIM and the other income.

(Operator Instructions) Our next question comes from Carlos Gomez with HSBC.

And sorry to come back to expenses, but obviously, it is the focus here.

Could you explain to us if you have a particular budget, I mean, if you have a certain amount that you're willing to spend in the Transformation process?

How long is it going to take?

1 year, 2 years, 5 years, 10 years?

And what are the key elements that led you from the current 44% cost to income ratio to expected mid-30s.

It's a big, big change.

So where -- what are the keys is in the reduction?

Is it the reduction in branches?

Is it doing business electronically?

What brings us from here to there?

Just to be very specific, the mid-30s expectation is at the BCP level, not at Credicorp level.

For your info, if BCP level cost to income closed in 41% -- not 41%, 44% last year.

You can do the math.

We do have a plan on investing in digital, and the overall result are that -- in that investment can help us -- should help us reduce an important weight in the cost-to-income ratio.

I don't if, Francesca, if you -- I don't know if you can share the specifics, but I believe you can give us a little flavor of how much we're spending on the digital transformation.

The way we look at the Transformation expense is it's difficult to separate pure transformation to the improving of the way we serve customers in a digital world.

So the way we look at it -- about 1/3 of the investment we have is related to making our current business better.

And that's investing in technology, in channels, et cetera.

The other 2/3 is investing in disruptive technology, disruptive way to profit and so forth.

And we do have a budget.

We set a target annually.

We discuss with the rest of the bank the appetite that the bank wants to include in the Transformation.

And we also set these AGMs that we talked about in the conference relating to engines focused on achieving cost reduction but also new income sources.

The channels, i.e., the distribution channels, the IT engine, that data engine, are very much focused on reducing the cost to profit and serve our customers.

Yes, and probably to add, we have set out a governance framework to classify the costs and investments in run, grow and transform, and we have the specific methodologies to approve projects and to set out expectations for each of these categories.

Our next question comes from Diego Lucio with Wells Fargo.

Early in the presentation, you mentioned that you had adjusted your profit sharing because you exceeded revenue goals.

I was wondering what the expense of that adjustment was and if you have an idea what your cost-to-income ratio was before the adjustment?

(foreign language) Yes, the specific comment was related to BCP stand-alone and

(technical difficulty)

explains very well, I believe, the 5% of the yearly increase.

That is significant in the fourth quarter in which the whole adjustment was made.

(Operator Instructions) Our next question comes from Miguel Tola with CAPIA.

My question comes from the funding costs.

We have seen -- sorry.

You said there's going to be a pressure of margins because of competition in Mibanco.

I want some guidance of funding costs by subsidiary for the next couple of years.

And also, we have seen a reduction in the loan and deposit ratio in Mibanco for the quarter-over-quarter and year-over-year ratios.

What's your guidance for the next year on this ratio?

We don't provide specific guidance for these figures, but we can you give some comment.

In general, we expect that the PEN short-term rates are going to increase slightly at the end of the year, and we are improving our own funding structure, both in BCP and in Mibanco.

In the case of Mibanco, they are working actively in creating distribution and transactional capabilities, so they are going to improve the needs probably at a higher-rate pace than the previous years.

As I was told, they are probably going to improve the cost of funding, but there are significant pressures in terms of interest rates.

It's a very competitive market.

Just -- mainly just to complement what César just mentioned.

At the Mibanco level, maybe the most -- the weakest strategic part of the business at Mibanco is their funding structure, and this comes from the previous Mibanco because Mibanco has most of their microfinance institutions get bulk -- the bulk of their funding through the local capital market or professional investors.

So Mibanco is developing -- is investing and developing their whole transactional microfinance proposition for their clients so that they can get funding from those guys.

You'll have to bear in mind that Mibanco already has 2 million clients.

So on their side, so we do see an opportunity to get a very low cost funding going forward.

That, obviously, in any retail business is a long-term strategy.

The group itself had problems in profit last year...

Sure, sure.

We know that, but just really specific, lower funding cost at Mibanco for last year was mainly because Mibanco had launched very successful campaigns in time -- for time deposits.

Going forward, what we're planning to do, and what we're doing actually, is to bring and provide the right value proposition in order to get saving accounts, current accounts, funds, which are even at lower costs.

Thank you.

There are no additional questions at this time.

I would now like to turn the conference back over to Mr. Walter Bayly for closing remarks.

Thank you very much, Stephanie.

During 2018, the main characteristics were clearly an event of political volatility during the first half.

It's not very often that we go through such level of political change without major disruptions in the economic side of the economy, fortunately.

We've also suffered, mainly as a consequence of this political volatility, slow growth.

Both of these events created a certain deterioration of the cost of goods, particularly true to the tail end of Lava Jato at BCP and some very specific issues at Mibanco, which have already been addressed.

The fundamentals during this last quarter have been very encouraging.

The results, nevertheless, have been impacted by an increase in operating expense, I think, that has been well explained already.

We are not concerned, but it is very important to give the market the confidence that we continue to have a very strict discipline in cost control.

After many years of a very successful efficiency program at BCP, we are probably going to launch and going to a second stage of that as cost discipline is a necessary item going forward, and we have not lost, and we'll not lose that very strict discipline that has proven to be very successful for us in the past couple of years.

And we believe and are confident that we are very well directed towards continuing to improve the efficiency ratio, particularly at BCP.

As just Gianfranco explained, at Mibanco, on the other hand, we have decided to pursue further growth and expect to deteriorate somewhat our short-term efficiency ratio because of the expense of hiring and training sales force.

We have already corrected the specific risk issues and, again, are ready to pursue growth at Mibanco.

Overall, at Credicorp, we are confident that our short-, medium- and long-term strategies are well defined, well executed and have the appropriate governance to monitor developments, deviations and timely [evaluations] to market and technology developments.

We continue to seek growth opportunities in the markets in which we operate through the continued existence of a bank and bank segments of the populations and grow in the economies in which we operate.

And we are very confident that our different subsidiaries and initiatives are very well positioned to continue to capture the growth.

We are optimistic regarding the future results of Credicorp, both in the short and medium term.

With this, I really want to thank your continued presence in the conference calls and look forward to meeting you one-on-one and as well as to being with you in the end of the results -- in showing of the results of the first quarter of this year.

Thank you very much, and with this, we finalize this conference call.

Thank you, ladies and gentlemen.

This concludes today's presentation.

You may now disconnect.