Credicorp Ltd. (BAP) Q4 2017 Earnings Report, Transcript and Summary

Excuse me, everyone. We now have our speaker in conference. Please be aware that each of your lines is in a listen-only mode. At the conclusion of today's presentation, we will open the floor for questions. [Operator Instructions] It is now my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Fernando Dasso. Mr. Dasso, you may begin.

Good morning, and welcome to Credicorp's conference call on our earnings results for the fourth quarter and full year 2017. Before we review Credicorp's performance, I would like to take a few minutes to look at the Peruvian macro environment. 2017 registered slower growth due to the El Niño Phenomenon, the LavaJato and political noise. We estimate that real GDP growth will fluctuate at 2.4% while domestic demand will only expand 1.3% in 2017. Looking at 2018, we decided to reduce our GDP growth forecast from 4.2% to 3.5% mainly due to political uncertainty and risks in the construction sector. Nonetheless, 2018 will be better than 2017 as we expect GDP and domestic demand would grow around 3.5%. Our forecast for 2018 is driven by the following first factors; first, our favourable international environment as you can see in chart 1, the IMF recently made an upward revision to the world’s GDP growth forecast for 2018 from 3.7% to 3.9%, which is the highest print [ph] in seven years. Second, as chart two shows the price of copper stands around US$3.2 per pound and has increased around 60% compared to the two years ago. Moreover, the prince of zinc currently stands near maximum level for the last 10 years. Third, as you can see on chart three, financial conditions are positive as the money for Peruvian debt has remained strong, and sovereign yields have fallen considerably since last year. On the local front, countercyclical monetary and fiscal policies will boost economic activity. The Central Bank lowered its reference rate a 100 basis points in 2017 and an additional 25 bps reduction was taken in January 2018. We expect another 25 basis points with current 2018 and then inflation is likely to gradually increase, and we foresee end of the period inflation near 2.5% In addition, public investment is expected to roll around 10% this year after 10% year-over-year contraction during the first semester of 2017. All-in-all, as you can see in chart four, economic growth in Peru will outperform the main economies of the region, if new launch and risks do not materialize. Finally, in 2018, we expect the exchange rate to close between 3.2 Soles per U.S. dollar as this year the surplus in our trade balance will reach its highest print in six years. Let’s review Creditcorp’s financial performance. Next page please. Regarding our quarterly financial figures, in the fourth quarter of 2017, Creditcorp reported net income of 1,064 soles, that includes the gain for the sale of an equity position, which amounted 164 million soles, this led to a return on average equity and average assets of 19.5% and 2.5% respectively. Creditcorp’s performance in the fourth quarter was driven by, first; nominal loan growth of 2.8% quarter-over-quarter and 3% year-over-year in average daily balances, which represent the highest quarterly growth rates posted in 2017. Second, net provisions for loan losses increased 16 7% QoQ after reaching their lowest level in the previous quarter. As a result, the cost of risk increased 17 basis points. Third, net interest income increased but at a lower rate than average daily loan balances because loan growth was led by Wholesale Banking. In this context, the net interest margin contracted four basis points QoQ and 30 basis points year-over-year. All of the aforementioned together with a normalized cost of risk translated into a increase of 17 basis points QoQ and year-over-year in the risk-adjusted net interest margin. Fourth, the efficiency ratio increased by 160 basis points QoQ and 180 basis points year-over-year, due to a seasonality in operating expenses every fourth quarter, as well as an increase in expenses for the strategic project transformation. Finally, in terms of capital ratios at BCP Stand-alone, the common equity Tier 1 ratio fell 10 basis points QoQ mainly due to higher growth rate in quarter and loan balances. Next slide please. Let’s review Creditcorp’s annual results. As you can see in the graph, Creditcorp has managed to grow steadily in the scenario mark by a much slower pace of growth in the Peruvian economy and by aggressive competition. In this context, we have managed to leverage the different capabilities that would have strengthened overtime to be safer [ph] profitability. Significant improvement in risk management as well as discipline and governance in cost have been the most important drivers of 2017’s results. All of this allows Creditcorp to post a record high in net income was 4.1 billion soles in 2017. These results show Creditcorp’s resilience 100% and ROE of 19.8% and an ROEA of 2.5% for 2017. Our results in 2017 are explained by the following. First, the expansion of 1.9% in the total loan portfolio in average daily balances, this was led by Mibanco, SME-Pyme and Mortgage, primarily in local currency. Nonetheless, the loan book measured in quarter end balances grew 6% with a gradual recovery at the yearend driven by wholesale banking. Second, low loan growth in average daily balances, coupled with the loan mix and the contraction in margins within Wholesale Banking, led to a contraction of 14 bps and NIM with regard to a level posted in 2016. Third, the cost of risk fell 10 basis point and situated at 1.78% which is the lowest level since 2012. This contraction accentuated the drop in risk adjustment. Fourth, control and governance over operating expenses allowed Credicorp to maintain its efficiency ratio relatively stable in 2017. Finally, BCP Stand-alone comfortably reached a common equity Tier 1 ratio of 11.8% at the end of 2017. This was mainly attributable to a higher level of credit risk weighted assets in line with loan expansion at the end of 2017. Let’s review these results in more detail, next page please. On this page you can see the evolution in the fourth quarter of the loan book, which is the most important interest turning asset and the key driver of net interest income and NIM. First, as you can see in the chart, at the top of the left hand side, loan expansion QoQ was mainly driven by wholesale banking followed by SME-Pyme and Mibanco, The year-over-year analysis shown in the chart at the bottom of the left hand side was led by Middle-Market Banking, SME-Pyme and Mortgage within BCP Stand-alone, and by Mibanco and BCP Bolivia. Second, the dynamic of loan growth has changed the loan mix. As you can see in the bar chart on the right hand side, higher margin business segments increased their share of total loans by 0.8 percentage points year-over-year. Finally, it is important to note that after a decision to resume growth in the Consumer and Credit Card segments, these portfolios reported growth rates of 2.4% and 3.3%, respectively. The aforementioned represents a substantial improvement in the dynamic given that these segments reported either a contraction or very low growth in previous quarters of 2017. Next page please, on this slide you can see the year-over-year evolution of loan utilisation. It is important to highlight that first; the current level of foreign currency loans is not a concern. Second, the higher level of foreign currency levels of Creditcorp and BCP is mainly due to loan growth in Wholesale Banking, which in turn is related to client that generate income in dollars. Third, as is shown in the chart at the bottom on the right hand side, the level of clients that are highly exposed to foreign exchange risk is nearly two [ph]. This type of exposure has reached its lowest level at the end of December 2017. Next page please, Credicorp’s funding structure has changed throughout 2017 to stabilize the funding cost which have begun increasing in 2015. It is important to note the increase in the share of total deposits which is the funding source with the lowest cost; moreover bonds and subordinated debt also grew at the end of 2017. All the aforementioned allowed the group to replace BCRP Instruments and Due to banks which have fallen in 2017. In the chart, we can also see the Credicorp’s cost of funding maintained at a relatively stable level in 2017 and posted an increase of only two basis points. It is important to note that funding cost stabilized in the second half of the year. Finally, the loan-to-deposit ratio maintained a downward trend throughout 2017 and reached a level below that posted at the end of 2016. Next page please, with regard to risk quality, this has been a successful year. After three years of comprehensive effort to enhance Credicorp's commercial and risk management capabilities. As you can see in the chart, at the top Credicorp's cost of risk reached a level of 1.78% which is the lowest level reported since 2012, the year prior to the acquisition of Mibanco and to Peru’s economic slowdown. This result is even more noteworthy if we consider the provisions made in 2017 including those made for the El Nino Phenomenon and the Lava Jato case. As such the cost of risk for the underlying portfolio which excludes the one-off provisions dropped from 1.88% in 2016 to 1.66% in 2017, as depicted by the dotted red line. The drop in the cost of risk was in turn due to an improvement in risk quality in most business segments. Finally, as we mentioned in our last two conference calls, we have room to increase the speed of growth in the Consumer and Credit Card segments, which will allow us to maximize portfolio spread of profitability while keeping the book within the organization’s risk appetite. Next page please, on this page you can see the evolution of net interest income and NIM. Considering that there is loan seasonality in our banking business, let’s focus on the full year analysis. As we explained earlier, average daily loan balances expanded 1.9% in 2017, which translated into an increase of 2.5% in net interest income. This result was due to first, the positive effect of a different mix in the portfolio where high margin business segments increased their share of total loans and second, more active management of the investment portfolio in a context of low loan growth that allowed us to maximize profitability of investments. All of the aforementioned offset the effect of low loan growth and the construction in margins in Wholesale Banking due to aggressive competition. However, average interest earning assets expanded 5.2% toping growth in net interest income. The former was attributable to an improvement in loan growth towards the end of the year, thus credit cost and NIM contracted 14 bps in 2017. In this context, the reduction of provisions for loan losses led to a smaller contraction of risk adjusted NIM which fell only 8 basis points. Next page please, in terms of operating efficiency, Credicorp's efficiency ratio increased 160 bps QoQ and 180 bps year-over-year, which was mainly attributable to the seasonality in operating expenses every fourth quarter and high expenses for the strategic project transformation at this peak. On an annual basis, the efficiency ratio increased 20 basis points and situated at 43.7%. This was attributable to low loan expansion which led operating income to go below expectations. This scenario was nonetheless partially offset by adequate control operating expenses which were pressured by increasing operating expenses for the strategic project, transformation mainly at BCP Stand-alone. It’s important to note the improvement that Mibanco which was due to a better than expected result in earnings generation that offset slight deterioration at other subsidiaries. Next page please, on this page you see our guidance for full year 2018. We are introducing a more structured on former process to provide guidance about Credicorp's main indicators, which we will present during the conference call every fourth quarter and review on a quarterly basis going forward. The first part of the table shows our estimates for macroeconomic indicators in 2018 that we discussed at the beginning of this call. The second part of the table shows Credicorp's estimates for the main business indicators. Loan growth for full year 2018 measured in average daily balances should be between 6% and 8%. This growth will come from first, Mibanco and SME-Pyme segments that we expect to expand at a higher rate than the total portfolio. This is in line with our recovery expected in domestic demand which started posting better dynamics at the end of last year. Second, the mortgage consumer financing and its semi business segment should grow at similar rate to that of our total portfolio. With regard to consumer financing, which includes consumer loans and credit cards, we have identified growth pockets as we mentioned in our second and third quarter conference calls. Also, after a fine tuning of our risk models, we feel prepared to increase the speed of growth in these segments to maximize the portfolio’s profitability while maintaining this loan book within the organization’s risk appetite. Finally, it is important to highlight that every that even though we expect Wholesale Banking to grow at a lower rate than the portfolio, this growth is quite noteworthy after a year of contraction in a scenario of aggressive competition and lower demand for credit. Regarding the cost of risk for 2018, we expect it to be between 1.6% and 1.7%. This is in line with the level posted for the underlying portfolio in 2017 and a scenario with better loan growth in 2018. Moving onto the net interest margin, in 2018 we believe it will be between 5.3% and 5.5%. This means a slight increase with regards to a level of 5.28% posted in 2017 as if to reflect a higher pace of growth in high margin business segments. It is important to note that considering estimate for cost of risk and NIM, then risk adjusted NIM should recover from the level of 4.11% posted in 2017. In terms of operating efficiency, we expect the efficiency ratio to maintain the level reached last year even though we believe income generation will recover and that will improve efficiency we have decided to speed up the execution of the transformation project which will require more expenses and investments. However, we believe this strategic project – although not focused on efficiency will give us [Indiscernible] to improve efficiency as a byproduct in the near and long term Regarding the common equity tier 1 ratio for BCP standalone we have set a minimum of 10.5% for the first quarter every year after we declare dividend BCP to Credicorp. Finally we expect ROE for year 2018 to situate between 17.5% and 18.5%. This reflects our decision to speed up the transformation project in the scenario where the loan book is expected to expand below potential due to some business segments. Nevertheless, we continue to believe that Credicorp sustainable ROE will situate around 19%. To achieve this, investments in transformation is key. With these comments, I would like to open the Q&A session.

Thank you. [Operator Instructions] Our first question comes from Jason Mollin with Scotiabank.

Hi. Thank you very much. Morning, Fernando. My first question is on the profitability trend that we saw in the fourth quarter. We saw very good bottom line and very strong return on equity. But if we strip out the gain from the sale and now in the quarter on the back of the higher provisions and lowered NIM we saw the recurring, I would call it, ROE decline with 16.5%, I just want to see if you can give us some color here? Clearly you had a good bottom line. You had this gain. You made some provisions in the fourth quarter and you're talking about is sustainable ROE at least 2018 in the 18% range and even higher following your investments? If you can just give us some color on that? And secondly, if you can talk about potential regulatory changes for Peruvian banks, if there is some expectations that the bank has for this year or next that would be interesting to hear? Thank you.

Thank you, Jason. First, on your second question on the regulatory changes, we actually don’t foresee anything important coming not only in terms of banking regulation, but financial services regulation as a whole. As we have talked many times, we have a very close relationship with regulators, with everyone, the central bank, their superintendency. We are all time ruled and they have lots of information of ours. We have a very constructive relationship. We don’t see something important coming in terms of regulation. Then on your first question, yes, we had our one-time item in our fourth quarter. In general, we believe that the numbers for our fourth are recurring numbers are more or less where we should be next year. As we mentioned, the tailwinds are really what is happening to our loan book. We begin to see some more appetite for investment in a business community, both foreign and local, so that is good. Then in terms of our loan portfolio, I think that our underlying trend show that we are doing much better in terms of the health of it. And we will continue to stress our efficiency with the exception as we mentioned of this transformation project which we can discuss later on. So, we see a better year in 2018. That’s at least our focus for BCP and you should expect that.

Thank you very much.

Thank you, Jason.

Thank you. Our next question comes from Philip Finch with UBS.

Hi. Fernando. Thank you for the presentation. My question first of all is regarding your capital position. Given your assumptions on loan growth and ROEs how much capital do you think you could generate this year in 2018 through retain earnings. And link to that, given your common equity tier 1 ratio was 11.8% [ph] in Q4 last year. How much scope do you have to return more capital to shareholders? And my second question is linked to all of this. You just gave ROE guidance for 2018 at 17.5% to 18.5%, what capital levels are you assuming behind this guidance? Thank you.

As we mentioned, when we talk about our first quarter at 10.5% common equity tier 1, what we have decided also it that within our risk appetite we will let owner subsidiary provide dividends to the holding companies in March. We won’t keep any excess capital at our subsidiaries level. All the capital will go – as I mentioned after we comply with all the risk appetite rules, internal rules we will provide that capital to the holding companies. And then as we mentioned at the holding companies level we will keep a fund [Indiscernible] of around 10% of total capital and above that we will pay dividends to our shareholders. That had been already decided in our board. I don’t know if I answered your questions with that answer.

Okay. Thank you. And what about the ROE guidance please [ph], Fernando?

Which guidance, ROE?

The ROE guidance you gave 17.5% to 18.5%?

Yes. As I said, our ROE guidance for the year is between 17.5% and 18.5%, however we think that our sustainable ROE after we finished with all this transformation effort, which is a huge one should probably hover around 19%.

Okay. Thank you, Fernando.

Thank you, Philip.

Thank you. Our next question comes from Ernesto Gabilondo with Bank of America/Merrill Lynch.

Hi. Good morning, Fernando and thanks for taking my call. A couple of questions from my side, the results, when I look to the bottom line, that it was favoured by the sale of the shares by the reversal of excess provision related to the improvement of your ATMs process, what should be the level, the recurring level of net income in 2017? Also in terms of your cost risk, I think you’re guiding 1.6%, 1.7%. And I think you stood at 1.7% in 2017. So, what are the reasons behind to expect a lower cost of risk even with a strategy to expand portfolio into higher yield products? And also a follow-up with your ROE guidance, why is it lower than the reported in 2017? Thank you.

Thank you, Ernesto. I didn’t get your last question, but I will be answering the cost of risk one. As we have mentioned many times we have been working extensively in terms of managing risk especially a retail risk. We have worked along the whole process meaning [Indiscernible] all the policies, back and forth assessment and experiment with what we’ve done there. We’ve also work on the collections part extensively and these have been done for many years already bringing not only people from abroad that is helping us there, but actually strengthening our models which we feel you’ll never finish with it. But we already still very comfortable of tools and process we have. So probably think to expand a little bit on the risk that we are willing to take. And then it’s proving not only interesting but fruitful. So we would probably continue to do that in the near future and this is [Indiscernible] to learn. Therefore we will continue [Indiscernible] but we’ve done at the BCP levels, we have subsidiaries, we’ve been questioned also with this particular answer, we’re seem probably both the occupancy in the Congress [Indiscernible] and we will continue to do that. So that’s why we feel that the underline trends [Indiscernible] including day by day. In this [Indiscernible] that economic situation [Indiscernible] in the beginning of our presentation. Then given with your last question [Indiscernible].

Yes. My last question was about the ROE guidance of 17.5%, 18.5%, I think it would be lower than the reported in 2017?

I’m sorry but I – we will transformation in second. Thank you.

Ladies and gentlemen, we will continue with this teleconference in just one moment. Please continue to hold. Ladies and gentlemen we now our speaker back in conference Mr. Dasso, you may continue

Ernesto, I’m waiting for your last question.

Yes, sure. A follow-up in your ROE guidance which was 17.5% to 18.5%, I think it’s a little bit lower than the reported in 2017. So I just want to know the assumptions behind?

Well, as we mentioned we have – actually we’re working with this transformation of project. What is really a transformation? Our client, we need back to serve them differently. This is not only in terms of the channel that they approach, but in terms of a whole series that we write in, this is changing very fast. We are investing importantly on that, we’ve last invested around 71 million, and this year we’ll probably invest double of that figure. That should be happening during that next two, three years, we have begun at the BCP level, but you’ll continue at the subsidiaries level. We need to do that. This is a moment to do it. We have very low efficiency ratio numbers. And that’s why we are receiving that pressure for this year 2017 and 2918. But then we should after finishing the book of this project we should continue, we should resume the ROE number early that will hovered probably around 19%, but definitely with better service provided to our clients. That’s really our goal.

Okay, understood. And so with this project how will be the amount in 2018? And what should be the OpEx throughout this year?

Well, the amount for this specific project should hover around 160 or 180 million soles and we have definitely – I don’t have the calculator, but an impact on the operating expenses.

Okay. Thank you very much Fernando.

Thank you, Ernesto.

Thank you. Our next question comes from Carlos Macedo with Goldman Sachs.

Thanks. Good morning, gentlemen, Fernando. One first question, a quick clarification than a question, when your guidance for average balance outstanding 6% to 8%, is that the average balance for the year or is that average balance for fourth quarter over fourth quarter?

It is for the year.

So basically you’re saying the average balance for 2018 will be 6% to 8% higher than the average balance for 2017. And in fact when you look at end-to-end you might have much stronger growth if you’re basically doing a lot faster – growing a lot faster than the year and would that be the right read?

You are right.

Okay. So, within that range, I know you gave some color that retail should grow faster than wholesale. Could you give us a little bit more color, I mean, are we talking double digits maybe in the past retail loans have grown at three times GDP and you have 3.5% for GDP. Is that something that is in the realm of possibilities?

We feel that the engine should probably be Mibanco, SME-Pyme and those should be around say 11%, 12%. We don’t see those 20% figures that we saw in the past. So those would be the engines, I mean, SME-Pyme, Mibanco and maybe a little bit on the consumer part that could be around 9%. Then Bolivia should continue growing, Bolivia will probably have a good year, because the election is in 2019, so year before elections usually are better in terms of what the government does to try to become re-elected. So that should improve numbers in Bolivia. And then basically in wholesale what we really need is investment. And for investment to resume growth we will need to have better situation, better business sentiment for people to invest, and I’m not only talking about the huge project, the huge mining infrastructure on whatever project, but also all the projects are under taking by middle market company and this type of entity.

Okay, perfect. Thank you so much.

Thank you, Carlos.

Thank you. Our next question comes from Tito Labarta with Deutsche Bank.

Thanks, Fernando for the call. My first was on the – just if you can give an update on the political environment, you mentioned in the beginning that you did lower your GDP growth forecast for this year. Do you think the worst is behind it? Could it be more noise? Could it be more impact on growth and infrastructure? If you can just give an update on that would be helpful. And then, my second question, just looking at the efficiency ratio which in the base – at the low end of the base scenario, you just like to be stable. Just wanted to get some assumptions behind that give loan growth of 6% at the level and roughly stable margin, does that mean expenses should grow around 6% this year. What about fee income – fees were good in the quarter but only up 4% on the full year, what kind of expectations should we expect for fees in that guidance that’s your getting? Thank you.

Tito, we didn’t get your last question, but I’ll begin with a political environment. In the political arena we expect more turbulence, we expect more noise. We talk about their important tailwinds on the economy, because the world is doing better. There is some volatility now in the stock exchanges, but the underlying numbers are telling us that world specially, the countries are doing better. That is what the IMF is telling US ourselves that there is a common view. So that really helps. The commodity prices are doing well. They are supposed to even improve a little bit during this year. So our macro numbers are doing well. If we talk about the trade balance, if we talk about the current account balance, if we talk about our reserve inflation, I won’t one by one, but all of them are doing well. So the economy is there with political growth. Unfortunately the political side is not healthy. We have lots of friction between Congress and the administration. We have a very weak government right now. And we don’t know exactly what’s going to happen in the next months. But, yes the business sentiment is receiving somewhat influence from what is happening on the political side. I think that this is not behind, but it will stay while amongst while these politicians get. That’s what we can say until now. Then on the efficiency ratio as I mentioned I didn’t get exactly a question, but what I can tell you that we have realized that we are – we still need to go further down in terms of efficiency. And we have a clear commitment inside our management and inside – not only BCP, but all the other companies that we should continue pressing, pushing further in terms of efficiency. Things are changing importantly on the financial service. We need to have better numbers to be able to compete in the future. We will continue pressing further. We still have the important projects to undertake what’s going to happen with IT. We are – we’re planning it, we will probably rebuild all our IP in the coming three, five years. We are actually understanding what we do with our branch network not only at BCP but other subsidiaries. So they are plants there and we should probably go further down. I don’t know these two particular next years will be those years because of what we’ve talked about the transformation effort but we will continue pushing further around in terms of provisions [ph].

Thanks. That’s helpful. Just couple of follow-ups. And part of my question was also trying to understand some of the assumptions behind the stable efficiency. So just given 6% loan growth and roughly stable margin does that -- is it safe to assume that expenses should grow around 6%? And what about -- would does that mean for fee income -- fees grew on 4% last year. Is that the kind of growth we should continue to expect in fees?

What I’m trying to – as we mention growth in loan book by 6% to 8% and in terms of the other income we should probably be hover around between 4% and 5%. I didn’t get your question completely because the communication is very bad, but if that is what you asked maybe those are the answers.

So, almost I’ll try to ask one more time if I can. So the 4% to 5% I think that’s for the fee income or another income which make sense. And then does that imply roughly 6% expense growth given you expect stable efficiency and the lower end of your guidance?

Yes. That is accurate.

Okay, perfect. Thank you very much.

Thank you, Tito.

Thank you. Our next question comes from Carlos Rivera with Citigroup.

Hi. Good morning everyone and thanks Fernando for the presentation. My first question is regarding the competitive outlook particularly towards the end of the year. Loan growth, we didn't see much acceleration in terms of the average daily balance, but if we look at the end of your balance there were significant quarter over quarter growth. So just wondering if this was the result of the market growing faster towards the end of the year what’s more probably Credicorp being more aggressive and trying to regain that market share? That is my first question. And my second question is related to the outlook for the cost of risk. I understand all the improvements that you have made, but do you just see any risk for higher cost of risk related to the construction companies. I mean we’ve hear some articles that there was an interview from one of your peers saying that banks have stopped issuing guarantees for many construction companies given the risks related to corruption investigations that could affect their liquidity. So are you concerned at all in at this point and if you could share without your exposure to construction companies? Thank you very much.

Thank you. On your first question Carlos competitive outlook, yes, as you know this year has been a year of low growth. And when that happens competition gets stronger. We have in the year. And we have endured that during the year. The good thing was that at the end of the year things began to improve, the business sentiment began to move faster and yes, the market began to grow faster especially in cost [ph]. But on the other hand we also decided in quarter that we want to be more competitive, more aggressive in the year, so we want to be more different, if the market moving faster and we being more aggressive. Then in terms of cost of risk and construction companies we have – that growth is not behind, it is far from being behind. We are in the middle of it. Unfortunately it also deals with political issues, so we – I mean, this is not only our banks but all the other competitors are working together to try to see what would be the solution for this. But that won’t happen fast. We will continue – I mean, being assessing the situation day by day I’m trying to understand what would be the way out, but I don’t see things happening soon. We still need the Congress and many institutions trying to get out of this problematic situation.

Okay. Any exposure level you could share with us or given that it is not an immediate impact you don’t see major risks for this year?

We don't share these figures with the market. What I can tell you is that we've been working extensively on [Indiscernible] for years and now, we feel comfortable [Indiscernible] with the provisions, but [Indiscernible] what ravels in the coming months.

Okay. Thank you very much Fernando for the answers.

Thank you. Our next question comes from Yuri Fernandes with JPMorgan.

Hi, Fernando, this is actually Domingo here for the question -- for taking the call. I noticed a significant change in speech in the press release, more constructive tone towards the growth. So, my question is what exactly is driving that and also the loan acceleration? More specifically, what kind of approval rate did you have most of 2017 or in the first half? And what's the kind of approval rate for new loan applications you are having now or in early 2018? And if it's not the approval rate of that change, what exactly -- what's the strategy that's basically driving some of these changing view?

Thank you, Domingos. We talk a lot non-acceleration. We need to go piece-by-piece. We see what is happening in quarter. As I mentioned, business sentiment improved during the second half of the year and we also were more aggressive on lending. The situation got a little better that helped. Then if we go to retail, as you know, the last content [ph] of the year is very important in retail, especially in SME, but also in consumer and we took advantage of that. And we also took advantage of that with [Indiscernible] improving our rate. [Indiscernible] I won't be talking about approval rates here, [Indiscernible] but yes, we feel much more comfortable with the way of managing risk that we have, risk of understanding our clients, taking advantage of that. And that is what we can tell you for retail portfolio. Then Mibanco, Mibanco has been doing fine during the whole year. It was grown by around 10% in 2017. We continue to see good figures there. We understand the market and have really are in a best position to continue growing. Bolivia also had a good year. So, in general, we see fee mix improving, that's why we are talking about that 6% to 8% growth in the portfolio next year.

Okay. Thank you.

Thank you, Domingos.

Thank you. Our next question comes from Alonso Garcia with Credit Suisse.

Good morning everyone. Thanks for taking my questions. First, just to clarify, is the timeframe for this plan -- engagement plan to be concluded at the next couple of years, I mean, 2018 and 2019? Or can it extend to 2020 or further? And also related to this, I was wondering how do you feel in terms of the core digital capabilities of BCP vis-à-vis the market? I mean is it plan intended to put you ahead of peers or you are [Indiscernible] catch up with the rest of the peers? Thank you.

Thanks Alonso. On your second question, on our competitive position against the market, I continue to think that we have a very good position, a leading position to try to actually lead the market because of the market contraction we were not [Indiscernible] competing in terms of pricing. But we continue to feel that we have a very good understanding of the market and of our clients. We have been [Indiscernible] working on data analytics on ways of really approaching [Indiscernible] very strong in terms of our competitive capabilities and much stronger than in the past. We've been talking about modeling in terms of risk, but we are also modeling in terms of pricing. We are also very much aware of how should we approach and reach our clients with better offers. So, I think that our position is really very strong impact. We are actually willing to take advantage of that in the coming months.

Perfect. And sorry, just again, the timeframe for this investment plan concluding next year or cam it extend to 2020 as well?

I don't get you. I'm sorry Alonso.

Would you--

Were you asking about how many years will the transformation take?

Exactly.

Okay. I think that you never finish with these processes, but I think, the bulk of it will take the next two years at BCP, and then maybe, one or two more years in all the other subsidiaries. It's a very comprehensive process and it is titled a very transformational one. We are there learning day-by-day, it's not really that we know exactly where should we be heading. But we are learning and we -- our clients are telling us I like this, don't like the other. So, that's a continued process. Two years for the bulk of it we've undertaken.

Perfect. Thank you very much.

Thank you.

Thank you. Our next question comes from Sergei [Indiscernible].

Yes, good morning. Thanks for the call. Just a couple of questions. The first one on the interest rate trajectory in Peru as well as your net interest margins. If I heard you correctly, you said that you expect another 25 basis points cut in 2018. Could you just outline what's driving the Central Bank thinking there, given that the economy seems to be recovering in a stimulus measure or what was driving that? And then related question with that as in the back of that sort of rate decrease, you still -- and your NIM has compressed obviously in the last quarter of this year but you're forecasting an expansion and part of it would be due to business mix, but would that be enough -- your business mix change, would that be enough to offset the competition in wholesale as well as rate decrease? That's the first question. The second one is, which I'm surprised you didn't mention is, is there anything on IFRS 9 that you guys see in terms of cost of risk and capital? And is IFRS 9 even be implemented in Peru, I guess, the first question? and if so, how would it impact Credicorp? Thanks.

Thank you, Sergei. If we talk about larger trajectory of the reference rate in soles, yes, it has come down since April by 125 basis points already. It now sits at 3%. We plan the Central Bank to bring it down again, we don't know if it will be February, but basically probably March by 25 basis points. They are doing this, we feel, especially because the inflation is under control. Now, our inflation is 1.3% that is really below the target of the Central Bank, which is 2%. [Indiscernible] the date, I mean, February, March, April, last year, where months of high inflation. So, the rate is really high. So, it will probably be lower than 1% in March or April and then, it will resume growth -- the inflation and it will probably end the year at 2.5%. So, there is room in terms of inflation to bring it down. And also because we all feel that growth is not -- I mean GDP growth is not where it should be. They could bring some more stimulus there -- monitory stimulus, it will definitely help. And we feel that that's really on their minds not our [ph]. [Indiscernible] then, if that's going to affect our NIM, we don't feel that it will affect our NIM [Indiscernible] 25 bps. We are competition especially than last year, I think we report or knew where they are. And then, on your third question, the IFRS 9 impact, that impact is really for this year. As you know, it is actually for that specific hit will be actually the first day of this year. We've already calculated. As you know, we are a very conservative institution and we have our positions very strong before it. So, we don't feel that it will move the needle. We already have the numbers. We cannot really disclose those numbers yet. But you should keep in mind that it won't be an important effect on our balance sheet this year. The balance sheet because it goes directly into our capital, it doesn't go through the P&L.

Right. But in terms of the cost of risk guidance that you gave, which is 1.6% to 1.7%, does that incorporate the IFRS 9 sort of adjustments or is it fully baked in the expected loss model that they require?

It includes those calculations already.

Got it. Okay, great. Thank you.

Thank you, Sergei.

Thank you. Our next question comes from Carlos Gomez with HSBC New York.

Hello, good morning. A very interesting question. I wanted to know the level of tax that you paid in your sale of NL [ph] shares -- tax on NL [ph] shares? Second, could you tell us what impact, if any, the U.S. tax reform is going to have on you and what your expected tax rate is going to be for the future? And finally, if I may ask, can you give us some details about what the transformation project involves? Three, four years ago, you already went through an extensive review of your expenses. You have done for [Indiscernible] in the past, what is it exactly that you're focusing on right now? What actions have you taken? What is changing at the bank? Thank you.

First, on your tax question, you ask around the tax on which shares.

NL shares.

NL shares. On the NL construction, we didn't have to pay any taxes because of the regulations. If those shares are traded at the New York Stock Exchange and provided there one or two pieces, we need to pay any taxes. So, that was the case for those shares. [Indiscernible]

Yes. And then, on tax reforms -- the U.S. tax reforms, I don't know -- I mean, we are assessing what could happen, but I don't see any important influence on that regulation, on that tax reform in our business. And the third one was the transformation project. It involves changing the way not only in which we approach and serve our clients in many ways, meaning, what are the channels that we will provide to them -- and the different mixture of channels that we will provide to them, what are the products that we will provide to them, how are we going to approach them? Imagine, our clients are not comparing us to our neighboring environment to our competitor. They are actually comparing us with the service they receive from the Amazons or the [Indiscernible] of the world. And that's really what financial institutions should be concentrated and trading and that's a complete change of mind here. It involves a very comprehensive effort in terms of culture, of how should we at BCP and our subsidiaries behave towards our clients and towards our teamwork. It's a complete change that I have to tell you [Indiscernible] as we mentioned before.

Okay. Thank you very much. I guess, at some point, you probably want to expand about -- I said, at some point you probably want to expand to what has changed, how you would think before and how do that now? Can I go back to the tax return, ask you once more what your long-term expected tax rate will be if you can reconfirm?

Our tax rate indeed and our income tax in Peru is 29.5%. Depending on the instruments we have and the way we manage our business, we hover around 26%, 27% every year. We expect that to continue.

Thank you very much.

Thank you.

Thank you. Our next question comes from Joswilb Vega with Integra.

Thank you. Good morning Fernando and thank you for taking my question. I would like to know about the exposure to the construction sector here in Peru and the companies involved in the construction scandal? How difficult and expensive is to get the bank letter for these companies so that they can participate in the building process? I mean, are you tightening the credit lines for these companies or making the loans more expensive? Thank you.

As you know this has been recent news, these construction companies. We are assessing the position that we have with this client. And yes, we are trying to understand what is really the way forward with all the [Indiscernible] with all the institutions as well. I cannot be really specific or detailed in terms of this because we are in the middle of the problem. But what I can tell you is that we are putting all our efforts with the authorities on banking institutions to try to understand what is the way out and to make it the best effort in terms of the country because we really need construction to be an engine for our economy.

Okay. And about the condition of to the current [Indiscernible] to these companies, I mean, what is going to be your position? Are you going to help them to win more business or are you going to make more -- tighten the credit lines?

We -- our approach is always to try to help our clients. On this particular situation, we will always go case-by-case, on a case-by-case basis, understanding what is the new project? Why should they need facility? And we will make decisions as we have done in the past.

Thank you. It is now my pleasure to turn the call over to over to Credicorp's CEO, Mr. Walter Bayly, for closing remarks.

Good morning to all of you and thank you very much for joining us in this call. 2017 was quite a disappointing year. We started the year with a very positive outlook to the extent that we had a new administration that had a series of good initiatives and a view to where to take the country, which was not similar to what the main opposition party had in mind as well. Unfortunately, all these failed to materialize and political [Indiscernible] amongst the political forces really did not create a very positive scenario for growth. On top of that, we started the year with El Nino and then, quite rapidly the Lava Jato case came up, which paralyzed and rendered useless a quite detailed plan that the new administration had regarding infrastructure investments. So, it was quite a disappointing year from that point of view. Nevertheless, we have not been idle. We have been working diligently inside organizations. We continue with our transformation process at the bank, at the insurance company, and at Mibanco. Obviously, the bank is slightly ahead, but the other institutions are equally going with their own programs. And we specifically decided that we did not want to stop investing or doing this transformation, knowing quite well that in the short run, this would affect profitability, return on equity, and cost to income ratios. But in the long run, we thought that the wise decision was to continue going forward with our long-term plans. Not only have we been working on the transformation, but a lot of our management practices, streamlining risk management, particularly on the retail side, which has had given us good results, our collection process [Indiscernible], which Fernando mentioned and pricing techniques. So, we have been working on improving our management skills quite diligently. We are also very focused on looking at new sources of efficiency. As Fernando also mentioned, the current level of efficiencies is not where we want to be. We think that there is more room, but it requires a lot work -- a lot more work. We are reviewing our footprint, our branches, our centers, our ATMs, and in general, how we interact with our customers. And of course, we are, as everybody else, reviewing our IT architecture, robotics, and artificial intelligence. So, yes, we have to keep pushing forward the current levels of efficiency, even though, we have advanced a lot, it's not the end result. Furthermore, we have been also working, reorganizing all of the [Indiscernible] aligning the different functions and the different subsidiaries to be more organized and prepared this new [Indiscernible] for the next 10 to 15 years. So, even though, it has been a disappointing year in terms of results, market activity [Indiscernible] of course, conservative in trying to give guidance. It doesn't make sense to a country with the level of penetration, the banking industry that we have to continue growing at 6% to 8% in terms of risk weighted assets. The potential, obviously, is there for more and we try to be very conservative because we have, as I mentioned, these two forces growing against each other. A group macroeconomic scenario, particularly worldwide and a complicate political scenario in the short run. But be reassured that we are working diligently and [Indiscernible] that growth comes, we will be to more than prepared to capture it with all our different businesses, be that BCP, Mibanco, [Indiscernible] fund, and all of our subsidiaries. So, again, thank you very much. It's been a disappointing year, but nevertheless, I think, we continue to be very focused on providing long-term profitability, both to our shareholders and to our customers. So, again, thank you very much. And with this, we conclude our full year 2017 conference call. Thank you and good bye.

Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.