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…

[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…

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.…

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 --…

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…

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