Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Credicorp Ltd. (NYSE:BAP)

Q2 2014 Earnings Conference Call

August 8, 2014 10:30 AM ET

Executives

Fernando Dasso – CFO

Barbara Falero – Chief Corporate Compliance Officer

Analysts

Thiago Batista – Itau

Carlos Macedo – Goldman Sachs

Fred de Mariz – UBS

Tito Labarta – Deutsche Bank

Jose Barria – Bank of America

Saúl Martinez – JPMorgan

Boris Molina – Santander

Operator

Welcome to the Second Quarter 2014 Credicorp Earnings Conference Call. My name is Mithilda, and I will be your operator for today. At this time, all participants are in a listen only mode. Later we will conduct a question-and-answer session.

Now I would like to turn the call over to Mr. Fernando Dasso, Chief Financial Officer. You may begin.

Fernando Dasso

Good morning and welcome to Credicorp’s second quarter earnings results conference for 2014. After an improved results reported in the first quarter of this year following the change of the functional currency final efforts to recover profitability, the second quarter captured the impact of the slow loan in our economy which revealed the lowest GDP expansion in the 2009 crisis in the month of May. Reaching only 1.8% year-over-year growth for that month and an estimated 2% for the quarter.

In this context, Credicorp reported mixed results with BCP showing the impact for what is probably the tailend of the slowdown in the proven economy, while the other Credicorp subsidiaries revealed an external resource compensating to some extent BCP’s lower contribution to our bottom line. Furthermore primarily signs of turnaround in the economic activity in the coming months were visible as well as the signs of the slowdown in the PDL formation which should contribute sterilizing the level of provisions and in time finally meet to lower provisions.

Nevertheless year-to-year results are encouraging in France doing this loan growth, income generation, PDL ratio, provisioning, efficiency improvements, stability in the currency and several other areas that should help us meeting our target. Furthermore results for the first half of this year make us confident about the second half of the year and our ability to deliver the committed 20% ROE. More so, our government and central bank have also given the economy a boost with reactivating measures that should help recover business confidence and public and private industry.

Before going into the business discussion, we should point out that we have chosen to focus on numbers excluding Mibanco in most of our charts of business discussion this second quarter. This to avoid the distortions, the consolidation of Mibanco generates especially given the turnaround situation from Mibanco and the interest for the market in following the performance of BCP. This makes sense in the contribution of Mibanco for this year is expected to be negligible and we count its contribution only as of next year. Next page please.

Credicorp reported the second quarter of the year at 12% drop in net earnings excluding Mibanco to 582.8 million soles leading to an ROE of 19.9%. Mibanco’s consolidation grew percentage and marginal contribution to the bottom-line increasing earnings by only 2 million soles but affected ROE more significantly bringing it down one percentage point to 18.9%.

Despite the underlying economic slowdown reported total loans were up 4.7% excluding Mibanco and 4.3% quarter-over-quarter including it. There is still a strong number given the contraction in Mibanco’s and BCP’s SME portfolios. This expansion was, however concentrated in the segment that deliver lower margins and recorded at the end of the quarter, which is the reason for the lower growth of BCP’s average daily balances of around 2.7% as we will can see further on.

Consequently, net interest income excluding Mibanco was up only 2.4%, but gets a boost from the consolidation of Mibanco which adds a more significant volume of interest income bringing total net interest income up 14.9%. This resulted in net interest margin expansion to 5.7% versus 5.2% in the first quarter. Furthermore net interest margin on the loan book excluding the Mibanco portfolio also improved 10 basis points which helps compensate the higher cost of risk.

In fact the impact of the economic slowdown on the bank’s results is more evident in the increased provisions stemming from the partially affected SME being effect. Our results in a 17 basis points increase in cost of risk to reach 238% before including Mibanco’s provisions and a more steep 55 basis points increase from 2.07% to 2.62% when considering total provisions as a percentage of total loans.

Nevertheless, the overall PDL ratio deteriorated only two basis points to 239% on excluding a particular corporate loan now what’s briefly reported delinquent and corrected of the quarter even drop 4 basis points to 233%. Thanks to a good quality portfolio expansion on a close on in PDL formation.

Furthermore the insurance business continue showing significantly better performance in the second quarter not only due to improved technical results overall but also due to tighter cost managed improved combined ratio and despite a drop in financial income. Technical results show a strong quarterly aggregate growth of 7.3% while the medical services technical results improved an important 21.9% quarter-over-quarter. The second quarter OpEx were up from the low levels of the previous quarter which expired being sealed well under control resulted in a higher efficiency ratio of 42.7% for the quarter excluding the effect of Mibanco as a result of a drop in income generation.

And given the high cost related to Mibanco position on merger process shows a further deteriorated level of 43.9%. Operating income therefore reflects all this moves and shows an 11.8% contraction which explains the drop in the bottom line on profitability report. As a result, our result that does not concern us as we see as a reflection of a temporary duration of the business environment. The pension fund business Prima and the asset management business ASV performed better than expected continue seeing with good levels of profitability to Credicorp numbers as we will see in the next slide.

Despite this complicated second quarter, year to date results are in line with general expectations for Credicorp with net earnings of 1.2 billion soles for the first half of 1914 and net interest margin of 5.56% from 4.90% last year. Efficiency ratio of 42.4% from 43.7 % the previous year, and ROE back to 20.2% despite the deterioration in the PDL ratio to 2.6% from 2.2% and cost of risk of 2.3%.

Next page. Looking at BCP performance the economic slowdown is evidenced on an affected loan growth and great quality it also the more risk appetite as reflected in our adjustments and tightening of the score in mobile and resulted in reduced accrual rates.

Nevertheless despite the economic slowdown and even up to including a contraction in BCP SME portfolio quarter end reported total loans were up 4.9% quarter-over-quarter, a strong number that reveals a pick-up in lending activity in certain sectors. However, measuring average daily balances, BCP’s loan book expanded a more modest 2.7% quarter-over-quarter given that most of the portfolio growth was recorded towards the end of the quarter.

Furthermore, such expansion was in turn concentrated in the wholesale portfolio which was up 3.4% quarter over quarter since BCP’s SME portfolio showed rather a contraction of 0.9% in line with the evolution of the Pyme sector and the stricter lending policies implemented. The only exception is the Edyficar’s portfolio, which continued showing an excellent evolution and strong growth of 7.5% in average daily balances for the quarter. It is therefore evident that a portfolio quality deterioration and economic slowdown have affected most of our book which as a whole expanded only 1.4% quarter over quarter whereas the book grew 3.4 % for the quarter.

Furthermore the derealisation of the portfolio continues as we yield by growth or currency with aerosol portfolio growing 5.2% within the quarter and the U.S dollar portfolio expanding only 0.9%. In average though we’re really turnaround in the contracting trend and stronger expansion of the U.S book at the end of the quarter.

Next page. Despite the slowdown in the economic activities reported some early signs of recovery are already visible as loan growth picks up at the end of the quarter mainly June and the PDL ratio deteriorated only one basis points to 2.46% and excluding a particular corporate loan that was briefly reported delinquent and corrected after karat of the quarter, even dropped five basis points to 2.4%. This is explained by the growth reported in good quality loans and a slowdown in the deterioration rate of our portfolio. The chart with PDL per second has been adjusted to show more detail and open the more traditional and formal SME loans that we go business loans and the complicated SME Pyme loans showing a very good preferable SME business while the SME Pyme book continues to show the expected deterioration though at a slower pace.

The results were evident from this chart that all other portfolios have a very good performance and stable quality. The only SME Pyme book in our watch list and of course also the Mibanco portfolio as expected. Despite the legal deterioration of the PDL ratio provisions still increased with most of this spending from the partially affected SME Pyme sector. For the second quarter of the year provisions still have to catch up with loans reported in previous month and there is a natural lag of up to a 120 days between PDL formation and provisions to go over the total of delinquent loans. This resulted in a 12.9% increase in provisions for the BCP portfolio which added to the already expected Mibanco provisions led to a total 31.9% increase in total reported provisions.

As a logical consequence net interest income after provisions at BCP and this result consider Mibanco drove the second quarter which explains to a large extent the reported drop in the bottom-line.

Next page please. Operating results at BCP here also excluding Mibanco show mixed trends. Net interest income was up 3.2% quarter-over-quarter mainly driven by lower interest expense which contracted 3.5% in the quarter. While interest income grew a modest 1.4% as a consequence of the growth composition of the book and the timing of this growth. Mainly lower yielding wholesale loans which were dispersed towards the end of the quarter. Nevertheless year-over-year net interest income expansion is solid at 20.8%.

Consequently net interest margins on the loan book improved a significant 10 basis points up to 8.38% in the second quarter of the year. While overall net interest margin was only 3 basis points higher for the quarter at 5.53%. However the 51 basis points increase for the year revealed the better asset structure which changed in favor of higher yielding assets and the health recover ROE which was a whole recovered to the 2% plus level from the lower levels reported in 2013.

Non-financial income at BCP was up 2.8% despite some changes in relation that foresee the referral of certainties and lead to a contraction in sync as this was compensated by higher foreign exchange gains on other income. Further in the second quarter and excluding the effect of Mibanco OpEx were up 8.5% from the previous quarter but reached a reasonable level industrial returns which given the drop in income generation resulting from the evolution of our portfolio resulted in a slightly higher efficiency ratio of 47.2%. On a year-to-date level however and even including the Mibanco effect the efficiency ratio of 46.7% in the first half of this year compares extremely well to a 49% efficiency ratio of the first half of last year.

Next page please. Even though sustaining a solid and efficient low cost funding [Gimtu] present a challenge in the last year the funding structure has remained structurally similar and does not show any concerning trend. In fact deposits continue covering 66% of total funding compared to 68% three years ago. Even though our loan to deposit ratio moved from 88.7% to 98.5%. This responded to more to a better asset structure in favors of the higher yielding loan book as the local currency denominated loans picked up in 2014.

Furthermore, there have been moves in the funding structure that responded to a proactive search of more efficient and cheaper funding. And in many circumstances other sources of funding offered by the Central Bank instruments can be cheaper than term deposits. Therefore and despite the slight variations in total deposits as part of the total funding average funding cost is cheaper at 1.92% vis-à-vis the cost of over 2% reported in the previous year?

Next page please. With regard to the efficiency program we announced last year as a way to compensate for a more challenging environment in future years, we are pleased to say that since its internal announcement in the third quarter of last year and launching towards the end of last year BCP has been able to benefit from the implementation of some quick actions resulting from the change, expense patterns due to a strong internal message and commitment and from the collection of some low hanging fruits.

As shown in the chart in this page BCP shows a very positive trend in the gap between income and expenses growth something known as the (inaudible). As a consequence the efficiency ratio also improved dramatically since the third quarter of 2013 as we can see in the next page.

Next page please. It is however important to point out that BCP subsidiaries Edyficar, BCP Bolivia and Mibanco are not part of the scope of this first phase of the efficiency program. Therefore we mentioned success of the program which is focused on BCP unconsolidated numbers only shown in the top chart of this page. As send here BCP has shown an important improvement in its cost to income ratio moving from 50% in the second quarter of last year to 47.9% as of December of last year and to 44.8% for the first half of this year. This improvement in BCP’s efficiency ratio translates into a more diluted but still important improvement for the [inaudible] efficient as shown in the same ratios for BCP consolidated in the bottom chart and also for Credicorp as a whole.

All these numbers show the results achieved to-date based on the simple application of Jo concept and tight cost controls. And do not yet include the impact on cost reduction of the more structural changes that are still to come. We are still in the process of determining the scope of such changes. The cost of the implementation and finalizing the analysis of such costs versus the expected benefits (Inaudible) which projects will be implemented and how far we will go. We’re commitment to implement the lean management approach and walk this efficiency path in the coming year and we will inform you as we move along.

Next page please. BCP Bolivia’s net earnings contributed – contribution totaled solid $19 million in the second quarter of this year which represented an increase of 22.8% quarter-over-quarter. In this context the ROE reached 18.6% and the contribution to Credicorp solid $19 million. This was due primarily to first a 14.4% quarter-over-quarter increase in non-financial income due to higher gains on foreign exchange transactions. Second growth of 3.7% quarter-over-quarter in net interest income due to loan growth and third a 20% quarter-over-quarter drop in income tax paid given that in the second quarter of this year.

There were fewer non-deductible expenses than the first quarter. This results were in line with a positive evolution of loans which expanded 5.6% quarter-over-quarter. This improvement was due primarily to the mortgage segment and the fact that delinquency levels and coverage ratios are under control and reach 1.51% and 290 – 256 respective.

Edyficar continued outperform the local economy and the SME sector in particular. This evolution is reflected in the bank’s loan growth which surpasses the 40% growth in the sector and in fact that its portfolio quality ratios are the only ones in the system that have remained stable and that’s 3.8% can be considered to lower for the sector. In this context, total loans at the end of the second quarter reached 3 billion while operating income grew 8.5%. These results without including Mibanco effect helped generated net earnings of 32.5 billion and ROE of 25% resulting in a contribution to Credicorp of Soles, the reported numbers however incorporating effects of Mibanco and show net earnings of 33 million soles with an ROE of 12.8%.

Next page. Pacifico Insurance Group reported net earnings before minority interest of 47.7 million soles at the end of the second quarter, on a contribution to Credicorp of 46.4 million soles which represent a significant 22.5% improvement over the last quarter, with this result ROE was 11%. This positive evolution in earnings was due to better results at the PNC business which is concentrated in TPS underlying and life or which is concentrated in Pacifico with a health division for TPS and the mega subsidiaries showed appearing this quarter.

TPS reported high underwriting results thanks to an increase in net earned premiums as smaller adjustment to reserves, lower commissions in the general and behold line. This better income was accompanied by lower general expenses due to our cost controls implemented and an increase in income tax to an extraordinary tax adjustment in the previous quarter. NIMs were better reported by Soles.

In the life business the improvements registered at Pacifico also starts with the high underwriting result due to premium growth in all business lines, our lower reserve ratio, our lower claims as well as higher financial income following interest income increases related to adjustments for inflation.

However low and directed results in the health division while Pacifico TPS resulted from our fees on increasing claims while the drop in the major subsidiary results was due to higher general expenses resulting from startup cost and a new label search. All in all, Pacifico continuous showing improvements and continue to 84.3 million soles to Credicorp’s borrowing line in this first half of this year. Next page please.

Atlantic Securities Fund reported extraordinary high net earnings of $29 million in the second quarter, this represent a significant increase with regard to appendix current results includes extraordinary income of $14.6 million equivalents to 41 million soles relative to reimbursements from reinsurers for our claim on losses incurred during the financial crisis in 2008. As we also focus at an improvement in income spending from the recovery in the securities market in the second quarter of the year. Earnings this quarter led to our reported ROE of 58.3% which is obviously extraordinary. If we exclude the losses we collect from the insurance policy this year reaches a high 28.8% which reflects the high profitability of Atlantic’s business considering its low level of implicit risk. The Bank’s assets under management which includes client, client deposits, investments in funds, and cluster of financial instruments total $5.8 billion on marketed value in the second quarter. This represents a fine 6.3% increase with regards to our first quarter and a solid expansion of 15.6% in the year-over-year comparison.

Next page please. In the second quarter of this year net earnings at Prima ASP totaled 4.8 million soles which represents an important 7% increase with regard to our last quarter’s figure, with this result ROE reached a high 24.8%. These results was achieved thanks to real estate sales which generated earnings of 5.6 million soles worth complimented within the same quarter in which an income deferral of 5.4 million was recorded, following new regulatory requirements.

Compensating such loss and income, accommodate opportunity in addition the reversal of 2 million soles in income tax for 2013 was also recorded. Nevertheless even if we isolate this extraordinary effects ROE will have to reach our very high 32.2% by the end of the second quarter. Prima ASPs funds under management at the end of 2014 2013 close 34.7 billion. This deal represents growth of 5.3 quarter-over-quarter that means the company match 32% of the systems [profounds] at quarter end. Next page please.

Looking at total results in our contributions chart, total net income attributable to Credicorp is precisely halfway to reach a total of 2.5 billion soles for the year 2014. However, recurring net income net of extraordinary income and refer also net of Mibanco showed a shortfall. Adjusting results roughly from its current net income around 88 million soles in the first quarter and around 40 million soles in the second quarter is clearly that the shortfall in conclusion for BCP of about 44 million soles could not be totally compensated by improved results in all the other Credicorp’s subsidiaries. But this helps the same Credicorp’s ROE very close to our target of 20% in fact we reported ROE excluding Mibanco for the first quarter reached 22.8% and for the second quarter 19.9% which once adjusted for extraordinary non-recurring income which shows 20.3% for the first quarter and 18.5% in the second quarter, resulting in a solid 19.3% for our first half of the year.

Furthermore the reasons behind BCP’s contribution shortfall which are related to slow growth for the retail book on high cost – are expected to impact less BCP’s results in the second half of this year. What’s important is trends in the business evolutions of full – and general macro environment changes introduced to correct the identified close and the efficiency improvement ROE is expected to continue making us confident about the second half of this year. If we are through this we expect the contribution of Mibanco Edyficar new ventures in the coming years and the effect of the more structural efficiency improvement expected going forward. We believe potential for growth and better ROE’s significant. With this comment, I would like to open the call for questions and answers. Thank you.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) The first question comes from Thiago Batista from Itau.

Thiago Batista – Itau

Hi guys thanks for the opportunity. I have basically few questions the first one regarding the banks margins would you give some color about the bank’s margin evolution what we could expect when put together the mixed change towards it’s portfolios with the contraction of pursuit in Peru and also the strong growth in local currency loss so what is our expectations regarding the bank’s margins?

And the second question is about loan growth in the scenario of let’s say weak GDP growth in Peru how much the bank’s portfolio can extend and you start to assume that you will continue to focus the expansion in the low risk portfolio so in quite a bit of loans or wholesale or banking?

Fernando Dasso

Hey Thiago, I will begin with the second question despite this slowdown in the economy what we have seen in terms of growth for the financial systems of loan growth in the financial systems comparing to June this year to June last year the system is still growing like 14% even it’s close to 15%. In local currency it is around 22% and in foreign currency it is around 5%. We believe that the settlement that – have taken important measures both fiscal and monetize we believe the economy will speed up a little bit.

But despite that we feel that the growth of the financial system will continue to be around 14%, 15% for the year which is still very healthy. We believe our bank will continue to grow with the system having the same market share. – in terms of volumes, we talked about margins as you heard our team in this presentation, we are growing a little faster in our closer portfolio and that portfolio has a less important margins than the retail portfolio. We feel that that will continue to be the trend. We are seeing very important projects in terms of infrastructure in terms of important mining projects coming online, so we feel that the quarter will continue to outperform the regional so our margins will definitely show that in the coming months.

Thiago Batista – Itau

Okay thanks.

Operator

The next question comes from Carlos Macedo from Goldman Sachs.

Carlos Macedo – Goldman Sachs

Good morning gentlemen thanks for taking the question, I actually have two. The first is on asset quality we did see flat quarter-over-quarter but you mentioned that provision expenses are trailing asset quality, what should we expect in terms of that going to the end of the year I mean are you still probably now provision more given the weakness in asset quality coming into this quarter from the previous quarter is that mean your coverage ratio is going to go up where should we expect, how much should we expect in terms of provisions for the end of the year really make based on the evolution of the NPL ratio through the beginning at the end of last year beginning of this year?

The second question is again on efficiency you mentioned that you’re still working and trying to determine how far you can go on a standalone basis BCP is like operating expenses are growing 7% year-on-year is that a baseline assumption that we consider as a run rate going forward? Or are there other low hanging fruit that you can take advantage of in the next coming quarters that can push that level a little bit lower or on the other hand should we expect it to be higher given the integration of Mibanco and other things? Thank you.

Fernando Dasso

Thank you Carlos I’ll begin with your first question in terms of asset quality. While we do have asset quality and you can see that in the 21st page of our report, in most of our sections and this with exceptionally – the PDL ratio for SME’s, PYME for Mibanco we feel that most of them will continue to be flat in terms of those ratios. You consider trends already happening this year. In terms of the SME segment in BCP we feel that line will continue to pick up until the end of the year. we are taking many measures now in terms of risk of scores, of collections, but those measures were on the, we begin to produce better results, we feel beginning in next year and that is probably the case. In terms of Mibanco we still are really analyzing very thoroughly the portfolio and we feel that the first good results will definitely come next year but we cannot promise anything for this year because we’re still in this process of finalizing the authorities.

Carlos Macedo – Goldman Sachs

Just sorry to interrupt, just a question you said there is a lag between when NPLs come and when you have to provision for them does that mean that given the NPLs increased through the end of last year beginning of this year we should see provision expenses still going up as a percentage of average loans for the end of the year or should we expecting the same more or less last?

Fernando Dasso

If I talk about the SME segment we have already seen in June and also in July a flat evolution in terms of provisions for that segment. So we hope that that will continue to be the case. But as we have already told you in our last meetings we feel that we got other line we’ll continue to pick up until the end of this year.

Carlos Macedo – Goldman Sachs

So going back on expenses I understand that Mibanco is going to contribute in the next year but on a standalone basis for BCP is the 7% that you reported this quarter something that we should consider as in baseline for the next few quarters?

Fernando Dasso

What I was going to answer you about efficiency, could you repeat your question please?

Carlos Macedo – Goldman Sachs

Sure operating expenses are really at 7.5% quarter-on-quarter is that a baseline going forward for BCP should we expect are there additional low hanging fruit that you can take advantage of and lower than 7.5% to a lower level or will the integration of Mibanco and other factors push that number higher going forward?

Fernando Dasso

Two answers, the first one is – that 7% we’re talking about BCP by itself, whereas about the other related to BCP consolidate. We feel that we’ve got line around 7%, 8% we’ll continue to realign in the future. We are able to continue open in that gap we feel that we’re very confident on our results. It will be around 8% on the growth and income will be around 16%, 17% that will achieve what we plan to achieve in the next three, four years. As we said we plan to achieve in the next three years a level of around the low 40s in the cost rate.

Fernando Dasso

And excuse me, please remember that this is BCP what Fernando is referring to.

Carlos Macedo – Goldman Sachs

Yes of course.

Fernando Dasso

You put together all the other elements and Mibanco obviously have some additional cost and so that consolidated will look different.

Fernando Dasso

When we talk about Mibanco and Edyficar as we operate total market we are planning to merge world institutions at the end of this year. It depends on the systems merger but is coming a lot we feel that we’ll be able to do it. We will achieve many, we are already achieving many synergies but we will definitely achieve more synergies once both institutions get merge doing that during the end of the year and the beginning of the next year.

Carlos Macedo – Goldman Sachs

Okay thank you Fernando, thank you.

Fernando Dasso

Sure.

Operator

The next question comes from Fred de Mariz from UBS.

Fred de Mariz – UBS

Good morning everyone thank you for the conference call and the presentation. Couple of questions, the first one is the follow up and just wanted to make sure I understood your answer to the previous question on the NPLs for SMEs. If I understand well you were saying that the NPL for the SME segment could increase up to the end of this year but the provisioning, the provisions to loans are going to be flat going forward that’s your guidance did I get that right?

Fernando Dasso

That is right.

Fred de Mariz – UBS

Okay. Thank you. And the second question you mentioned obviously you had good growth deceleration in GDP, are you seeing any signs, any tangible signs of recovery do you see more of a demand from larger clients from corporate clients on the consumer just wanted to get some color on what you were seeing was your loan officers.

Fernando Dasso

What we’ve seen is that – some other charts is that wholesale portfolio especially in the corporate segment is growing at a higher pace than the retail portfolio. And we feel that the portfolio will be a case for what remains of the year especially because our consumption is not growing as it did in the past and also some important infrastructure projects are coming along, both in terms of roads, ports, airports on these we go to ourselves. So we feel that are very important engine for the growth of the economy.

Fred de Mariz – UBS

That’s it. Thank you. And just a final follow up on the efficiency, you mentioned a level for BCP of cost to income in the low 40s. I imagine that’s a level for the coming years and just wanted to know do you have a view on the cost to income if we consolidate everything?

Fernando Dasso

Our review in the cost to income for BCP and the BCP alone is to achieve that level of the low 40s in the next three years as we have already told the market and that is I mean in the two years ago in the low 50s and we are now around the mid-40s and there is still some room to go through.

Fred de Mariz – UBS

Thank you. That’s very helpful.

Fernando Dasso

Sure.

Operator

The next question comes from Tito Labarta from Deutsche Bank.

Tito Labarta – Deutsche Bank

Hi, good morning. Thanks for the call. A couple of questions just as a follow-up when you mentioned your loan growth, you said you continue to expect to grow faster on the wholesale portfolio. But I just want to understand the system you are seeing faster growth in the corporate segment but the strategy had been for quite a while so we focus on the retail side, I know you’ve had some issues there with the SME portfolio and trying to control that. But is this sort of like a change in strategy going forward where you expect to grow more on lower risk segments as the continuing to maybe gain some market share on the retail side and then thinking about your profitability if your margin is going to come down I mean do you think you could still get to 20% ROE. Just want to how you are thinking about profitability if you go faster on the wholesale side? Thank you.

Fernando Dasso

Good question Tito. First thing is that we are growing by 3.4% in wholesale and 1.4% in retail, which has been the case this quarter. And if we talk about year-over-year, wholesale was 22.4% whereas retail was 9.5% and this is really because of many things. On the one hand as I said there are many projects coming in terms of large infrastructure projects and big projects. Second previously because we have begun to be a little more in terms of what we do in SME.

So SME is actually decreased this quarter around 1% and it has only increased 3.5% for the year, the year over year and that’s also have been in consumption, in the consumption segment and it is not only helping in BCP but also in our competitors. We are growing less and that is really a case, we are actually fixing our portfolios and fixing our models in terms of application and scoring models, fixing things in collection and that is really a case. We are not losing market share in retail but the whole retail segment is growing less this year. Despite that we feel that our margins are going to be, we are having less margins than our budget but they continue to be very healthy this year if we continue going in that trend on that ways we would have feel.

Barbara Falero

Tito and I would like to add one thing, this is not really a change in the strategy, I think this is the reaction of the situation in the market that we have right now, The strategy in the organization has always been to continue to develop in the retail side and the SME business and that’s why the acquisition of Mibanco is so important and once that together with the DC cut has been put together and nice well we will probably start seeing a pickup on that front again. I think this is really a temporary situation and we will see a continuation of what used to be the typical growth retail higher than wholesale in the coming years but this is like setting the base for that.

Tito Labarta – Deutsche Bank

Alright. Great. Thank you. That’s very helpful. So just in terms of second question in terms of profitability, is your margins are coming down a bit that you mentioned provisions are sort of stabilizing. Just kind of worry that you don’t see much increase in profitability so how do you think about your bottom line I guess both in the short term and then kind of longer term as you get back into and grow more in retail again?

Fernando Dasso

We talk about margins we have to also talk about our funding and our funding cost is going down as you can see on page 14 of the report and it has gone down from 234 during the second quarter of last year to 1.92% during this quarter. And that is helping with our funding because of many reasons and in terms of our net interest income, we are continuing to grow we have loans this year already between the first and second quarters 3.2% and we feel that it will continue to be grow in a healthy fashion.

Barbara Falero

Also an additional point there we remember that we are in a historical low in interest rates. Right now we have a slight decrease in the interest rate locally but it is historical low for general market and that is affected to grow up in the coming year and that will improve the margins because with increasing interest rates and growing interest rate environment we make more margins that will benefit that front. On the other side remember that the compensate for those effects is why we are doing the whole cost control and efficiency program. So the bottom line should not be impacted.

Tito Labarta – Deutsche Bank

Now so do you think, are you comfortable still targeting a 20% ROE at least in the short term and is that still kind of comfortable in terms of your profitability?

Fernando Dasso

Yes we feel that we will achieve that this year.

Tito Labarta – Deutsche Bank

Okay. Thank you.

Operator

The next question comes from Jose Barria from Bank of America.

Jose Barria – Bank of America

Hi, good morning. Thank you for taking my questions. Just wanted to follow up on the asset quality in particular what’s happening in SMEs and credit cards. I wanted to know if the deterioration that you’re seeing in SME is largely driven by those loans that have been originated before you started changing your credit risk assessment in that segment or have you’re also seeing deterioration in new loans originated after that and with regards to credit cards also we saw an increase in NPL ratio during the quarter. So that had been sort of stable after you saw an increase last year but we are starting to see that pick up again. Is this a function of lower growth in the denominator or you’re also seeing some deterioration on the consumer side. And then a follow up on AMAs what is the impact on name of the lower reserve requirements that we’re seeing now and especially on the local currency denominated loans? Thank you.

Fernando Dasso

First when we talk about SMEs you were asking about vintages what we are seeing is in the latest vintages is improved compared to the vintages we had in the past. And that continues to be a case months by months however since we are growing less in the SME segment the denominator is really growing less in that ratio. So that’s why you are seeing a pickup in the PR ratio in these months and we will continue to see that for this year.

Second you are talking about the credit cards, if you see, if you go to page five of this presentation you can see a line with the credit cards and that line is really going down rather than half. In March the peer ratio was 576, in March it was 588 and now it’s 545, so we are seeing a healthy trend in that segment. And your last question was can you repeat it please.

Jose Barria – Bank of America

Sure. In terms of the impact of the cutting reserve requirements on the local denominator portfolio is the local denominated deposit what impact does that have on their NIM?

Fernando Dasso

The reserve requirements in Soles have gone down during this year and they are now at the 11.5%, in dollar they are on 43% and this have remained the same for the year. So that really helps because we’re able to especially in soles not in dollars we’re able to use more funds in better use.

Jose Barria – Bank of America

Right that’s what I was getting at. Can you quantify sort of what the impact would be on NIM and is it enough to sort of offset some of the pressure that you are seeing on the yield side?

Fernando Dasso

I am not able to quantify now maybe we can get back to you with an answer. What we can tell you is that we feel that the Central Bank should probably continue to lower that rate I mean it’s already at $- maybe to $11 or even $10.5 this year but we will see.

Jose Barria – Bank of America

Okay. Thank you very much.

Operator

Our next question comes from Saúl Martinez from JPMorgan.

Saúl Martinez – JPMorgan

Hi, good morning everybody. Two questions. Can you clarify the ROE discussion a little bit and whether that is on your – you mentioned a 20% ROE is achievable for the year but is that on a recurring or an reported basis because you had non-recurring benefits in the first half as you mentioned that are about 10% of your pretax income and on a recurring basis your ROE in the first half according to your earnings release is about 18.5%. So when you talk about a full year 20% ROE is that reported or recurring because it obviously has a very big implication for the kind of earnings you need to generate in the second half of the year to get to that ROE.

Second question is on your net interest margins. I am still little bit confused as to whether you expect margins to be flat, up or down in the coming quarters because and it seems like you have had as you mentioned quite a bit of a benefit from lower funding costs and I wonder whether how sustainable it is to continue to see that given how low they are and given where your loan-to-deposit ratio is and the fact that you are growing local currency lending, you need to grow local currency funding and obviously you have the mix shift towards wholesale lending.

So how do all of these cost currents come into play? I know you guys have talked about it a lot on this call but are NIMs going to be it is your guess or is it your estimate that NIMs were flat in the coming quarter will they compress a little bit in the coming quarters and then stabilize in the coming years as retail loans start to pick up again or how do you think about your NIM progression both in the next few quarters and then in the next few years?

Fernando Dasso

First we’re going to talk about your ROE question. As you said our ROE for this first half is really not a recurrent ROE, the recurrent one is around 20% but the other one is around it’s less than 20%, it is around 18%. We don’t know what’s going to happen in the second quarter of the year but we feel that we will able – the efficiency measures will continue to come into play. And we feel that for the second half of the year we will be able to reach that 20% obviously on a non-recurrent basis because we

Unidentified Participant

On the recurrent.

Fernando Dasso

On the recurrent basis. That’s our feel for this

Saúl Martinez – JPMorgan

I am sorry just if I could the run rate in the second half is recurring basis should be 20% ROE on a recurring basis the run rate in the next couple of quarters you should be able to get to 20% is that the idea?

Barbara Falero

That is correct, that is correct Saúl. If you look at the ROE in the first half we do exclude Mibanco from this calculation.

Saúl Martinez – JPMorgan

Okay.

Barbara Falero

Because Mibanco – to like an external – . But on a recurrent basis the ROE for the first half of the year excluding Mibanco was 19.3%.

Saúl Martinez – JPMorgan

Okay.

Barbara Falero

What we’re saying is that on the same basis excluding Mibanco recurrent ROE should be able to bring it up to 20% in the second half so that we can close much closer to the 20% on a recurrent base excluding Mibanco.

Saúl Martinez – JPMorgan

Okay. Alright. And on the NIM?

Fernando Dasso

And then related to the NIM. If you go to page eight of the report you can see our NIMs being flat this year and already around 5.5%. Our – yes our net interest margin we feel that – BCP.

Barbara Falero

In this.

Fernando Dasso

Page four we’re going to list presentations chart number six and you can see our NIM being around 5.53% the second quarter and 5.50%. We feel that, that will be the trend this year we will be around those numbers we feel confident about it.

Saúl Martinez – JPMorgan

Why? Why do you think it will be flat and not fall considering the mix shift and maybe the potential for funding cost and not continue to benefit the NIM?

Fernando Dasso

One reason is because our portfolio is turning more towards Soles and we have larger margins in Soles. Also we’re not so sure that interest rates in Soles will go up, interest rates in dollars we all know it depend on the Fed but in Soles actually the Central Bank has brought down the rate from 4% to – % and we feel that it can come down again in the near future. So we feel that that margins will continue to be very healthy.

Saúl Martinez – JPMorgan

Okay, okay. Thank you.

Operator

Thank you. The next question comes from [Marcellus] from Credit Suisse.

Unidentified Analyst

Hi, good morning gentlemen and (inaudible) time. I have two questions. The first one is on the de-dollarization trend I know you have been facing over the past year or so when you look in this quarter at least on the lending side we saw that there was an increase in foreign currency loans as a percentage of total loan which seems like a different trend from what we’ve seen over the past four quarters. Do you think we might be getting a little bit closer to the end of the de-dollarization process here or you think this is just something very short-term that you might resume the trend of local currency loans continue to gain share of your overall loan portfolio? That’s the first question.

And the second question. Sorry to get back to the asset quality question I know there were many questions on that front but on the SME side can you help me understand how this old vintages are actually being treated in the sense of renegotiations or so because my understand is that some of this the badminton they are pretty much from like 2012 part of 2013 and part of the increase in provisions was related due to the fact that lot of these loans they become 120 days past due. So given that these loans have being originated much older than that I was wondering if the reason why there is such a lag between the past due and the provisions is the fact that you have been renegotiating some of this credit or this credit lines with SMEs have been more of a revolving nature. So if you could clarify that, I’d appreciate it.

Fernando Dasso

Sure. First on the de-dollarization. We have no risk especially at the end of this quarter. We have seen some our clients beginning to ask now for loans in dollars again. That is very true. And that really depends on the expectations when our clients in terms of work it, exchange rate going to be in the next month, that’s really what they do. And also on the things that they are really financing.

First, it’s also is growing more than retail and that’s been the case for this year, and especially now some of the projects that need financing in dollars, large projects are coming into play and that’s part of the answer.

The other part is yes some of our clients are having or changing a little late their expectation on what’s going to happen with the dollar and the local currency in the future. As you probably know the dollar is strengthening in terms of the soles and that’s has been the case for the last weeks and that will be probably be a case not only at FSOL but against other currency. Other currencies for this second half of the year.

So we feel that could be a possibility that we will get more demand for dollars than soles that we need in the first half of the year. It also depends on what happens to the rates in soles and dollars and those are changing, they are changing in different directions we feel that dollar rates will continue will begin act, they are very low but they will begin to lot dependent on the Federal Reserve.

And the soles ones will begin probably to go a little down because our Central Bank is trying to give some support to the economy with monitory policy that’s on the de-dollarization question. Then if we talk about SMEs and all versus new vintages as we said we’re seeing the new vintages coming around better. You also asked about active negotiation with delinquent clients and we’re doing that on a very or in a more strong stand in this – we have done this for the last two or three months and we’re getting some results of that. We don’t know what’s going to happen in the future obviously but our new vintages are doing better now.

Unidentified Analyst

Okay. Now that’s great. And thank you so much I think we will definitely see some encouraging signals that now things are improving I think on the cost side and I think any – formation starting to improve, so thanks a lot for your time, appreciate it.

Fernando Dasso

Sure.

Operator

The next question comes from Boris Molina from Santander.

Boris Molina – Santander

Yes, good morning. I have a question to see if you guys could give us a little bit of color of what have you found inside Mibanco in this first quarter that you have been running the bank. And would like to now a little bit of how you see evolution of the volume and provisions cost because when you say that obviously Mibanco is not going to contribute anything if – zero earnings for the year and you didn’t increase capital for this your return on equity is not going be affected by Mibanco but some operating metrics are going to be effected if you are going to be more on the provisions side more on the cost side and have you quantified what is the total amount of integration expenses that you plan to incur this year or your incurring in the second quarter so far, so that we could like begin to strip out what is requirement from – .

Would you expect the loan portfolio to it appears to have contracted some slightly in the second quarter and do you think it’s going to continue to contract, do you think that vintages are still showing a deterioration trend and asset quality is going to continue to deteriorate in Mibanco how could we think about where the bank is going?

Fernando Dasso

Mibanco, okay. Let me begin with provisions. With what we have gathered from what we know about Mibanco now, we feel that there are many things to do in terms of commercial side of Mibanco. We have already changed the Commercial Manager and in this company the Commercial Manager is very important and we have put now in charge of that side of the bank the actual Commercial Manager of Edyficar a person that has more than 20 years of experience, very good experience.

So we feel that the commercial side of Mibanco should begin to improve very -. We don’t know when yet because we’re still contracting but that should begin to because we have also changed some of the commercial most important managers in Mibanco.

In terms of provisions as you already know we – a very important provision when we took Mibanco two months ago, it was around 200 million Soles. And so we feel that we’re on a safe side with that provision which we did in the beginning. Now we’re seeing and we’re – rise in the vintages we feel that Mibanco should do as it is doing now. We still need more information to be able to answer you better. What else can I tell you about Mibanco? We – to achieve important synergies I don’t have the number for the synergies that we want to achieve but it is important we can get back to you on that and it will be towards the end of this year.

In reality we’re cannot tell you that much about Mibanco, we would like to be more open in the future meetings.

Boris Molina – Santander

Okay. Wonderful. Thank you. I appreciate this color. Sorry I hear were you going to add something.

Barbara Falero

No I was just saying in Mibanco we still need to complete the whole acquisition, the merger, the tender offer and several things, so that’s why it is not completely open disclosure yet.

Boris Molina – Santander

Wonderful. I appreciate that. Thank you so much.

Operator

The next question comes from [Jordan] from Philadelphia Financial. Jordan your line is open please go ahead with your question. Thank you. It seems that the participant was not stating his question. With this we have no other questions on the line now we will like to turn the meeting over to Mr. Dasso for any final remarks.

Fernando Dasso

Just to thank you all for your interest in Credicorp. We will see you further in the future and many thanks.

Operator

Thank you, ladies and gentlemen. This concludes today’s conference. We thank you for your participation. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Credicorp's (BAP) Q2 2014 Results - Earnings Call Transcript
This Transcript
All Transcripts