Welcome to the Q1 2015 Credicorp Earnings Conference Call. My name is Richard and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Fernando Dasso, Chief Financial Officer. You may begin.

Good morning and welcome to Credicorp’s conference on our earnings results for the first quarter of 2015. In 2014, we focused our efforts on various fronts, including the acquisition of Mibanco and its preparation for the merger with Edyficar. The turnaround of our SME business model, the improvement of our operating efficiency, the restructuring of Grupo Pacifico and the consolidation on the investment banking business. As a result, Credicorp reported net income of S/. 305 million in the first quarter of 2015, which reflects good performance in the main business lines. The aforementioned translated in turn ROE and ROA of 22.8% and 2.3% respectively. Although the result in this first quarter includes extraordinary and non recurring income of S/. 107 after tax due to the joint venture signed between Grupo Pacifico and Banmedica, Credicorp’s profitability, excluding this effect, also translated into a solid ROAE and ROAA of 19.9% and 2%, respectively. This result was in line with the organization’s objectives despite the weak results, boosted by the Peruvian economy in the first quarter, when the recovery expected by the end of 2014 did not materialize. Serious concerns about the slowdown of the Peruvian economy I would like to look at some of the more relevant macroeconomic indicators before examining Credicorp’s first quarter results in greater depth. Next slide please. Although our medium and long term outlook remains optimistic, we have revised our focus for real GDP growth in 2015 downwards from 4% to 3.5%. The reduction in our estimates was based mainly on three factors. First, the global economy performed below expectations during the first quarter of 2015, in particular in China where growth came in at 7%, the country’s weakest growth rate in the last six years. Second, our investment confidence index, as well as other confidence indicators, continued…

Thank you. [Operator Instructions] Our first question in the line comes from Gian Costa from Itau [Indiscernible]. Please go ahead.

Good morning guys, congratulations on the results. I have a few questions. First, do you expect to see any improvement in the EBITDA ratio of the SME segment going forward? And second, we observed that the loan to deposit ratio in service increased to 122% in First Q 2015, do you believe that the essential bank would stop providing local funding through repos and swaps or you could face an increase in the cost of funding?

Okay, first we will address NPL and ratio question. We just hardly believe that we approximate last year both in terms of the morals, the whole system, elections in the SME arena will be into bring results. We already are looking at those results. However, part of those delinquencies are really all delinquencies and they are under the tip, they are all loans. What we are seeing is better delinquency ratios in what we call new delinquencies. So that will probably show in the next month. Second, you were talking about the Central Bank and on funding in service. Central bank is on the one hand providing ample sources of funding in service to financial institutions but on the other hand restricting the liquidity in solids because of the own policies towards especially the exchange rates. What they have already told us is they got a very important set of deposits from public institutions from their own institutions that they will begin to auction to the market. Those funds are around S/. 30 million and those will definitely bring new liquidity service to our market and we’ll be in service [Indiscernible] liquidities.

Okay. Perfect. Thank you.

Thank you. Our next question in the line comes from Carlos Macedo from Goldman Sachs. Please go ahead.

Good morning, Fernando; good morning, gentlemen. A couple of questions, first question on the Mibanco Edyficar merger, we're seeing here PEN40 million in the first quarter, that's stronger than the first quarter last year, certainly stronger than the fourth quarter of 2014. 14% ROE, still increasing NPLs, what is the outlook for this business? Where do you expect it can get in terms of the NPL ratio, ROE going forward and how quickly do you think you can get there? Second question, going back to the capital ratio, we saw that the fully loaded common equity Tier 1 after the transfer of the BCI shares is now at 7.8% are there other actions that you can take to raise that ratio without issuing capital? We understand that you're still not under Basel III in Peru, but is there anything you can do there to address that capital ratio, which is lower than peers in the region?

Okay Carlos, I will begin with the first question. As you know Mibanco actually renew Mibanco is in our process of transition. On the one hand it is already institution we have only system, it has only one brand. It operates like one institution, but on the other hand we are still putting together two different cultures of competitors for the last ten year, ten, twenty years. So that’s still a transition period but what we are looking at is a better results for the month by month. We are actually putting or as you can say [Indiscernible] the company and it will be really functioning as one institution very soon in terms of commercial, in terms of collections, in terms of working as a foreign company and that will definitely bring ROEs to better levels. However, I cannot promise ROEs but we believe that they will come to very healthy levels in the near future.

So I know you cannot promise, do you think it can go back to the levels where Edyficar was before the merger?

If you see Edyficar was around 30% before the merger. Those levels we can further reach those levels, we have taken into account what we call the synergies, but that will take a while, will probably some months to reach levels of the mid-20s I think.

Okay. And then, on the contribution, in other words, could increase from PEN40 million a quarter to something much -- sorry?

I didn’t listen to your question.

Sorry. So the contribution could increase from something like PEN40 million a quarter to, if you go to 25% ROE level, there is something like PEN60 million or PEN70 million a quarter.

Yes those are the mathematics, yes.

Okay. Thank you. And now on the capital, please.

On liquidity Tier 1. Yes, we have now reached a low of 7.8% after serving the package we have in BCI our subsidiary, that package was in BCP and it was sold to Creditcorp, so now our renewals are doing better, and we have reached that 7.8%. As you’ll probably know our BIS the ratio is our regulatory ratio, in Peru in the Basel II and we are fully complying with that, but now you want to talk about Basel III standards, that’s an internal ratio and what we plan to reach is that 10% level in economic to tier 1 at the end of next year, end of 2016. We feel that we will be able to reach it with internal sources because we will continue to grow faster which should probably grow by having loans or loans and interest margins will grow by 30%, 40% and we will attain for around say 20% so we will be able to reach that common equity tier 1 with internal sources.

Okay. Just can you give us, is there an update on the timetable for Basel III in Peru?

There is not really a timetable yet, we are actively talking in a very constructive mood with the regulators and they are very aware of Basel III and the different sets for [Indiscernible] but there is really no timetable yet. As you know we are at the end of this Peru Government Superior potential period. We believe that will probably change in the next period.

Okay, thank you.

[Operator Instructions] Our next question in the line comes from Mr. Philip Finch from UBS. Please go ahead.

Hi, Fernando. Thank you very much for the presentation. A couple of questions from me as well. First is the dollarization, the percentage of loan books in dollars. In the presentation slide 6, you give a very helpful breakdown by the various segments. What is it for the whole bank or for a whole loan book, the percentage of loans in dollars and specifically how much of that book is supported by dollar revenues for the borrower as opposed to those may have local currency income. So i.e., where is that potential FX credit risk? The second question is regarding your cost of risk which you said was higher than expected in the quarter. Just going forward, should we assume it to be at this current level at 2.46% or is that artificially high? Thank you very much.

First I’m going to address your first question on dollarization or de-dollarization, which I’ll go back to chart 6, sorry, what did I tell it here that different segment [Indiscernible] especially in corporate and middle market we have many companies, you have to acknowledge that this economy is truly a dual economy and companies and people operate both in dollars and so is our local currency. That effect is more evident in corporate and middle market and we probably have in corporate and middle market around 30% of companies that produce income in dollars rather than in [Indiscernible] and that is the case. And also in the mortgage arena, we have some individuals, especially the high net individuals that have income and savings in dollars. So if you look at this chart, at the bottom part of the chart where we really have a change I think a bit is especially in what they call the SMS business segment because those are small companies, more fragile because of being smaller and we have really to turn those portfolios into dollar factor. On the other hand if you look in solid spectrum, on the other hand if you look at the other portfolios we are worry about the mortgage portfolio which is already two-third solid and those in dollars are old loans where loan to value are really low and especially given to high net worth individuals. So that’s not a problem. It will continue to de-dollarize but our most important segment will need change in the SME business. Corporate and middle market, if the dollar continues to strengthen against the sol, they have the pressures. If you noted they know especially corporate [ph] guidance and they will turn slower but to getting to turn to some of this in their norms. That's in regards to the first question.

Okay. Can I just follow up on that, please? So just on that basis, looking at your chart, is it fair to say that around 40% of your loans are in dollars and maybe 15% of total loans are unsecured in the sense that you don't have dollar revenues backing that?

Yes. That is true. But some of those loans if you talk about Credicorp, already $19, we consider them to be foreign currency, but they are in petro [Indiscernible] and. If you look at BCP standalone, it’s probably around 39% dollars and 61% soles already. And we are in the phase [Indiscernible] moving into the system or depolarizing into these loans. However, I have to you that in corporate and middle market many of these loans have collateral. We are very conservative in situation and ask for collateral, a high collateral I would say 9 or even other types of collateral and that some more component over this business.

Okay. Thank you. And you're going to answer that second question.

Second question on the cost of risk, as you know we are in the process of extending our business into more risky segments. We were in the past a very traditional used to work, especially in the corporate arena and now we are extending our business into retail. These last quarter’s have not been a reflection of the first quarter has grown more than retail. But we feel that in the future we will need to get more into retail and that will involve probably occasions and more cost of risk. But next part of the business we are in. Second, we have very important emerging population and consumer loans, anatomy loans is concept continues to grow will be more important in our portfolio. So we will, I mean, at the end what we are looking at if the net income and ROE, however in that process, cost of risk may drop a bit.

Thank you very much, Fernando.

Thank you. Our question will come from Mr. Saul Martinez from JPMorgan. Please go ahead.

Thank you. I have two questions. First, I wanted to follow up on your response on the auctions. I believe you said PEN30 billion of soles, can you elaborate on that? Has that been decided, what is the timing? Do you expect to gain your fair share of that? What do you expect in terms of prices? Will it increase cost of funding or not? Just it seems like a very relevant point. So I just want to get more color as to whether this is actual public policies at this point or whether this is something that is being discussed and still in the process of occurring. So that's my first question. Secondly, on your cost of – it's just a follow-up. I'm sorry for following up, maybe I didn't hear it very well, but when I look at your cost of risk, it did increase a bit this quarter as you've mentioned, for the reasons you've mentioned, but that was in spite of very high loan loss recoveries, your recoveries more than doubled quarter-on-quarter and in fact gross loan loss provisions grew 26% sequentially and 54% year-on-year. Can you comment on that, what's the sustainable level of recoveries one, but also what you expect for your cost of risk in the coming quarters? Given the high level of recoveries I may have without those high level of recoveries, your cost risk would have gone up even further. Should we expect your cost of risk to at least stay at these levels, improve, go up a little bit? Just, I apologize if you answered it, I didn’t rose in the previous question, but I had a hard time really following what exactly was the point?

Okay. I’ll begin with [Indiscernible]. I will now – I have to make some statements, like eight years ago the government decided the funds from the state-owned companies had to be reported at the Central Bank, for many different political reasons. Before those funds were released in the different financial institutions. So what is the problem now? The problem now is that its financial situations need more sort of funding because loans are already given in soles, while the deposits are beginning to grow in dollars. This is because of the exchange with the dynamics that we’re leaving [Indiscernible]. On the other hand the Central Bank once this exchange rate that much to be controlled this exchange rate. So, what it's doing really bringing solid liquidity to the market really bit by bit, so there is scarcity of liquidity and solidity in the market and that’s why we are having this situation in our balance sheet. However many of these institutions, financial institutions may talk to the Central Bank and they said we have a very constructive relationship with them and they haven’t acknowledged that they need to send some more funds, solid funds into the market. My belief is that they have really decided that and they are putting together the logistics to make the options. While we feel we had at the end of this month, at the end of May destructions will be in to be put in place. But that’s really where those funds will really important for the system and also for the government and the Central Bank because they are trying to bring in an expansionary and monetary policy and this is really a way to do it. So we feel confident that they will do it.

Has this been announced or is this or have you just gotten strong signals that this will occur very soon?

We feel very strong it will occur soon.

And the PEN30 billion that you mentioned, is that based on -- because I think in the release you said there's PEN80 billion in the system, the PEN30 billion that you mentioned?

Yes. But part of it is in dollar – in dollar currency.

Okay.

So we release that qualities [ph] also remain little more on that, but we one are really conservative until around 30.

Okay. And you would expect to gain some share of the PEN30 billion based on your market share or you said it would be an auction process. How would that auction process work do you think?

Our natural share in market is around a third or maybe 30%. We probably would try to get better.

Okay, great. All right. That's very helpful. And I’m sorry, on the cost of risk if you could just elaborate on your views there in light of the high gross loan loss provisions that you had this quarter?

In terms of we just told – in terms of cost of risk, we believe that we will continue to improve in some segments. However, as I said we are extending our business and being more focused in retail and retail requires more risk. However, we do get vintages, especially to very early events we’ll be chasing a different retail segments, we see better numbers. I don't know if I’m answering your question, but what we see is that in the next month, in the next quarter this will really begin to show in the numbers.

Okay. What is the more normalized level of recoveries because it seems like you had a very big number this quarter of about PEN122 million?

We feel that if you see our provisions loans recoveries were like PEN57 billion service.

Okay.

Yet, PEN57 million last quarter and PEN102 this earlier quarter. We believe that PEN132 is and out layer. You got a great, I would say a great quarter, very cyclical, did at least say here, there is more money in the streets in fourth quarter especially in December, people receive more money in their payrolls, in their payments. And also in March when people [Indiscernible] for payments. However we feel that Peru will be around say from PEN60 million to PEN70 million...

Great. Thank you so much.

Thank you. Our question comes from Tito Labarta from Deutsche Bank. Please go ahead.

Hi. Good morning. [Indiscernible] Couple of questions. First on your net interest margin, we saw a spike because of some derivatives income that you mentioned. Just want to get a little bit more color on that? And also on the loan margins which fell in the quarter, you mentioned I think it's a little bit because of the loan mix. But if you could just give a little bit some more color on how you see that evolving going forward because it seems to have fallen about 30 basis points, 40 basis points? Is it just a mix or are you feeling some pressure on spreads? If you can give a little more color on the margin, what happened with the derivatives, the loan margins, and how you see that evolving? And then my second question, I guess just following up on the asset quality and provision. With SME NPL, we've begun to see some stabilization there the last couple of quarters, so I was a bit surprised that that picked up again. Was that just some seasonality or what really makes you feel comfortable that this time is the peak? I mean we've heard that before so just want to get a little bit more comfort that can improve going forward? And then an up provisions, you mentioned there were some provisions I guess with some Brazil corporates improve, so could you quantify how much of the provisions this quarter were related to that and is it safe to assume those are like one times and we wouldn't expect those going forward? Thank you.

[Indiscernible] Next about net interest margins and the derivative income. In reality the derivative income is really income and I will tell you how to meet our goal [Indiscernible]. This is potentially because some of our especially investors, foreign investors that have papers, derivative papers with soles make forwards to follow those papers. We actually sale sell those foreign contracts and we want to cover those foreign contracts and to cover them the Central Bank because of these policy of trying to control exchange rate is selling what they call exchange slots, this is a word in Spanish called swaps cambiarios or exchange soles and these swaps, those exchange swaps so we cover our position. But we go them with the market, because we are – the sale of those like 200, 250 basis points less than what we sell to our clients, so that’s really the business. We have a window there. We are taking advantage of that window, but each release not as speculative derivative interest but rather coverage business which we are [Indiscernible] Central Bank. That’s the reason we are doing in derivatives. Your question was really talking about net interest margins, the interest income. What I’ll tell you there, the first quarter of the year, each year is not great quarter compared to the others in terms of interest income, especially because its summer time here and it also because those loans really we gave in the fourth quarter of that year Christmas campaign or this campaign at the end of the year for many companies are they during this first quarter. So this is not a great quarter to talk about interest income. We should definitely improve this next quarter.

Okay. So, then would you expect the derivatives income will go away, but the loan interest income will come back so should we assume stable margins from this going forward, is that a fair assumption?

I mean, at one point derivative income will diminish, we don’t when. It will be when things change especially in terms of the exchange rates. We don’t know yet what’s going to happen there. Interest income on loans should continue to improve, especially if the country grows a little better than we have expected. However that’s not situation now. Last year we grew about 2.4% as a country, the GDP of this country and this year it will be probably around to 3.5%. This first quarter has 1.5% and [Indiscernible] a little bit in the foreign policy.

So then the derivative income may not completely go away in the next couple of quarters so margin can actually expand at least in the short term?

Yes. We should – you know the mix should be changing in the next quarter.

Okay. Fair enough. And then the second question which I don’t think you heard that well you mentioned was in terms of the SME NPLs because we have begun to see some stabilization and you had mentioned this is a segment you’ve been working on. Was the deterioration this quarter mainly due to seasonality or how comfortable you are, that this is the peak trend because we've heard that before and it hasn't happened so could there be more surprises there? And then on the provisions, how much were related to the Brazilian corporates in Peru because I imagine that would be sort of a one-time provision and can go away?

First we have to divide it between wholesale and retail. In the wholesale banking, we have someone isolated pieces, some of them are improving. We feel very comfortable at that portfolio. We performed well. In terms of retail, what we are looking at [Indiscernible] numbers. We are aware that this country is not growing as it should and also that we will be in to [Indiscernible] process, so, investment, private investment in Peru to diminish a bit. We've worked for many months now in this area with all the different segments and numbers are beginning to show. But we don’t want to promise anything especially in the very traditional in terms of second half.

Okay, fair enough. Thank you.

Sure.

Thank you. [Operator Instructions] We have question from line of Boris Molina from Santander. Please go ahead.

I would like to go back to the issue of capital because there is this perception about this headline 7% Tier 1 capital ratio being low. Now, when you try to make an estimation of your capital under fully loaded Basel III, your capital ratio is obviously not that low. But you mentioned you’d have an internal number that your target is to achieve around if I’m not wrong you said 10.5% by the end of next year. What is the current number now because we think that there is no capital deficit that it's the Peruvian regulator that imposes additional capital ratios that increases risk weighted assets to almost 100% of total assets and this is obviously not the case or will not be the case if the country goes to Basel III? So our experience tells us that regulators are overly keen in being very conservative, it's very difficult to see them changing their policy and going to an environment where your capital ratios not 7% [ph], but closer to 10% right now. So what is the current level of your estimate of a fully loaded common equity Tier 1 under Basel III and do you really expect that the Central Bank is going to – the regulator is going to go into this type of environment basically which is more relaxed than what they have today?

We are following I’d say internally Basel III fully loaded ratios. As you know for 2015 Basel III only requires 40%. But if you – and if you fully loaded, a 100% loaded in 2018. If you look at our number on a fully loaded basis, we look at 7.84% now. But if you look at in say with a low, with a 40% it will be around 4.18% versus 41%. So we feel pretty comfortable that we’ll able to reach 10% fully loaded at the end of next year or maybe at the beginning of 2017.

Okay. Sorry, there was some noise in the line and I couldn't hear those two numbers that you mentioned. Could you please repeat it?

Yes. Sure. We are really working under Basel III fully loaded standard internally and that number right now for us 7.84%, but you would be working under partially loaded and the current load is around 40%, our number would be with reductions, yes, our number would be 8.41% right now. Now turn to next question.

Yes. And what about the regulator because at the end of the day the tool that they would have if they were to scrap their current policy, they would have to go to a maximum of around 200 basis points or 250 basis points for you as a domestic CC institution. So that would take the target probably towards closer to -- and it's the minimum for you guys closer to 11% or something more. So is this something that you think is probably going to be the case or how do you think about it?

We feel that they are relate to I’d say 2015 or prior question, we feel like I really won’t change regulation during this government. As you probably know this government is changing in July next year, so since one change until that time. However they are fully aware of Basel III and it difference with Basel II and they are working with us. They will probably issue some secondary relation to bring all the financial institutions closer to Basel III. But if you want to change to Basel III standard they will need to change the banking law that implies going to Congress and we feel that this is not a political time to do it.

Wonderful. Thank you. And one follow-up on these auctions that you mentioned on these funds. What would you expect would be the relative cost of these trade lines that you're getting from the Central Bank versus the expected rate that you would get with these funds? Is that going to be something that is going to expand your margins meaning that it is actually going to be lowering your cost of funds or do you expect that competition is going to take these costs higher than the current rate what you're financing from the Central Bank?

When we refer -- the reference rate, which is an overnight rate that you know is 3.25%. we are actually right now getting some funding from the Central Bank two years, three years, four years, the rates overrun 350 to 4% with us. So, that will be the current state of the market. We believe that they will be willing to because they are in this expansion policy so they would be only coming to five financial institutions rate that really is – let them implement the policy. I can’t talk about this specifically on numbers because auctions are not in place now.

Okay. I understand. Thank you so much.

And our next question comes from Mr. Carlos Gomez from HSBC. Please go ahead.

Thank you very much, two questions. The first one refers to the joint venture with Banmedica. This has taken care of one of the life insurance. Are there any plans to consider joint ventures or disposals in the other lines of insurance as part of the restructuring of the business and is there a timeline for that? The second, going back to the capital question, you mentioned that you are sticking to your target of reaching 10% by the end of 2016. I have to say you do the numbers and it's not easy to get to that number. Is there something inorganic that we are not considering, disposals or any other measure, and why does it have to be in the present existing -- why not take more time if you require more time to do it organically? Thank you.

I’ll begin with the second question and I’ll let [Indiscernible] Head of Insurance and Health business talking there. On the first question we – as you know, it’s internal. If we don’t reach at 10% at the end of next year we will reach it by the end of 2017 [ph] that’s really not – we have something you’re listing there. On the other hand, how will we reach it. Our ROE in DCP is around say 20% to 25%, our growth in loan, the growth in capital and [Indiscernible] will be among 12% to 30%. So you can figure out that you have some excess capital if we continue to have that ROE in the coming months. And that will be funds that we will need to raise sort of capital to those standards. On the second question, maybe if you can repeat it a bit because I don't hear exactly [Indiscernible] please.

Yes. Sure. It's very simple. You have reached an agreement with Banmedica for the health insurance business. We know that as part of their restructuring of the insurance business you are considering changes; would you consider taking partners in other parts of the insurance business?

Okay. Now currently the only area where we were looking for partner within the health insurance business and basically because we have done in to the provider side of the business, which is a business in which Credicorp had little or no experience. The other lines of business we've been running them for while, actually in that regard we bought the partner we had, the original partner was AIG during the crisis and we took advantage of that and we'll continue to run those business well as part of Credicorp.

Okay. Thank you.

At this time I see we have no further question in queue. I would now like to turn the call over to Mr. Walter Bayly, COO for any closing remarks.

Thank you all for joining us in this call. I just want to go over some of the recurring things that we have heard from you. And unfortunately the quality of the communications is quite poor. So I hope we have appropriately understood your questions and you have been able to understand our responses and if that have been the case, please look out us so we can pursue your enquiries. And again, I apologize for the quality of the communications. There are couple of subjects, as I mentioned, that have been recurrent that I would like to comment on. One is the loan to deposit ratio, the loan to deposit of the bank has improved. The loan to deposit in local currency has deteriorated that something we do not like and something we are watching very closely, that is something that really does not keep me awake at night. Actually the situation a couple of years ago in my mind was more destabilized. What I mean is that a couple of years ago the deposits, our loans in dollars were growing and we have to fund those in the international capital markets. Today the situation is that our local currency loans are growing and we have to fund them today through the central bank. I’d rather depend on the Central Bank to give me local currency that depends on the international capital markets to give me dollars. So clearly as I mentioned again this is something we do not like, it does not keep awake at night and this is something that is less worsen than we were a couple of years ago. The Central Bank have given us very clear indicative signs through several channels that they are gong embark on this option process that Fernando has mentioned.…

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