Credicorp Ltd (BAP) 0 Q0 法說會逐字稿

Welcome to the fourth-quarter 2013 Credicorp earnings conference call.

My name is Richard, 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 a question-and-answer session.

I will now turn the call over to Mr. Fernando Dosso, Chief Financial Officer of Credicorp.

Mr. Dasso, you may begin.

Good morning, and welcome to Credicorp's fourth-quarter and year-end earnings results conference call for 2013.

Operational trends and income generation for the fourth quarter as well as for the year, the full, were significant better than reported numbers suggest.

Income generation was a strong throughout the year as a result of good portfolio growth and improved pricing to compensate for higher cost of risk, combined with lower funding costs.

However, the year 2013 presented a series of events, which given our reporting and functional currency, the US dollar, and the financial environment generated substantial accounting and extraordinary losses related to -- first, the nature of the dual currency financial system and the transitional period in which we find ourselves, combined with the unexpected currency volatility, experienced in the first half of the year.

Second, the general market volatility.

And, third, some regulatory changes that affected some business sectors and resulted in extraordinary accounting adjustments, most of them in the fourth quarter.

Isolating only the most easily quantifiable losses, where expense is generated by the [adverse] events, we can identify a total of $194.4 million that was deducted from the income generated in the year of which $34.2 million affected this fourth quarter.

Furthermore, this reported income was already diminished by the conversion of the around 80% of the income generation, which is in Nuevos Soles to a 9.6%, more expensive US dollar, resulting in lower US dollars denominated reported income amount which distorted the real growth and income generation perception.

If we were to report the same year in more constant currencies and focus on recurrent income generation, excluding all accounting on extraordinary costs that affected this year, net interest income growth for the year would reach an approximate of 24.1%.

And loan book growth about 70.3%.

However, provisions of real business related expense, which did increase for the already known reasons expanded 20%.

And operating expenses would show a real and still high 20.4% expansion.

Despite this latter too-high risk that need improvement, adjusted numbers represent a significantly better performance than suggested by the US dollar denominated reported numbers.

Hence, recurring net income for the year will then be adjusted to $738.3 million and for ROAE to 17.6%.

It is precisely for this reason that we have taken the decision, which was recently announced, to change our functional currency and report as of 1 January 2014 toward today's business dominant currency, the Nuevo Sol.

Therefore, when reporting this year, we have to distinguish between the accounting results based on our reporting currency until 2013 and IFRS rules and the analysis for real business strength and results isolating currency-related distortions and excluding extraordinary costs and accounting adjustments.

In this presentation, we will focus on the first one to start.

We subsequently proceed to try to help you see the real business trend and real income generation in order to better assess how the business was run and the future potential of our business.

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Reported IFRS [USR] results show a net income attributable to Credicorp after a minority interest of $151.6 million for the fourth quarter, 15.5% down from the previous quarter despite the favorable currency within the period and due this time to extraordinary, in some cases, nonrecurring losses or expenses and adjustments that accumulated and were booked in the fourth quarter.

Therefore, responsible for this drop quarter over quarter were -- first, some one-off costs related to impairment in the valuation of IM Trust shares, Social Security payments and remunerations paid in past year due to a regulatory dispute on provisions for tax contingencies in Bolivia and others, which in aggregate amounted to $28.8 million.

Second, a cost of approximately $5.4 million due to rule changes that set requirements for additional resales at Pacifico to cover future administrative expenses.

Third, some adjustments, of course, for the year which were grouped in a cumulative in the fourth quarter, such as equated value adjustment of derivatives for 2013 of $7 million and a regulatory change that requires an adjustment in accrual of commissions that generated reduction in income of $4 million for the year.

Fourth, the seasonal increase in administrative expenses, which tends to be between $15 million and $18 million in the last quarter [of the year].

All of which affected operating income, which drops also 14.8% for the quarter.

As mentioned before, business plans were however positive with loans growing 2.6% for the quarter when looking at quarter end balances.

But 4.5%, when looking at average daily balances, reflecting solid growth for the quarter.

Net interest income expanded also, 3.2% for the quarter, despite some extraordinary adjustments of derivatives valuation throughout the year, which reached an aggregate $7 million and was booked in the fourth quarter.

Excluding these adjustments, real net interest income growth for the fourth quarter was 4.7% in line with our average volumes growth.

The good evolution of the business and improved pricing also led to higher NIM, which expanded a few basis points to 5.2% for the global NIM and 8.4% for the NIM on the loan book.

The insurance business was affected by the loss of a profitable business related to the pension fund insurance business, following the introduction of our regulatory auctioning process of this insurance coverage.

In addition, we have also had some extraordinary nonrecurring adjustments that led to growth in both total premiums earned, down 7.7%, and underwriting results, down 22%.

Consequently, ROAE dropped to 14.6% as we digested extraordinary costs on adjustments for the year.

We chart it out to $45.2 million, less the seasonal increase of expenses between this fourth quarter.

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Looking at BCP's performance.

As mentioned before, loan portfolio growth is well within expectations.

Measuring growth in average daily balances, the Nuevo Soles portfolio, which is mainly dominated approximately 80% by the retail business, expanded a robust 8.9% quarter over quarter, while the US dollar portfolio expanded a mere 0.6% for the quarter, resulting in a 4.5 expansion over the total portfolio.

Given the stability of the currency for the quarter -- the quarter over quarter numbers led to real growth.

However, year-over-year numbers, to incorporate the currency conversion distortion, I show only a low 11.6% portfolio growth for the year.

While growth for each portfolio, separated by currency reveals much better growth as we will see further on when we do an exercise to eliminate distortions.

Our wholesale portfolio continues so pricing with strong growth of 21.2% in local currency denominated borrowings, while US dollars denominated lending was less strong with an expansion of only 2.4% for the quarter.

This special continuation of a definitely stronger preference of local currency denominated borrowing after a volatility in the currency for the first half of the year.

On the retail front, a more cautious expansion is also evident with a Soles book growing 4.8% and the dollar book showing a slight contraction of minus 12.9%.

This expansion was led by mortgages, [marked] lending, and business loans, followed by consumer loans and lastly, Pyme and credit cards, being these two less segments to one have slowed down the most following the correction in the score models.

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With regards to credit quality, we continue showing an evolution in line with an expected slight deterioration resulting from what we have defined as our learning curve and feel fairly confident about the corrections introduced in the new in adjusted scoring models.

In fact, we are seeing a slow run in the duration of the (inaudible) portfolio, though a pickup in the credit card portfolio appeared as a regulatory change raising the minimum payment a credit card loans what introduced recently.

This is in line with expectations and has caused the overall PDL ratio to increase only 580 points and situate at 2.3% this fourth quarter.

For all delinquencies, but only increased one basis points up to a still very low 1.53% PDL ratio for over 90 days delinquency.

In this context, provisions increased 5.4%, but cost of risk remains unchanged at 2.2% of loss.

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Operating results of PCP set the pace for Credicorp.

Given the sound growth in volumes of loans outstanding throughout the quarter, net interest income expanded also 5.3% by what is affected by a credit value adjustments in derivatives, according to IFRS, that resulted in a cumulative correction for the year of $7 million that affected interest income in the fourth quarter.

Therefore, reported net interest income for the fourth quarter shows only a 3.6% quarter-over-quarter growth.

Consequently, NIM for loans only another 5 basis points to 8.4%.

And the global NIM expanded only another 10 basis points.

Nonfinancial income was also affected by an extraordinary adjustment related to a regulatory change in the recognition for certain fees, introducing the accrual concept and leading to a reversion of $4 million increase.

Nevertheless, nonfinancial income expanded 6.9% quarter over quarter.

Furthermore, operating expenses absorbed this fourth quarter a significant amount of nonrecurring costs as indicated earlier.

In addition to a seasonal increase in expenses, which was this year, is still unavailable.

Those seasonal nonrecurring expenses included some Social Security-related payments, related to out compensation awarded in previous years, due to a claim and dispute with SUNAT, which is a Peruvian tax authority; tax contingencies for Bolivia, (inaudible) that sum up to $8.9 million.

This plus the seasonal expenses led to an increase of 18% in administrative expenses for the quarter, which were to a large extent compensated by lower personal costs as we continue at tight control on headcount and provisions for 2013, where bonuses were reversed.

Therefore, operating expenses grew only 8.3% quarter over quarter.

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This chart briefly summarizes the results of the different subsidiaries and the contributions to Credicorp.

It is evident that the performance of most of them was affected by these extraordinary adjustment and costs.

BCP's contribution drops, as we explained in the previous charts, both for the quarter and the year and delivered a 16.1% ROAE.

BCP Bolivia continues performing fine with sound portfolio growth, but profitability remains depressed by regulatory changes and pressure, in spite of which it is still able to deliver 12.2% ROAE.

Edyficar continues being the crown jewel and reports an almost flat performance despite the large distortions on its 100% Nuevo Soles business.

And still delivered at a 1.6 ROAE.

Specifically insurance had a difficult year from an operational point of view, exacerbated by the currency volatility and regulatory changes that affected the business and generated additional expenses and provision.

Its contribution to Credicorp was 40% down on its ROAE at an extremely low 5.9%.

ASB, a fewer US dollar business, is the only want to show, through its reported numbers, its excellent performance, growing 22% quarter over quarter, 5% year-over-year, and delivering a 25% ROAE.

Prima, despite concerns due to our regulatory changes in Peru by the end of 2011, had the best performance of all and expanded its business and income 33% year over year, with a spectacular ROAE of 31.4%.

And lastly, Credicorp Capital had a year of consolidation in preparation for the business expansion and was at the same time affected the events in Chile by the elections, resulting in a still negative ROAE of minus 1.1%.

All in all, we believe potential for growth on better ROAE is significant.

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Moving out to an analysis of the year-end results, we will try in the next few slides to make here the adjustments to show real trends in income generation (inaudible).

IFRS dollar-denominated reporting for year 2013 suggests poor performance of net income growth 28.1% to $567 million, way below expectations for Credicorp.

And ROAE drops from 20.9%, 13.5%, as does also ROAA from 2.2% to 1.4% in 2013.

In addition, reported for full expansion also shows a significant drop in growth down $0.02 on 1% from very high growth of about 20% in previous years, accompanied by credit quality deterioration by 51 basis points to 2.24% and cost of rates increasing to 197% of total loans.

However, as we mentioned in our introduction, real operating trends are significantly better than suggested -- that are reported results.

The year 2013 presented a series of events which generated substantial accounting and extraordinary losses related to -- first, the nature of the dual financial system and the transitional period in which we find ourselves.

Second, our reporting on functional currency being the US dollar combined with an expected currency volatility experienced in the first half of the year.

And, third, the general market was (inaudible).

And, fourth, some regulatory changes that affected some business sectors and resulting in extraordinary accounting adjustments.

Therefore, in the next charts, we will try to isolate those events and reach recurrent net income and show real growth rates for our business.

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As we have explained in detail, in our press release, a period of extraordinary cost adjustments and charges occurred in this year that significantly affected reported results.

First, that translation loss for the whole year that amounts to $105 million and was originated from the Soles denominated equity position.

Second, the loss of $43.5 million in forward contracts also related to our local currency equity position.

Third, the loss of $11.5 million in the valuation of sovereign bonds [carrying] the portfolio, due to move in the rate of the US dollar.

Fourth, the cost of approximately $5.4 million due to rule changes that set requirements for additional reserves at Pacifico to cover future administrative expenses, ULA.

And fifth, other nonrecurring expenses that reached an aggregate amount of $28.8 million related to payments to our tax and social security authorities for past years.

Tax contingences in Bolivia charged off both (inaudible) assets and permanently related to a valuation of IM Trust shares following market trends on IFRS accounting rules.

Accounting -- adjusted Credicorp numbers for this nonrecurring costs, operating income will increase to [$1.154 million], leading our recurring net income of $738.3 million after adjusting for taxes on the income adjustment, which, when compared to recurring net income of 2012, excluding only a transaction gain line as a tax adjustment reveals a 7.1% better operating income, and only marginally higher that earnings net compared to recurrent net earnings for 2012.

But this adjustment to recurring net income incorporates only be extraordinary costs and expenses and does not correct the distortion costs by the currency devaluation on the more than 80% of the income, which is generated in Nuevo Soles.

So turn please the next page.

As we just said, income generation is significantly distorted, even the high percentage of Nuevo Soles businesses with income generating in Soles, which are then converted to US dollars at a 9.6% more expensive dollar, hiding real growth for this business.

Therefore, in order to better determine real growth rates and income generation capacity, we are showing income generation in the currency in which it is generated to estimate that growth for each income source and focusing on the pure interest income excluding [all this].

As you can see in the chart, adjusted net income -- net interest income is excluding other income and other expense in local currency rose 28.2% for the year while dollar-denominated net interest income reaches only 2.6%.

If we convert the Soles income to dollars, as in our accounting, growth for all income reaches only 14.2% for the year.

However, if we calculated a blended growth number, using a simple weighted average principal, we see the real growth achieved for the total income generation was 24.1%, a significantly better result.

Similarly, [Soles] non-financial income shows a real expansion in constant currencies of 19.9% while operating expenses, which, in fact, were benefiting from the currency move in the reported numbers, shows a higher 20.4% real expansion for the year.

This expansion includes the adjustment for nonrecurring expenses from the previous page and reviews real cost expansion, which is still high.

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With regards to portfolio expansion, we saw reported numbers show a total 11.6% portfolio growth.

However, if we analyze each portfolio by currency and calculate growth numbers, using a weighted average growth, we see the real growth of the different businesses is significantly better.

And the surprising element is the wholesale portfolio, which again, all expectations, even the slowdowns of the economic environment, turn out to be a faster growing sector.

Thus, also loans grew 18.8% for the year with the corporate sector leading growth with 25.4% expansion.

Plus, the retail sector growth rose at a slower pace but still healthy level, reaching a total of 16.1%.

In the retail business, mortgages led growth with 20.5%, followed by consumer loans, SME, business loans, and lastly credit cards.

But, as we mentioned before, the crown jewel is Edyficar, growing its portfolio 39% and maintaining the lowest delinquency ratio for this type of business at 3.9% and the highest profitability.

Overall, growth measured this way showed a portfolio expansion of 17.3% for the year.

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Therefore, we would like to leave you with this core business numbers to think about the real performance and income generation capacity of Credicorp, which are indicators of future potential.

Portfolio growth of 17.3%.

Net interest income expansion, 24.1%.

Nonfinancial income growth of 19.9%.

Recurrent net income growth of 0.7%, reaching $738.3 million.

Recurring ROAE of 17.6%.

The negatives still embedded in these adjusted numbers being cost of risk of 2.2% of loans and cost expansion of 20.4%.

Therefore, our strategy today, which focuses on bringing risk management to best practices and the ambitious efficiency project, addresses precisely those two weak sides of our business.

The objective -- to bring ROAE back to a 20 level.

With these comments, I would like to close out our presentation and open to Q&A.

Thank you.

(Operator Instructions) Thiago Batista, Itau.

I have basically two questions.

The first one on your nonrecurring items during this 4Q.

Could you give us a little more color about what you did the impairments in IM Trust this quarter?

What was the main [reason] for this impairment?

That was my first question.

And my second question is about asset quality.

I know that you have had some comments and that you are very comfortable with all the adjustments you have did in the past.

So it is possible to expect that the PDL ratio of Credicorp will contract during there.

And specifically about the SME segment, we saw in the chart you put forth in your release that the PDL ratio of the SME both from [is now down peak] in December against November figures.

So my question is, is this it too soon to say that the peak in the PDL ratio of the SME segment is occurred in November or maybe we could see some additional iteration going forward?

This is Walter Bayly.

I will tackle the first part regarding the nonrecurring items and leave to Fernando the second part of the question.

The nonrecurring items for this quarter indeed have been quite high.

The most important one is the one you mentioned, which is the impairment charge for IM Trust.

And there, the reality is that we paid a price which was really to the margin.

And we had very little margin for mistakes.

It was a difficult market situation.

There are not different or alternative investments we could have done.

With that being mentioned, what happened were two things.

One is that the markets moved against us.

IM Trust gained market share in all its domestic businesses, but the overall size of the market was relatively smaller.

There was less business activity in the domestic capital markets in Chile.

And while this was happening, of course, there was also a devaluation of the Chilean peso so that, in dollar terms, which is what was recorded, the price which was recorded is recorded at Credicorp's books, the overall market became smaller.

So if one looks forward, the exercise which we have to do to value to -- on a yearly basis impairment, involves projecting forward the expected results of IM Trust.

And we see that those projections, original projections, will converge with the numbers that we project this year.

I think three or four years down the road.

But there is a gap which will not be recovered and that [personal] value of that is the impairment.

So yes, we pay through the margin.

We have very little room for error and error did occur.

The markets played against us.

The volumes were smaller than anticipated, and, of course, the currency did not help.

There were a couple of other extraordinary items in the quarter.

One related to a salute, which is the local social health -- Social Security.

There was a new interpretation by the regulatory authorities on how that charge should or should not be applicable to extraordinary bonus payments, et cetera, et cetera.

And yes, this affected several of our companies, and we had to do a one-off adjustment, which I -- if I recall correctly, throughout Credicorp amounts to about $10 million.

And then, last but not least, there were several accounting items related to our slowly incorporating all IFRS principles to some of our accounting.

And those included items of about $10 million.

Now, with the past, we have always had extraordinary items that affect our P&L, not at this magnitude, but they were always countered by extraordinary items on the positive side, none of which we have had this year.

So it is unfortunate, but it is nothing that keeps us awake at night.

The IM Trust is an unfortunate one, but reality is what it is.

And I would now pass on to Fernando to tackle the second portion of your questions.

As you can see the charts -- in the chart, there are six lines, for each different segment.

We are very comfortable with the lower four lines, if you can imagine.

And, actually, very positively impressed with what is happening in the consumer segment, although we have to admit that December is a very good month in terms of payments because people that earn wages, former workers, earn a double wage.

So that helps not only in the consumer and the other segments, but also in the SME segments because this could go have sometimes two different jobs.

One is an independent and one is a dependent job.

So that happens.

And that is probably what happened in the SME segment.

There is actually, as we say here, more money in the street, so our customers are able to pay more.

So what I would say, that number in the SME is a good number.

The line is turning down, but it is still very early to make conclusions.

During the whole year, 2013, we have engaged in making -- in taking a lot of measures in terms of application scores, in terms of collections, in terms of policy, for grades in the SME segment.

And we feel that they are beginning to realize good results.

But this is still an early stage to tell you that we will go down in the near future.

We will probably have to talk again in May, and we hope to have better results.

There is another point, important to talk about, in the Credicorp portfolio.

The thing is that, like two months ago, regulation made all the banks institutions in Peru to shorten the period of payment for credit cards.

We have large periods of payment and now with most -- depending on the card, we have shortened them by half.

So the actual installments for our clients have increased somehow, and they are adjusting to that.

And we will see what happens.

We feel that these PDL line for credit cards will go up a little further, and then it will come down when our clients it just to the new rules.

In reality, this measure taken by the SBS, our regulator, is a very healthy measure in terms of the future of the market, and we are actually -- I mean, we are taking it and we are actually looking for great results in the long run.

Okay, now.

Thanks for the answer.

Carlos Macedo, Goldman Sachs.

I have a couple of questions.

One, Fernando, if you could give us a more color on your efficiency program and how that is progressing, what stage you are in.

We did see some benefit from at this quarter.

What kind of impact do you expect that to generate in the coming years?

And just some more color on that.

And the second, you just mentioned regulation, that change in credit cards.

Is there anything else in the pipeline that we should be thinking about, looking forward to the next 12 months that you can see that is in the process of approval that may affect your results?

Thanks.

Carlos, this is Walter Bayly.

I will tackle the first question regarding the efficiency.

And thank you for your question because it gives me the opportunity to clarify this because I know there has been a lot of questions to our Aida and her team about it.

Yes, we have embarked on a very thorough profound initiative to take our efficiency levels dramatically down.

This is something we initiated around September -- probably October.

Where we are now is that we have developed the methodology.

We have about a complete front related to long-term changes.

We have nine different fronts and a whole area of work related to short-term controls or tools to help management spend more intelligently.

We are in the process of looking at this very closely.

Each of the different teams is working and what we expect everybody to come back to the table around May, June.

And only then will we have a very clear number as to what level of efficiency do we want to reach and when.

Only in May, June, when each of the different teams tackling the different initiatives will come back and, again, we will be able to consolidate all the information and give you guidelines as to how we will be able to do this and what timeframe and what levels of efficiency.

So right now, it is still premature for us to give you a number or a timetable, and we expect that -- to be able to give you that in may, June.

So yes, we are working on it.

It is one of our key initiatives, but I don't want to mention numbers before we are really prepared to do so.

Carlos, and in terms of the second question, as you know, during the last 24 months, the regulators have been very active in terms of new regulations, in the pension funds system, in insurance, in banking, especially in terms of fees, regulating fees -- a number of fees and what you can charge or not, whatever.

We don't feel that they will be active in the near future.

As you know, this year is still a normal year.

Next year is already a pre-electoral year so we feel that they will be into -- be very less active in this [terms].

Thank you, Fernando.

Thank you, Walter.

Tito Labarta, Deutsche Bank.

My question in terms of your margin, I just want to get kind of how you expect to see that going forward.

We saw very strong loan growth on a local currency side, which I think helped the margin, but the growth is also driven more by the corporate side as opposed to SME.

So could you give a little bit of color on how these moving elements should impact the margin going forward with the strong loan growth in the local currency, but driven more by the corporate as opposed to consumer, and how you see the loan growth evolving in these segments, and how that is going to impact your margin?

Thanks.

Thank you for your question.

First of all, the country is planning to grow by, say, 5.5% next year.

Things were a little rough in terms of expectations at the beginning of the last year.

This year, the environment looks better.

We feel that the country is to continue growing better than last year.

And the first thing you see is the corporates and those companies beginning to be more active.

And that is what we have seen in the last quarter, and we are continuing to see this quarter.

So we feel that this could be a good year.

And what is happening, really, is that our lending business is turning more towards Soles and we are receiving more deposits in dollars.

It is not a very sharp trend, but it is a trend.

And that will help if rates begin to go up, and that is really the case where we are looking at.

Margins will probably come up as well, and that will be helpful for our institution.

Thanks.

Maybe just give a little more color on that as well as you're getting -- growing the loan portfolio more in Soles, but then deposits are growing more in dollars.

Wouldn't you be worried about some mismatch from that perspective as well?

As you probably know, because of what happened during the last three, four years, we had a portfolio in which our loans in dollars represented 56%, 58% so that number is coming down.

And in Soles, it was the opposite.

Deposits in Soles were around 54%, 55%.

So the trends are the other way around now because of what is going on with the currency of [all our] countries and also group.

So what we see is that the balance will be more -- will actually be more balanced with our assets and liabilities in the same currency.

We were less balanced in the past.

I see.

Thanks.

So just to be clear in terms of the margin expectation, and so even though you will probably grow more on the corporate side, given that it is more from the local currency than US dollars, overall you think that should lead to higher margins for this year.

What we see is that as the corporates begin to grow, companies will begin to grow, and then their employees will also begin into grow and earn more money.

And that will also help the retail.

But that will come further along the way.

So would you expect the corporates to grow faster than consumer this year or maybe corporates grow faster in the first half.

And then the second half of the year, you will grow faster on the consumer side?

I just want to get a sense of the loan growth in corporate versus retail as well.

I feel that we have already -- the corporates are growing faster now and the retail customers will probably catch up during the second semester of the year.

All right.

Thank you very much.

Saul Martinez, JPMorgan.

Two questions.

I'm going to be blunt with my first question.

Should you be in the insurance business?

Is this a good business?

For as long as I have covered you guys, it has been a turnaround story.

It has been sort of a drag on profitability and you guys -- you brought in David Saettone a few years ago.

He didn't work out in terms of turning around.

Now Alvaro is trying to turn it around.

Doesn't seem to be getting better, even notwithstanding the one-offs.

The results have been pretty poor.

The ROEs are at or below the cost of capital for a long time.

Is this just a bad business?

Is this a business that maybe you don't do as well as the banking business?

Should you be allocating capital to other businesses?

So I kind of want to get a sense for what your strategic vision is here and whether this is a fixable business, because it has been a while.

It feels like it hasn't really delivered in terms of results.

Secondly, on your credit card -- credit card asset quality, I get the change in regulation.

It makes sense that NPLs would go up.

Having said that, if I looked at the industry numbers, NPLs went up I think 30 basis points and if I probably -- if you exclude your numbers from that, it went up less.

Intercorp had no deterioration in the fourth quarter.

Why is your NPL evolution in cards so much worse that your peers, especially considering that it has been a while -- well over a year since you introduced your pricing adjustment to that business?

Sure.

Thank you, Saul.

This is Walter.

Let me tackle the second question first and make a brief comment about insurance.

And fortunately, we have Alvaro here who will be able to give us a little more color regarding insurance.

As to the credit cards, the adjustment for the new regulation was passed at the beginning of the year, and each bank -- and the latest you could do it was by December.

And most of the other financial institutions did it earlier in the year.

Thus, we were the latest, and so we are the only ones that did the adjustment this last quarter.

Most of our competitors did it in earlier quarters.

We had until year end.

Intercorp, which is the one that you mentioned, did not have to do the adjustment because my understanding is that they have been operating under the new guidelines for quite a while.

So, I hope that answers the question.

Regarding the insurance, yes, those are all fair questions -- questions that we have debated amongst ourselves.

But again, as I mentioned, I will leave Alvaro to give you a little bit more color on where we are and where we intend to go forward.

Alvaro?

Thank you for the question.

Actually, that was my first question before I stepped in the position.

And, I would say that, after four months in that role, I still have a few [unanswered] waiting there.

But basically, what you see in this Company and this business is that you have very different realities within it.

First of all, you have the property and casualty business, which is the poorest one where we have the most complexities and difficulties to make it profitable.

Then, you have the health (inaudible) of insurance business, which is getting better and better with all the adjustments and improvements of last year.

And then -- and the investment within that business we made into the medical services.

We start to be profitable, but we have already made all the improvements and adjustments, and this is the year to make it -- put it on the positive side and start getting a better return equity.

And, finally, the life insurance business, which is a very profitable one, we do it well.

We have it very well linked to bank insurance, to the bank-generated insurance linked to the loan side.

And in addition to that, we have the annuities and all the other businesses that are performing quite well.

Going back to the property and casualty, which is where we have challenges.

Within it, again, you have different businesses.

The large companies or customers, that has been a challenge for a while, and now we have a different type of reinsurance there.

We have this quota share contract that is basically transferring the risk to reinsurers, a big part of the risk -- 55% today.

And that has brought much more stability and less volatility to the P&L this last year.

However, businesses are smaller.

Of course, now we have less retained earnings with less casualties, but all in all, it's a smaller business.

The return equity there, that is a question mark.

Because if you see what happens in the world, we turn return equities for that business is not that very high.

Therefore, we will -- after, I would say, a year or so of understanding that business well and this new model works, we will have to make a decision whether our return equity of, let's say, 10%, 12% in that business is good enough for us.

Okay?

On the retail side, you have the car insurance.

That has been a real headache last year.

We have lost millions of dollars, and that is a combination of things.

It is underwriting, methodology, which is very basic in the country.

We don't use still -- still don't use scoring systems or modeling, and we have started.

And we have to develop that capability to make it more profitable or making pricing much better.

You have several other fronts in that business, for instance, how to manage costs on the repairs side in that business.

That has been also a complication last year, because expenses were getting higher and higher.

And as you know, we cannot just raise prices and have the result right there.

We have to wait for a year for the renewal process of the whole portfolio.

So that business, we are very, very focused on proving that business that car insurance business.

And we have deployed additional people, and we are developing the models that I just mentioned.

In addition to that, another complication in this market is that you don't have [bureaus].

You don't have the records of the people of -- of incidents, (inaudible) fines, and infractions, or -- I don't know how you say it.

So that business itself is a specific focus for us.

But in addition to that, and I would say the third front in the business, is the expense side.

We have a net underwriting operating result that is -- a net underwriting result that is well below the operating expenses of the company, so that is not sustainable in the long run.

We have to take that expense side very seriously and see how well we can do, how much we can reduce the structure that we have in the company to make it more profitable.

So, in summary, what I would say is that, this year, we will take probably this year to make all those adjustments and see if this is a business that we want to be in, what part of the business we want to keep, and if there is a different decision, we will have to make a decision as to partner with (technical difficulty) or we don't know yet.

There are options out there.

Okay, no, that's very helpful.

Thank you for the very thorough answer.

Just one quick follow-up on insurance.

The loss of the Prima business, how much does it impact the life insurance bottom line?

It is about -- this year, this last year, the first nine months of the year where we had the business, because we lost it starting October 1, was a very profitable one, which doesn't mean that it has been that profitable in the past and won't be that profitable in the future.

Basically, the contribution has been around $5 million in the past.

This last year, it was $12 million, and that could be what you see as we have lost there.

However, the rules of the game have changed.

Now you have much lower premiums there, and the companies that have won the business seem to be losing money basically.

So, we were not that wrong by losing that business as it was designed.

We are really hoping that since the company started losing money in this business, in the new option, the rules would change a little and could be an opportunity for us to get back in.

Okay, that's helpful.

Thank you very much for your answers.

Philip Finch, UBS.

Good morning, everyone.

Thank you for taking my questions.

I have got two please.

First of all, in the past few quarters, you've been slowing down your branch expansion program.

So can you give us an update on where we stand here in terms of how many branches we should expect you to open this year and each year going forward?

And secondly, what is your ROE expectations?

Again, in the past, you talked about achieving close to 20% ROEs.

Is that something you think you can achieve this year?

Thank you.

Sure.

This is Walter.

Regarding our branch expansion for charging a couple of (inaudible) reviewing with [Jim Franco] who runs our retail operation, its midterm expansion program.

And yes, we will continue to expand probably a number which will be around 40 to 50 branches per year, probably closer to 40.

Those numbers can change not in the next year because there's a lag of about 18 months between the time you decide to open a branch and you actually do it, so probably the next 12 months are already played out.

But more on a longer-term basis, that is one of the issues that is going to be tackled through the efficiency whether the model of our branch, the footprints that we want to have is the right one, do we want to change it or not.

But to give you a simple answer, probably a number of about 40 is one that you can feel comfortable around.

The second question was regarding return on equity.

Yes, 20%-plus return on equity is a doable and achievable target for Credicorp, and we are very, very focused on reaching those return on equities in this first quarter.

Sorry, did I hear you can achieve that in this first quarter?

Yes sir.

Wow, okay.

thank you.

Just a little bit on the branch question, what we're looking at is actually transactions in our branches are diminishing month by month.

So, our branches will be much more devoted to sales and service and less devoted to cash transactions.

And that's already the case for -- it's been the case for the last 50 months, and it will probably continue to be so.

So it's not only a matter of putting more branches, but of redesigning the branches, because we are needing them more for sales and service rather than transactions.

Very good indeed.

Thank you very much.

Fred De Mariz, UBS.

Good morning everyone.

Thank you for the call.

A couple of questions on my side.

The first one is a follow-up on Peter's question on the margins.

So, I understand that corporate is going to grow a bit more in the first half of the year, and then maybe consumer will catch up.

But we also have the impact on the currency.

I wanted to hear from you net-net if the impacts on the margin would be positive for this year.

In other words, do we expect margin extension for 2014?

So that would be the first one.

And the second one is on one of the subsidiaries, Edyficar, which you mentioned was a great asset.

We have seen an increase in NPLs at one of your main competitors in micro-finance.

And I wanted to hear from you your thoughts in terms of asset quality, whether we should be concerned about contagion and whether you expect the trends to continue to be very strong at Edyficar.

Thank you.

In terms of margins, there are really two businesses, as you said.

One is the wholesale business.

And we believe that margins could improve a bit, especially because rate -- especially long-term rates will begin to roll up.

We don't know what's going to happen in this market because it's really volatile, but the trends are telling us that they will go up, so margins will expand a bit.

But that is a very competitive business.

Our margins are very small compared to retail.

In the retail segment, there is ample room for improvement.

Last year, we've been very much engaged in developing new tools to make our numbers and our pricing more transparent to ourselves and to our customers.

So we have these new pricing tools now in place in most of our businesses, which will really increase some of our prices, some of our rates in the SME segment.

We plan to be much more intelligent in putting our rates and also our fees in place next year.

And that will probably have a very good impact in terms of margins.

Regarding your questions on the credit quality of Edyficar vis-a-vis its competitors, Edyficar in the micro segment business, which is still the bulk, or not the bulk, but the largest share of its portfolio, they have a very successful model in which I would say 70% of Edyficar customers are not shared customers.

They are customers that exclusively work with Edyficar on the lending side.

So that gives them a very special position in the market, which the market which has been contaminated because of over-lending.

Most of the financial institutions have been very aggressive.

You have a whole bunch of (inaudible), municpales, (inaudible) etc.

that have been very aggressive, including Mibanco, which is the name I understand you were alluding to.

Yes.

So yes there was a bit of over-lending.

Fortunately, it has not hit Edyficar because of the fact that I mentioned the bulk of the customers are not shared customers.

On the other side of the portfolio, which is the larger, the company is slightly above the micro finance, which is the [Prima].

It is not an important portion of Edyficar's portfolio, though it is growing, but with a different business model, and we think it will not be affected.

That's great, very clear.

If I may just ask you for a follow-up on this 20% ROE that you just referred to.

You were saying that you could reach this by the third quarter of this year?

And maybe just to summarize what would be the main driver.

Are you thinking that maybe the performance in ROE will be because of margins, because of lower provisions?

What do you think is the biggest driver for this return?

Sure.

The only caveat I would say to my comment about the 20% this quarter is that there aren't any major currency disruptions.

Okay.

But even aside, assuming there will be no major currency disruptions, what will allow us to reach a 50%-plus return on equity?

Just the fact that we would not have all those unusual circumstances that have overshadowed our performance.

These are, again, the devaluation, the impact of the fixed income, the accounting changes, etc., etc.

If you take all those from the performance of Credicorp the last year, and even assuming the underperformance of Pacifico, and we will have been under 20%.

So what we need to happen for that 50% return on equity to be obtained in the first quarter, one, no major currency disruptions, and second, elimination of nonrecurring items.

Just the business itself will do it.

That's good.

Very clear.

Thank you.

Jose Barria, Bank of America.

Thank you gentlemen.

Most of my questions have been answered, so I'll just ask some very quick ones, mostly on follow-ups to previous questions.

The first one is on loan growth.

I am understanding that you are seeing maybe a better economic growth this year, but given that you've had some problems in certain portfolios that you're trying to rectify, what kind of loan growth can we expect in 2014, assuming no currency impacts?

The second question is with regards to your decision to change the reporting currency, obviously given that there is a high degree of de-dollarization in the economy, it makes sense.

But I wanted to understand what your thoughts are on changing the composition of your equity, because you still have a large portion in dollars, and there could be some translation effects still happening in the other direction.

Those would be it.

Thank you.

Okay.

The first one, in terms of loans, we actually -- what we've studied in the past is the growth of loans which is approximately double the growth of inflation -- of the country or the GDP plus inflation.

So, if the GDP grows by, say, 5.5% and inflation is planned to be around 2.5%, it will be 8%.

So we are planning to grow twice that, so it will be around 16%.

That's probably what we are planning for next year.

And it will depend on the segment.

Some of them will grow faster than others.

There are still measures to take to let them grow faster in terms of risks.

And your second question was about currency.

Okay.

We've changed our currency because now like 70% of our income and costs are in soles.

So that's really our functional currency.

And now the dollars will give us volatility, the dollars in our balance sheet.

And we are planning to live with that.

Actually, we are still trying to cover a little bit our net worth, but in the future, we will have to learn to live with that because the [quarter] will continue to go into soles, and therefore our business will be in soles on and on.

Let me expand on that a little bit.

Even today, we have already switched our functional currency.

But the path is not changed.

We still have a dollar portion of our portfolio in the local currency of our portfolio.

Clearly, the trends are the local currency will grow at a faster pace, and that's this de-dollarization overall in our P&L and balance sheet will continue to happen.

But we will this year and the next couple of years continue to have a portion of our assets denominated in dollars.

The question is should we or should we not have a long dollar position?

And there are two debates, two counter arguments.

One is do we want to have volatility on our P&L?

If the answer is no, then the dollar position should be zero.

But the counter argument to that is should there be a more drastic movement in the currency as you have a portion of your assets denominated in dollars and your capital is all in soles, then there is a potential for us to be undercapitalized because, as expressed in local currency, your dollar portfolio will have more soles.

So the counter argument if you're worried about your equity is that you should have a dollar -- a composition of your equity which mirrors the dollar-sole mix of your portfolio.

So there is no simple answer.

So what we have done is probably a combination of both, that we do want to have a portion of our equity invested in dollars because we do not want to be totally unprotected should there be some movements in the exchange rate.

But on the other hand, we want to minimize the volatility on our P&L.

So somewhere in the middle is where we will be navigating.

I hope I explained myself.

No, yes, absolutely.

Just in terms of for our purposes so that we can try to quantify what the impacts could be, what do you think is a sweet spot in terms of mix of soles versus dollars on your book value?

The number I have in my mind is probably around having a long dollar position of about $400 million.

What percentage would that be of the capital?

Do you have a number in mind?

The capital of Credicorp is $4 billion.

Probably 30% or something.

I'm looking at $4 billion, so $400 million, we are talking about 10%?

We are (inaudible) 23 (inaudible) because 10%, 15%, probably that number.

Got it.

Okay.

Lastly, Alvaro, if you could -- just because I didn't understand clearly your answer to Saul's question on the impact of the loss of that Prima business on the insurance side, what did that represent in terms of net income for the Pacifico group in the first nine months of 2013?

It was around $12 million.

$12 million.

Yes, it was a very good year, lower casualties and good income, which will not be repeated necessarily.

So, roughly around $4 million a quarter.

And in 2012, it was around the same level?

I mean I know you're -- okay.

It was about $1 million, $1.5 million per quarter.

Got it.

Okay, thank you very much.

Boris Molina, Santander.

Let me string these together a little bit from your comments so far what is going to affect your guidance for the year.

So basically we're talking around 16% loan growth.

Could give some more details on the cost and provision expenses for the year?

Do you see that, in terms of other operating lines, how do we arrive to that 20% plus ROE for the year?

If you can give us some clarity on that, I would be grateful.

Thank you.

Good question.

We took (inaudible) loans.

You're asking about operating costs on provisions.

What we feel is that given all the measures we have taken already, those numbers will grow by about the same.

In terms of costs, we are planning about maybe 14%, 15%, and in terms of provisions, probably the same growth of our loan portfolio.

Okay.

Thank you so much.

Amit Mehta, PIMCO.

Some of my questions have been answered.

But I guess I just quickly wanted to focus on your MPA level, and also kind of maybe elaborate on the components of the cost of risk charge that you see going forward, given the mix shift that you are seeing.

And then also on the cost growth, I just want to understand how much of your cost growth is flexible going forward.

I appreciate you're in the process of doing your review at present, but I just wanted to understand if we have a deceleration or reacceleration, how manageable is it for you to control your costs going forward?

Because it does seem quite sticky historically.

We are right now in the process of analyzing all our OpEx and all of our personnel costs.

As you said, part of it is fixed, but the first findings of our analysis is that there is ample room for improvement.

Some of that improvement will be faster to make, and the other part will need some automation.

As Walter said, this efficiency program, because it's really a program, will not take six months.

It will probably take some years.

And we are putting together the pillars to make that a strong and healthy program.

There is some flexibility in our cost structure that if there is a downturn in the economy, we will probably need to bring to the table in terms of our results.

Is there going to be any additional one-off costs to implement this cost-saving program ultimately?

Nothing major, at least that we have foreseen right now.

We will be able to give you more details, as I mentioned, later on, later in the year, but at this stage, nothing that should stand out.

Okay.

And on the MPA and credit costs?

The MPL side of the P&L?

Yes, nonperforming -- I mean as you highlight in your summary slide, your cost of credit is 2.2, but you're saying that will grow.

Can you just give us some color on where you think that level will get to?

We feel that, as I said in the wholesale arena, we are almost there.

We have a very low risk portfolio, and we plan to continue in that very low risk space.

In the retail segment, as you probably already know, we have been penetrating different less penetrated segments, and there is less knowledge of how to deal with those people.

That was risky.

That was a learning process.

And a product of that learning process was all the measures that we had taken last year.

We have learned a lot in terms of how these people behave, how these people pay, and we have included those learnings in our models.

And we feel that we have much more robust models in terms of applications scores, behavior scores, ways of calculating the income of these people.

So we feel much better.

We have not won 100% of this battle, but we feel much better than we felt last year.

So that's really our plan, to continue growing fast, as you've seen the numbers, and hopefully with less delinquencies.

And would you be going back into segments where you have been before and have had a bad experience because now you're better prepared in terms of how to analyze the situation?

So how should we think about the lower segment of SMEs that you've been dabbling in and kind of retreated from?

It's really very strange because, for example, in the lower segment of SMEs, that was a difficult place.

And we have a great portfolio, very healthy, stable delinquencies, stable PDLs, and they know their business.

Then if you go a little further, that's where our opportunity and also our challenge is.

And this is in terms both of Edyficar and BCP because that is the area where we are still learning how to deal with.

Then, if you go further up, we've taken many measures in different segments, and we feel that we can grow in a very healthy fashion in those segments, both in terms of SMEs and in terms of consumer lending.

Okay.

Thank you.

Carlos Lopez, HSBC.

Good morning.

Two questions.

If you go to Page 27 of your report on the capital section, you have a common equity Tier 1 now of 7.52%.

I would like to know where you would like to take it and where it would have a Basel III figure that you would have today and where you want to be.

And my second question refers to goodwill.

Could you update us where your goodwill now stands, both for IM Trust and for [Coradores] and (inaudible) will it be next year?

Thank you.

In terms of the first question, we plan to bring our DIS ratio to the higher 14%s.

We are right now somehow over there.

We have an internal limit, which is around 13.5%, and we plan to have it around the 14%s.

We also have this other ratio which we call common equity Tier 1, which is also Basel compliant.

And that -- I don't remember exactly, but Basel states that you have to have it around 10%, 10.5%.

We plan to reach around 10% by the end of the year 2016.

10% by the end of the year 2016.

Yes.

Okay.

And that will be current Basel, I guess Basel II?

That's Basel compliant.

That's why they call it common equity Tier 1, the most strict of those ratios.

So that will incorporate all the new limitations (inaudible) of Basel III (inaudible)?

Correct.

Yes.

We feel that our own regulator will begin to get more compliant with Basel.

That's what they are beginning to do.

So we plan our relation will we really Basel based in the next two or three years in terms of capital.

Again, if you want to do that, would that have any consequence in terms of dividends?

You obviously have to retain more to get to 10%, right?

Yes, it is unlikely we will grow our dividends.

It depends on the growth of our portfolio, but that is the case.

Okay, thank you.

And on the goodwill sir?

Could you repeat your second question please?

Yes.

What is the current level of goodwill especially for [Coradores] and for IM Trust, and when will it be tested again?

Every piece of goodwill that we have in our books has to be tested on a yearly basis according to the International Financial Reporting Standards.

We will do so again by the end of this year.

And the current balance?

Good question.

I don't have it.

We will get back to you.

Yes.

I don't have it on my mind, frankly.

Thank you.

Jose Barria, Bank of America.

Just to follow-up on the question of guidance on expenses, you said 14% to 15%.

Should that be off of the reported operating expenses or the adjusted after you take out the nonrecurring charges?

Without our recurring charges.

I see.

Okay.

That's it.

Thank you.

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

I will now turn the call back over to our COO, Walter Bayly, for closing remarks.

Thank you all for joining us in this call and for some very, very good questions.

Last year was clearly a disappointing year for Credicorp.

Our performance was overshadowed by a series of one-off events.

Clearly, the movement in the exchange rate was by far the largest which hit us in several parts of our portfolio.

Just the simple line translation losses I believe is about $105 million.

The margins were hit by about $140 million, of which $45 million was just the open position of foreign exchange, which is recorded in the margin, but the fact that our local currency portfolio are smaller in dollars, in dollar terms, means that we had less margin than we had last year.

So overall the impact of the valuation is probably closer to $250 million.

If you recall, in the first quarter, we had, when interest rates moved up, we had fixed income portfolio which marked to market gave us $44 million in losses.

Fortunately, those ended up in $12 million because we were able to have some gains throughout the year.

But that was a large one-off event that, unfortunately, we did not properly anticipate.

And then we were hit by various extraordinaries which have been already talked about.

I trust the interpretations in the rulings with social security, accounting, etc.

which come to about $35 million.

All in all, if you take income taxes into consideration, this was probably about $230 million in after-tax impact, which would have taken Credicorp's earnings closer to the $800 million, which is a 19% return on equity.

That is why I am so confident that we don't have to do anything extraordinary, just having a stable foreign exchange environment and trying not to have those one-off events.

Our wholesale bank exceeded its budget last year.

Our retail bank, even including the effects of devaluation in their margin, made their budget.

And this includes the fact that they were able, because of adequate increases in pricing, to counter the effect of larger provisions in SMEs.

So our wholesale and our retail bank did meet their budgets.

All in all, Credicorp, Prima and Atlantic were clearly the stars and we have a lot of work to do as was mentioned in Pacifico and in Credicorp Capital.

Credicorp Capital we haven't talked a lot about it more than the fact that the impairment, but there is work in progress there.

So where are we heading this year?

We have three priorities which we have established, particularly at the bank level.

We want to work on the efficiency program which has been mentioned.

Our risk management initiatives continue to go on, and we are very focused on the Pyme sector, which even though has not produced good results this year, has continued -- has a tremendous potential going forward.

And we think there is a lot of value that we can extract and a lot of growth that we can take through there.

And clearly we have to focus on the two units that require a lot of work, which are Pacifico and Credicorp Capital.

This year, Banco de Credito will celebrate its 125 year anniversary.

We are very proud of that and we are going to be making some noise in the domestic market, relaunching our brand, and really trying to reconnect with our customers.

We think that all of our units in our corporation are very well positioned to capture the growth with very good clear strategies of where we want to go.

And it's a matter of execution and having a more stable international environment.

Again, I thank you very much for your time and dedication to following the company, and we look forward to meeting with you at the first-quarter conference call this year.

Thank you very much and goodbye.

Thank you, ladies and gentlemen.

This concludes today's conference.

Thank you for participating.

You may now disconnect.