Hello and welcome to the Fourth Quarter 2014 Credicorp Earnings Conference Call. My name is Hilda 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. I will now turn the call over to Mr. Fernando Dasso, Chief Financial Officer. Mr. Dasso, you may begin.

Good morning and welcome to Credicorp’s fourth quarter and year end earnings results conference call for 2014. The year 2014 has been a challenging one. Not only for us giving the multiple fronts, we are actively working on such as the acquisition of Mibanco, but for the country as a whole, given the country’s economic performance and the drastic drop in GDP growth, which persisted throughout the quarter and resulted in the lowest annual GDP growth number for our country in years, 2.4%. We have been fortunate at Credicorp to see our business growing consistently despite this scenario and the last fourth quarter was not an exception with the lending business showing further growth. However, the fourth quarter has also been a period to clean up the house and the decision was taken to account for a series of valuation adjustments in extraordinary costs in order to leave a clear path for future growth. Those one-off costs represented a significant amount accumulated in the fourth quarter and strongly affected reported results for the quarter. In the aggregate for the year, these got however compensated by some extraordinary income we were able to generate in previous quarters. So, the effect for the full year just softens up as we will see further on. But before talking about Credicorp, we thought appropriate to start with two charts on the Peruvian economy, which has been the source of serious concern in the market this last month. Next page please. The Peruvian economy became subject of concern due to constant revisions to reduce expected GDP growth numbers for the year following surprising and disappointing data. Not only was Peru affected by the LatAm’s worst growth year in the last 12 years, but also by the deteriorating terms of trade as copper and gold prices…

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I will resume the conference the last page of the presentation, it is Page 17. We are looking at our total results in our contribution chart, the total net income attributable to Credicorp for the quarter shows contraction due to the extra organized. We have extensively explained the significant improvements for the year-to-date reached a total of 12% increase in net income to bring it close to PEN2.4 billion. Furthermore, I have stated in my opening, the year 2014 has been challenging but at the same time extremely successful. In this year, we have been able to first, digest the cost of the impact of the economic problems added to the learning curve of the SME business, improving the business model and perfecting our credit processes. Second, consolidate our strategies, closing up unprofitable ventures and focusing in the profitability of the core business. Third, improve our result on certain issues including cost structures, [indiscernible] business model in the insurance and medical businesses, partnering with the leading health services provider in the region at Chile and BanMédica. Fourth, better allocate capital and improve our capitalization ratios with some shift of investments. Fifth, clean the house, meaning adjusting the evaluation of certain investments to today’s market conditions as well as realizing gains in non-strategic investments to compensate for the latter. Lastly, acquire the most important and leading Pyme & Micro-lending entities with the current growth. Order which was achieved without sacrificing market profitability in the reported ROE delivered to our shareholders for the year of 18.5% is by all means a good return within a slowing macroeconomic environment. With the above advancement and the two transactions recently announced, we certainly feel better prepared with all contingencies out, a pure business and [indiscernible] and the house ready for further pace of expansion in the core businesses with significantly more solid and natural business strategies to take advantage of the expected reactivation of our economic growth in our markets. We have great expectations about the expected contribution of the new Mibanco in the coming years and the effect of the most structural efficiency improvements there to come. We also have great expectations about our new joint venture with BanMédica and realignment of the insurance business. Therefore, if the economy plays along as we hoped, we believe potential for growth and better ROE is significant. With this comment, I would like to open the call for Q&A. Thank you.

Thank you. [Operator Instructions] Our first question comes from Thiago Batista from Itau.

Yes, hi everyone. Thanks for the opportunity. I have two questions. The first one related to the asset quality. We saw during this Q some contraction in the overall delinquency ratio. It was the second quarter in a row that the PDL declined it. Do you believe this trend will continue or are we expecting any impact of the slowdown of the economy in the asset quality trend? And my second question is about the bank’s margins, we saw some contraction in the margins of Credicorp during this quarter even considering an increase in the loan to deposit ratio. So, my question is what is our expectation in terms of margins and also loan to deposit ratio in coming quarters?

First, I am going to begin with your first question about the PDL ratio, you should probably go to Page 8 and you can see the trends in our ratios. We believe that ratios are improving – have been improving for the third and fourth quarter and we also believe that next year they will continue to improve. We have worked extensively last year, especially in the SME segment. With new models, collections, I mentioned, the PDL scores and I think the results are beginning to show. And you can see the lines are pretty – we can see pretty safe lines on the PDL arena. I don’t know if I have answered your question?

Yes, yes.

And then in terms of margins, this year is going to be a different year, because as we said in the presentation, the central bank is really fostering that banks really flip or ship their balances from dollars to Soles. The banks in this country have around – you kind of do a currency and have in reality to our sheets, 50% Soles and 50% dollars, not the Central Bank is really bringing us all the advantages to foster that – our loans become sol loans rather than dollar loans. And they will bring ample funding to do that. And now for – not only ample funding, but also that funding will be in very good conditions meaning the tenure are no to the interest rates. So our belief is that our margins can widen a little bit this year compared to 2014.

Okay. And your view on the loan to deposit ratio?

In terms of loans to deposits, yes we have some stress there especially in sols. And we believe that we will continue to experience some stress in sols though on the other hand dollars, our loans to deposits will be really safe. In the aggregate, we will probably reach 110% loans to deposits for the aggregate balance sheet. And we are beginning to think about bringing some mortgages off of the balance sheet. We are working on that project and we will – when we have results we will definitely talk to you further on.

Thiago, this is Walter Bayly. This – the rotation of the loan to deposit ratio which is uncomfortable is really a consequence of the government’s decision that all public sector deposits end up at the Central Bank. And it is the Central Bank that feeds the private banks that necessarily, political goals. So in reality a huge portion of the deposits of the Peruvian economy are withdrawn from the system. And thus as the system as a whole we have a loan to deposit ratio which doesn’t appear to be very healthy, but it is a direct consequence of the decision as to how to manage monetary policy in the country. We don’t necessarily like it, but it is what it is. Again, it reflects the fact that the whole banking system, private sector banking system does not have the benefit of receiving any deposits to come from the public sector company.

Okay. Thanks a lot.

The next question comes from Philip Finch from UBS.

Good morning everyone. Thank you for presentation. And couple of questions, please. Some regarding your expenses while you showed a sizable increase year-on-year in terms of operating expenses, now obviously you have got Mibanco included in that year-on-year growth of 17.5%, so could you tells us first of all how much it would be without Mibanco. And obviously there are a number of non-recurring items that you mentioned in the presentation, so going forward looking to 2015 what sort of our growth in expenses should or could we assume for the group in 2015. And the second question is a more broader question regarding an update on Mibanco you talked about how 2014 was very much in terms of trying to clean it up ahead of the merger, was 2015 about what you expect to happen for Mibanco just some color on when you think the merger will happen, how much more provisions will built at Mibanco, when can we expect the Mibanco itself to return to profits and the – in the previous conference call also I think you talked about a turnaround ROE potential of 25% or so, when can we envisage that going forward? Thank you very much.

Its Walter, let me tackle the Mibanco side and I will leave for Fernando the other piece. The merger of Mibanco expected to take place 1 March. We are working diligently in making this happen which involves of course systems, sales force integration, shutdown of branches, etcetera, etcetera. We expect this year Mibanco to be the second most – the second largest contributor to profits to Credicorp and that target of 25% for the merged entity would probably be halfway there will probably be around 15% return on equity for the combined operation, including all the goodwills involved. So, this will be a year, in which we will start to see very positive results in terms of contribution – earnings contribution to Credicorp from the combined entity again becoming more selective, the second most important contributor to profits with an estimate or general equity of around 15% for a number of the other pieces. In regard to cost and then the efficiency ratio, what I can tell you is that BCP will continue with our program of efficiency. We have refinery in this forum for around 15 months and we plan to achieve 100 basis points per year, more or less. This is BCP’s turnaround. But as Walter said, Mibanco and Edyficar were no longer engaged in great expenses. They have endured a traditional year last year and this year will be a year – is still a challenge, but most of the synergy is cooperating taking into advantage by our house. When we got a lot in our Pacifico, what I can tell you is that they have also gone through a very important efficiency program last year and they will reap the benefits from that program during the whole 2015. So, those are the most important companies of the series at Credicorp. And we believe that efficiency ratios in the future should reflect these efforts. We plan at the end of this decade to reach the low 40s, around 40% efficiency. And that’s really a trend that we want to achieve.

It’s important that on the efficiency ratio at the bank level, we have already finished consolidating all the different initiatives and plans going forward with timelines etcetera, etcetera and our target as Fernando was saying is 40% cost efficiency ratio at the bank and consolidated by 2018. And we think that’s an achievable target. We have moved substantially forward, if I recall correctly at the end of 2012, we were close to 49%, we are down to almost 42.3%. And clearly, the first tranche of that reduction was the easiest part, but again, our target is 40% coverage at the bank level and consolidated for 2018.

That’s very clear. Thank you, Walter. Thank you, Fernando.

The next question comes from Carlos Macedo from Goldman Sachs.

Good morning, Walter and Fernando. Thanks for taking questions. I have a question with loan growth, you have mentioned in the beginning how we expect economy to pick up 2 percentage points potentially stronger than this year. Historically, we have given guidance that loan growth is three times real GDP growth, this year, loan growth 12%, if you take away the dollar and Mibanco. Could you give us some color on what you expect for loan growth in 2015, where they are going to come from and what kind of mix are you going to generate and how that could affect your margins? Thanks.

This year, this past year – the country grew 2.4%. This year we are supposed to roll around say 3.5% to 4% for the country. Therefore, we believe that we will continue to grow at the same pace that we did last year around 12%, 13%. We are beginning to see that in our numbers even this month. The segment that will grow better as we said last year, wholesale grew by 30% and retail grew by around 13%. We feel that this year retail will pickup a little bit especially on the [indiscernible] arena. So, we will see that growth happening, but on the other hand, we have to say that at the beginning of next year, we have general elections here in Peru. So, from the middle – second half of this year, it will be a pre-electoral period. And there can be some volatility on typically investments lower a little bit during that period. So, we will achieve that 13%. There are some clouds that we will have to really fight against.

Thanks. Just following up then, it would be reasonable to say then because you are moving into retail growing faster than wholesale and presumably that the mix will continue to shift over due to Soles that you will see margins improve during the year as a result of the mix shift?

Yes. In Soles, we not only have better margins, but as you know we have talked about it in the past, we mismatch a little bit to balance sheet. So, that mismatch between funding and lending gives us a further margin. It can engage us in more risk, but it gives us a wider market.

Okay, thank you.

The next question comes from Saul Martinez from JPMorgan.

Hi, good morning guys. I hope this question doesn’t come across as antagonistic or confrontational. And I realized that the economic backdrop has been troubling, but if I go back even to 2008, there have been various missteps, whether it’s made off of corporate bond write-downs, for example, your SME book deteriorated more than some of your peers – your credit card book deteriorated more than some of your peers couple of years ago. The IM Trust write-downs have been meaningfully greater than I would have thought. Insurance has taken a while to turnaround. Obviously, it’s better now, but it took a while to turn around and get better underwriting margins. My question is, is there a risk issue at the company and how do you respond to questions about whether you are properly assessing how to get good risk – risk adjusted returns on your investment, whether it be from credit activity or from M&A activity? And my second question is on the loan to deposit ratio, I know it’s been mentioned and you guys have talked about the funding coming from the Central Bank. But in local currency, it’s 115%, 116% and I get the de-dollarization policy, but does that leave you vulnerable? For example, in a situation where the Fed starts to raise rates leading to currency weakness and even leading to a lesser propensity of depositors to provide funding in local currency? And in a related question, does that leave you vulnerable in that situation to liquidity issues and a related question is how much of your funding actually does come now from the Central Bank and how much can that go to in going forward?

Okay. Good questions. Let me tackle that. First, the second piece associated to the cost of income ratio, I think I already mentioned in the prior question why we are here? It is a decision of the Central Bank of which we have very little to say about. We have conversations about it, but they are very firm and that they believe they need to impress policy that allows them to keep control and try to force the de-dollarization of the portfolios which is something that they worry about a lot. So, yes, we don’t like it, but that is life. Is it a problem? No, it’s not. We believe that it would be absolutely countered to the Central Bank’s intentions to allow the private sector banks, all the banking systems reality – in reality not to have access to funding to continue growing. One of the drivers of the Central Bank policy is growth clearly providing enough liquidity is a necessary element. So, do we like it? No. Can we do something about it? We have talked to a Central Bank about it, but that’s about as far as we can get. Do we think it’s a problem – sustainable problem in the future? No, we do not. At a certain point in time, all the funds deposited from the public sector into the Central Bank will, as development starts to run deficits start to flow back into the economy and we will have the more normalized loans to income – loan to income ratio, loan to deposit ratio for the whole banking system. So that it is what it is. Regarding the other questions, yes, we have had a lot of – we have had our share of missteps, but we have had our share of successes. At the end of the day, the return on equity is something I recall has been quite healthy for the past 15 years. The evaluation of our stock has proven to be quite interesting. So, as they would say, the proof is in the pudding or something, in the eating or something. So, yes, we have had our share of mistakes, but we have had more than our share of successes and the end result is probably a positive one.

Okay, fair enough. What proportion of your funding is coming from the Central Bank, do you share that?

Yes. I can elaborate a little bit on that part of the question. We were looking at our numbers yesterday and [indiscernible] funding in dollars. At the end of this year, we will probably be around 8% funding from the Central Bank and deposits will be around 70%, while the other piece we will be borrowing and bought.

Okay. 70% of the local currency deposits, is that okay?

Yes, yes, we still have local currency now, because that’s where the Central Bank operates.

Okay. And final quick question, you had a small loss on Petrobras exposure at Atlantic Security, is that the only exposure that you have for Petrobras related suppliers or Petrobras related issues, whether it be at BCP or at Atlantic? Does that something that we should be aware of?

We had a little bit more solid faith and the maturities were in two weeks ago, that’s the breakdown. I think we have got a little bit more, nothing material.

Nothing material. Okay, thank you very much.

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

Thank you for taking my question. Actually I have two, the first one is on asset quality, looking at your NPL ratio, which includes PDL’s post-restructuring and finance, that ratio has increased in the quarter and looking at the stock refinance loans, it’s gone up by about 28% in the quarter, can you tell us what is driving such a high level of refinance activity at BCP?

What I see here in the PDL ratio chart number 8, you see the numbers there and I don’t see a variety actually it’s an improvement.

Yes. I am talking about the NPL ratio which includes restructuring and finance it went from 2.9% at the end of 2013 to 3.4%. So, it looks like there has been refinancing or restructuring activity in the fourth quarter. So, I just – I am wondering if that is I guess a result of you guys being more active and why that’s the case if it’s marking some sort of deterioration that you guys fixing by refinancing and restructured loans?

Yes. There are really two factors here. First, yes, we have our refinance a little bit more, nothing special, but also we have been slower on charging of loans this last quarter, so that’s why it shows in a ratio. If we need to refinance, it will only refinancing.

I see. So, you wouldn’t say that this is a trend that shows maybe some deterioration in the portfolio?

What we have been seeing is that on the other hand to the country, our portfolio is really improving, especially in the retail sector. And I am talking about SMEs and consumers. It really has improved. Hello?

Yes. Okay. I thought you were going to say something. Okay, that’s fine. That’s clear on the asset quality. When I am looking at the operating expense line, obviously there is a big increase in the quarter, some of that is seasonal, some of that is non-recurring. I want to get if you can, because it wasn’t clear from the release maybe an idea of what exactly is the recurring level of expenses that we should see on a quarterly basis, because just giving the amount of sort of one-offs that we saw in the quarter, I couldn’t really make that out?

What happened during the last quarter, I think that’s really usual, for example, we will receive the invoices from our suppliers and we will receive them after a month. But in December we will receive the invoices of November and December at the same time. So that’s difficult and it’s also difficult to make some more expenses at the end of the year. But that’s really what happens in terms of accretive expenses.

Now there is a flipside to it which is that on the first quarter they are usually the low. More reporting numbers if you focus on the first quarter and multiply that’s where actually a little growth and that’s probably be what we have this year.

Okay, perfect. And lastly going back to your slide on efficiency which is Slide 12 of your presentation, just wondering what is happening at Edyficar which is the only – first of all congratulations on the trend on improving efficiency here. The only one that’s not really improving is Edyficar and I guess my question is this because of any non-recurring items in 2014 or is it something else happening there that is leading to rising efficiency ratio?

No, it basically non-recurring items that we have incur because we were preparing Edyficar for the merger that is going to take place in 3 weeks. So it’s nothing special with the operation by itself.

Okay. Thank you very much.

It is around PEN25 million in one-time items.

Okay, got it. And that’s included here in the expenses. Okay. Thank you.

Your next question comes from Carlos Gomez from HSBC.

Hello, good morning. I have two questions. The first one refers to capital, we saw the capital increase and we went on December 1, there was a change in the goodwill of Mibanco, I see it in the reports – we would like to see how much effect that had on the capitalization. Second, we had [indiscernible] 7.45 we are hoping to have another 47 basis points from BCI sale do you have any additional plans and are you stick to your target to reach a 10% core equity Tier 1 ratio, by the end of 2016?

Yes, that’s our target and that’s the target for BCP which is – as you know it’s a rate related entity. We have to now reach around 8% in core equity Tier 1 for BCP. We still plan to reach 10% by the end of 2016. And that is in our plan. And you had another question in terms of the goodwill of Mibanco that we really have get back to you because we haven’t made any change in Mibanco.

I think from the press release, I mean you got some of the – I think you got the Mibanco brand consider an asset and therefore is no longer part of the intangible and it may not be deducted from capital?

I will try to get back to you and have a more detailed conversation about this. What we have done in Mibanco you have charged systems and there also we are incurring cost – one-time costs for example branches that we are closing, but not in terms of the goodwill. What we have amortized is the Mibanco is difficult for us. We will - the merged entity will be called Mibanco [indiscernible] branch is being written off – was written off throughout the last quarter last year. And it is in the books BCP because BCP is the owner of Edyficar.

Going back to the target and the 10% target, do you expect to get to it organically or are there any other ways in which you are going to do it because when you look at your returns and your expected growth, there isn’t a lot of room for capital accretion if my number are correct?

The return on equity at the bank level should be around 34, 55. We will be conservative in the dividends we pay out of the bank. And we will have 12% growth approximately in assets. So yes, there is a space for accretion.

Okay. And dividends at the – last question, dividends at the holding company level, what’s your expectation for the coming years?

We have not taken that to our Board yet. We expect some marginal growth.

Okay, thank you very much.

Thank you.

The next question comes from Boris Molina from Santander.

Yes. Could you please give us a little bit of idea of by how much you expect your ROE to expand in 2015 and what the big drivers would be? I would suppose that given that you have gone through the process of riding off and restructuring the integration of Mibanco etcetera, you should see a significant pickup given that Mibanco is always going to be 50%. So, what would be affected the consolidated level? What do we expect in terms of earnings growth for the year? What are you thinking about?

Well, it depends on return on equity for Credicorp is all within our target and we should get this year.

Only, 20%, okay.

Yes, because we will retain more equity as we mentioned at the bank level.

Okay, thank you.

The next question comes from Jordan Hymowitz from Philadelphia Financial.

Thanks guys. I was wondering if you could help me understand how you think about loan loss reserves, especially as a percent of non-performing loans including restructured loans, because the reserve coverage has been coming down after several years and I was just wondering is there a line in the sand where you don’t want that reserve coverage to go any lower?

Yes. I mean, we have done our reserves to stay at basically the same levels. During the last years, we have remained at the same levels. We don’t see any further stress at PDLs or NPLs for next year. So, we will continue with a conservative session that we have had for many years.

Do you look at the reserve level when you use that ratio, excluding or not excluding restructured loans?

Yes, PDL is without the restructured loans and the NPL includes the restructured loans.

Right, so if you look at on just the PDLs, the numbers stayed flat, but with the restructured loans, the coverage keeps coming down to a certain extent, you know what I am saying?

I didn’t understand what the question is, maybe we can prepare some charts and give you a detail how the regulatory and the IFRS provisions are calculated in our policies. So, I am not sure I quite understand the question, sir.

Okay, that would be great. Maybe we can do it offline, but basically my question is the level of loan loss reserve coverage ratio, should we be considering restructured loans in that ratio into this net NPLs and why or why not?

Okay, great. We will prepare something and send it over to you. We do calculate both, our [indiscernible] ratio with restructured loans and without restructured loans. So, I am not expecting to share which of the one you were looking at in which charts, because we do publish both.

Okay, thank you.

You’re welcome.

Yes. Just to give you a number for example, the coverage of NPLs, the last quarter of 2013 was 135%. And this last quarter was 134%, so without – with the NPLs, the NPLs covering.

Okay, thank you.

The next question comes from Amit Mehta from PIMCO.

Hi, afternoon. Thank you very much for the call. I wanted to ask a question just to understand your dollar exposure and how you hedge for rising dollar risk against the currency, I mean, you mentioned briefly how you are running a mismatch position and that obviously gives you better margin, but can you just kind of talk us through how you manage that risk going forward? And what kind of exposures or net exposures you are running?

What we do is that was the same in previous question is without – in reality to our sheets, one is in dollars and one is in Soles, where we do the mismatch is inserted in our Soles balance sheet. In the dollars balance sheet, we [indiscernible] because people want to really run the business that you are talking about. So in that sense what we have is combined balance sheet which currently we have a long dollar position equivalent of about $200 million we have established today a minimum of $150 million position. Where as in class we are the way around, so we kind of think a view on where you would think the exchange rate is moving and based on maximum amounts to minimize volatility but also be able to get some profits we play in a position. As I mentioned today we have 150 long dollar.

Okay. So you are long dollars banks. And then can you – the mismatch in sol is the LDR ratio that you refer to basically?

The loans to deposits, well, we always actually we land on the longer term basis. Yes there is – it is [indiscernible] mismatch. We land on our longer term – it’s tenue.

Right, okay, it’s tenure. Okay. And what’s the mismatch in terms of tenure what kind of duration mismatch are you running?

In dollar terms we are matched in tenure as well and in local currency we must have a long – we must be long assets for the on the average a duration of 2 years, 3 years. And liabilities must be very short 900 days – 180 days.

And I mean how far are you comfortable stretching that tenure mismatch from here?

We do have some measures, which are sub-listed by our Board as to how much risk we can take in tenure and so it’s a certain amount which is just obviously a smaller [indiscernible]. It’s difficult to measure the amount of risk you can take in duration. We do on the right local currency mortgages that go – have an average life of 7 years and we don’t necessarily match fund them. But the overall duration of our assets in local currency is closer to 3 years and the average duration of liabilities in local currency is closer to 90 days, 180 days.

Okay. Thank you very much. And can I just one last quick – one quick follow-up question in terms of the capital build, if – how will you balance the growth rates versus the capital build I mean which one do you think about there is a minimum capital accumulation you want to do a year that caps your growth rate in terms of asset growth for – how do you strike that balance?

Well, no. We will not sacrifice growth for capitalization. If we have established it we want to reach core equity Tier 1 of 10% in 2016 give or take a couple of months. And if we are unable to reach that with our own resources which we think we can we would find capital from other sources. We would not sacrifice market share of growth because of lack of capital.

Okay. Many thanks. Thank you.

We have no future questions at this time. I would like to turn the call over the Mr. Walter Bayly, Chief Operating Officer of Credicorp for final remarks.

Sure. Thank you very much for your patience and for joining in this the call. Just a quick summary, in about the middle of 2013 it became obvious to us that there were a couple of elements that required us to change or to adjust our policies. It became very clear that the country was going to grow less and the financial system was going to grow less. The country is going to grow less because of the reasons we know. And also it’s important to take into account is the level of bank activation or penetration of the banking system in Peru has increased in the past decade. So we are now at levels close to Mexico and almost reaching Colombia. So even though there is still room to grow, we have advanced a lot in level of penetration of the banking system. Throughout this period we have gone through very, very large growth periods in which year after year after, our assets were growing 25% 20%. And it’s clear that, that would not be the case going forward. Thus in 2013, we decided to adjust and refocus the bank and Credicorp through several initiatives. Throughout this period of growth, we have been very focused in capturing all the growth that has happened in making sure we have presence in every market, in every product, in every each. We decided to take a step back and look at all those different initiatives that we have started and really reevaluate each of those initiatives market segments and product and we have started to scale down what that have been less profitable. Clearly, Tarjeta Naranja is one of them. We also have the brokerage released, which we are in the process of finalizing the sale. We had an agreement with Mobistar…

Thank you. Ladies and gentlemen, with this we conclude today’s conference. We thank you for your participation. You may now disconnect.