Walter Bayly - COO
Carlos Macedo - Goldman Sachs
Thiago Batista - Itaú BBA
Jose Barria - Bank of America
Tito Labarta - Deutsche Bank
Boris Molina - Santander
Mariel Santiago - HSBC
Credicorp Ltd. (BAP) Q1 2013 Earnings Call May 7, 2013 10:30 AM ET
Good day, ladies and gentlemen. And welcome to the Credicorp Ltd First Quarter 2013 Earnings Release Conference Call. My name is Richard and I will be your coordinator for today. At this time, all participants are in a listen only mode. Following the prepared remarks, there will be a question-and-answer session. (Operator Instructions)
I would now like to turn the presentation over to Mr. Walter Bayly, Chief Operating Officer of Credicorp. Please proceed sir.
Thank you. Good morning and welcome to Credicorp’s first quarter earnings results conference call for 2013. I will be covering for Alvaro Correa who is out traveling and I understand that we are having some issues regarding the communication, so I hope you will excuse us if you are unable to hear me properly.
The first quarter of the year typically shows slower growth when compared to the disbursements at the end of every year generated by the good commercial activity and the company's holiday season and beginning of the summer in our country. Nevertheless, we are pleased to be able to show we are starting the year with still good growth and very good operating results in our core businesses.
However, an issue that has been in our minds and has been the topic of multiple discussions as our economy in market gradually detached from the US dollar; we happened to manage the impact on our results of any volatility in the US dollar Sol exchange rate. Therefore, the discussion of our first quarter results adversely impact in most of its analysis. Prior to neutralize in order to be able to evaluate real business trends and results.
All-in-all, we feel this was a very good quarter in terms of business trends, evolution and achievements. However, our earnings results were negatively affected by the FX mostly and present a challenge for us to reach our projected bottomline growth. Notwithstanding, our strategies regarding our future expansion remain unchanged. In fact as we will see in the following chart, portfolio growth continued at reasonable rates, margin on the lending business expanded, portfolio quality showed the change in the mix and remained sound and in line with expected performance and cost decreased from the prior quarter, but will most likely continue at a high percentage of earnings as the opening of new branches continue in a quest to rough up our infrastructure and prepare organization for the future growth.
Next page please. Following a 1.5% devaluation of the local currency by the end of the first quarter, Credicorp recorded for this first quarter net earnings after minority interest of $181.5 million. After deducting from its operating results an $18.6 million translation lost. This result was 9.3% lower than the $200.2 million reported in the previous and last quarter of 2012 which in turn included a translation gain of $30.5 million.
Consequently, return on average equity dropped to reach 17.5% for the quarter. However, operating trends were very strong with operating income increasing 16% to reach $276.5 million in this first quarter, up from $238.3 million in the fourth quarter of 2012; as a result, which is also slightly understated given the impact of the devaluation on income generation.
Loan book growth measured in average daily balances was also inline with the business activity in the Peruvian markets. It reached 4.1% growth for the quarter. However, quarter end book balances do not clearly this solid growth and showed only a 0.9% expansion. This was the result of a very steep peak in book balances at the end of the year 2012 and typical post holiday loan repayments.
Net interest margin for loans improved to 8.15%. As a result of the good expansion for outstanding balances in most of retail products. Enterprise corrections introduced last year. However, a 9 basis points decrease and Credicorp’s global NIM was reported for the quarter as a result of increased investment in Central Bank CDs as we will explain when looking at the CDs number.
The insurance business results reflected a seasonality and reported high claims related to the rainy season which goes from December to March every year, depressing it's results. Of the lower operating cost for the quarter, maybe efficiency ratio looked better. We will see all this better explained in the following slides.
Page four please; BCP’s loan book growth measured at average daily balances reached 4.1% for the quarter. However, quarter-end book balances showed only 0.7% higher booked loans. As explained before with Credicorp numbers, this is the result of a very steep peak in book balances at the end of year 2012. In fact, average daily volumes outstanding reveal a constant expansion across the portfolio. Wholesale banking group; its average daily outstanding 4% in the first quarter, a strong demand for medium and long-term financing was recorded, despite strong competition from capital market alternatives and international banks.
On the other hand, retail banking daily outstanding balances including Edyficar grew 4.4% reflecting some seasonality, loan growth is typically lower in the first quarter every year after the Christmas season. The most extraordinary quarter-over-quarter growth rates were reported at Edyficar, which expanded 11.2% in the quarter, followed by mortgages with 5.6% growth and consumer lending with 4.5%, while the credit card business which has being carefully monitored grew moderately at 1.7% for the quarter. These numbers grew either stronger when taking into account the impact of the devaluation of the local currency were Nuevos Soles growth in U.S. dollar terms. Since 45% of the total loan book issue is in Soles, is Soles denominated and the retail portfolios are mainly denominated in local currency.
Next page please, the low growth in quarter-end balances, which failed to reflect growth with the same clarity as average daily balances made deposit loan ratio increased stronger and faster, when delinquency are in fact inline with the outstanding volume growth in new portfolio mix. Consequently, BCP’s as to loan ratio jumped 26 basis points to 2.04 in the first quarter for total delinquencies and 21 basis points to 1.35% from 90-day delinquencies. Nevertheless, it is important to point out that the credit card for the full year is rate after the adjustment for our credit processes scoring models totally within the expected performance. New vintages in the Whole or the Consumer sector are performing within expectations. All other business sectors are performing well, with only the SME or Prima sector showing a deterioration which is to a certain extent attributable to a specific event that has early indications of our deterioration that requires some adjustment in our processes.
In fact, given the delinquencies are well within expected ranges, the level of provisions remain below the expected level of 2% of north which in only 1.8% of the average portfolio. This leaves BCP and therefore Credicorp with the healthy portfolio 48.4% of which is in the retail business, low to mid point 6 and relatively low cost of risk, i.e., less than 2% of loss and a good coverage of 173%.
Next page, given the sound growing volumes of loans outstanding throughout the quarter, net interest income expanded 4.6%. This number also understates growth and income generation given the effect of devaluation on the portion of BCP’s income which is today Soles denominated.
In fact, and as explained with Credicorp’s numbers, net interest margin for loans improved 16 basis point to 8.15%, as a result of a good expansion of outstanding balance sheet in most of retail products and the price corrections introduced last year. However, an 11% decrease in global net interest margin was reported for the quarter as a result of increased investment in Central Bank CDs which were up 10% quarter-over-quarter. This is an activity which (inaudible) given the low or manageable margins of Central Bank CDs by reducing the effective tax rate through the tax shields they generate which in turn make them an attractive investment. This led the net interest margin or total interest earning assets to drop to 4.96% in the first quarter of 2013.
Non-financial income contracted slightly mainly due to lower gains on the sale of securities. In fact, fixed income which is now mainly Soles denominated expanded 7.2% despite the currency effects.
Operating expenses dropped 5.1% after the seasonally high peak of the first quarter. This trend repeats itself every year and is also this first quarter. Despite the continuing expansion of the business, 14 new branches opened and 81 new ATMs installed in the period. The contraction expenses reported in the US dollar results was this time also helped by the exchange rate move and was mainly in the administrative and general expense.
Next page please. Our Bolivian operation reported a net income of $4.8 million, up 19.7% quarter-over-quarter. Net interest income remained fairly stable as the loan portfolio was flat and income generation was supported by 7.8% growth in non-financial income and a decline in of research leading to a stronger bottom line despite the tax levied on sales of foreign currency in effect since December last year. This result led to an improved return on average equity which recovered to reach 14.1% on an annualized basis and in contribution to Credicorp of $4.7 million.
Edyficar had this first quarter an excellent evolution and reported a 32.8% increase in operating income reaching $40 million. This was a result mainly of excellent portfolio growth which reached 6.6% for the quarter, low delinquencies, and therefore low provisions. However, also Edyficar suffered the effects of currency fluctuations and strengthening of the US dollar and reported the translation loss that depressed net income to $8 million and in conclusion to Credicorp of $7.9 million, 28% down from the results of the fourth quarter last year. Return on average equity calculated during the goodwill also suffered and dropped to 21.4% for the fourth quarter.
Next page please. On Pacifico Grupo Asegurador net premium growth was strong at 2.9% for the first quarter. However, due to recurring seasonal increases in claims during the rainy season would stretch us from December to March of each year, technical results in the property and casualty business posted a drop of 67% quarter-over-quarter and an increase of 200% year-over-year. Therefore, operating cash earnings has this quarter a negative contribution to the insurance group of $4.8 million. This deteriorated technical result in property casualty led to a 27% lower total underwriting results for Pacifico Grupo Asegurador. The health insurance through EPH however should improve results recovering from previous losses and contributed 1.3 million this quarter.
The medical services business, our new venture is included in these results and is still in the investment phase. The life insurance also had a good contribution of $14.9 million. It's also important to point out that the foreign exchange impact of Pacifico 2 million in translational losses contributed to the drop of Pacifico’s contribution to Credicorp which reached 11.3 million this quarter, 33% less than the fourth quarter last year. However, on a yearly comparison, Credicorp performed significantly better in all businesses. Housing reflected in its bottom line results which were a 133% higher this first quarter of 2013.
Return on average equity was therefore 3% while adjusting its equity deducted and realized gains on the life business, portfolio business and 6% result such adjustments significant.
Atlantic Security Bank reported net income of $50.5 million in the first quarter which represented an increase of 13.1% with regard to the fourth quarter fee. Although Atlantic’s well managed business performed well and increased its core results 3.8% for the quarter, the stronger bottom line increase was attributable primarily to income from sales of investment assets, following the liquidation of the fund, which helped to increase its annualized return on equity this quarter to 30.8, up from the 25% reported in the first quarter last year.
Furthermore Atlantic’s asset management business continue to expand with assets under net administration including deposits reporting a market value of $5.6 billion. Overall, Atlantic in fact showed selection and performance for the quarter with all other indicators showing also improvement. A mature net interest margin of 2.6% and an efficiency ratio at 12%, which involve on the 30.8% in return on average equity for (inaudible) a truly profitable business.
Next page please. On first quarter this year Prima’s net income and contribution to Credicorp totaled $11.6 million, up 43% with regard to the fourth quarter last year. This reflects Prima’s privileged position as all new affiliations are assigned to Prima as low as the new AFP winner of the latest bid is not yet up and running, which is expected to be June.
In addition, in the fourth quarter last year an extraordinary deferral of income had to be implemented and explains part of the differential. Consequently, Prima’s return on average equity reached a very strong 29.6% this quarter. Furthermore, funds under management totaled $12.2 billion at the end of the first quarter, which represents 32% of the total funds under management in the private pension fund system.
However, Prima’s leading position in the market was changed as a result of their position of (inaudible) previously owned by BBVA by the two other existing ASPs today and (inaudible). In the following chart we will see the new market share after the acquisition. In light of this pro forma market share recalculation, the new leader in fund of the management in our pension fund market will be [after] paying data with our 41% market share followed by Prima with 32% market share. In data we start as the largest ASP in the market up to this acquisition. In this new scenario we are in the process of evaluating the new market environment in order to define the strategy which we will implement in order to pursue the recovery of (inaudible).
Next page please; overall the summary chart of contributions to Credicorp’s bottom line, shows a negative evolution of net results. It is important to highlight that operating and business strength have been good for the group. The quality of our consumer portfolio which generated some concern in the middle of last year is to-date fully under control and with new businesses performing as expected. Delinquency numbers evident this show the improvement since the adjustment in the credit process were implemented which will be and more noticeable in the third quarter of this year.
All other segments are also performing well with the only exception of (inaudible) SMEs which as we did with the consumer portfolio is being evaluated to take the necessary steps to control the increase in delinquencies reported in that portfolio. We continue our expansion plans despite a slight slow down experience in business activity and the costs incurred are fully within our budgeted numbers. Our exposure to FX movement has typically been benefiting our results, adding translation gains to our good operating performance in most of the reporting (inaudible).
In a few occasions and this is one of those, the FX move has generated a translation loss. This is to a certain extent inherent in our dual currency financial system representing the challenge we have to manage. We believe however that operating trends and results are the true indicators of growth and future profitability; for which I would like to close the presentation with the following slide. Next page. Core income generation all of Credicorp subsidiaries showed strong expansion quarter-over-quarter and year-over-year, and we therefore focus on these results to measure our business performance and estimate the future potential. I will stop here and open the Q&A session. Thank you very much for your interest.
(Operator Instructions) Our first question in the line comes from Carlos Macedo from Goldman Sachs.
Carlos Macedo - Goldman Sachs
A couple of questions, first obviously I know you are focusing on the core business but the translation gains and losses do affect the bottom line quite significantly. This happened over the last three quarters. Is there anything that you can give us more color without a look at this line specifically? It was only 1.5% weakening of the (inaudible) that created this translation gains. Is there a sensitivity here, is there something that you can manage to maybe reduce the sensitivity so that we can see the solid results that you generate go through to the bottom line and reduce the static. The second question if you will allow me is on asset quality aside from the NPLs which went up provision expenses went down as you said and the coverage ratio declined quite materially in the quarter its still high coverage ratio, I just wanted to know if this is a level there's a 173% as a level they are comfortable working with and what should we expect with respect to the coverage ratio going forward. Thanks.
Okay, thank you very much, good question. The issue of foreign exchange let me go one a little deeper. There are three pieces of our P&L which are affected by translation, the most obvious one and the one we really highlight a lot is the pure translation line that appears before the income tax. But there are two other aspects that also affect us very negatively. One is that a portion of our sole possession is through open floors, which affect the margins and that is an impact in this quarter which is not insignificant. I think this quarter numbers that has affected [varies] closer to $15 million and the third element where it affects our P&L is the income tax, because even though it’s measured in dollars 25% of our equity is denominated in dollars where you look in to the local currency, we do have a dollar position. That dollar position generated an income in our local currency P&L which is the one used for tax collections. So our effective tax rate in the dollar P&L is negatively affected. So there are three sides which affect the evaluation.
What can we do about it? The obvious solution is clearly to increase the coverage so their loan dollar position is now 25% but to the extreme 100% of equity. Could you we do that? Yes. What are cost? Two sides; one is clearly, we would be investing, we would have more dollar assets which yield than a local currency asset. Taken to the extreme, if we were to invest excess cash in fed funds, we would get practically zero. If we are to invest those excess cash in local currency, we would get something very close to 3%, 3.5%. So those are negative carry in buying long dollar position. But not only that in the fundamental reason we haven't dramatically changed our dollar position is that we think the fundamentals are there for the currency to revalue. What we have seen is the effect of two separate events. One is clearly a weakening of commodity prices slowdown in China etcetera that affected all of the local currencies. All of the local currencies meaning, Colombia, Mexico, Chile, etcetera, etcetera.
So all of the currencies evaluated because the world is - probably commodities are moving the world in to a slower pace, but there was a second unrelated event which had to do with the Peruvian political situation that is where generated a certain level of uncertainty and it did not allow currency to rebound as it should have. So we have not reversed and bought back the dollars, we have maintained our position because we clearly think that it is going - the fundamentals are there, the fundamentals being that this country continues to generate a positive trade surplus and continues to attract more foreign investment than (inaudible)
Thus the potential is there, the fundamentals are there for the currency to continue to evaluate, probably not at the pace at which it was happening in the past but clearly we think that in the next quarter or two quarters the currency should go back a couple of basis points. That is the main reason why we have not reversed the coverage of our capital. Let me go in to the asset quality and I really want to make sure that this is understood by everybody and please do ask me more questions, or clarifications regarding this issue. Regarding asset quality clearly no concern, everybody’s concerned what's related to the consumer portfolio. As I mentioned in my remarks, we have made several adjustments both in the CapEx for the credit scoring, visiting our processes and our pricing and we think that that is very much under control. We have seen obviously slower growth and we are seeing that the new vintages are clearly for much better quality than the ones in the past.
Having said this, we have to continue to digest the vintages that are already within our [books] and we think that we will all start to see the positive results of that probably at the last quarter this year, sorry last quarter of this year. The news or the surprise that we have seen is the deterioration of the Prima portfolio is not a huge portfolio; we are in the process of evaluating what thickness of that portfolio which products of that portfolio is clearly related to the revolving part of the Prima portfolio and we want ahead with the necessary adjustments. We will do our work and review and fix it; it is not an unprofitable portfolio, so in the next quarter we will be able to give you a little bit more clarity as to the total impact of that. The coverage of 173% is obviously more is better then less, but we do not feel unprotected or with the portfolio that is not adequately provisioned. We think that now at the levels where we are is what we should expect it to remain; it answers your both questions.
Carlos Macedo - Goldman Sachs
Yes, sir thanks for all. So just a follow up on the first one then, the Sol is a remarkably stable currency and then there is no big swings in terms of the direction or the magnitude of the swings on a quarterly basis. If by any chance something like that starts happening, do you feel you have the tools to protect the capital of the bank in such a situation?
Clearly yes, and the simple tool is just to buy dollars; that is relative ease and efficient, the magnitudes are relatively large related to the amount of flows in the domestic market, so it’s not anything we could do in one day; that is something we could do in two weeks. Having said that, let's not forget that our Central Bank has also changed the manner in which that intervenes in the foreign exchange market and traditionally our Central Bank was very aggressive intervening, but smoothing out – when the driver was to smooth out the volatility in the exchange rate. They have changed in the December last year and now their policy is to allow volatility. They want to create the volatility within the economic agents so that people do not exclusively go for the currency with a lower coupon or rather the currency to have the overall perfection that makes sense. They are trying to get companies that do not have a dollar flow to stop borrowing dollars by creating volatility in the foreign exchange market and they are being successful. So yes we can expect more volatility that we have seen in the past two to three years. So that traditional comment that the Peruvian currency is the most stable; it’s probably going to slowly disappear and we will have the volatility not similar to that of our neighboring economies.
(Operator Instructions) Our next question online comes from Thiago Batista from Itaú BBA. Please go ahead.
Thiago Batista - Itaú BBA
I have two questions. The first one is a follow-up on the asset quality. You already adopted some measures to reduce divestible loans on the SME segment, could you give some additional color on these measures and when do you expect this to affect the (inaudible) quality segment and talking about the overall retail ratio, overall after launch what is your expectation for the volume of this ratio during the year? And my second question is about Edyficar; it calls for an outstanding loan growth in the Edyficar segment, could you give some color to us about your strategy in this segment?
Okay. On the SME, the initial actions or initiatives we have undertaken are relatively blunt and simple which is to reduce the cutoff and increase prices in the low end. That is the most obvious response and if you will the one that does require a more thorough and profound analysis which we are still in the process of doing. Numbers have just appeared and it takes about 10 to 15 days to really process the detailed data in order to have a better sense of which segment of the portfolio is the one that is showing the weakness. So we have done some initial moves which are the obvious as I mentioned reducing the cut off and increases prices of certain segments and I think we will be able to give you further on a little bit more color as to what happens here and which segment of this one that has been affected.
As I mentioned we know it is in the revolving side of the portfolio; that portfolio of SME is comprised of current loans and ought to grow for six months to I think 24 months in total loans and a credit cars and a revolving kind of portfolio and that is the one that has been deteriorating. So at this stage, we are doing the simple things and we need to do the more detailed fine tuning analysis in order to produce more fine tuned measures as well.
Regarding the types of loan ratio, we have to be very clear that that ratio will continue to deteriorate. As the growth happens in the retail sector which has a higher passive loan than the wholesale, the change in product mix by itself will show that the overall portfolio will have high factor loans. I don’t have the number in front of me that I can give you as a guidance for the end of the year, but one should expect a gradual deterioration of the loan as the portfolio mix changes.
Regarding Edyficar; Edyficar has a very clear strategy which have not changed in the past, just required, I think 2.5 or 3 years, which is capturing the customers at the entry level of microfinance. They have a very good model that basically works; work exclusively with customers, they very, very share customers and put the new entrants in the system. They’ve got at good financing model and a very labor intensive monitoring process that is proving to be very successful. We still some room for growth, though frankly I do not think that the long-term growth numbers are the ones that we have seeing in the past. Most likely, the growth in that sector would slightly start to come down over the next two to three years.
Thank you. (Operator Instructions) Our next question on the line comes from Jose Barria from Bank of America. Please go ahead.
Jose Barria - Bank of America
Just two questions, one is a follow-up on a translation impact on your results. So absent, I guess looking at what happened in the first quarter and seen there had been a little bit more depreciation in the Soles in the beginning of the second quarter. I understand you are saying, do you expect this maybe to change in the second half. Wondering if your target of 25% ROE that you have given in the past is still achievable in the absence of these translation gains or maybe event translation losses for the year? That would be the first one.
And the second is, with regards to your strategy on Prima. And if you could elaborate a little bit further about what things you could see, I am looking here at the chart you presented with market shares and it looks like there is already a high concentration in this space. And I am wondering if there is any limit here that would sort of prevent further consolidation that could -- can be maybe drive more efficiencies in that business and if you expect fees to come down as well there? Thank you.
Sure. Our return on average equity would be effective. We are absolutely convinced that the 20% is totally completely achievable and we will reach to 20% this year. I have no doubt about that in my mind. This has not been a good quarter. We do not expect to have 1.5% devaluation every quarter. We have already seen the currency rebound slightly, hopefully that will remain for the rest of the month and hopefully we think that there will be further revaluation of the currency between now and year end. So yes, that would be very effective. We believe that the 20 plus return on equity for Credicorp is achievable and that we will achieve it this year.
Regarding Prima, clearly there is no further room for consolidation and even the breakup of [Risonte] was something that were required by the superintendence in order to avoid further consolidation. From now on we are looking into two directions, one is clearly is there anyway we can become a little bit more efficient and second we will just have to the old fashion way which is at a time earn more customers and flowing gradually increase market share. There will be a certain level of commercial dynamics, certain number of customers from Risonte will find themselves in an AFB that maybe is not choice, so there will be some opportunity there and we will obviously be there to capture that, but at the end of the day I think the our recovery, our leadership is something that will happen on a day to day basis on a long term basis.
I don't think clearly that on move on for consolidation, could fee reduce, could there will be a further reduction in fees, very, very marginal, yes, but a very marginal nothing that will necessarily change the dynamics of the market.
Jose Barria - Bank of America
And just I may one other is more with regards to your new sub but I guess Credicorp capital. Looking at the contribution, I mean it is, I mean throw in the quarter already, what can you give us in terms of guidance for this business, what do you expect the contribution from this business, it should be on a several recurring basis after you can complete the consolidation of all the businesses that you are putting together?
Sure. It's been difficult to see very clearly in our numbers because Correval is still underneath BCP where IM Trust and BCP Capital already sisters of BCP if you will, they will (inaudible) and we are in the process of making the transition of Correval from BCP to Credicorp Capital and we are still about 100% consolidating the properties because we've got the minority shareholders. We expect (inaudible) to be much more clear before year end, but basically leaving all that on the site, this is the business that's roughly should generate approximately $30 million to $40 million every year and we expect good growth rates there. That's capital intensive and we think that we are building a platform that will allow us a lot of synergies from the business side.
Our next question on line comes from Tito Labarta from Deutsche Bank.
Tito Labarta - Deutsche Bank
Couple of questions. I just wanted to get some more color on your outlook for net interest margin, even though the margin on loan continues to increase, we did see some elements in the quarter sort of impacting margins with increase in Central Bank securities, also saw time deposit rise a lot in the quarter. So if we look at sort of the group level, how should we think about margins for the rest of the year, can the continued growth in retail increase margin going forward or should some of these other elements put some pressure on the margin?
And then just the second question on fee income, we saw good growth in the banking fees which was around 7% for the quarter but at the group level fees fell around 4%. So if you can just give some more color on what led to the decrease in fees in the quarter?
Sure. On the net interest margin, really there are two dynamics there. One is related to the net interest margin on the loan portfolio and there we don't see any downward pressure that is material. Furthermore because of the product mix we expect that our net interest margin on the loan portfolio will expand. We are being much more careful in pricing the increased risk so we are increasing prices. This is partially to offset increases in delinquencies but also the fact that some fees are being eliminated.
And we are somehow recovering our margins, our result fees that are being eliminated. We are incorporating them into the margin. As to fee income, I don't have a good answer to be very frank. The dynamics of the bank are very clear. Fee income for the bank is in good shape, I understand it’s been growing. Even though that we do have very substantial and serious pressure from our regulators and we are in the middle of intense debate as to how is the fee income going to evolve over time, but I really don't have a good answer to that question Tito, I'm very sorry.
Tito Labarta - Deutsche Bank
Okay, no problem. I will follow up with that later, but just to follow up on the margin question. So you are saying loan margins will expand but just given some of the elements you saw in the quarter with the higher Central Bank security and increasing time deposits, should we expect the overall NIM to also expand or do you think there could be some other pressures aside from loan margins impacting margin for the rest of the year?
The overall NIM is a complicated one because it depends on the Central Bank policies. The Central Bank continues to aggressively buy dollars as they have been doing. They have to retire those dollars, those local currency, which they – disburse better dollars they have to return the local currency and they buy or issue the Central Bank CDs. So to the extent that they continue to do that, our overall NIM will be under pressure because of the low yielding portion of our portfolio.
To the extent that the Central Bank does not continue to buy dollars aggressively that Fed requires initial CDs, that portfolio would shrink and you know we have seen in the quarter that portfolio go down by 10% which is a lot. So that can very tough one to produce and careful in doing that.
And having said that, since we expect the currency to have a certain reevaluation again, I do not expect the Central Bank to lessen its activities issuing CDs. So I would imagine a portfolio of Central Bank CDs will remain same at least and thus the overall NIM could remain under pressure, but again the overall NIM is a consequence it’s nothing we can really manage. What we manage is the NIM on the loan portfolio.
Our next question online comes from Boris Molina from Santander.
Boris Molina - Santander
I have a couple of question, one related to our local asset quality and economy, in your prepared remarks you also mentioned several times that you monitor on the credit card basis, and I just wanted to see if you, if there is a regulatory or fee or other pressures that leading you to reconsider your strategy on the card portfolio, or whether this is more related to the overall potential risk in the economy. I don't know if you are concerned about the slow down in the first quarter GDP particular in the construction center is this something that leads you to remain cautious in terms of asset quality and your card business? And my second question is related to the consolidated group capital data that you published. This is very well comment and very useful. However, don't see a tier one calculation like the one you do for the capital ratio when you are talking about BCP, so we made our own calculation and we not sure if you are doing right calculation or not, but could you tell us what is the tier one ratio on the consolidated group from this data that you had published?
Okay. Asset quality and fees, yes, there is intense regulatory involvement in the credit card business. There are certain portions of more than credit card consumer finance that the regulator is requiring more capital, particularly any consumer finance that extends over five years is requiring a lot more capital. Thus we are increasing prices on those pieces of the consumer portfolio and basically they are being priced out of the market if you will. Those parts are disappearing because they become extremely expensive because of the amount of capital that the regulatory agencies are requiring against it. So yes, we expect a slower growth and the consumer portfolio and there is intense pressure on the regulatory side as well on the fee income or the credit card, and we are in the middle of a very intense debate with the regulator as to the fees of the credit cards and it’s not looking very good.
We are having a lot of confrontation which are very unfortunate with the regulators and that could seriously impact the growth of that portfolio, because if all the fees that the regulator wishes to eliminate, doing it become eliminated, we will have to dramatically increase prices and a lot people will be priced out of the market. So that is something that we have to watch very carefully in the next quarter or the next couple of months. So we have all seen credit card portfolios grow a lot less this quarter because of the initial impact of regulatory changes and the extent of those are yet to be seen. So there is a good question here. Regarding GDP yes we have seen a slow down in GDP, it has not yet affected any quality of our assets. We are all being very careful because we see a lot of the economies that tell us that, there are lot of one time affects in that slow down of GDP. Clearly the world, the emerging market world and China is slowing down a little bit, so that undoubtedly will have some impact, but I have yet to see an economist that does not tell us that Peru will grow above 6% this year and the next.
But we are very vigilant on the macroeconomic numbers that are coming and we expect that we will have a lot more clarity regarding the growth of the economy going forward in the next couple of months. We have seen as you mentioned a slowdown in several sectors, but again I hear a lot of explanations related to one time event, the number of days, the Easter holidays were long and effected one month versus last year they were in the next month. So a lot of one time effects, but I'm still not very sure that I have enough data to be able to take any, merit any drastic changes in our strategy or view of the portfolios. Your question regarding tier one; I think we don't calculate tier one for the holding company follow on (inaudible). I will have to get back to you with those numbers. I don't have all clear in my mind. We do have excess capital and we will clarify the table with you.
(Operator Instructions) our next question online comes from Mariel Santiago from HSBC.
Mariel Santiago - HSBC
Most of my questions have been answered, but I just have another additional one on the expenses. How should we think about operating expenses growth going forward this year and at which level of efficiency do you feel comfortable.
There are several angles to that question. One is clearly that we have set ourselves an aggressive growth in our infrastructure, clearly with the assumption that the growth in the economy will be in the 6% to 7% and that has been in the past the financial system would grow at 15% to 18% running. That is the base case scenario that we are still working and as I mentioned in the prior question at this stage we are being very vigilant of the numbers that are coming, the macro numbers that are coming and at this stage we are still reluctant to shift our base scenario for a slower growth which is relatively easy to do. So sticking to our base scenario what we have is that it would be relatively easy for us to go down to the 47% to 48% cost of income ratio if we just stop doing the investments that we are doing. We have done so in the past and you see the cost to income ratio rather quickly adjusted and it tailed downward. The fact is that we are in the process of still expanding our infrastructure branches, ATMs, sales persons, etcetera, etcetera and those are investments that do require a certain period of time to reach maturity. Branches on average need about two years to reach breakeven and to the extent that we continue to open new branches they have a negative impact on our cost to income ratio. So our base case scenario continues to be that we will be in the 50% to 51% cost to income ratio which is not one that I feel comfortable as a fairly straight cost to income ratio but it's one that we have to live with if we are going to continue with this expansion process.
Mariel Santiago - HSBC
Okay, thank you and how many branches, can you remind me how many branches you are targeting for this year and how much of those have been opened?
About a 100 for the year and we have opened I think about 30. The exact number is 38.
Mariel Santiago - HSBC
38? That’s great. Thank you.
At this time, there are no questions in the queue. (Operator Instructions). This concludes the question-and-answer session of today’s call. I will now turn the call back over to Walter Bayly, Chief Operating Officer of Credicorp for closing remarks. Sir, please proceed with closing remarks.
Thank you all very much for joining us and I apologize for the quality of the communication. I was barely able to hear all your question. I hope I have answered most of them and we will definitely follow up or the ones I was unable to answer. But in summary, we're of course very uncomfortable with the way the exchange rate has affected our bottom line results. In retrospect we could have been more aggressive in managing that, but we continue to have a view more of a fundamental point of view with managing our foreign exchange position and capital coverage less over trading view and more of a long term secular view. It is very difficult to hit all the peaks and valleys. Hopefully the trend that we have anticipated is the one that will prevail, that is a slow recovery of the foreign exchange rate to levels not similar to what we had at the beginning of the year and at this point.
Thank you for your participating in today’s conference. This concludes the presentation. You may now disconnect. Good day.
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