Credicorp Ltd (BAP) 2013 Q2 法說會逐字稿

Welcome to the second-quarter 2013 Credicorp earnings conference call. My name is Lorena and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct question-and-answer session.

I will now turn the call over to Mr. Alvaro Correa, Chief Financial Officer of Credicorp. Mr. Correa, you may begin.

Thank you, Lorena. Good morning and welcome to Credicorp's second-quarter earnings results conference for 2013.

As you will see along this presentation, the main message that we want to convey today is that even though our results for the quarter have been severely affected by the devaluation of the nuevo sol, the core business activities of Credicorp have performed well and the Company is well-positioned to continue capturing the growth opportunities that lay ahead.

The stronger devaluation of the local currency was recorded this second quarter which reached 7.5% and added to the 1.5% devaluation of the first quarter resulted in a total of 9% devaluation for the first half of the year. This volatility of the local currency in our market surpassed all precedents in the last 20 years. These variations were initially attributable to change in central banks' policies and then to the fact that the US dollar hasn't strengthened for a while. In the past and as long as the US dollar remained dominant currencies in the different businesses of Credicorp, this exposure was small and easily managed. However, as the local currency gained importance and began to dominate in Credicorp's core businesses, our corporation became more exposed to currency fluctuations when reported in US dollars even more so given that we maintained a policy of keeping our equity in both currencies as a way of protecting capital.

Therefore, the results for the second quarter incorporates the full impact of such devaluation. This has generated a significant distortion in the reported volumes for growth and income generation as most of Credicorp's nuevos soles denominated businesses which currently contributes over 87% of the corporation's income and has also generated translation losses as well as evaluation loss on structured forward contracts, both of which arise from efforts to protect the capitalization ratios of the organization through the construction of the nuevos soles denominated equity portion in our books.

Therefore, the discussion of our second-quarter results addresses such impact in most of its analysis and focuses for the first time on the evolution of the core businesses in the currency in which it is contracted in order to be able to evaluate real business trends and results. All in all, we feel this was a very good quarter in terms of business trend, evolution, and achievements. However, our earnings results as reported in US dollars distort these conclusions and we will try to help you see beyond the reported numbers.

Let's move to page 3. Reported IFRS US dollar results show a strong negative impact of the currency fluctuation. Total loans dropped 1.6% in the quarter, net interest income 2.2% drop. Global net interest margin dropped 6 basis points. Operating income is down 26% and net income dropped 70%, resulting in a 5.4% return on equity. In addition, the delinquency ratio deteriorated 14 basis points.

However, a more detailed look at the performance of the business denotes a truly self business evolution with stronger income generation and margins when evaluating the performance and the currency in which the businesses are conducted. In fact, a closer look at the top line of net interest income of Credicorp reveals for example that net interest income in nuevos soles, which made up 87% of total net interest income, expanded 7.9% quarter-over-quarter and 21.6% year-over-year if we exclude the impact of other income and expenses which can incorporate losses that arise from our soles equity position held in part through structural forward contracts.

This reveals a dynamic banking business that posted strong loan book growth of 5.7% quarter-over-quarter for the nuevos soles portfolio, which is almost half of our loan book. However, the FX movement hit both this stronger income generation and the loan book expansion and led to report a 0.4% quarter-over-quarter and 16.8% year-over-year net interest income growth and a solid portfolio contraction when expressing both in US dollars. In addition, when including the structural open forward position, the distortion in net interest income reported increases as we will see further on. These distortions are also reflected in the NIM, which dropped to 4.81%. Therefore what we see in this analysis by currency is strong loan portfolio growth, strong income generation, higher delinquencies in line with the retail expansion and a necessary learning curve, excellent fee income generation, and good profitability.

In summary, and as we will see along this presentation, distortions are found both when expressing nuevo soles' results of Credicorp's domestic businesses in US dollars for important purposes as we just showed but also when incorporating the accounting impact of the volatility in the exchange rate from the open currency position that arises from holding our equity in both currencies. We will see all this better explained in the following charts.

Next page. When looking at BCP only, loan portfolio growth is well within expectations. Measuring growth in average daily balances, the nuevos soles portfolio, which is mainly dominated approximately 80% by the retail business, expanded a robust 5.7% in the quarter, while the US dollar portfolio reflected the contraction in the corporate business following several international initial stock and bond offerings by major Peruvian corporations and at slight slowdown in business expansion and contracted 2.8% quarter-over-quarter.

Furthermore in year-over-year terms, the solid portfolio expanded 23.4% and the US dollar portfolio 10.4%, which are both very strong numbers. However, the effects of the devaluation in the consolidated US dollar reporting of the portfolio evolution hit this strong performance and led us to report near 0.4% growth in the retail business and a contraction of 3.8% in the wholesale business. This in turn led to a negative consolidated growth of total average daily balances in US dollars of 1.4% in the quarter, a complete distortion of real performance.

Next page, please. With regards to credit quality, we feel we are showing an evolution in line with retail expansion and an expected learning curve and feel fairly confident. In fact, similar to the evolution of the credit card business which is currently performing well within expectations in all new vintages after adjusting we were introduced, the low segment of SME has experienced deviations that have led to an increase in delinquencies to 7.6% of this portfolio. This cost the overall PDL ratio to increase 12 basis points and situate at 2.16% in the second quarter for all delinquencies but only increased 10 basis points up to a still very low 1.45% PDL loan ratio for over 90 delinquency.

This deviation prompted us to make significant adjustments in our models and conduct a thorough revision of the business model we use to evaluate low income SMEs. Furthermore, our conditions for portfolio quality required us to set aside additional provisions as we continue the process to adjust the models we use to penetrate such low income sectors.

Although this segment currently requires additional provisions, these needs should subside over time as the adjustments may begin to have an effect. In this context, provisions increased 21.8% for the quarter. However, this situation was attenuated by the devaluation given that more than 90% of provisions are booked in local currencies. This leaves BCP and therefore Credicorp with a healthy portfolio, 52% of which is in the retail business, low delinquencies, and still relatively low cost of risk. That is around 2.2% of loans and a good coverage ratio of 167%.

Page 6, although reported net interest income dropped 1.6% for the quarter, it is precisely here where the strongest distortions are observed. In fact, the table at the bottom shows that local currency net interest income, which makes up for 89% of total net interest income at BCP, expanded 4.7% quarter-over-quarter and 20.4% year-over-year when expressed in nuevos soles and excluding the impact of derivatives, which includes the structural forward contracts that make up part of our nuevos soles denominated equity portion we referred to before. This expansion reveals a dynamic banking business that posted strong increases in market shares in the retail products. When expressing these figures in US dollars though, growth comes down to minus 1.6% quarter-over-quarter and 15.6% year-over-year. After the foreign currency business, net interest income contracted 8.7% this last quarter but showed a positive though unimpressive 2.7% growth year-over-year. This was primarily due to the aforementioned contraction in the corporate business following several international initial stock bonds offerings and a slight slowdown in business expansion.

As a result, total net interest income excluding the impact of structural forwards contracted 0.9% this quarter and expanded 16.7% year-over-year. Including such derivatives, BCP experienced a 1.6% drop in net interest income quarter over quarter and reduced the year-over-year growth to only 14.1%. This distortion is also reflected in the NIM, which dropped to 4.92%. However the NIM on loans, which is much less distorted, does reflect the better performance we are indicating as it increases 9 basis points to 8.19% for the second quarter.

Next page. Reported nonfinancial income at BCP also shows a negative evolution and dropped 8.8% for the quarter. Nevertheless, this includes fee income which is 72% nuevos soles denominated and which grew 7.4% for the quarter despite the negative effect of the devaluation of the local currency. This indicates that expansion, which was driven by significantly better banking fees, was quite notable [for the quarter].

Net gains on foreign exchange contractions, which are positively affected by the foreign exchange volatility in the market, also expanded significantly to post 12% growth quarter-over-quarter. However, the securities in our portfolio did suffer from interest rate increases for the US dollar which generated significant markdowns from the value of long-term notes and led to a $28 million loss in sale of securities impacting negatively the overall nonfinancial income line.

Operating expenses were up 7% in the quarter, reflecting increases in fees paid to third parties, rent payments, expenses in other subsidiaries, consulting fees related to strategic support and systems and marketing. While these additional costs were attenuated by a slight quarter-over-quarter decline in salaries and employee benefits, since this expense is mainly incurred in nuevos soles and to a lesser extent by a reduction in additional employee profit sharing.

It is important to note that at the end of June 2013, approximately 70% of all operating expenses were denominated in nuevos soles. As such, the devaluation of the nuevo sol against the US dollar had a positive impact on this item and these expressed in US dollars dropped 0.7% quarter over quarter.

On the other hand, other expenses were inflated by a nonrecurring loss associated with the sale of Corrival to Credicorp Capital which is neutral when consolidated at the level of Credicorp.

Next page, please. BCP Bolivia reported net income of $4 million, down 13% quarter-over-quarter. This resulted from a lower nonfinancial income after an extraordinary high result in decline the previous quarter and higher provisions related to portfolio expansion. BCP Bolivia also reported a $0.6 million translation loss as it had some investments in the Peruvian capital markets which led to its return on equity to drop to 12%.

Edyficar posted excellent performance and business evolution in its natural currency. Here again we see the sizable impact of FX conversions in the reported results. In fact, Edyficar is a local currency business and its portfolio grew 6.5% quarter-over-quarter and 44% year-over-year. This quarter, net interest income was 9% up in nuevo soles while net income grew 28%. However, after converting to US dollars for reporting purposes, we find that the valuation effect has significantly distorted its performance. After this conversion, we see that its contribution dropped 32% from $7.9 million to $5.4 million this quarter, which was the result of both the unfavorable conversion exchange rate and a large $11.4 million translation loss.

Return on equity calculated including the goodwill also suffered and dropped to 14.3% for the quarter, revealing a total distortion of a truly solid business.

Next page, please. Pacifico Grupo Asegurador reported a 52% decline in its contribution to Credicorp, which totaled $5.5 million after deducting the $6.4 million translation loss recorded for the second quarter. Reported net premium growth was 2% for the quarter. This growth however, was understated given that 48% of the premiums are calculated in nuevo soles. Higher claims led to a decrease in the underwriting results. This was offset by the fact that the Company's investments performed well, which led to subsequent increase in financial income.

The life business was again the top performer in the Pacifico Group and contributed to $13.8 million to PGA. The property and casualty business, however, was a loss generator and has concentrated most of the translation loss. The earnings-per-share business -- sorry, the EPS business, medical insurance, reported a 49% drop in its contribution which totaled $1.2 million. The medical segments, the clinics, this is still in the development phase and incurred extraordinary expenses to launch its new medical services brand, Sana, and reported a loss of $2.2 million for the second quarter. Return on equity therefore dropped to 2.7% for the whole group.

Next page, please. Atlantic Security Bank reported net income of $13.4 million in the second quarter, which represented a drop of 13% with regard to the first quarter of 2013. This drop was due to the lower interest rate income following a contraction at the portfolio level, fewer earnings on investment, and losses on foreign exchange transactions due to the devaluation of the nuevo sol. Despite this evolution, Atlantic Security Bank's return on equity remained strong and reached 30.3%.

Next page, please. Prima's contribution to Credicorp reached $14.4 million, up 24% from the previous quarter. It is important to emphasize that income from commissions this quarter was affected by the following factors. First, an increase of 6.1% was recorded in income in nuevo soles with regards to the first quarter in local accounting. This same growth calculated in US dollars was equivalent to 3.1% due to local currency devaluation.

Second, the application of International Accounting Standard 18, which led to deferred income for $1.4 million. In IFRS, these effects translated into a 1% drop in fee income and slightly lower operating income. Despite this evolution, lower tax provisions and a translation gain of $1.6 million, this is the only entity in the group with a positive translation result resulted in the increase reported in net income. Consequently, return on equity reached an extraordinary 38.8% for the quarter.

Furthermore, funds under management totaled $10.7 billion at the end of the second quarter, obviously a lower number when expressed in US dollars after the 7.5 devaluation of the quarter and represented 31.1% of the total funds under management in the private pension fund system.

Next page, please. Although this summary chart of contributions to Credicorp's bottom line shows the negative evolution of net results with almost all subsidiaries contributing significantly less to Credicorp, it is important to highlight that operating and business trends have been very good for the group.

So please move to the following page when we try to summarize and quantify some of the impact of the current fluctuation which affects our US dollar results.

On page 13, as mentioned before, the impact of the devaluation is strong on Credicorp because of two factors. First, the fact that given that we operate in a dual currency system and have an asset structure today fairly evenly distributed between US dollars and nuevo soles, we maintained a policy of protecting our capital against currency fluctuation by holding it in both currencies in line with our asset restructure, a fact that generates an open position in our equity structure and exposes our P&L to translation gains and losses from the volatility in the foreign exchange market.

Second, the fact that we report in dollars, which in this case meant a distortion when expressing business trends, income generation, and results in such currency, given that a significant portion of income and assets are denominated in local currencies.

In the chart above, the box at the left hand side, we quantify the impact of the first point, that is of holding a portion of our equity exposed to currency fluctuations. This explains a differential of $126.5 million in less income from our expected results as a consequence of the currency fluctuations and its impact on our equity position constructed through holding soles in cash and through forward contracts, plus the additional taxes paid based on the opposite results in local accounting.

However, the negative impact of the second factor that is expressed in 88% of our soles income and nuevo soles expenses in US dollars is not quantified here but what we have shown in the evolution by currency in this report can give you a sense of how our local businesses really performed.

Finally on the right hand side of the table, we present the magnitude of the operational and market negatives natural to the business, which this second quarter impacted Credicorp's results in $31.8 million. We appreciate the difficulty of seeing beyond the reported numbers and hope to have given you a better feel of the real evolution of our business.

Page 14, please. With these projections and a few macroeconomic figures, I will now pass it to Walter Bayly for some remarks before opening the call to Q&A. Walter?

Okay, thank you. Good morning to all of you. Before we go into the Q&A, we thought it was worthwhile that I take a couple of minutes and try to give you a better sense on how we see the future long-term. Clearly this first six months have been highly impacted by evolutions in the world economy. The world that we saw at the end of last year clearly is not the same one that we see today.

Our base case scenario going forward continues to be that Peru will probably grow at a 5% plus or minus 5% per annum GDP growth. But how does this translate into growth in the financial sector?

Traditionally this meant that the financial sector would grow between 2.5 and 3 times GDP growth. We think that that is no longer the case. Not only has Peru reached a higher level of penetration of the banking industry but furthermore, regulators are very much concerned to continue to see very important growth rates in the loan portfolio of the banks. Even with this 5% per annum GDP growth, our base case is that the financial system as a whole will probably grow between 10%, 12%, at maximum at 15% growth. Those numbers continue to be very good, particularly when compared with the rest of the world, but that is basically the scenario that we see.

Now having said that, our base case scenario, now having said that, there is another scenario which is that China does not to what everybody expects after a slowdown in the Chinese economy, it is a lot stronger than what is in our base case in China grows at a 4% rate give or take. Those numbers would have severe impact of the growth of the Peruvian economy because they impact the revenues of the central government via lower income taxes, lower royalties, etc. So that scenario is one which is not our base case scenario but is not a zero% profitability. It is obviously impossible to pinpoint a number but anywhere between 20% and 35% probability is where we think that scenario could play.

More importantly, probably the percentages of probabilities of those scenarios are growing, so even though our base case scenario continues to be one of growth of between 10% and 15% in terms of loan portfolio, we cannot take our eyes off this other scenario, so we are being a little bit more conservative in trying to assess what's going to happen in the future.

Given this scenario, the base case scenario and this other alternative scenario where we cannot take our eyes off, we see that we have two very important levers which we can use to extract value at the Credicorp level.

Number one is clearly risk management. As we have mentioned to all of you in the past, starting half of last year, June, July, we have gone through very detailed reviews of our risk management process on the retail side and we have found that we had room to improve. Our practices are not along best practices worldwide.

Basically three topics which we can address. One is the governance of our risk management and again, I'm exclusively referring to the retail side. We do not have a very long history of working extensively with statistical models and the governance around how those models operate is something which we have to severely improve.

The second is the quality of the tools themselves. In these reviews that we have done internally, and with the help of outside consultants, we have found room to improve the quality of the tools.

The third is the staffing of our retail risk management teams which we are in the process of seriously upgrading. So lever number one, we think we can extract a lot of value with risk management on the retail side. We have initiated all the processes that would lead us to take us to best practices. Clearly they are quick hits and things we are doing initially, but this is a two-, three-year process but we are very focused on taking our risk management practices to worldwide best practices.

The second level that we are very focused on is efficiency. For the past four or five years or even more, the big driver for us has been to capture the growth and we have done so. We have positioned ourselves as number one in the two key markets, (inaudible) [micro] finance and consumer finance. We have grown our branch network but we think that there are a lot of opportunities to capture additional operating efficiencies.

We are initiating a transformation process within our organization that we think again will take two or three years but that I think will be a key driver for increased profitability going forward.

The third initiative that we are very much focused on is on the SMEs. Even though delinquencies have increased in our SMEs, we think that that segment is poised to grow to have growth rates -- higher growth rates than the rest of our portfolio, so we are initiating a very thorough review both of our commercial practices and risk management practices obviously because we think that that segment merits special attention.

So those are the three if you will new initiatives we have embarked upon in the last couple of months. Furthermore, just from a Credicorp standpoint, we still have a couple of open issues. We have done relatively large investments in our investment banking operations, acquiring Correval and IM Trust. Both are performing well but we have not -- we are yet to extract the synergies out of that business. We have paid multiples of the book value and clearly including the goodwill, the returns are not yet where we expect them to be.

I am very satisfied with the work that is currently being done. We are setting the foundations for a very good business. We are reviewing our processes, working on the culture, integrating the three companies, so it has proven to be a little bit more difficult than we had originally estimated. And again, I feel very comfortable that we are doing the right thing and we are setting the basis for a business that we will probably be an important contributor to Credicorp.

Then in Pacifico, we have two transformational processes going on. On the property-casualty business, we are in the process of shifting our portfolio more to the retail side more into direct sales that involves investment and change in the culture and the process, etc. that has yet to produce the expected results.

And on the health services, we have embarked upon the investments on the health services side which again has yet to produce the expected results. Clearly the demand is there. We see it. All our facilities are absolutely working at very close to capacity but we have to do the expansions and we have to price our products properly, etc.

So again, taking a step back, there are three levels that for Credicorp will be focused on, three new levers which is risk management, efficiency, and the SMEs. And we have these open projects that we think that we have to take to really extract the value of this, our open issues that we are very focused on.

So going forward, I have absolutely no doubt that Credicorp will be a growth company. I have no doubt that the 20 plus return on equity is an extremely achievable target and we expect that the second half of this year will be clearly substantially better than the first half for all the factors that Alvaro has already explained.

I just wanted to take a couple of minutes before the Q&A to again give you a long-term vision of where we expected we see our Company going forward. With this, I conclude my remarks. Again we are open to have -- hear all your questions and try to address them. Thank you very much.

(Operator Instructions). Thiago Batista, Itau.

I have two questions. The first one regarding the asset quality in the SME segment. After all the adjustments you did in the [credit] policy of the segment in September last year, have you -- starting to see some improvements in asset quality in the new vintages? When do you believe the peak of the capacity loan of the portfolio would be achieved?

My second question is regarding the impact of the soles depreciation. Are you taking any measure to reduce the exposure of the bank to the currency? At least in short term?

Sure, thank you very much for the questions. I will tackle the first one and I will leave the second one for Alvaro. On the SME portfolio, we have seen continued deterioration. Clearly we have made I think it was 60 days ago a first set of initial changes in our underwriting policies and adjustments in our credit standards. I would expect results to start showing in the last quarter of this year. We have within our portfolio certain zones that will continue to deteriorate, so provisions and pass through loans will probably even slightly increase in the next three months and we could expect a first stabilization or even improvement in the last quarter of this year.

With regards to the exposure, what we have now -- we are not far away from the neutral -- let's say neutral position in the mix of dollars and soles coverage of the equity. What we have done in the last quarter is probably we are little bit into the larger sol position because we were preparing the equity for faster growth in soles. So we are taking a step forward but basically what we have done in the last few months is putting ourselves in a more mutual position in terms of protecting equity. This does not mean that this is a neutral position in terms of P&L but this will continue to bring productivity if there are major changes in the FX.

Okay.

Carlos Macedo, Goldman Sachs.

Good morning, gentlemen. I have actually a couple of questions. The first one is more related to what Walter just announced in terms of the growth in loans and also the growth or the efficiency program. If I remember maybe not last quarter but the previous quarter, you were talking about doubling the size of the bank and how that would have a negative impact and wouldn't allow the efficiency ratio to improve for two or three years.

What does this -- given the new outlook for loan growth and given the new outlook for this efficiency program, what does that mean with respect to your efficiency ratio and to your branch network? Do you still look toward an aggressive expansion of branches or is that going to be on the back burner for now while you carry out this efficiency program?

The second question is a little bit more related to the FX exposure as well, though not specifically the exposure. With the currency being -- I think you mentioned in the last conference call that you expect the government to allow the currency to fluctuate with a little bit more volatility going forward and with over 87% of your net income coming in soles, I understand that your functional currency is $1. But is there any way that you can start reporting in soles in order to basically offset part of the translation confusion? Thank you.

Thank you, Carlos for two questions. I will tackle the first one and Alvaro will take the second one.

In terms of branches and efficiency, what we are seeing is that yes, we will continue to grow as I mentioned in assets anywhere between 10% and 15% with, say, 12%. That will require growth in our branch network absolutely, yes. The number that is floating around and we are still in the process of making detailed projections. So this is still preliminary but the number that we seem to structure it around is about 50, 60 branches per year going forward.

So yes, it is a lot less than we had originally mentioned. We were always talking about a number 80 to 100 and we are now talking 50 to 60. But again, preliminary numbers but just to give you a sense of what we're seeing going forward.

In terms of the efficiency, I will probably need a little bit more time to give you more detailed numbers. We are in the middle of the process of working. We are having a series of workshops working internally. We have visited banks that have been very successful doing this and I think it will be a bit preliminary on my side to give you targets. We will give you to those obviously to the market as soon as we have them, which will probably be for the next quarter. But clearly we are going to be very ambitious.

We have been fluctuating again big numbers. We have been fluctuating around the 50% to 52% and clearly we would love to be closer to the 42%. But again, these are preliminary numbers but just to give you a sense of our visions and the overall sense of where we are going. Alvaro?

With regards to reporting to change the functional currency, that's definitely a very reasonable question. We are in the process of doing that assessment. It makes sense to start thinking about that once we have reached this turning point of 50% solid dollar mix in the asset side and even more so when we talk about income and expenses. So it's in progress, but no decision so far.

Okay, thank you for the answers, both very interesting and we will hope to hear more from you in the book developments. Thanks.

Tito Labarta, Deutsche Bank.

Good morning, thanks for the call. A couple questions also. Just given also the outlook you've just presented with kind of slower growth environment, how do you think that's ultimately going to end up in terms of profitability? In the past you've mentioned your target ROE of 20% plus. Do you think that's still the case or does this kind of slower growth environment mean that you think profitability will also come down from the guidance you've given the past?

And then a follow-up question in terms of your asset quality and provisions. You mentioned you may have some additional provisions in the third quarter related to SMEs. Now is that on top of the $20 million that we saw this quarter or should we think more the addition of provisions would be above like the 1.8% excluding that? So just if you could give some or color on provisioning levels for the rest of the year. Thank you.

Sure, Tito. Thank you. In terms of profitability, I want to be very clear, I have absolutely no doubt that the 20% plus return on equity is achievable, sustainable over time. We have been affected -- this is the first quarter I can think of or the first half of the year that I can think of since I've been in this bank where we have not achieved a 20% plus return on equity. It is exclusively attributable to the fluctuations in the currency, even leaving all the other things on the side. So the 20% plus return on equity is very much our target and I have very little doubts that that is an achievable number.

In terms of provisioning, just a few comments and maybe, Alvaro, you want to add something afterwards. I was referring that of the SME portfolio, we continue to see -- we have not fully digested the loans that we have on our book and as they continue to deteriorate, we will have to increase our provisions. That is exclusively on the SME. Clearly all the other pieces of our portfolio continue to be very stable. You have seen them in the chart.

We have seen a spike in provisions but related to growth, which is fine, so asset quality is really not a concern. Our consumer portfolio continues to improve. The new, the new vintages that we sell are very good, so increasing provisions will only be on the SME and hopefully offset by improvements in the other pieces of the portfolio.

Alvaro, I don't know if you want to add anything.

Just to stress on the point that you made before that we started with the adjustments in the SME policies just two, three months ago and we will get to see the results of that in the second quarter. So -- sorry in the fourth quarter of the year. So I would say that we might expect additional revisions in that business alone going forward for a short period of time.

Thank you, it was very helpful. Just to follow up on the provisioning then, so the way we saw about $20 million in additional provisions this quarter, there could be some additional provisions like that just related to SME, but do you think the level will come down from this $20 million or is that kind of a level to expect? Do you think that should trend down a bit?

Just to be conservative, I would keep a stable marginal increase but nothing -- I think the level that we have right now is what I consider relatively high. We don't expect dramatic improvements, nor dramatic deteriorations from this level.

All right, thank you very much.

Jose Barria, Bank of America.

Good morning, Walter and Alvaro. Thank you for taking my question. Just on loan growth, we did see some pretty different trends on local denominated portfolio and the US denominated portfolio. Looking specifically at the US denominator portfolio and most of that concentration is obvious in commercial loans, what exactly is happening? We understand that the economic environment is decelerating, but looking at the quarterly evolution, there was a decline in the portfolio. Is this related to specific clients that maybe did not renew and decided about capital markets or is this more of a trend in the system that you are expecting much less demand in commercial loans going forward?

Okay, it's both. Actually there were a very few number of specific customers that did bond issues in international capital markets, dollar bond issues and obviously with those bonds, they repaid the loan facilities that had a lot of them which were with BCP. So yes, there was that particular specific effect.

Second, we expect less dollar demand, clearly corporate have been also very affected by devaluation. Coming from a very stable currency exchange rate, it had become quite common to see large corporates borrowing dollars because of the lower coupon. They have been affected, the results have been affected by translation losses this quarter. Clearly they are being a lot more conservative in matching their flows so that we do not expect growth in our dollar portfolio.

We expect on the other hand more and we are seeing more local currency demand. So overall commercial loans will continue to grow, but of course tied to a lower growth rate in the economy if you see the addition of both currencies. In dollars, we expect a lot less demand. I don't know if I explained myself.

That was very clear, thank you. Then when we think about margins going forward, the central bank really is easing maybe on reserve requirements. You've got higher growth in retail, lower in commercial. How should we think about margins going forward? It seems to me like those movements should imply that we should see some stability already increasing, barring any future impacts on the currency, which could add some distortion to the evolution.

I think the trend that we expect to see going forward has not changed what we have been thinking in the past, which is that there are two forces playing against each other. One is the fact that this is a very competitive market and competition is clearly driving margins downwards. But on the other hand, we do have a portfolio mix, which is growing more on the retail side, which has higher margins. So I think it would be conservative to expect our overall margins to stay flat or even marginally increase. But I think it is a fair assumption that they would stay flat going forward.

Perfect, thank you very much.

Philip Finch, UBS.

Good morning, everyone. Thank you for the presentation and taking our questions. I just have one question. In the second quarter, you introduced a new scoring model for SMEs, which led to the additional $20 million of provisions. That is nonrecurring. Can you tell us what other part of the loan book has yet to come under this new scoring system, whether this means we can see additional provisioning adjustments in future quarters? Thank you.

Okay, we are continuously upgrading our risk management tools of the SMEs. We have introduced a new scoring model but the scoring model, what it does, it allows the entry or non-entry of new loans. The provisions that we have done are related to the portfolio that is already on our books, which have -- which will continue to deteriorate. So the fact that we continuously change the models and we have done that in the past and changed even the parameters of the approval rates, and that is a continuous effort. So the fact that we have made additional provisions is not directly related to the fact that we introduced a new model and again, what the new model does, it allows us to have better predictability on the loans that we accept. The provisions are for the loans that we have already on our books.

Thank you very much.

Mariel Santiago, HSBC.

Thank you for taking my question. My questions have been answered but if I can just do a follow-up on your -- you mentioned that you are very -- you are sure that you can achieve the 20% ROE for this year. If you can just explain a little bit more, what are going to be the main drivers to achieve these ROE levels this year?

Okay, yes. No, I did not imply that for this year we will have a 20% return on equity. Clearly that will be a complicated mathematical exercise given return on equity in the first half. What I replied is that our long-term return on equity objective continues to be 20% and that clearly hopefully even only having the second half of this year, we might get closer to the 20%. Depends on how the currency fluctuates.

So no, let me make it very clear for the year 2013, we will not have a 20% return on equity but that is our target, reasonably achievable on a long-term basis.

What do you think then could be your ROE range for the year?

Anywhere between 20 and what we have in the first half. I'm sorry, I try not to give very detailed projections going forward, as you can imagine.

All right. Thank you for the answers.

Saul Martinez, JPMorgan.

Good morning, everybody. I'm going to play devil's advocate a little bit and I apologize if the questioning, the line of questioning comes across as a little bit aggressive. But I want to ask -- it seems like the message that Alvaro gave was really that this is a very good quarter operationally in terms of operation and profitability trends if you look past the currency depreciation. When I look at the numbers, my conclusion is that it was a good quarter from a topline perspective and a growth perspective looking past the currency depreciation but not necessarily from a profitability standpoint. When I look at for example the BCP numbers in local currency and adjusting for currency gains this quarter obviously in local currency and maybe some one-offs, I know it's tricky, it seems like the earnings there were not very good in local currency but you had pretty elevated cost growth, obviously. You had, as you mentioned, very high increases in provisioning.

And it seems like at least the growth you have had is in the short term negatively impacting your core profitability. So I'm wondering how you respond to that especially in light of the later comments made that you really -- that you are fine-tuning your risk management practices, you didn't have best practices, how do you think about that and is that assessment that that growth has led to lower profitability more recently this quarter in the first quarter? Is that a fair assessment in your view?

Sure, you are not absolutely wrong. I think you have a good point. It was a good quarter again excluding all the FX noise. It was a good quarter from a topline and yet can be better on the bottom line.

Two things to consider when you are looking exclusively at the BCP local currency numbers. One is that we continue to have within BCP Correval until the end of the second half, which was not there the first quarter, the last year. So comparing -- you are not comparing apples to apples. There are a couple of oranges there.

The other thing that again excludes from there a loss which is already reflected in BCP's books of the sale of Correval. So if you take Credicorp capital, which is on the consolidated -- it's not a loss obviously, so even if you take those throughout which clearly make it for more comparable numbers trying to look for from your conclusion would be not exactly what you are saying though at a different level. We just have to work better on our bottom line and on our bottom line I think where we can extract a lot of value is again under risk management and on the efficiencies. Even excluding Correval, I think we have work to do and again, we talk about the negative effect of translation but then you have positive effect on the cost translated to dollars.

So yes, we do have to work a lot on efficiencies and we can fine-tune our risk management. So you're right even if you exclude the foreign exchange and the extraordinary items that you have mentioned, we do have work to do. And that is what we are very much focused on and your conclusion would not be absolutely wrong, but at a different level. So we see good results, good bottom line results, but not extraordinary.

Can you remind me what the loss on Correval was at BCP? Do you disclose that or no?

10, 10 million.

10 million, okay? 10 million?

$10 million.

No dollars, okay, got it. Then just secondly related, you know, how do you think -- the risk, the three levers -- risk management, and efficiency and SMEs, but typically when I look at SME, when I look at a segment where the Company is tightening risk selection and tightening risk standards, they typically don't grow as quickly as you are still growing in SMEs even as you are tightening risk standards. How do you respond to the notion that you shouldn't be growing 30% in your local currency SME book, 6% sequentially if you really are indeed tightening risk standards and trying to tighten up risk selection there?

Let me go deeper into the SMEs. Even within the SMEs you do have different types of SMEs. Obviously you've got the large SMEs and the very small if you will entry-level SMEs. The entry-level SMEs we had extremely healthy portfolio mostly down through the capital report separate numbers, so you can fully evaluate what I am seeing. You will see extremely healthy growth and very consistent delinquencies.

Where we have had a problem is with the highest SMEs, which are mostly done at BCP in BCP's books. So of the low-end SMEs, we have absolutely no concern. They are growing quite healthy.

What I referred to in terms of focusing on the SMEs going forward is what we see a longer trend, which is that the entry-level SME at the Edyficar type of model, we don't see that market segment gaining market share if you will of our total portfolio. Where we see the growth coming in the next five to seven years is at the high-end, precisely where we are not very good at. We are not very good at risk management and we are not very good even in our commercial processes.

So that is what we are focusing on. These lower SMEs is a very healthy business model, which is operating quite perfectly with low delinquencies. On the high-end is where we have to focus, which is at the bank level.

Okay, thank you very much. That's very helpful, Walter.

(Operator Instructions). Boris Molina, Santander.

Yes, I had a question regarding capital issues. I see that you began to publish the consolidated group capital ratio and requirements for the bank and insurance operations and we really appreciate this big improvement in disclosure. Nonetheless, when you look at the Tier 1 ratio that would be derived from this disclosure, it would be around 7.8 for the second quarter but that has improved on a year-on-year basis. We would like to see if you could help us understand how does the local regulator look at these capital ratios and what are the limits there and how do you feel about this number? Because it's the discrepancies between what the bank and the group are could be misleading.

Thank you, Boris. The local regulator does not have a minimum of Tier 1 capital. What they do have is a total capital and a minimum mix of Tier 1 to Tier 2, which is 50%. Obviously we don't want to be at that level. We have a target of Tier 1 to Tier 2 or Tier 2 to total of around 30% roughly. But not a specific target for a Tier 1 or Tier 1 common ratio.

We do have an internal minimum set by the Board which is going to go up over time from 8% to 9%. I think we are about 8.5% today, for BCP -- I'm talking about BCP.

With regards to your question on Credicorp consolidated capital ratio, the local regulator is -- was defined as the consolidated regulator for Credicorp and they do have -- they implemented consolidated capital requirements about two years ago and we do comply with that and we report that as well and that includes all businesses, of financial and nonfinancial businesses that we may have.

So do they set the same minimums and limit requirements for the consolidated as for the bank or is there a difference? Because there seems to be some too big to fail and market shares and all this stuff, the additional capital requirements that they put in so we don't understand if this is the same at the bank with the group level and how does the regulator feel about the minimum? Is the minimum for the group the same as the minimum for the bank?

There are different measures. For the bank, you have working capital requirements for different purposes. As you mentioned for too big to fail, for concentrations, and other types of capital requirements. There is even a schedule to adapt to that, to adjust to that. We have decided internally to adjust it fully by July of last year so we are very compliant with that. We do not have the same type of measures for the consolidated Credicorp Capital. There what we have is an amount that has to be defined depending on the different businesses we are in. So it basically refers to an amount, not a ratio.

Boris, this is Walter. This is extremely a complicated calculation for the (multiple speakers). For the bank it's relatively simple standard worldwide capital ratios and very comparable to what you see in other places. For the group though, they are very complicated because it includes the insurance. We even have nonfinancial businesses, capital requirements. How do you consolidate them separately? It's very complex and what I will do is I will ask our investor relations team to give you a call and go into all the detail you want because it will be very complicated --

I appreciate it.

(multiple speakers) to trying to explain it here, I'm sorry.

One additional question, the local regulator has introduced some accounting changes for local listed banks in terms of certain IFRS adaptations. Do you foresee that they would ask you to comply to the local regulatory accounting standards as part of this process of review of your functional currency change? Do you foresee that you might be willing or required to publish audited statements with notes on a quarterly basis?

As of this year, we already have to comply with new IFRS aligned reporting for local purposes, very, very similar to international standards, so you won't see besides if we ever change the currency, the functional currency, besides the translation -- or sorry the conversion -- you should not see major differences in reporting. We are not required to have quality audited financial statements.

I guess I was making this question just because I was wondering where the local accounting treatment of the forwards that you put in your margin would be, IFRS compliant or on the Peruvian version?

Yes, same accounting rules.

The only major difference you see between local accounting, IFRS, Peruvian, and international, is probably the provisions itself, provisions for portfolio in which provisions with the local books are more in line with the superintendent fees, methodologies than with international financial reporting standards.

Wonderful, thank you.

Thank you. At this time, I am showing no further questions. This concludes the question-and-answer session of today's call. I will now turn the call back over to Alvaro Correa, Chief Financial Officer, for closing remarks.

Thank you very much, everyone. Good questions. I think we have been successful explaining the results of the quarter and we definitely hope to have a less volatile quarter and hope to hear from you soon about our Company. Thank you very much.

Thank you. And thank you, ladies and gentlemen. This concludes today's teleconference. Thank you for participating. You may now disconnect.