Credicorp Ltd (BAP) 2013 Q3 法說會逐字稿

Welcome to the third quarter 2013 Credicorp earnings conference call. My name is Lorraine, and I will be your operator for today's call. (Operator Instructions)

I will now turn the call over to Mr. Walter Bayly, Chief Operating Officer from Credicorp. Mr. Bayly, you may begin.

Thank you, Lorraine. Good morning, and welcome to Credicorp's third quarter earnings results conference call for 2013.

After the volatility experienced in the sol-dollar exchange rate in the first half of the year, this third quarter the exchange rate remained very stable and allowed us to focus on our business without having the significant distortions in the reporting of our US dollar-denominated results.

Numbers this time, though still incorporating some FX distortions, reflect a more accurate picture of our performance, which has maintained its dynamism and promises to continue the good growth story though at a more cautious pace.

As you will see along this presentation, the main message that we want to convey today is that business evolution and income generation remain strong, but we need to continue improving the risk profile of our SME portfolio before becoming more aggressive. And we still need to operate and build with a dual-currency system and the implications of having a balance sheet and income generation split in both currencies.

In the effort to get this message across, we are trying to show the business growth by currency, isolating it to a reasonable extent from the performance of the currency, a difficult and not perfectly accurate task but helpful when comparing our results in time. However, given the minimal FX change in the third quarter, the discussion of our third quarter results is much simpler when comparing results with the previous quarter, but still incorporates some distortions in the year-over-year comparison which is why we continue trying to isolate the business performance from the currency performance. All in all, we feel this was a good quarter in terms of business trends, evolution, and achievements, and our reported numbers as opposed to last quarter's help us show this.

Next page, please. Reported IFRS US dollar results show net income back in track with $183.5 million for the third quarter and $179.4 million net income attributable to Credicorp after minority interests. Both net interest income and operating income reflect the real expansion versus the previous quarter, with net interest income expanding 4.1% quarter over quarter and operating income showing a stronger improvement, an expansion of 28%, as the latter includes lower operating costs and no significant losses of market valuation of the investment portfolio as seen in the previous quarter.

Furthermore, total loans are up 5% quarter over quarter. Global NIM is up 32 basis points. And in the absence of volatility and resulting translation effect, net income reflects the true performance, and more than threefolds to reach the reported $183.5 million for the quarter, resulting in an 18% return on average equity, which is still not within our target range but a significant recovery from the previous quarter.

The return on average equity did remain below the 20% threshold, since it does incorporate the higher cost of risk incurred this year reflected in the expected further deterioration of the existing delinquent portfolio, which is up another 7 basis points, resulting in a level of net provisions of 2.2% of total loans. Cost of credit risk has marginally improved quarter over quarter, from 2.23% to 2.19%, but still remains at historically high levels.

On a year-over-year comparison, some distortions are still incorporated in the numbers, since the third quarter 2012 income numbers which were over 70% soles-denominated were all calculated with a significantly cheaper exchange rate, PEN2.59 versus PEN2.78 per dollar. Thus, if we recalculate all at a flat exchange rate to measure real business performance, this will be stronger, reflecting the robust evolution of the business, ex-FX impact.

In fact, in an approximate calculation, loan growth year over year would reach 13.6%; net interest income would show an expansion of 16.4%, revealing the better gross margins today; and operating income growth would turn positive. Net income, however, still shows a drop of 8.4% when including translation results.

Making a raw approximation of net income excluding translation results, the year-over-year evolution would also show a significant different performance, with net income expansion of more than 12%. The importance of these approximate recalculations is only to call to your attention once more that the business continues solid and growing strongly and that the performance of the currency incorporated into our reported results distorts this positive business evolution and can be misleading.

Next page, please. When looking at BCP only, loan portfolio growth is well within expectations. Measuring growth in average daily balances, the soles portfolio, approximately 80% which comes from the retail business, expanded at a robust 9.1% quarter over quarter, while the US dollar portfolio expanded at a more moderate rate of 2.1% for the quarter.

A particularity this quarter is however the very strong expansion of our wholesale portfolio, more importantly our corporate portfolio which shows a significant growth of 24.3% in local currency-denominated borrowings, while US-denominated lending was less strong, with an expansion of only 2.4% for the quarter. This is the result of a shift in corporate borrowings from offshore US dollars to soles-denominated local borrowings, plus some accumulating investment activity after previous months of holding back such investments. This does show a definitely stronger preference of local currency-denominated borrowings after the volatility in the currency of the previous quarters and the measures of the central bank to de-incentivate dollar borrowings.

On the retail front, a more cautious expansion is also evident, with the soles book growing 4.9% and the dollar book staying totally flat. This expansion was led by mortgages, micro lending, and business loans, followed by consumer loans, PyME, and lastly credit cards, being these last two segments the ones that have slowed down the most following corrections in our scoring models. Furthermore, in year-over-year terms, the soles portfolio expanded 28% and the US dollar portfolio, 6.6%, both which continue to be strong numbers.

Next page, please. With regard to credit quality, we continue showing an evolution in line with an expected slight deterioration resulted from a leaning curve and feel fairly confident about the correction introduced in the new adjusted scoring models. In fact, as explained last quarter and similar to the evolution of the credit card business which is currently performing well within expectations in all new vintages after adjustments were introduced, the loan segment of SME experienced deviations that have led to delinquencies in the previous and last quarters and, as anticipated, to a further increase in delinquencies, to 8.03% for this portfolio in the third quarter.

This is in line with expectations and has caused the overall past due loan ratio to increase 9 basis points and situate at 2.25% this third quarter for all delinquencies, but only increases 7 basis points, up to a very still low 1.52% past due loans, for over 90-day delinquencies. Nevertheless, it is encouraging that the SME segment has stabilized in provision requirements, and we expect this needs to drop down the first quarter of the next year, as the adjustments made are showing improved performance in the new post-adjustment vintages. In this context, and as mentioned before, provisions were flat for the quarter, and cost of risk has marginally improved, from 2.23% to 2.19% of total loans.

Page 6, please. Given the sound growth in volumes of loans outstanding throughout the quarter, net interest income expanded also 4.9%. This number results from good expansion of interest on loans, helped by lower interest expense as the shift toward soles-denominated lending released US dollar liquidity to reduce more expensive US dollar funding, expensive when calculated including strict reserve requirements.

In fact, net interest margin for loans improved 16 basis points, to 8.35%, as a result of the good expansion in outstanding balances and important price corrections introduced this last quarter. Furthermore, a significant 35-basis points increase in global NIM was reported for the quarter, as a result of redirecting funds from investments in securities available for sale to the loan book, as the latter grew 5% quarter over quarter while total interest-earning assets grew only 1% for the same period, leading to average interest-earning assets to drop 2.2% quarter over quarter. This led the NIM on total average interest-earning assets to increase to 5.27% in the third quarter this year.

Non-financial income expanded again almost 10%, despite flat fee income and slightly lower gains in FX transactions, mainly due to the absence of losses in the securities portfolio included in the Other non-financial income bucket. However, also the absence of gains in the security portfolio in that same bucket explains the year-over-year 5% drop.

Operating expenses dropped 8% in the quarter, in the absence of one-off expenses related to the investments in Correval Colombia recorded in the second quarter and also as a result of some immediate cost controls on administrative expense and lower personnel costs as we took advantage of the normal rotation of personnel to reduce headcount. This increased cost control is also evident in the very modest year-over-year growth of 2.6%. Furthermore, the reported growth in expense is also intensified by the solid depreciation from the previous quarter.

Page 7, please. In this third quarter, Bolivia reported net income of $4 million, which represents a 3.2% decline quarter over quarter. This was attributable to, one, growth in net provisions for loan losses, which doubled due to the expansion of the loan portfolio which hit the $1 billion mark at the end of September -- this is a record high -- and, two, an increase in operating expenses, which was due to the fact that extraordinary provisions were set aside for tax contingencies. The aforementioned increases were attenuated by growth in non-financial income, as investments in Peruvian mutual funds recovered. These results led to a return on equity of 12.4%.

Edyficar on the other hand reported net income of $12.5 million, more than double the second quarter income. This significant increase is associated to a large extent with a decrease in the translation loss, which was only $0.7 million this quarter versus $11.4 million loss in the second quarter, in the previous quarter.

Nevertheless, operating income fell 15.4% this third quarter due to a 7.9% drop in net interest income, which was in turn attributable to a strong competition in the micro finance sector. In annual terms, operating income grew 77% due to strong net interest income expansion associated resulting from increase in portfolio volume of 30%.

This annual expansion was accompanied by good risk management. We maintained a stable [past due loan ratio] of 4.03%. These results led to a return on equity of 30% in the third quarter 2013.

Next page, please. The Pacifico Insurance Group posted a significant recovery in net income, reaching $18.2 million in the third quarter. This result was primarily due to, one, an improvement in the underwriting results of the property and casualty and health businesses due to an increase in the premium turnover and a decrease in claims that led to total underwriting results 22% higher for the quarter, and higher financial income at Pacifico due to better performing investments but mainly to important gains of about $7 million on real estate sales.

In addition, the company's translation result was significantly smaller this third quarter, at $235,000, which contrasts favorably with the loss of $6.4 million posted in the second quarter 2013. These results allowed Pacifico to contribute $18.5 million to Credicorp this quarter.

An analysis of the results of each of the businesses reveals some improvements. Pacifico Peruano Suiza earnings totaled $7.6 million, mainly due to an increase in financial income plus improvement in underwriting results and a positive translation. Pacifico Vida reported $13.8 million in earnings, very little variation, [due to] an increase in premium income and a positive translation result.

And the health business shows a slight improvement in its underwriting results, which added to better technical results in the medical services, led to consolidated earnings of $0.4 million. This medical services showed this quarter high occupancy rates at the network clinics and an increase in the average billing per patient due to more complex medical services.

Page 9, please. Atlantic Securities Bank reported net income of $9.8 million in this third quarter, which represent a decline of 27% quarter over quarter, from $13.4 million the previous quarter. This is also reflected in a drop in return on average equity, from 30% to 22% this last quarter.

This drop is mainly result of lower gains of sales of securities since the previous quarter significant gains in the liquidation of a fund were realized and resulted in a $4.1 million higher gains on securities. Nevertheless, the uncertain market conditions was reflected in a pretty flat level of assets under management at $5.1 billion. Despite this [juncture], Atlantic's contribution to Credicorp in accumulated terms was $38.7 million at the end of September, which tops the figure reported the previous year by 11.6%.

Page 10, please. Prima reported very good performance and a further increase in fee income, to $34 million versus $33 million the previous quarter. Nevertheless, net income reached $12.5 million at the end of the third quarter, a figure which is 12% below the second quarter's level.

The quarter-over-quarter net income drop is due to the fact that a translation gain of $1.3 million was registered in the second quarter versus a translation loss of $67,000 at the end of this quarter. And an income tax last quarter was also $0.7 million less than this quarter's figure.

Nevertheless, in accumulated terms at the end of September, net earnings totaled $38.5 million, which represent a growth of 28% with regard to the same period the prior year, and year-over-year it represents a solid 32.7% increase in earnings. This expansion was due primarily to an increase in fee income which coincides with expansion in the client portfolio, more than 200,000 affiliates during the assignment period.

In this scenario, Prima AFP's portfolio under management totaled $11.1 billion at the end of September 2013, 3.9% increase over the quarter, which represents 31.5% of the total system's funds under management. These results led to a return on average equity of 31.7% at the end of the third quarter.

Page 11. This chart summarizes the results of the Group as the sum of the different subsidiaries and businesses. It is evident that the performance of all of them is back at more normal levels.

However, the year-over-year comparison does incorporate some distortions as mentioned before. So, just let me remind you that if we were able to isolate business and currency performance, those year-over-year numbers would look much better.

Nevertheless, it is also evident that, one, BCP is having to digest the higher cost of risk but has significant potential to improve results, precisely through a better risk management and search for efficiencies. Pacifico still needs to improve its underwriting business and complete the health service project to reach the committed returns.

And thirdly, the BCP capital is still to deliver results that capture the synergies expected and growth potential in a growing business segment. All in all, we believe potential for growth and better return on equities in the future is significant.

With these comments, I would like to open the call for the Q&A session. Thank you very much.

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Thiago Batista, Itau BBA.

Hi, guys. Thanks for the opportunity. I have big picture questions. The first one is about the efficiency project.

I know that the plan is not completed yet, but could you share with us some of your initial view or the potential of this plan? And also the targets of this plan?

And my second question is about asset quality, especially in the SME segment. We saw that this segment it is still posting some deterioration, but at least at a slower pace than the previous quarters.

It's possible to say that the new vintages of this portfolio have better asset quality? And also, when do you believe the past due loans of this portfolio will peak?

Thiago, thank you very much. Let me tackle the second question first, regarding asset quality and the SME portfolio.

The answer is clearly, yes, we are seeing the new vintages at a much better quality level and delinquencies. Clearly, the new loans that are being generated are clearly of a much better quality.

As to when we think we will finalize digestion, this, as I mentioned in the call, well into the first quarter. I clearly expect this last quarter the digestion process will continue and it will spill over into the first quarter next year.

Regarding the efficiency, we're still at the very initial stages of doing a very thorough and complete review of all our different processes and the projects that involve putting the efficiency target very high up in our agenda. We expect to be launching the project internally during the month of December.

I want to be very cautious in terms of committing to a specific number. So, I would just mention maybe a very longer-term number. The target that we are setting for ourselves, it is kind of twofold.

One is that we think we can extract probably $100 million in savings in the year four. And second, we are aiming for a low-40%s efficiency ratio. This is a three-, four-year time frame.

I'm reluctant to commit to shorter-term numbers or guidelines at this stage. We're still -- we have not yet fully launched the project internally.

OK. Perfect for the answers.

Thank you.

Carolina Yoshimoto, Goldman Sachs.

Hi. Good morning. Congratulations for the results.

My question is first of all on the admin expenses. It looks like this quarter was lower and it wasn't related to the efficiency ratio, [you are still] to put in place.

So, it seems that there were some [in-play] rotation, and therefore it had some lower provision for profit churn. I was wondering if you could explore a little bit of what that mean, if this is going to happen again, if it's sustainable or not?

And also, I know that the focus on efficiency is associated with a lower loan growth going forward, but growth was still strong in the quarter. I was wondering if you could also provide some more color on how do you see that going forward in 2013 and for 2014? Thank you.

Thank you, Carolina. Regarding the administrative expenses, it is important to note that the currency depreciation has some negative impacts but also has some positive impacts.

If you look at BCP by itself, which is clearly the bulk of Credicorp, and you look at general administrative expenses, quarter over quarter they're actually flat. If you look at depreciation and amortization, it's about 2% above.

So, there are some increases which have been offset by the devaluation because, yes, we have not had devaluation end-of-quarter over end-of-quarter. But the average devaluation has been about 4% for the quarter. So, that has helped the administrative expenses.

There is only one important decrease in the Other line which, frankly, I don't have the answer. I'm just looking at it right now.

It's related to lower marketing expenses. So, it's probably a one-off kind of situation.

So, yes, in dollar terms, we show lower administrative expenses. That is not the case in local currency.

We have not yet initiated our efficiency drive. We're obviously being as usual very careful with cost increases particularly now, but I cannot attribute the dollar decrease in administrative expenses to management. It's more related unfortunately to the FX impact.

OK. Thank you. And about the loan growth outlook that you're seeing?

We are going at a --. There are a lot of different and contradicting signals in the market.

And actually, the central bank yesterday announced a quite surprising -- or, it caught us by surprise, all the analysts by surprise -- reduction in our reference rate. And there are two readings we can obtain from that.

One is that it obviously feels comfortable with the inflation, and that is clearly a forward-looking view because we are as of today not yet within the target set by the central bank. So, it means that going forward the central bank expects inflation to rather quickly, I would say, fall within the target, and -- rather quickly -- I would imagine this clearly has to be less than six months, probably around three months.

But the other reading into this is that they feel that the economy needs some stimulus. So, what I'm going back to answering the question, we are seeing a lot of contradicting signals.

We see growth in the electricity consumption, very important growth, but again a slowdown in the sales of cement sales. So, there are portions of the portfolio that are growing.

We have mentioned the corporate portfolio has grown a lot. But again, possibly a portion of that can be attributed to a desire of the borrowers to borrow in local currency rather than in dollars.

So, they have been borrowing local currency from the domestic banks, obviously ourselves, and paying dollar loans with ourselves and a lot with non-domiciled banks. We also are seeing some growth in medium-term lending related to projects, but those are projects that were initiated three, six, or maybe a year ago.

On the retail side, we have seen some dynamics, clearly less aggressive than we have seen in the past. But there's also the fact that ourselves, we are being more cautious and we have raised our lending standards.

So, there are a lot of contradictory readings of what the macro economic scenario is going to be going forward. We are seeing some mixed signals.

But if I were to boil it down into numbers, I would say that I expect the portfolio of the banking system and reserves to grow at a rate of about 15% year over year. And that would be the average of maybe 18%, 19% on the retail side and 12%, 13% on the corporate side.

Clearly, a very strong bias of growth toward local currency lending rather than dollars. Sorry. That was a long answer to a short question.

Yes, but that was clear. Thank you very much for that.

You're welcome.

Jose Barria, Bank of America.

Hi, Walter. Good morning. Thank you for your remarks.

Most of my questions have been asked already. Just to follow up on your previous comment, given what we're seeing in terms of central bank movement in reserve requirements and now lowering rates, what do you think the impact on NIM will be for 2014?

Well, our base case scenario continues to be that next year growth will be anywhere between 5.4% and 5.8%. Very difficult to pinpoint a specific number more than that. And we continue to have the base case scenario where the growth in the portfolio will be as we mentioned before.

If anything, this adds a little bit more growth potential into the economy, but again, the flip side of that is, what is the central bank seeing that prompted them to make this move? So, I still don't have enough elements to change our base scenario, but we'll keep you posted.

Sure. I think my question was more on how you see NIM evolving given all these changes and also the fact that the commercial portfolio, or the local denominated local currency portfolio, is growing at a faster pace. I just wanted to get your thoughts and where do you see NIM evolving to?

Sure. Sorry. I didn't pick up on the part of NIM.

On NIM, what we have been doing rather aggressively in the past quarter is reviewing all our pricing in the retail products -- mortgages, credit cards, SME lending, et cetera. And we have improved our margins in each and every of those businesses.

A part of that increase in margins was also to compensate some fee reduction. We have gone through a simplification and elimination of our fee structure.

This is in coordination with the regulators and with the whole industry. So, a portion of that increase in the margin was related to compensate for lower fee income.

But we have gone a little bit further than that, just to compensate fee income but to cover for increased risk costs. Frankly, I think we might have been a little bit too aggressive.

We have seen two specific niches where we have lost some market share. So, we will be very cautious in improving or trying to continuously improve our pricing. I would expect NIM to be flat.

OK. Thank you very much.

You're welcome.

Saul Martinez, J.P. Morgan.

Hi. Good morning, everybody. I have a couple of questions.

First, I'd like to understand the fee evolution a little bit better, Walter. You mentioned that you simplified some pricing and maybe that had a little bit of an impact on your fees.

But it seems like there were a lot of moving parts in the numbers, especially at the consolidated level. They fell sequentially.

And the question is more on the sequential evolution. They fell sequentially, but in local currency terms you actually had nice growth. And at BCP alone, if I look at the local currency numbers, there was good growth.

Can you just help --? How much of the impact this quarter was from the exchange rate, a lower average exchange rate? How much of it was from a weak result or a slower result in non-banking businesses -- Credicorp Capital, you mentioned Pacifico?

And the underlying gist of the question I suppose is, how confident you are that your fee generation capabilities will remain robust and that you can grow fees on average in the double-digit range? So, it's a broad question I guess on -- or a multi-part question I guess on fees.

Second thing is asset quality. I guess more simply, how confident are you that your cost of risk will stabilize in the coming quarters? And when do you foresee that happening?

Thank you, Saul. Two good questions.

One, regarding fee income, specifically for the quarter the three elements that you mentioned are accurate. One, if you look at the local currency at the bank level, local currency, there is a good growth.

That again translated into dollars, because the average exchange rate for the quarter was not flat. Translated into dollars, that is basically a flat result in fee income for the bank.

Second, at Pacifico, we had more of an accounting issue, which is that fees paid were recorded as an expense and are now recorded as less fees. So, we show kind of a net fee structure. So, that's a second impact which is about $4 million.

And the third element is that, yes, at the investment bank, grew particularly in our Chilean operation, fees were quite low. They were about $2 million or $3 million -- $2.7 million lower in the quarter.

So, specifically the three impacts that you mentioned are the ones that explain the relatively poor result when expressed in dollar terms.

Now, to give you more color on what we see going forward, particularly at the bank level it is very clear that we will not have any increase in fees other than related to growth in the number of transactions or usage of products. That is, our fee structure will basically remain as it is today. We will not be increasing any fees or creating new fees.

Having said that, looking forward I would say that the growth in fee incomes for the bank as a whole in local currency is in the low-teens. That is what we see going forward -- 10%, 11%, 12%, somewhere around those numbers.

Clearly, it (multiple speakers).

Is that still true at the consolidated level which represents maybe a quarter of your fees? Is there any difference in terms of what the expectations would be?

No, what I was mentioning is that that number in the low-teens is what we see at the bank level in local currency.

OK.

I would expect the investment bank to grow hopefully a little bit better. They should have some fee growth, though still subdued. So, at Credicorp level I would say that the fees will be --. If at the bank level we're seeing 12%, 13%, at the consolidated level that's probably 10%.

OK. And on the cost of risk?

Cost of risk? Yes, sorry. Relating cost of risk, as I mentioned in my comments and in the previous question, we're clearly still not fully digested the deterioration of our SME portfolio.

We clearly will see that, live with that throughout this last quarter and well into the first quarter. That's where we expect the full digestion of the SME.

Going forward, yes, we will be living with a higher cost of risk, because our portfolio is shifting. But we should be focusing on what percentage of the margin will be dedicated to risk. What we expect going forward, particularly for next year, is that the growth in margin will be higher than the growth in provisions.

See, as our portfolio shifts more into retail, more into SME, more into consumer, clearly the cost of risk to total assets will increase. So, a more relevant measure in my mind is what percentage of our margin is dedicated to cover risk. Going forward, what we expect next year is net interest income to grow at a much faster pace than the increase in provisions.

OK. So, you think NII grows faster than your loan book, faster than the 15%. Loan loss provisions may grow a little faster than the 15%, but NII still grows faster than loan loss provisions, essentially.

[Clearly], yes. I would say that it makes --. If our portfolio grows at 15% next year, the NIM should grow close to 20%.

OK. Great. That's very helpful. Thank you.

You're welcome.

Amit Mehta, PIMCO.

Hi. Good afternoon, guys. I think quite a few of my questions are answered. So, I just wanted to confirm, as you said, the net interest margin should expand even with the backdrop of this rate cut going forward for next year?

And then, just to elaborate in terms of your asset quality trends, we have a second --. We've had two episodes with the Company now. You expanded into consumer credit and showed some growing pains there and retracted from certain segments.

And in SME, you went lower down the curve and have shown some pain there. I'm just wondering where else are you expanding into new territories of your credit book right now that we could see some growing pains going forward into next year potentially?

Good question. Well, I think we've made all the mistakes we can. There are no new segments that we can go and we're all over the place.

Yes, clearly the last two segments in which we had been very focused in trying to increase market share were particularly consumer and micro finance. Those were the only two segments of the financial system in this country in which our market share was below the 30% which we aim to have in every product segment. And those were two segments which continued to be particularly attractive, not only because we can aspire to increase our market share, but also because there were the highest segment margins and the segments with higher growth potential.

So, clearly, we had to focus on those and, yes, there is a learning curve. And, yes, there are costs of going through that learning curve. And fortunately the costs have been relatively manageable -- quite manageable, I would say -- and they have happened after four years of extremely extensive growth.

So, yes, one can always do things better, but putting into perspective into a three-, four-year very aggressive expansion of almost 25%, 30% per annum growth in these segments, I would say that the pains have been relatively manageable.

So, going forward, yes, we will continue to be focusing on those segments that have still room to grow.

Our overall NIM I would expect, as I mentioned before, maybe slightly growing. I want to be conservative and think that they will remain relatively flat because, yes, there are two forces playing at the same time.

While there's a portfolio shift which allows for NIM supposedly to grow, there is also very intense competition. So, I do not eliminate the fact that -- I don't want to not be cautious of the fact that competition might force us to tighten our margins. So, trying to be cautious looking forward, NIM should remain flat, but growth in margin should be healthy.

And can I --? Sorry. Last question.

I maybe didn't quite fully hear your costs target that you elaborated to, but maybe I heard $100 million cost cut on the cost base of the bank, which I think if I'm correct. So, if you mention a 40% target cost income efficiency ratio and just to put that into perspective, that stands at 48% right now. Am I using the right benchmarks which you're targeting?

Yes, to put it in some perspective, please. We're talking about year four.

We want to go into the low-40%s, and that can probably be at least $100 million cost savings. But it's going to take us a while and some pain in the process. Don't put it into your projects for next year, please.

Sure. But I would represent somewhere around 7%, 8% of the current cost base in that business.

Yes, it's an ambitious target.

OK. Thank you very much.

Thank you.

Jorge Chirino, Morgan Stanley.

All my questions have been answered. Thank you.

Thank you.

Carlos Gomez Lopez, HSBC.

[Mahir Estava], Compass.

Regarding SME segment quality, you mentioned you're going to improve standards of lending, and so on, and that's going to improve quality. How much of improvement should we expect considering that credit in that segment should grow less than what we have seen in the past?

I imagine some of the effect on quality has come from the fact that the loan book is growing less than what we have seen it growing before. So, in order to get a sense of what's a natural level of quality for this segment, not growing at 20%, but growing at 15% or 10%? I imagine some of the effect comes from the matureness of the portfolio.

Yes, you're right. Clearly, some of the deterioration in the ratio comes because the numerator is growing at a lower pace. Clearly, that's an accurate comment.

But let me try to give you a little color of what's happening in the market. We have been growing quite aggressively.

We have been the financial institution that has been pushing aggressively and gaining market share in this segment in the past three years. We have gained about 500 basis points in market share.

We have been the institution that has been pushing margins, because creating this intense competition. We think that there is still some room for us to continue growing in terms of market share, and we are revisiting both our risk management techniques, upgrading those, and we are also reviewing our commercial processes.

While this adjustment is taking place, clearly the market is growing a little bit slower. The competition is there, and there are certain segments where we can find over-leverage. So, we have to be very cautious going forward.

The color I can give you is that we think that there is still room to grow, that we will continue -- that the new vintages of loans that we are generating are very well within the returns, the modeling and the expected returns that we would like, and that we have to continue digesting what is already in our books and that will take us well within the first quarter next year. And, yes, growth will be less than what we had in the past.

In the past, that segment was growing at rates of 25%, 30%. That growth going forward will probably be closer to the 15%, 18%.

Thank you. And can I just make another question, regarding deposits of de-dollarization that's ongoing in the country.

Given that you are also changing your loan mix, do you think that de-dollarization in your loan book will be even more than what we are seeing for the country overall? And given that that may be true, do you think that's going to create pressure in funding costs considering that you will have to have more local currency funding than dollar funding?

It's actually the opposite. Our portfolio, even though it is de-dollarizing, compared to our other banks domestically we are the one with the largest dollar portion with a high dollarization of our portfolio. And that is because we have a very strong market share in the top corporates, and those are the ones who borrow in dollars.

The mortgages, all the new -- I would say, 80% or 90% of the new mortgages which are disbursed every month are in local currency.

All SME lending is in local currency. All consumer finance is in local currency.

So, we only have dollar borrowings in the corporates and in the middle markets. And that is where our market share is closer to the 45%. Thus, our portfolio is more dollarized than that of our competitors.

Yes, all in all, as the portfolios of everybody start growing more aggressively in local currency, there should be some pressure going forward in terms of funding costs. We have not seen it so far, fortunately.

If there is pressure on funding costs, that would be a competitive advantage for us, in that our competitive advantage in terms of funding is having this very low, stable, low-cost funding base which has not been a competitive advantage in the past three, four years as we have lived with very low interest rates and excess liquidity. But if there is a shortage, our competitive advantage would start to show.

Thank you.

You're welcome.

Boris Molina, Santander.

Good morning. Thanks for taking my question. I wanted to pick your brains a little bit about how could we think about the three moving parts of your plan in terms of network or branch expansion and this idea that maybe you would have to scale down a little bit your expansion plans in terms of distribution channels; versus a [bank-related] economy still growing relatively healthy, around 4.5% or 5%; plus the need to invest in IT and your cost-cutting plan which I would say requires, or has a prerequisite, that you develop new software to support streamlined operations.

So, maybe if you can talk about these three factors of how this is going to translate into a cost growth? We've seen the cost growth decelerating in the bank, and we're pretty impressed about it.

But we don't know if this is something that is more of a one-off, or should we expect cost growth to still grow close to 15%, 20% next year? Or, is it something that is going to decelerate to the lower teens as your investment cycle --? We've seen already a hefty increase in expenses, and we don't know if there is more to come.

Thank you, Boris. Not easy questions.

Branch expansion, we are probably looking into 50 or less branches for next year, as opposed to the 100 that we were looking at two years ago. This is a consequence of a couple of things.

One is less growth in the economy. Second, we have been quite successful in taking number of transactions out of the physical teller.

The physical teller now only represents about 13% of all the transactions that we do. Actually, the Agente BCP, now more transactions are done via that channel than by the teller at the branch.

So, the second element is not only less growth in the economy, but we have been successful in having moved our transactions out of the branch. Thus, we need less branches.

Branches in the future are becoming necessary more as a point of sale than as a point of transaction. Thus, it is a slightly different type of branch. Locations of them are slightly different.

And we are testing a lot of different models. But I would say that the two drivers that will allow us to open less branches are the ones that I mentioned -- less growth in the economy and successful transferring of transactions out of the branch.

In terms of systems, our big driver and effort here is through outsourcing. We have been quite successful in the first two steps that we have taken.

And the overall concept is that we want to make sure that, one, costs in terms of systems become variable costs and, second, try to get some economies of scale. This is not easy.

This takes a lot of discipline and a lot of time to actually materialize. But we think we're on the right track.

So, I would not expect substantial savings in cost of systems. What we can aspire is that those costs will become variable and, second, over time the cost of systems overall as compared to net interest income, hopefully we will be able to capture some economies of scale, and that become a smaller percentage.

In terms of investments, we will continue to invest, clearly. We have to do investments to capture the growth, but hopefully those investments will be less in infrastructure and more in efficiency of sales and [excessive] utilization of data to be more focused on reaching the customers.

The efficiency, even though initially it might sound contradictory, you can grow and capture efficiencies. There are a lot of models that we have visited around the world.

And there's some financial institutions that have been successful doing this. This is a not thing you do overnight. This is a process that will take us two or three years to get our processes aligned, our incentives, and this becoming at the top of our agenda.

We are confident that once this institution focuses on an objective, figures the right way to go about it, and go about it in a disciplined fashion, aligning all the incentives, we over time are quite disciplined and will get there. So, yes, I think we can grow and capture efficiencies and invest and walk and chew gum at the same time. We think we can do it.

And a little bit of a guidance towards loan growth? Do you think that it's going to accelerate? Or, sustain around mid-teens, or low teens, next year?

Loan growth, as I mentioned, probably around the (multiple speakers).

Sorry. Cost growth.

Cost growth. I don't have a good number for that. Cost growth for next year, what I would like is that our efficiency ratio comes down by 1%. That's a nice target for next year.

OK. Wonderful.

So, whatever number we close this year as cost-to-income ratio, lower it by 1% and that will be a target.

Wonderful. Thank you.

You're welcome.

Jose Barria, Bank of America.

Hi, Walter. Just one follow-up question.

Putting all the thoughts together, would you venture to give us your thoughts on when you think the Group will return to a 20% ROE? If we're on our way there?

And by when do you think that could be achieved? Thank you.

With a little luck, by next quarter. With a little luck. With a good end-of-year quarter, we --. End-of-year business activity, we should do it --. We could do it by the next quarter.

I feel a lot more confident that the first quarter or second quarter next year, the first half of next year, we'll be there. But hopefully, end of quarter.

OK. Thank you.

You're welcome.

Michael Holme, CQS.

Good morning. More of a macro question from my side.

There seems to be more approval of mining projects and infrastructure efforts going on in Peru. I was just wondering if you're seeing the government being more supportive to the mining community and being more active on the infrastructure side? And is that leading to more activity maybe on the lending side for you guys? Thank you.

Thank you, Michael. Yes, on both sides.

One is that clearly the government is also worried about the slowdown in the Peruvian economy due to world and domestic circumstances. And, yes, once they've realized that the economy has slowed down, they are redoubling their efforts in trying to promote investment.

And as you will know, investment in this country is private sector investment. It's not public sector investment. So, yes, they have redoubled their efforts to support all types of private investments.

As they regard to infrastructure, a good number of fairly large projects that are going to be implemented, launched in the next couple of months. But these are long-term projects.

We're talking about, for instance, the airport in Cusco, the new airport. That's a big project. But building an airport is a three-, four-year project.

The subway system in Lima. A lot of infrastructure improvements in the city.

So, yes, the projects, the government is very aggressive trying to push those projects. But unfortunately, those are projects that do not happen overnight.

As regard to the mining, I have got the sensation that the tide is turning, that the anti-mining movement, or whatever you want to call it, tide of sentiment is clearly losing momentum and that as the economy has slowed and some of the provinces have seen a couple of large projects not materializing, this movement has lost steam.

And I would not be surprised if a couple of projects that had been blocked or had been having problems going forward will materialize or start to get destrabados in the next couple of months. So, yes, the government is very active, both in the infrastructure sector and by trying to promote those large mining projects that had been blocked in the past.

OK. Thank you.

You're welcome.

Chris Delgado, J.P. Morgan.

Hi. This is Saul, again. Just one very quick follow-up on your capital position.

You've seen some slippage in your Tier 1. It's closer to 9%.

In the past, you've always indicated that you feel capital is burning a hole in your pocket. So, just curious as to how you feel about your capital position and whether you think it's sufficient in light of your mid-teen type of loan growth outlook?

Currently, we have excess capital, both by two reasons. One is that we have been carrying some excess capital, which is invested. We have as you well know a relatively interesting and profitable investment in BCI, the bank in Chile, which consumes a certain amount of capital.

It has been a profitable investment. But at the end of the day if we were to have some important capital requirement, those are assets that we could dispose of.

We've also got investments in Egenor, the electric utility company. Again, that's a good investment.

That's a good place to park some excess capital, but it's not core to our businesses. So, we have excess capital well deployed within our organization.

And second, this year at the beginning of this year we anticipated the issuance of Tier 2 capital. Being the rates where they were and having country risk at the levels that we had at the beginning of the year, we anticipated a lot of our Tier 2 requirements. And thus, we overfunded, if you will, our Tier 2 requirements going forward.

And what happened ever since is that we have grown less than we had anticipated. So, not only did we pre-fund it, but the projected growth was less than expected.

Thus, we're at a very healthy capital level at the bank as well. So, unless we find some interesting investment opportunities, clearly what we're talking is a continued increase in the dividend payout.

Is there a Tier 1 at which you feel comfortable as a target Tier 1, or below which you would be uncomfortable and maybe monetize some of the investments?

The Tier 1 level that we have established as minimum is, let me recall --. The internal target that we have set a minimum for Tier 1 is 8.5%, reaching 9% over the next three or four years.

And I think right now we're even slightly above that. If I recall correctly, right now, 9.27%. So, we are even very close to where we wanted to be in a couple of years.

OK. Thank you.

Thank you. This concludes the question-and-answer session of today's call.

I will now turn the call back over to Mr. Walter Bayly, Chief Operating Officer of Credicorp for closing remarks. Sir, please proceed for closing remarks.

Thank you very much for your continued interest in Credicorp, and thank you for this very active and interesting set of questions. It's always a challenge and an opportunity for me to be able to have this exchange of opinions with yourselves.

We are fairly confident that after a couple of quarters with a lot of volatility we are bringing our results back into track. This is not something that you do in a month's time, but it will take us probably two quarters.

We have a lot of open issues that we are aggressively focused on. We want to take the property and casualty insurance to a level that we feel comfortable.

We have made investments in the health services side that are still not giving us the returns. We are focused on capturing the synergies of our investments done in our investment bank. And we will be focusing aggressively within the bank at improving our risk management capabilities and focusing on efficiencies.

So, we've got a lot of open issues, a lot of work to do. But again, we are seeing a lot of potential of growth in the economy.

The economy continues to be very healthy with very interesting levels of growth, both for the economy and for the financial system. So, we continue to see a very bright future ahead of us.

Again, I want to thank you all for your participation and very active Q&A session, and hope to be with you at the end of next quarter. Thank you very much, and goodbye.