Credicorp Ltd. (BAP) Q4 2015 Earnings Report, Transcript and Summary

The following is a recording for Carla Garcia Baccalini [ph] of Credicorp on Tuesday, February 9, 2016, at 8:30 a.m. Central Time. Excuse me, everyone, we now have our speakers in conference. [Operator Instructions] At the conclusion of today's presentation, we will open the floor for questions. At that time, instructions will be given if you would like to ask a question. I would now like to turn the call over to Mr. Fernando Dasso. Mr. Dasso, you may begin.

Good morning, and welcome to Credicorp's conference call on our earnings results for the fourth quarter of 2015. For the fourth consecutive quarter, Credicorp posted a solid result with net income of PEN 731 million, which led to an ROAE and ROAA of 18.7% and 1.9%, respectively. After excluding the effects of nonrecurring net expenses for PEN 38.4 million, the result translates into net recurring income of PEN 769.6 million and recurring ROAE and ROAA of 19.8% (sic) [ 19.9% ] and 2.0%, respectively. The main drivers of Credicorp's results were: first, loan expansion of 2.8% quarter-over-quarter and 13.1% year-over-year in quarter end balances, which excluding the effect of the revaluation of the U.S. dollar, turned into real loan growth of 0.5% quarter-over-quarter and 7.4% year-over-year. However, it is important to note that average daily balances reveal a much better performance of our loan book and show an expansion of 4.8% quarter-over-quarter and 16.8% year-over-year, which represents real growth in line with expectations of 3.1% Q-over-Q and 11.6% year-over-year. Second, an increase of 13.1% quarter-over-quarter and 14.9% year-over-year in net provisions for loan losses. This led to a cost of risk of 2.23%, which represented an increase of 21 basis points Q-over-Q and only 4 basis points year-over-year. Third, significant net increase, net interest income growth of 5.8% quarter-over-quarter and 15.4% year-over-year, which more than compensated the increase in provisions for loan losses. This result was mainly due to higher interest income on loans and represented the highest quarterly growth rate in 2015. Fourth, a solid NIM of 5.55%, which represented an increase of 6 basis points Q-over-Q. This was attributable to a significant growth in net interest income, the highest quarterly level this year; and a lower increase in average interest earning assets, which was due to a decrease in BCRP funding. On a year-over-year basis, NIM fell 11 basis points. This was primarily due to more use of BCRP instruments and to an increase in the funding cost as we'll explain later. Fifth, although the efficiency ratio increased 140 basis points quarter-over-quarter, we decreased 180 basis points year-over-year. This was well in line with expectations and the result of BCP's efficiency program. Let's review the profitability by subsidiaries in next slide, please. Credicorp's solid performance reflects relatively stable or normalized ROAEs at the main subsidiaries, as shown in the table. Nevertheless, subsidiaries such as Credicorp Capital and Atlantic Security Bank posted negative and very low ROAEs, respectively. The former reflects the impact of an impairment related to acquisition of the Chilean business and the latter shows the effect of a deteriorated and [indiscernible] asset management business, one of ASB's core business lines. Let's review the most important drivers of Credicorp's performance. Next slide, please. The graphs on this slide show the evolution of Credicorp's total loans in average daily balance, which best reflects interest income generation. Loan book expanded 4.8% Q-over-Q and 16.8% year-over-year. All of these represented real growth of 3.1% Q-over-Q and 11.6% year-over-year. In general, the dynamic of past quarters changed even the retail banking -- that retail bank accounted for the highest share of nominal and real growth in average daily balances, which differs from the scenario observed in previous quarters throughout 2015 when Wholesale Banking led loan growth. In the year-over-year evolution by business segments, the dynamic remains unchanged as Wholesale Banking continue to lead loan growth. It is important to note that Mibanco reported loan expansion for the second consecutive quarter, which reflects ongoing recovery in loan origination after the bank's acquisition, the subsequent cleanup process. Nevertheless, it is important to remember that the speed of origination is still below the segment's potential, which reflects the bank's focus on prioritizing portfolio quality over speeding up the pace of loan growth because of the current macro context. Next slide, please. The year-over-year analysis offers a better snapshot of the dedollarization process under way and of the nature and control risk of Credicorp's foreign currency loan book. In the chart at the top of the slide, it is clear that segments with higher dollarization have also dedollarized the most. This is the case with Wholesale Banking, SME-Business and Mortgage portfolios, which will lead at now levels of dollarization that do not represent material exchange risks. In the particular case of the Mortgage portfolio, it is important to note that the foreign currency stock has a very low loan to value of approximately 50%, which is lower than the portfolio average of 56%. With regards to the Central Bank's dedollarization plans, it is important to highlight that at the end of December, BCP Stand-alone has fully complied with December's target both total foreign currency loan book and foreign currency mortgage and car loan books. All of the aforementioned is reflected in the sensitivity analysis of BCP's loan book, which is shown in the chart at the bottom right. As of December 2015, in a stress scenario, with an exchange rate shock, 88% of BCP's loan book posted no exposure to foreign exchange risk on credit risk. This percentage continues to increase as the dedollarization level fall. Next slide, please. The chart at the top of this slide shows the evolution of Credicorp's funding structure. It is evidenced that in 2015, BCRP instrument share of total funding increased due to improvements in the conditions, particularly in terms of tenure, which allows us to strengthen Credicorp's long-term funding. Nevertheless, it is important to note that for the first quarter, the share of BCRP instruments in total funding contracted from 8.7% at the end of September to 6% at the end of 2015. In terms of funding cost in the table at the bottom left, you can see that the funding cost at Credicorp and BCP Stand-alone increased for the second consecutive quarter by 4 basis points Q-over-Q. Year-over-year, the increase was 10 basis points at Credicorp and 9 basis points at BCP Stand-alone. This growth was both gradual and in line with expectations. For the full year 2015, BCP's funding cost increased 8 basis points, but Credicorp's cost grew only 3 bps due to the limitation of Mibanco's funding. Its funding cost dropped 9 basis points. Finally, with regards to our loan-to-deposit ratio, in the table at the bottom right, we can see that Credicorp's ratio fell 190 bps Q-over-Q and 380 bps year-over-year. The same trend was seen at the banking subsidiaries BCP Stand-alone and Mibanco. The improvement in the loan-to-deposit ratio is mainly explained by: First, the growth rate of deposits outpaced that of loans in terms of Q-over-Q of quarter end balances. It is important to note that Wholesale Banking loans posted significant cancellation level towards the end of the quarter. Second, the effect of high appreciation of the U.S. dollar in the fourth quarter. This led deposits to expand more than loans because dollarization is higher in the former than in the latter. Nevertheless, even after eliminating the effects of the appreciation of the U.S. dollar, the loan-to-deposit ratio fell 80 basis points Q-over-Q, 120 basis points year-over-year. Given the market's concerns about local currency liquidity and the funding cost as well as the Central Bank's participation as a funding supplier, let's quickly review some aspects of the funding structure at BCP, the subsidiary that is the most exposed to these factors. Next slide. The chart at the top of this slide shows the breakdown of BCP's funding by funding source and tenure. As you can see in the chart on top left, deposits here represent the largest funding source by its share in the total local currency funding of 68% by the end of December. The chart on the top right shows the strength in long-term funding position and to more use of BCRP instruments throughout 2015. If we analyze in more detail BCP's local currency funding, the chart at the bottom of this slide shows the breakdown of BCP's funding by source and the average cost of the most important sources. It is noteworthy -- first, in the pie chart on the left, it is important to highlight the high share of deposits. Moreover, BCRP instruments represent 21% of total local currency funding and replace mainly other funding sources, such as due to banks and bonds. Second, in the table on the right, you can see that the only funding sources with higher cost in 2015 were deposits and BCRP instruments. Moreover, the latter posted a larger increase of 9 basis points as compared with December 2014's cost. The former posted an increase in its cost of only 4 bps in 2015. Finally, the same table, it is important to note that the cost of total deposits dropped 5 bps in 2015 because the lower cost of foreign currency deposits offset the higher cost of local currency deposits. Next slide, please. Credicorp's net interest income increased 5.8% Q-over-Q and 15.4% year-over-year. This was due primarily to growth in interest income on loans. The chart on the top left shows that the net interest margin increased 6 bps quarter-over-quarter to situate at 5.55% at the year-end. Year-over-year, NIM dropped 11 basis points. NIM on loans increased 16 bps quarter-over-quarter but dropped 27 bps year-over-year, which reflects a change in the mix of loan book towards a higher share of low-margin business segments throughout 2015. NIM after provisions for loan losses dropped 5 bps Q-over-Q and 7 bps year-over-year due to a slightly higher pace of growth in provisions this quarter. This level is within expectations and in line with our risk appetite. Thus, the increase of NIM is explained by: First, the level of BCRP instruments fell Q-over-Q, which helped reduce the distortion created in interest earning assets, which expands due to the required restricted deposits; and second, higher-margin business segments led the expansion of total loans in the fourth quarter. Effects of these 2 factors was slightly diluted by the small increase in funding cost. The first element had some material effect as is shown in the chart at the top right. As you can see in the graph, the adjusted NIM, which eliminates the amount of restricted deposits required in the Central Bank's repo trades from interest earning assets, increased 5 bps Q-over-Q, 21 basis points year-over-year and 14 basis points in 2015. More than giving the precise estimated figure, this adjusted NIM gives a clear idea of the most important drivers of the slight reduction in NIM. Next slide, please. Net provisions for loan losses increased 13.1% Q-over-Q and 14.9% year-over-year, but the cost of risk remained within expectations and, more importantly, within our risk appetite. The cost of risk may have increased 21 bps quarter-over-quarter but in full year terms, fell from 2.15% in 2014 to 2.08%, 2015 due to continuous improvement in the risk quality of new vintages in retail banking in general and in the SME-Pyme, Credit Card, Consumer and Mortgages in particular, as we will see later on. Traditional delinquency ratios such as an internal overdue and NPL ratios remained fairly stable Q-over-Q and showed a slight increase year-over-year. Nevertheless, it is important to remember that these ratios are impacted by the distortion created due to the stock of loans that are provisioned but cannot be written off because of the existence of real estate collateral. This is the situation that characterizes mainly business segments such as SME-Business, SME-Pyme and Mortgage portfolio. Next slide, please. The chart on this slide shows improvement in the internal overdue ratio at each of BCP's different segments as well as at Mibanco due to the aforementioned factors. The drop in the internal overdue ratio of SME-Pyme, Mibanco and BCP Bolivia is particularly noteworthy. In the SME-Business segment, the deterioration shown in the delinquency ratio is attributable to 2 particular cases and higher level of refinanced loans. The clients in question experienced deterioration in their payment capacity due to poor sales performance on projects that were not related to their core business. For businesses such as SME-Pyme, Mortgage, Credit Card and Consumer segment, our most appropriate delinquency analysis entails looking at the early delinquency ratios, which we will see in the next slide. Next slide, please. In this slide, we can see the evolution of the early delinquency ratio, which is highly correlated with the cost of risk in businesses such as SME-Pyme, Mortgage, Consumer and Credit Card. It is also important to remember that the year-over-year analysis is the most appropriate way of looking at these scenarios, particularly in terms of SME-Pyme, Consumer and Credit Card, because it eliminates the effect of the seasonality that characterizes this business. In the case of SME-Pyme, early delinquency has followed a consistent downward trend year-over-year in 2015. Thus, the cost of risk also improved consistently throughout the year. This represents a great achievement because it reflects the comprehensive adjustments we have made in our business model over the past 2 years. In the Mortgage book, yearly delinquency ratio remains low at around 0.8%, plus or minus 7 bps. It is also evident that this ratio registers a real volatility but remains within the organization's risk appetite. The cost of risk in this segment increased 35 bps Q-over-Q. This increase was due to: First, the maturity cycle of the Mivivienda portfolio, which continued to account for approximately 15% of total mortgage loans. Second, an operating error in the booking of provisions for the Mivivienda program, which will be reversed next quarter. Thus, the adjusted cost of risk should be situated at 0.73%. Third, a slight deterioration of risk quality in vintages on foreign currency mortgages, which were issued just before the sol started its devaluation trend. And fourth and last, we identified deterioration in some clients' capacity to make payments to other financial entities and had to build provisions accordingly. In the Consumer and Credit Card segments, after falling consistently in the first 3 quarters of 2015 on a year-over-year basis, the early delinquency indicator increased 13 and 15 bps year-over-year, respectively, in the fourth quarter. Nevertheless and in particular, in the Credit Card segment, all delinquency and profit risk [ph] indicators are comfortably within our risk appetite. We are closely monitoring these events to make sure that we implement all measures to control the situation. Next slide, please. Mibanco's internal overdue ratio fell 66 basis points Q-over-Q. This was mainly attributable to the contraction of the internal overdue portfolio, which was attributable to efforts to clean up this portfolio as well as the charge-offs. The cost of risk increased 34 bps due to the high level of write-offs last quarter, which led to an atypical result for the cost of risk. In the year-over-year analysis, Mibanco continued to post improvement and show stability, which is reflected in the 134 bps decline year-over-year in the cost of risk. Next slide, please. Nonfinancial income grew Q-over-Q. This was due primarily to an increase in fee income and a net gain on foreign exchange transactions and, to a lesser extent, the nonrecurring income at Edyficar. The aforementioned offsets the loss on sales of securities and the loss from subsidiaries, which was mainly linked to cost adjustment of PEN 10 million at Grupo Pacifico. In a year-over-year and non-accumulated terms, nonfinancial income reported an increase of 9.5% and 8.7%, respectively, due to higher gains on foreign exchange transactions and to an increase in fee income, which are the main sources of nonfinancial income. Next slide, please. The insurance underwriting result increased 7.3% Q-over-Q. This was due primarily to a drop in acquisition cost and to a slight increase in net premiums in property and casualty and, to a lesser extent, the decrease in the acquisition cost in life insurance. The aforementioned mitigated an increase in property and casualty claims. In the year-over-year analysis, it is important to remember that our results incorporate the period end effect of the joint venture with Banmedica. Nevertheless, the underwriting result increased 29.2%. This was due primarily to the decrease in the level of claims in the fourth quarter and to a drop in the acquisition cost, which offset the decline in the net earned premium related to the JV. With regards to the main insurance ratios, it is important to highlight that our combined ratio of property and casualty fell from 100.2% and 92.2% in the fourth quarter of 2014 and the third quarter of this 2015, respectively, to 86.4% this last fourth quarter. Moreover, loss ratio also dropped from 65.1% and 60.4% in the fourth quarter of 2014 and the third quarter of 2015, respectively, to 59.7% in this last fourth quarter. Next slide, please. The efficiency ratio increased quarter-over-quarter, which is mainly due to the seasonality that characterizes the fourth quarter of every year. Nevertheless, efficiency program showed positive results, which were reflected in the reduction of 180 basis points year-over-year and 200 basis points in accumulated terms. Next slide, please. Credicorp and its subsidiaries have maintained comfortable capitalization ratios that are well above regulatory limits. Our common equity Tier 1 ratio, which is the most rigorous measure of capitalization, registered a significant Q-over-Q improvement of 33 basis points. This was mainly due to earnings generation. As a result, in 2015, we managed to raise the ratio from 8.01% at the end of 2014 to 9.34% at year-end. The main drivers behind this were: first and most importantly, earnings generation; second, the transfer of BCI equity investments to Credicorp; and third, a correction in our methodology after having erroneously deducted deferred taxes related to the VAT tax of our leasing business. Now let's review Credicorp's results for the full year 2015. Next slide, please. In 2015, Credicorp posted record high earnings, which outpaced expectations. These results clearly reflect Credicorp's solid position, which allows the organization to deliver extraordinary results despite low economic growth in Peru and volatility in the international markets. Net income reached a solid PEN 3,092.3 million, which led to an ROAE of 20.5% and to an ROAA of 2.1%. After excluding the effects of nonrecurring net income of PEN 141 million, the result translates into net recurring income of PEN 2,950 million. This represents solid recurring ROAE and ROAA of 19.7% and 2.0%, respectively. In the chart on this slide, you can see the annual contribution of all subsidiaries as well as the ROAE and recurring ROAE. It is noteworthy the better performance of BCP, Mibanco, Pacifico and Prima. Even more, we see the recurring ROAEs which have improved dramatically in 2015. Profitability is thus reduced in Credicorp Capital and Atlantic Security Bank due to the volatility and deterioration of international markets the business segments are linked to. Next slide, please. The resilience of Credicorp's businesses is clearly reflected in our achievements, which were well in line with our guidance and did not change even when the local and international markets became more difficult to maneuver in 2015. First, loans expanded 13.1% in period end balances and 16.8% in average daily balances. Second, cost of risk dropped 7 bps. Third, the funding cost was very well controlled and consequently increased only 3 basis points. Fourth, as expected, NIM reached 5.60%. This represents a slight contraction of 8 bps. Fifth, NIM after provisions expanded 3 basis points. Sixth, efficiency ratio dropped 200 basis points, which was even better than we had expected. Seventh, common equity Tier 1 ratio was situated at 9.34%, which is already very close to our target of 10% by the end of 2016. Eighth, internal overdue and NPL ratios increased only 5 and 8 basis points, respectively. Although no guidance has been given to the market due to the distortion caused by the presence of collateral in some business segments, it is important to mention that these ratios are not showing the consolidated [ph] improvement in some businesses such as SME-Pyme and Mibanco. All of the above translated into a recurring ROAE of 19.7%, which was close to our 20% target. With these comments, I would like to open the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Tito Labarta from Deutsche Bank.

Just a couple questions. First, in terms of asset quality and provisions, we saw nice improvement in terms of NPLs, but you did see a pickup in provisions. You mentioned, I think, some additional provision for a particular corporate, also credit card provisions would be higher. But I guess, want to get expectations going forward with still somewhat slow growth. How do you see asset quality evolving in 2016? And also, how should we think about the cost of risk kind of given it was a bit elevated, I think, this quarter? Does that come down back closer to the 2% of loans for this year? You can maybe give some guidance on that. And then, also, just any impact from El Niño that you're seeing, I guess, in the first quarter and any potential impact on asset quality because of that. And then second question, in terms of margins, also saw a bit of an improvement this quarter. If you can maybe give some color for your expectations for this year given what you're expecting for loan growth in the different segments, retail versus corporate and also your funding cost this year, so how you see net interest margin evolving this year. Can that improve further? Or does that remain relatively stable? If you can give some color on that as well.

Thank you, Tito. First, I want to address your first question in terms of asset quality. We feel that until now, the Niño is still on a very moderate stance. It will probably stay as it is, although it's raining a little bit in the northern region. But until now, nothing special has happened. Of course, we have compared our projections with 2 scenarios. Our base scenario is more than one. And the other scenario is a different one with a severe El Niño, which could affect our loan quality. Until now, we feel that we are running under the modern one and don't seem to -- feel that nothing special will happen in terms of loan quality. It will probably stay as it is. That's with regards to El Niño. However, as you have seen in the numbers over the last quarter, Peru is, in a way, slowing a little bit economically. And that subdued economy would affect a little bit especially in our consumer portfolio. However, until now, we are very well on our appetite and our risk appetite, don't seem to be noting anything special with the portfolio. Then in terms of the expectations for the NIM and loan growth, we feel that this is a very particular year because of when we talk about El Niño, because we have elections, the first one in April and the second in June, so that will bring some stability to the country. But we feel that last year, we have probably grown by 2.8%. And this year, we'll probably be around 3%. So as the country continues to grow by these -- in this particular pace, we feel that our loan portfolio will really resemble -- the growth of that portfolio will resemble the one we had last year, which will be around, say, 13%, 15%. If this happens, we won't see any particular pressure on our margins. This is a very safe pace of growth, both in terms of risk but also in terms of competition. There will be room for everyone to continue growing, and we don't seem to feel a special pressure on our margins. So they will probably stay where they are right now.

All right. That's helpful. Just a follow-up. In terms of the cost of risk for this year and asset quality, I guess, just from your comments, is it safe to say you could see some modest deterioration just given the slowing economy and impact on the Consumer portfolio, but in general, relatively stable, so stable to slight deterioration in NPLs? And what does that imply for your cost of risk for this year?

Cost of risk will probably stay between 2% and 2.2%. Last quarter was a little bit higher than that 2.2% guidance we give all the time. Yes, there has been some deterioration, but we feel confident that all the measures that we have been taking during the past months, especially in SME and the consumer arena, will let us continue to be into that comfortable 2% to 2.2% cost of risk.

Our next question comes from Saul Martinez from JPMorgan.

This is Saul. I have 2 questions. I've been worried about the LDR, especially the local currency LDR and the evolution there, the dedollarization of loans and the redollarization of deposit. I realize it's premature perhaps to call a stabilization. But this was the first quarter in some time, one of the few quarters in the past few years where you actually saw a decline. Can you talk about this ratio a little bit more? What you see is the cross-currency -- how volatility in the markets, the expectation that currency may still weaken impacts that? Conversely, are you seeing pension funds already swapped out of local currency deposits into dollar deposits? What are your expectations? Are we near -- do you think we're near the end of this? And is there a local currency LDR ratio that you feel uncomfortable with that would push you to be more aggressive in terms of raising funding cost? The second question is -- it's a little bit more on the global backdrop and how we should think about -- it's a broader question, especially given the ample market volatility we've seen, concerns about China. How should we be thinking about the transmission mechanisms of a difficult macroeconomic backdrop in the Europe business, whether it be through confidence, exposure to specific sectors, impact on economic growth? How do you think about a difficult economic backdrop, even a hard landing in China, and what it means for your business and how you run it?

Okay. Thank you. So first, on your dedollarization question, as we have talked now for some months, you have seen what happened during the last quarter. And we are -- in terms of the loan-to-deposit ratio, we have improved a little bit. We are around 103%. What I can tell you that during the last 15 months, we have been around at 100% to 105% in the loan to deposit ratio in the combined one. We plan to stay just where we are. So we don't see any particular difference in the coming months. However, when we talk about local currency loan-to-deposit ratio, yes, we are in the 140% to 150%. But as we have talked many times, we are under a very constructive relationship with the Central Bank. And all the financial institutions of the Central Bank are working now on this project, and we'll continue to do that. That's what we get from them. And if the exchange rate stabilizes a little bit, we don't know what's going to happen, we'll never know what's going to happen with exchange rate. But if it stabilizes a little bit, our feeling is that we will, in a way, balance a little bit our loan-to-deposit ratio in local and foreign currency. So we don't see -- actually from what we've talked a month ago, we see a much better situation in terms of that ratio -- in terms of that particular situation. Then on your question about China and what can happen if China brings more volatility to the market, to prices of commodities. And yes, we don't know what's going to happen with China, what we know is that when they say that they are going to grow 7%, they grow 6.9%. So they continue to really reach their targets all the time. Now their target is that they will grow from 6.5% to 7%. If that happens, we are going to do fine. There are good things that have had happened, improved in the last month, especially the coming into production of many important copper mines. Our output of copper has doubled, and I think it will double from what we had in 2014 to 2017. So our trade balance -- and this December was the first month when our trade balance was a positive balance for many months despite the prices of commodities. Because of these projects have come into production, those projects will reach full production at the end of this year. So we don't see anything special happening there in terms of our trade balance, in terms of our current account balance, and those are really a hard path that we have to really follow. If that happens, I feel that our country will continue growing. This is still growth. I mean, 3.2% is still growth. If it is better than that, fantastic. But 3.2% is still growth in a transitional year, with a presidential change. So we feel that the bank will continue growing, and there will be no important influence in the deterioration of loans.

Okay, great. Is there a local currency LDR ratio you feel uncomfortable crossing that precipitate higher funding cost?

I wouldn't -- I mean, I, wouldn’t like to give our guidance on that. What I can tell you is that on a combined basis, our roof, our ceiling is 120%. And we are very comfortable because we're at 103%.

Our next question comes from Ernesto Gabilondo from Bank of America. Ernesto María Gabilondo Márquez: Could you repeat your guidance in terms of loan growth? And what are you expecting in terms of net earnings' road in 2016? Secondly, I will appreciate if you can share your expectations related to the presidential elections, the currency devaluation and the possible downgrade of Peru to frontier market. I think any details will be very helpful. And finally, although there are no investments in mining, what can we expect in other infrastructure projects such as the airport, Metro, gas pipeline, although that could support growth of Peru's GDP? Do you think the presidential elections could be delaying infrastructure projects and consumption and then improving in the medium term?

Thank you for your questions. In terms of guidance for loan growth, we will be at around 13% to 15%, which is nominal growth. While in terms of net earnings, what I can tell you is that we -- our target continues to be 20% ROE for Credicorp. And that's really the guidance we use in terms of earnings. In terms of the presidential elections, as typical in Peru, we have -- now, we have a front-runner which is Keiko Fujimori, the daughter of former President Fujimori. She has around 35% of the votes. And then, the second candidate we don’t really have a second one, because there are like 3 candidates that share 10% each. But there in Peru, 2 months is a long time, and the elections are in April 10, the 10th. So what you are looking at what's going on, our feeling is that Keiko and somebody else would go into the second round of elections in June. But we don't know right now who's going to be the second one. What we feel is that the ones running are really market-oriented, ones are more market-oriented than others. But we don't have the typical populist candidate coming from the left. So we feel pretty safe that we will get a good president, a good president, someone that will be really market-oriented. What we feel -- and then you asked a little bit about devaluation of frontier markets. In terms of devaluation, last year, we had a devaluation of 14.5%. This year, it's probably going to be around, I don't know, 10%, 12%, depending on what happens, especially now in the U.S., because the U.S. seems to come along pretty strong. Now we don't know. I mean, Janet Yellen is going to talk in the Congress tomorrow. We view that the pace of increase in the interest rate, in the Fed funds interest rate, would not be as fast as we thought 3 months ago. So we will see what happens to the dollar. I mean, the dollar appreciated against the other currencies last year, 9%, and against the sol, only 14%. So we'll see -- it really depends more on the dollar than on the sol itself. In terms of frontier markets, as you know, we -- there was a very important push, both from the private sector and also from the government, and we talked to the MSCI and are pretty close to them, And are really trying to put our act together also improve working with some other companies to let these companies increase really their pace and their importance and be able to have more than 3 companies in the emerging markets arena. We don't know exactly what's going to happen. But what I can tell you is that we are working -- we are doing our job to try to continue to be an emerging market rather than a frontier market. Then on your last question in terms of infrastructure projects and the impact on GDP. Right now, as you know, last year was not a great year in terms of public investments. However, the pace improved importantly in the last quarter, there were some important infrastructure projects being under construction now, but we feel that this pace has to really speed up. We feel that the next government will come with an important package of reforms, both in terms of political reforms and in terms of projects that should really come into construction and in place in the coming, say, 3, 4 years. They will really need to move the machinery much faster than it is moving now. Peru has important -- a lack of infrastructure in terms of roads, highway, ports, airports, the Metro system in Lima. So there is ample room for improvement on construction, and that, that will evidently have an impact in the GDP. What I can tell you is that now, in terms of investment, private investment accounts for 80% of investment, and it's very productive and 20% of investment comes from payroll and the government institutions. That should really increase its pace in the future.

Our next question comes from Jason Mollin from Scotiabank.

My general questions have been asked, but maybe I could be a bit more specific. You did mention on the efficiency side, the improvement we saw in full year 2015, 200 basis points improvement in the efficiency ratio to 43.3%. What are you doing -- what are you continuing to do to improve that ratio going forward? What should we expect this year? And specifically on Credicorp's portfolio diversification, can you provide an update on what percentage of the loan book is with the largest borrower, perhaps the largest 5 and 10 borrowers, and how has its concentration changed, perhaps in terms of size? And if there's been any material change in terms of sector exposure? And maybe just lastly, the general question we've seen some...

Okay. First, in terms of efficiency, what I can tell you is that we have really been concentrated more in BCP. In terms of efficiency, our cost to income ratio in BCP has come down from the low 50s to the low 40s in 3, 4 years. We think that we have reached already a position that is very safe, however, we want to go further down and try to reach the 40 or even less than that in the coming 2 years, 3 years. That, in terms of BCP. Now, what we plan to do is really, what we have learned at BCP, under a very good group of people that understand what to do with efficiency, we will go into other subsidiaries of Credicorp. First, we will go into Pacifico Prima and some of the subsidiaries, and we will leave Mibanco, maybe for 2017, because as you know, Mibanco is under a very -- under a transition process. Now the merger took place only in March last year, which only been a year, really. And this year, there are some other things to do and to prioritize before going into efficiency thoroughly. But we have the lessons learned, we have the people prepared, and we have the culture where you build in the whole Credicorp to continue with this efficiency effort. So we feel pretty confident that we will reach the targets we plan to reach in that arena. In terms of portfolio diversification, if you go to Page 5 of the presentation, you can see what our segments account for. And you see that wholesale banking is 45% of loans, SME-Business is 4, and SME-Pyme is 8 and you see all the other segments. What we plan this year is to continue -- last year, we -- the wholesale grew faster than the retail. And -- but this year, we think there is going to be a more balanced growth in terms of -- and retail will pick up a little bit, Mibanco will also begin growing faster. So it will be a more balanced growth. If we talk about concentration, of what percentage is concentrated in our most important 10 clients, I know not specifically the figures. But you can -- we are going to publish the 20-F in 2 months' time and you can go there for the last one we published and for the next one, and really go in detail in that particular point. Then in terms of regulations. First, we want to talk a little bit about banking regulation. Nothing important is going to change in this year because the authorities are going to change in the middle of the year. The only thing that Superintendency is working on is a regulation that will resemble Basel III, especially in terms of capital requirements. They will probably publish it at the end of this quarter. We are really working with them. It will really resemble Basel III. But as you know, we are already working under Basel III standards, so we will be -- we need no change in terms of what we are doing. Then you asked a little bit at the pension funds' regulation. Yes, there is, as you know, a very open discussion of what's going to happen with the pension funds. It is now really in the political arena to decide if it's going to be a pension system or is it going to be a savings system. Until now, it is a pension system, because when you really become 65, you will begin to get your pension until you die. But because of saving system, you will get -- you will have a liquidity event at that time, and we are really preparing all the Credicorp, really, the bank, the AFP and our insurance company to be able to be part of that insurer of the liquidity event that our clients will have when they become 65. But that is under a political road now. And we will see what happens. And that's really the answer for regulation.

Maybe just some color you mentioned in the segment breakdown that we saw in the presentation. But what about in terms of sectors, mining, fishing. Have your largest exposures changed?

Not particularly. What I can tell you, and this is a very precise question, is that in terms of El Niño, you are probably worried a little bit about if we are in agriculture or if we are in fishing, those are the 2 factors that can become impacted by El Niño. And we are really not that exposed. Agriculture is only 1% of our portfolio, and fishing is even less than 1%. So we are really not exposed. We were preparing for many months and even years for this to happen, and we expect there will be no problems.

[Operator Instructions] Our next question comes from Victor Galliano from Barclays.

Just a quick follow-up from me, my main questions have been answered. But just looking at the breakdown of the dollar loan book in your stock of dollar loans, I mean, clearly the segments have performed very differently as of the last year in terms of growth of those stocks. And what we see is in absolute terms, there are some of those that are not really coming down very much. And when you look in particular at SME business, although they only grew in dollar terms, I think it was 2% year-on-year, it's still growing, SME-Pyme is coming down. And also, we saw the credit card balances increase. Although they’re low in absolute terms, they were growing at about 22% annualized. So can you give us some idea here of why these performances are so different? Why the SME business balances continue to grow, SME-Pyme is coming down, and why we also saw that, I think, big increase in the credit card balance as well, whereas, the others tend to come down?

What I can tell you is, in terms of SME, is that they are really 2 different segments. As you said, SME-Pyme, which encompasses both SME and micro lending, has been a really flat segment for the past 18 months. It's been flat for many reasons, but it was really a deliberate move by financial entities also, because there was risk in that segment. So we decided that we didn't want to grow as we did in the past. And it was -- I think that was really a good decision. It's been flat, we've been working with our clients. We feel that it will pick up a little bit, but it won't be growing fast. I mean, it won't be growing by 15%, 20%, it will probably grow less than that, and that will continue. If the economy picks up a little bit in terms of growth and instead of growing 3%, it grows 4%, we will see that as a very positive influence in the SME-Pyme sector. But if we talk about SME business segment, which are companies, that are a little larger and more formalized than the SME-Pyme companies, that segment has been growing faster, and each of -- a segment that we like a lot. We've been investing in that segment for many months now in terms of understanding risk, in terms of the models, not only to underwrite, borrow through to collect in terms of data, in terms of getting very much more closer to our clients, we feel that, that particular segment is a very attractive one, and we will continue to try that. I don't know if that answers your question.

No, I suppose -- let me ask my question in a different way, which is you still have in the SME business, you still have 56% of the loans in foreign currency. I mean, do these funds have that sort of a hedge naturally, or are they exposed to the sol depreciation here?

To be really transparent, we would like that proportion to be much less than 44%, and we've been working actively with our clients at seeking those terms. The thing is that some of our clients continue to make their income in dollars. Part of this economy is really hedged to the dollar, and some of these clients make part of their income in dollars. So they don't want to change. And we are, yes, some of them feel that the rates in dollar are lower than rates in soles, and they, in a way, take their own risks. However, there is still room enough for and a room in terms of what's going to happen with regulation, bringing these clients more into soles, that's really something we should continue to regulate.

Okay. Okay. So you're going to bring that level down from the 56%, which is in foreign currency?

We're going to try. Remember, we're working at a competition where these clients have other banks and there is a competitive arena here.

Our next question comes from Saul Martinez with JPMorgan.

Just a couple of quick follow-ups on asset quality. And it is something of a follow-up with the previous question, but from a different angle, you're growing very rapidly in credit card in a slow economic growth environment, and NPLs did go up sequentially. I apologize if you addressed this during the presentation, because you posted the presentation a little bit late on the website. But how -- should we be concerned about this? It does imply that NPL formation in this segment is increasing. And why should we be comfortable that we don't see what we saw a few years ago when you did see more ample deterioration in your credit card book? And secondly, do you know offhand how much of your -- the increase in the NPLs came from the 2 cases you mentioned in Pyme business? How much were those two cases, and how much did they impact the NPL ratio?

Can you elaborate on your second question that you asked?

Yes, you mentioned in your release that the Pyme business segment, there were 2 specific cases that impacted your NPLs. Do you know how much those specific cases were for, so we can kind of normalize or think about what the impact of those two cases were on the NPL ratio?

Yes. So first, on your asset quality question. We learn from our lessons. Yes, we have lessons that we learned 3, 4 years ago. We have put our best people, our best efforts to try to understand the risk to be able to underwrite and to be able to collect better than others. So now we feel that if the country continues -- as I said, this country continues to grow by 3% a year, we will have the same experiences we had some years ago. We feel enough better, much better stance in terms of the models we have, not only the models -- scoring models but also the collection models. So we are very much more preparing to have a better culture in terms of people that work and risk that work with our clients in the commercial side. So we don't feel that we're going to have the same experience. Then those 2 specific cases account for 60%, we are going to get back to you with more details, but that is around 60% of what happened in the SME business line for this quarter.

So in other words, 60% of the increase in Pyme business came from those 2 specific cases?

[indiscernible] Yes.

Thank you. At this time, I'm showing no further questions. I would like to turn the call back over to Mr. Walter Bayly, Credicorp's Chief Operating Officer for final remarks.

Good morning to all of you, and thank you very much for being with us throughout the year and in this particular call. If we take a step back and look at the year, clearly, we have seen something what appears to be contradictory, which is that the Peruvian economy is slowing down, a lot of volatility of the world, and nevertheless, our record earnings for the quarter. And somehow, what has happened this year is that we have benefited from initiatives that we started approximately 2 years ago. One is related to efficiency, and we've talked about that quite a while in detail. And that is an effort that started 2 years ago, as I've mentioned, we have had some very good results. Obviously, the first impact is faster now. We have to do the hard things that take a little bit more time, that we're extremely focused on that. And the second element that has benefited our results this year is clearly risk management. We are comfortable with our risk management practices, particularly as they relate to the retail side. We have seen a good growth, particularly in the consumer and credit card. The dynamic there was at the beginning of the year, one of our competitors, particularly Citibank, started to sell its own portfolio. So we decided to rather than buy, go up to some of their customers. As some of you know, we have a lot of publicly available information provided by the Superintendency as to who the borrowers are, and rather than paying the premium, we started a very aggressive campaign at the upper end, the wealthiest -- the customers that have the highest balances. We were extremely successful. Obviously, [indiscernible] campaign such as that, they're -- good comes with that. But it is all within the risk parameters that we had originally established. So again, we're benefiting from efficiency and risk management, which allow us to even grow in a year in which there was an economy that was slowing down and volatility. Other good things worth mentioning from the year that just finished is the merger of Mibanco. Putting together 2 financial institutions, always there's complications, not only in terms of systems, culture, sales, methods, methodologies, et cetera. Frankly, it was -- we are very comfortable with what we've done. In fact, it was not a very aggressive market, and we did not push our sales force, gave them a little bit more space to try to integrate and do things without a lot of competitive pressure. But nevertheless, we think we're on the right track, and acquiring Mibanco and merging it with Edyficar, we think will become a very strong contributor to Credicorp's revenues going forward. The Association with Banmedica, very, very valuable to us in terms of realizing that we do not necessarily have the learning curve to be able to reach the required levels of profitability, it was a tough one for us, and the Association with Banmedica, who has proven to be a very good partner, is probably going to help us achieve the required returns in a faster time frame. We are also comfortable with Credicorp capital. We think it's gone through its inflection point. It's been a complicated journey so far. We acquired at the peak of the Latin American boom, if you will. We paid prices that's clearly reflected a different perspective of what's going to happen in the future. We've had some difficulties in integrating the companies, but we are very comfortable that the inflection point has way -- is way beyond us. And this last impairment which we did was, I think, mostly 80% driven by changes in the tax law in Chile that do not reflect the actual dynamics of the business. The business has gained market share. It's very well positioned in a period where our competitors are withdrawing. Some of the large international banks, and even some of the regional banks have had difficulties and are withdrawing, and those are the spaces that we need to take now. When international players withdraw, it's where us that are committed to the region have the opportunity to capture some of those spaces, that this a highly strategic business for us. Challenges in this year, the continued review of the portfolio business of Credicorp. We have businesses that are still nonperforming or are underperforming, we have got to work and do the strategic reviews and keep pushing those businesses to obtain the results that the want them to. Mibanco, we have a challenge there. Mibanco was merged into Edyficar, with Edyficar, and Edyficar has the culture of being a mono line, a single product is only offered microfinance loans to a single segment, microfinance. Mibanco is now a multisegment bank that goes into small businesses and microfinance, and it offers a larger array of products in terms of deposits, transactional services, et cetera, et cetera. So we have to beef up that organization in order to fully capture the benefit of having built the fifth-largest bank in the country. As somebody mentioned, there was a challenge related to regulation on the pension plus insurance business. We have had a test of what could happen, which is, a few you might know, the law was approved by Congress, observed or not approved by the executive branch, and it's pending discussion in Congress in March, but there's already a high level of uncertainty and where it does impact is on the annuities business, where the volume has got 50% worldwide price with this regulation. So maybe that's the test of things to come on the annuity business. Nevertheless, as Fernando mentioned, what we see going forward is that our customers, when they reach the 65 years, they will have, as Fernando described, an event of liquidity. And clearly, the only thing that is not going to happen is that they take the money in cash. So we have to be able to put in front of our customers as set of products that suits their individual needs. Be that mutual funds, time deposits, insurance products, health, life and/or all sorts of investment products from Credicorp. So we have the franchise to be able to capture those funds and offer services to our customers that suits their individual needs. A lot has been mentioned throughout the year on the loan to deposit ratio. And that is clearly something we are all watching. We have seen an improvement in the last quarter. My gut feeling is that it's basically driven by the fact that the government started to spend some more money. And as you might have recall, the government has a substantial amount of money deposited at the Central Bank to the extent that they are running deficit, that money has to leave the Central Bank and flows into the system. We think that, that dynamic will start to happen once we have a new president. We have been in meetings with all the candidates, and the only thing they have in common or one of the few things they have in common is that they all want to beef up or expedite investments in infrastructure. So we think that, that money saved at the Central Bank will flow back into the system, and we will see some more soles floating around. We'll see, going forward this year, kind of 2 time frames. One is the first 6 months, in which volatility will continue because of China, interest rates, El Niño and elections. But the second half of the year with some momentum we hope we will start to kick in and we will find a country that, that's not have a serious inflation problem, deficit problem, financial system is healthy, there is no over-leverage with other government or the private sector and a lot of continued opportunities to continue to catch up. So we think that some momentum will start to kick in, in the second half of the year, and we will have a year in which we will grow at 3%, which is a lower potential but, nevertheless, it is growth. And of course, at that time, Credicorp continues to be very well prepared to capture growth in the fundamentals in this economy. Again, we thank you very much for your continued support and attention and being with us throughout this year. And we hope to have -- to deliver -- we hope to deliver to you a solid first quarter for this current year. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's conference. You may now disconnect.