Executives: Fernando Dasso - Chief Financial Officer Walter Bayly Llona - Chief Operating

Officer
Analysts: Jason Mollin - Scotiabank Thiago Batista - Itau BBA Ernesto Gabilondo - Bank of America Merrill Lynch Tito Labarta - Deutsche Bank Carlos Rivera - Citigroup Carlos Macedo - Goldman Sachs Carlos Gomez - HSBC Philip Finch - UBS Steve Ocampo - AFP

Habitat
Operator: Excuse me everyone, we now have our speakers at conference. Please be aware that each of your line is in a listen-only mode. At the conclusion of today’s presentation, we will open the floor for questions and 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, Credicorp’s CFO.

Sir, please begin.

Fernando Dasso: Hello, thank you. Good morning and welcome to Credicorp’s conference call on our earnings results for the fourth quarter of 2016. Before we review Credicorp’s performance in the fourth quarter, I would like to take a few minutes to review the Peruvian macro environment. We estimate that real GDP growth will be between 3% and 3.5% this year, our estimate is more conservative than those of Central Bank and the Ministry of Finance.

They have said in 2017 Peru is expected to remain as one of the fastest growing economies in the region, outpacing Colombia, Chile and Mexico. It is important to note that Peru is the only MILA country with a stable foreign outlook from the three major credit rating agencies. Even though GDP growth in 2017 will be similar to 2016, the drivers will be different. First, last year mining production explained almost 60% of GDP’s expansion. Conversely, this year mining production will only explain 20% of GDP growth.

Second, domestic demand is expected to accelerate from 1% in 2016, starting between 2.5% and 3% in 2017, as long as private investment recovers after declining for three consecutive years. It is important to note that private investment will no longer be affected by the approximately 50% drop in mining investment registered in 2016 due to a completion of large scale mining projects, in particular the expansion at Las Bambas and Cerro Verde. Regarding inflation, we expect the rate to close near 2% in 2017, which is the upper limit of Central Bank’s target range. In terms of reference rate, we estimate the Central Bank will call its policy rate at 4.25% in 2017. On foreign exchange, we foresee an end of period exchange rate between S/3.40 and S/3.45 per US dollar in 2017, due to international uncertainty.

That said, if corporate prices remain at current levels, loan management structures appear in the international or local context and Peru’s trade R surplus continues increasing. The exchange rate will remain at year-end level of 2016 while may even appreciate against the US dollar. Let’s review Credicorp’s quarterly and annual results. Next slide please. Let’s quickly review the quarter results before we analyze full year performance.

Regarding our quarterly financial figures, in the fourth quarter of last year Credicorp reported recurring net income of S/896 million, which represented recurring ROE and ROA of 18.6% and 2.3% respectively. The fourth quarter results show; first, although the quarter posted the lowest loan growth rate of the year, it was driven by the high margin in business segments, such as Retail Banking, Mibanco, and BCP Bolivia, which led to a better mix in terms of the margin. Second, net provisions for loan losses increased 18% QoQ, after registering in the third quarter the lower level in the past three years. In this context, the cost of risk rose to 1.94%, which is still below expectations. Third, all of the above allow the net interest margin to recover 34 bps QoQ, while the net interest margin after provisions increased 16 bps QoQ.

Fourth, the efficiency ratio decreased 30 bps QoQ and 19 bps year-over-year, this represent an extraordinary Sol considering seasonality in expenses every fourth quarter. Let’s review Credicorp’s annual results. Next slide please. In 2016 Credicorp posted a record high for recurring net income of S/3.4 billion, which led to a 19.3% ROE and a 2.2% ROA. The excellent results show Credicorp’s resilience in the economic scenario marked by a much slower pace of growth in the Peruvian economy and a volatile international environment.

It is important to note that a significant expansion of 16.2% in recurring net income is reflected in the 20 bps increase in ROA. Despite the aforementioned, ROE fell 40 bps due to a significant increase of an 1.9% in net shareholders equity, which is in turn attributable to better income generation and high growth in unrealized gains from our proprietary investment portfolio. The difference in results in 2016 are explained by; first, the loan book measured in average daily balanced expanded 4.1% which fell below sufficient. Nonetheless, the loan portfolio mix favored NIM, as such the local currency loan book expanded 5.6%, mainly in high margin business segments, where US dollar denominated loans only grew 1.4%. Second, the cost of risk fell 20 bps due to a contraction of 5.1% in provisions for loan losses.

And later was due to very low growth in gross provisions and a higher level of recoveries and reversals, in line with improvement in risk quality across most of the business sectors. Third, all the above offset the increase of 13 basis points in the funding cost and resulted in a relatively favorable NIM after provisions, which increased despite the NIM contracted 15 basis points. Fourth, the increase of 7.5% in the insurance underwriting results due to 8.8% growth in net earned premiums, this year Pacifico posted a combined ratio if 91.3% and a net loss ratio of 58.4%, levels that were relatively stable with regard to those posted in 2015, which were situated at 90.1% and 58.9% respectively. Fifth, control over operating expenses kept growth at 4% in an environment in which income generation grew less than expected due to marginal growth in loans. In this context, the efficiency ratio at Credicorp was deteriorated at 43.3% and remained stable with regards to 2015, which is outstanding considering that this ratio has posted year-to-date deterioration of 30 basis points in the first nine months of 2016.

Finally, with regard to loan, comfortably achieved the target in terms of fully loaded Basel III common equity Tier I ratio, which reached a level of 11.1% at the end of 2016. Income generation was the main driver of the improvement in these ratio, followed by deductions after the recurrence of BCP Bolivia and thirdly, below loan growth. Let’s review the year results in more detail. Next slide please. On this page, you can see the evolution of a loan book and average daily balances, which are an important driver of net interest income and NIM.

Throughout 2016 we saw a slowdown in loan growth, as you can see in the chart on this slide, the loan book expanded only 4.1% year-over-year. The main highlight in terms of the Credicorp’s loan book are; first, wholesale banking fee, a challenging environment marked by an extremely low demand for credit and aggressive pricing competition. As such, and after three years of leading growth in loans at Credicorp, wholesale banking’s loans expanded only 0.4%. Nevertheless, the corporate loan book grew 1.8% where middle market loans contracted 2.2%, which resulted in a mix of loans within wholesale banking that put downward pressure on its margin. Second, retail banking led loan book expansion in 2016.

Loan growth was driven mainly by SME business, SME Pyme and Mortgage, which helped improve Credicorp’s loan mix. Consumer loans and credit cards posted the lowest growth rate in the past seven years in the context of our delinquency, which began in 2015. This growth is nonetheless within expectations due to our risk capital. Third, Mibanco had an excellent year and expanding its loan book by 10.1%, which increased share of total loans at Credicorp. Fourth, beyond expansion at BCP Bolivia and ASP also help accumulate the impact of low growth.

The aforementioned has led Credicorp’s portfolio mix to post higher shares for segments with higher margins. Next slide please. With regard to loan book dollarization, the foreign currency portfolio at Credicorp represented 40% of total loans at the end of 2016, that is 41% at the end of 2015. The level of BCP Stand-alone continues to be dollarized by a much slower pace than that seen throughout 2015. In this context, BCP Stand-alone reported loan dollarization level of 37.1% in December 2016 versus 38.3% in December 2015.

Overall, as you can see in the chart on the bottom of right-hand side, the level of foreign exchange rates on credit risks has remained very low in the last two quarters of this year [indiscernible] not only 1%. Furthermore, the level of dollarization BCP is well in line with the target set by the Central Bank. Next slide please. In this chart, let’s review results of Credicorp’s focus on risk quality in an environment marked by significantly slower loan growth and an increase in the funding cost. Overall, the loan portfolio mix registered an increase in the participation of business segments, they offer higher margins are also implying a higher cost of risk.

Thus in the chart of this slide, it’s important to know. First, the mix from the overall margin during the second-half of the year after dropping 40 bps in the first-half. In this context, the overall margin in 2016 contracted only 16 bps. Second, even though the business segments that led loan growth of higher cost of risk, the overall cost of risk shown in the dark blue line fell 20 bps in 2016, offsetting the contraction and the margin can generate a relatively stable NIM after provisions, as shown in the right blue line of the chart. This result was achieved because of the risk quality of the business segments that’s led loan expansion, most retail banking and Mibanco respectively.

Finally, Credicorp’s efficiency ratio remained stable. Let’s review the evolution of the cost of risk and delinquency ratios in some business segments in more detail. Next slide please. On the chart, at the top, you can see the risk quality performance of SME business. The portfolio shows a significant growth of 52 bps Q-over-Q in the internal overdue loan ratio.

This was attributable to an increase in the level of internal overdue loans, which in turn was reinforced by loan growth. However, the NPL ratio decreased less 41 bps, of course, NPLs remains at the same level as the previous quarter due to an increase in refinanced loans. The cost of risk increased 133 basis points Q-over-Q due to higher provisions in the fourth quarter, which was attributable to the fact that some clients although reporting no provision in the past new loans levels experience a downgrade in the rating. This led to an increase in provisions that have no effect on delinquency ratios. In general terms, the cost of risk show great stability in 2016, remaining are the same level posted in 2015.

In the chart, at the bottom, you can see the evolution of risk quality in SME-Pyme. As you can see, since the beginning of the second-half of 2014, early delinquency has registered a downward trend year-over-year in line with ongoing improvements in the SME-Pyme business model. It is important to note that early delinquency fell 14 bps year-over-year, which now – that posted in the first quarter of 2013 before the delinquency program began in line with the aforementioned, the cost of risk fell 105 bps year-over-year to register a record low for the past three years. Next slide please. The figures on this slide show evolution of delinquency ratios and cost of risks in a credit card and consumer segments both of which have posted an upward trend since the last quarter of 2015.

As you can see the delinquency ratios and cost of risk posted significant improvements in both business segments of healthy adjustment introduced throughout 2016. Next slide please. The chart on this slide shows the evolution of Mibanco’s delinquency ratios and cost of risk. It’s important to note that all delinquency ratios continue to follow a downward trend. These also applied to the most stringent ratio, adjusted NPL, which adds back write-offs.

Excellent performance reflects the successful turnaround that began in March 2014. In this context, the cost of risk increased slightly Q-over-Q after having posted and a typical low in the previous quarter. Our sales year-over-year in line with an improvement in the risk quality of the loan book. Next slide please. Another important aspect of Credicorp’s financial figures is the funding, structure, and costs.

The chart at the top left-hand side shows a slight contraction of total funding in 2016, which reflects a context marked by low loan growth. A reduction in total funding was due primarily from increasing deposits, which was accelerated our growth and due to banks and correspondents, and in BCRP Instruments. The latter was mainly due to more regular repos with the Central Bank instead of the expansion and substitution repos that we took in 2015 as part of the dedollarization program. Even though, total funding contracted, the funding cost increased from 1.97% in 2015 to 2.10% in 2016, which include downward pressure on NIM. The increase in funding cost was mainly due to higher funding costs at BCP Stand-alone and Mibanco, which was attributable to first, interest expenses from deposits grew 23.6% in 2016, another 22% increase in average daily balances on deposits for the year at Mibanco and 8.6% of BCP Stand-alone.

Second, the dedollarization of deposits for the year, particularly in earning deposits, which implies higher average cost for remaining stock of time deposits. Third, the average cost of deposits and loans and subordinated debts increased in 2016. As you can see in the bar chart at the top left-hand side. Finally, the contraction of third deposits increased the overall loan to deposit ratio, which reached a level of 110%. Although, this level is still within our entire targets, it is important to mention the efforts we have made in 2015 to increase core deposits, such as savings, CTS, and demand deposits, which is reflected and increased posted in savings deposits.

Next slide please. In terms of operating efficiency, Credicorp’s efficiency ratio remain stable with regard to 2015’s level. This year’s result was satisfactory giving that excellent cost control at BCP Stand-alone offset lower than expected results for income generation. Furthermore, Mibanco reported a significant improvement in its operating efficiency due to better than expected results for earnings generation. In the case of a typical credit duration in its efficiency ratio is due to non-recurring income from the association with Banmedica in 2015.

Next slide please. In the chart on this page, you can see all of our subsidiaries contribution to Credicorp. We are focused on maintaining the profitability of the business, despite loan growth and aggressive competition. As you saw in the previous slides, the excellent results reflect comprehensive efforts mainly in risk management and efficiency. As a subsidiary note, it’s important to highlight first the excellent performance of Mibanco which is reflected in its 2.1% ROE for 2016.

Second, the relative stability of our subsidiary, such as BCP and Prima. Third, the improvement at BCP Bolivia and Credicorp Capital, and lastly, a drop in the ROE in Pacifico, which was attributable to two events in 2016. The existence of non-recurring income after a joint venture with Banmedica and a significant increase in unrealized gains in its investment portfolio in life insurance. With these comments, I would like to open the Q&A session, please.

Operator: Thank you, sir.

At this time, we will open the floor for questions. [Operator Instructions] Our first question comes from Jason Mollin of Scotiabank.

Jason Mollin: Hi. Hello, everyone. Thank you for the opportunity to ask a question.

My question is really on the expectation for 2017, you talked about the different composition of real GDP growth this year and the increase in domestic demand. And you mentioned that loan growth has been week for lack of a better term. And what are your expectations there? What – what’s driving this increase in domestic demand? And how can that translate into loan growth? And what kind of expectation do you have as a multiple of this, let’s say, nominal GDP growth? And maybe my second question is based on another one of your comments, I think, you’re mentioning how well the bank – the group has been able to do with this weak growth and competition? Can you talk about the competitive landscape? And what’s driving the change there, and which segments? And is this something that can impact your medium-term profitability? Thank you.

Fernando Dasso: Thank you, Jason. On your first question, as you know, GDP grew by 2.4% in 2015 and 2016, it was 3.8%.

We feel that this year, we will remain within the range of 3% to 3.5%. But as we said, it will be a different kind of growth, last year what really fostered by mining and the mining environment, mining projects. This year we will probably be more really fostered by domestic demand. And when we talk about domestic demand, we feel that consumption will be more or less the same. But now it seems that investments will go again faster than last year, especially prior investments.

On note, it will be a gradual improvement and the first-half will be worse than the second of this year. We feel and we are beginning to see some signs for that – for our growth in investment coming. However, we thought that we were going to grow more than four. Now it seems that it will be around the low 3% in that range. In regards to loan – loans, last year, as you know, we grew by only around 5%.

This year our paid scenario is around 7%. We saw better during the second-half, we’ll probably be able to reach maybe 8% or yield more than that. That’s really our focus. So I mean, GDP, so it will be probably around 1.1 times, 1.3 times nominal GDP growth because inflation will be 3%, GDP will be 3% more or less, so we will be adding more than that. And then your second question was on the competitive landscape and yes, as you know when growth diminishes there is really more competition for the best clients especially because all the competitors in this country beginning to look more in detail towards their delinquency numbers and they are beginning to pick and choose better, the best clients in the system, so there is more competition for those clients and that’s is what we are experiencing.

And we think that we will continue to experience that situation during mid-2017, where is that competition more visible in wholesale especially in the largest clients in Corporate Bank.

Jason Mollin: That’s helpful. Thank you.

Fernando Dasso: Thank you, Jason.

Operator: Thank you.

Our next question comes from Thiago Batista from Itau BBA.

Thiago Batista: Yes, thanks for the opportunity. My first question is almost a follow up on Jason questions, but my focus is on the margins. With this potential increase in the share of retail business, but we have some more competition in the wholesales, how do you see your margins during 2017? And the second question is a more open question about the digitalization process. Could you comment on how do you see the importance of a branch in this digitalization process, do you believe you could see a reduction in the number of branch in the couple of – in the next few years, with this process to become more and more digital? So these are my two questions.

Fernando Dasso: Okay. Thank you, Thiago. Your first question regarding the margins, yes, we are seeing some pressure on margins. I’m sorry, answered in my last answer, we feel that the country especially the financial system is going to grow on a higher pace than last year where we will still have some pressure on margins, but we will try to continue achieving the margins that we are gaining. It won’t be easy, I have to be very honest, but we feel that we have a very good group of clients – base of clients that we have good relationship with them and we will continue to try to maintain those margins.

If you see the NIMs, the trajectory of the NIMs here in the last quarters has been good. We will try to continue in that same fashion [ph]. Then on the second question in terms of digital and branches, what I can tell you as one figure, is that for example now we have more transactions in our mobile banking than in our branches, meaning, in the tellers of our branches. So the same is changing actually very fast. We have engaged in a very comprehensive program in terms of the digital approach that we want to incur in.

We are putting a great team of people working there, we are investing in the long-term, we are beginning to see some results there. We are already launching some new products and ways of actually interacting with our clients with this mini talk and we are convinced that that is really a way to continue investing. So we will definitely continue in that trend.

Thiago Batista: Okay, thank you.

Fernando Dasso: Thank you.

Operator: Thank you. Our next question comes from Ernesto Gabilondo from Bank of America.

Ernesto Gabilondo: Hi, good morning, and thanks for taking my call. And my first question is more related to guidance. I will appreciate your expectations in terms of [indiscernible] and what should be its correlation with loan growth and also where are you expected in terms of cost of risk? My second question is, what are you expecting in terms of net earnings growth, I just want to know if you’re still expecting double-digit growth, and if you’re evaluating to increase the dividend pay-out ratio above 25%? And finally can you elaborate more on the tax measures that are in Congress.

Thank you.

Fernando Dasso: Ernesto, thank you for your questions, I didn’t get them so clearly. I think that the first one was on loan growth, if I’m correct. We already told you that we expect loan growth to be around 7% last year, maybe next year, maybe a little higher than that. We will probably grow it faster in retail than in wholesale.

Ernesto Gabilondo: Yeah, I was trying to know about your net interest income growth and what should be the correlation with the loan growth.

Fernando Dasso: Okay. Net interest income, as you’ve seen in our presentation, we have a good trend, if you see, our NIM after provisions. Even before provisions, it’s around 544. We expect that number to continue in that range.

Yes, funding costs will be a little higher, but we will try to reprice our loan book as fast as possible especially in the segments where we have more cover and also we are working very thoroughly on NIM after provisions. When you see that line of NIM after provisions in the chart – in the seven, we expect to continue there in the 4% to 4.30%, 4.40%. We feel that it is feasible and that we will try to achieve that during the next month. Are there any other question, Ernesto?

Ernesto Gabilondo: Yes. And in terms of cost of risk what are you expecting in this year?

Fernando Dasso: In terms of what? Sorry.

Ernesto Gabilondo: Cost of risk.

Fernando Dasso: Cost of risk, okay. Cost of risk. We, as we have said, many times before, we expect cost of risk to be around 2% to 2.2%, now we are bit surprised last quarter especially – the third quarter I mean and then the fourth quarter because numbers are doing much better because of many measures that we’ve taken especially in retail banking. We have worked all the way with our scores, with our collections, people, our numbers are beginning to show, however, we do like to be more in a conservative side telling the market that we will be around 2% to 2.2% in terms of cost of risk.

Ernesto Gabilondo: Great. In terms of net earnings, should it be reasonable to expect double-digit growth in 2017?

Fernando Dasso: In terms of net earnings, we will continue to – I mean, we usually don’t give any guidance on net earnings specifically, what we can tell you is that we will try to maintain our ROE around 18% to 19%.

Ernesto Gabilondo: And for that are you expecting to increase the dividend payout ratio above 25%?

Fernando Dasso: If you – I mean, we still have to discuss that in our meeting in our – not only our board meeting at the end of February, but then our shareholders’ meeting at the end of March. But if you go thoroughly into our numbers, you have to understand that probably our dividends will have a better sense than the ones we had last year.

Ernesto Gabilondo: Great, great.

And finally can you elaborate more on the tax measures that are in Congress?

Fernando Dasso: The taxes, well, as you know, the income tax has changed from 28% to 29.5% this year, but then the dividend tax rate has also come down from 6.8% to 5.5%. So if you balance those taxes, I think that it’s really like a wash, so we will probably around the same area of taxes.

Ernesto Gabilondo: And about the value added tax rate, are you expecting that that will help in the [indiscernible] to increase the consumption in 2017?

Fernando Dasso: In terms of the VAT, again, if you – VAT tax, as you mentioned, we feel that we will continue at the same range – at the same number – at the same percentage this year because the only way to change it and bring it down is if we achieve very aggressive targets that they’ve already have set. So we feel that we will be around the same range this year.

Ernesto Gabilondo: Okay, great.

Thank you very much.

Fernando Dasso: Thank you, Ernesto.

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

Tito Labarta: Hi, good morning, Fernando.

Thanks for the call and taking my question. A couple of questions also. I guess, first on expenses, we saw very good cost control over the year with expenses growing in the low single-digits. I just want to get – maybe some color on the outlook for expenses this year, do you think expense growth will continue to be that low? Do you have more room to improve efficiency or what kind of growth should we expect on expenses? And then just another follow-up question in your funding cost, you mentioned you expect them to go up, we did see deposits decline this quarter, the loan-to-deposit ratio is around 110% now, do you see a lot of pressure there? Do you – will you have to increase prices to get to more deposits? Just want to get a little bit more color on the funding side and the expected increase in funding costs. And then just – last question in terms of capital, I know you talked about the dividend a little bit, but you are above 11% now, core Tier 1, you have excess capital at the holding company.

Just want to get your thoughts on what – I think in the past you mentioned you want to be above 10%, so you are well above that now. In addition to potentially increasing the dividends, do you see any buybacks, potential acquisitions, what should be a comfortable level of capital and what should we expect with that excess capital? Thank you.

Fernando Dasso: Thank you, Tito. Three questions. I’m going to address the third question first.

In terms of – yes, our captain levels, we have improved them consistently over the last three years. Remember that our common equity Tier 1 was 7% three years ago, now we are at around 11%. We think that in March when we declare dividends we will probably reach around 10% and that will be clearly the base of that ratio. And yes, we will – maybe keep some returns because as you we operate in Peru, in a volatile country, we will probably keep some returns and beyond that it will be dividends basically. But then you asked a little bit about buybacks or more investments, what I can tell you is that we are always open to – I mean, analyze new possibilities of acquisitions, but we are – we have learned so many lessons over the past to be very, I would say, sensible in deciding what to acquire or not.

In terms of buybacks, we will always be looking for ways to if we have excess cash bring it back to our shareholders. That’s all I can say in terms of capital. In terms of funding cost, it is always good when interest rates come up for financial institutions because margins tend to widen. Yes, the funding cost can come up, but we will try to in a way reprice as fast in our loan book. On the other hand, since retail is growing faster than wholesale, it is also good for the margins.

And then loans in solus [ph] are going faster than loans in dollar, which – margins in solus are wider, it is also – so in a way we see interesting prospect in terms of the margin. Then you talked a little bit about loan to deposit ratios, we fell that – I mean, we have talked many times to our shareholders and to you in particular about loan to deposit, we feel that we are in a good position now basically because there are many deposits – a large chunk of deposits that – from state-owned companies that are really at the Central Bank, which brings a disruption in the system because it should really be in the private financial sector. So actually the Central Bank provides us with those deposits by the repos, I mean, our loan to deposit ratio for the system is around 113% and with those deposits that reside at the Central Bank being in the financial system, it will be 88%, so it’s pretty stable. And as we have talked many times, the Central Bank is very constructive, they know what they are doing, so we feel very safe if they – if we provide them with excess dollar and they bring solus to the system. That on your second question.

And then on the first question, which dealt with cost control, what we are doing all the times is trying our income to grow faster than our cost and that’s what we are really achieving. In the past three years it was easier than now because we had a low hanging fruit, we took advantage of before, now it’s harder, but we are still – we do have many ways in which we can become more efficient. And you can imagine – I mean our branch network is already at 450 branches, do we need the 450 branches, maybe not, we are analyzing, if we do, only those branches should be at large as they are now, also reach smaller, but we still have many way in which we can improve our efficiency, not only because of cost control but because that ratio of income to cost which is what we need to deal with.

Tito Labarta: Great. Thanks, Fernando.

That’s helpful. Maybe just one quick follow-up on the capital. You mentioned you expect it to go back to around 10% after the dividend, could that lead to some upside to, you said ROE earlier around 18% to 19% for this year, but if your quarter one goes to 10%, could there be some upside to that ROE?

Fernando Dasso: We would like to remain more conservative and tell you that we expect our ROE to be between 18% and 19%. If there are more opportunities, we will be very keen on taking advantage of those opportunities.

Tito Labarta: Okay, thanks, Fernando.

Operator: Thank you. Our next question comes from Carlos Riva of Citigroup.

Carlos Rivera: Hi, good morning, everyone, and thanks, Fernando, for the presentation. Couple of questions from me. The first one is regarding the subsidiary Mibanco.

I mean in the past, you have guided for an ROE of around 25% to be achieved over the next two years, that was last quarter, but already this quarter in 26% ROE. Does this mean that Mibanco have a capacity of high ROE and probably at 25% is a little bit conservative, or do you see Mibanco now achieving the run rate that you feel comfortable with? And the second question would be regarding Credicorp Capital. This quarter, we didn’t see any impairment, I’ve seen in prior years. So, I assume that this was conducted, and if you could clarify just because of better than expected 2016 performance or basically because of prior write-offs in these acquisitions now, is that the new validation level and – that probably no more impairments in the future, are coming from these acquisitions? Thank you.

Fernando Dasso: Thank you, Carlos.

First of all in terms of Credicorp Capital, yes, we have no impairments this year. Actually capital market in Chile, Peru and Colombia, you need to look better than previous years, so we feel that the future of Mibanco should become – Credicorp Capital, sorry, should become better. In terms of impairment in the future, we don’t see foresee any more impairments in terms of Mibanco. And in terms of acquisitions, I mean, there are always possibilities of – Credicorp Capital, sorry, in terms of acquisition there, there are always possibilities of acquiring new players in these three markets actually improving Mibanco’s – Credicorp Capital’s numbers. We will be very active looking for those possibilities and very sensible on deciding what should we not acquire.

Then, Mibanco, finally. You asked about ROE, yes, after only two years since we merged Mibanco and Edyficar, Mibanco numbers are looking rosy. Yes, we feel that there are few more opportunities in terms of Mibanco. Regarding loan growth, there are still some synergies to be achieved. We still need to provide Mibanco with a better pace of deposits because they also have a large number of branches – around 300 branches and there is a possibility to bring in low cost deposits from the public.

They still have to work better in that – in those terms and also there is opportunity and we are working on segmentation. Before we had [indiscernible] approach to the clients of Mibanco and there is the opportunity to segment better and to address their needs both on the asset side and on the loan liability side of our clients better. We feel that ROE – I mean, Mibanco has now very important position in that market, they control around 22% of the market in the state play [ph], they are the leading player. So there are too many opportunities of improving Mibanco’s numbers in the future.

Carlos Rivera: So would you say that probably at something above 25% percent ROEs is doable? Would you target a particular number, maybe 30% over the next few years once you achieve all the synergies, all the increase in deposits raise that you mentioned.

Fernando Dasso: I mean I wouldn’t want to promise a number for Mibanco, especially a 30% ROE number. What I can tell you is that we will be very – we are very focused on continuing not only to improve the ROE at Mibanco, but to actually grow the net income at Mibanco because we see many opportunities, we have a very solid model, we feel that they will have a world-class model for approaching microlending and SME lending and we will try to continue to take advantage of that model and grow as fast – we are trying always to keep our risk numbers where we want them to be, but growing as fast as possible.

Carlos Rivera: Okay, thanks, Fernando.

Fernando Dasso: Thank you, Carlos.

Operator: Thank you.

Our next question comes from Carlos Macedo with Goldman Sachs.

Carlos Macedo: Thanks. Good morning, Fernando. Thanks for taking questions. Couple of questions, first, on loan growth, you said 7% to 8% potentially this year, more heavily in the second half of the year and more towards investments, which means corporate, does that mean you’re also going to grow dollars denominated loans more than loans in solus given the natural preference for some of these corporate borrowers to borrow in dollars and what kind of impact do you think that could have on your margins? Second question, results for the insurance company for Pacifico weren’t particularly good this quarter, loss ratios are up.

Can you give us a little bit outlook for that which we should think going out for Pacifico? Thanks.

Fernando Dasso: Okay. First, I want to address the loan growth one, yes, if those important projects, infrastructure, even mining begin to come in again, we will see growth in dollars more than in solus, but remember that in these huge projects we usually don’t take an important part. What we actually do is participate in this consortium, put a bit of the lending facility, but mostly try to lend more to all the suppliers and on the ecosystem around these projects. So that’s really how we improve in terms of loan growth if these huge projects come again.

We will still see this year that de-dollarization has been really low, the Central Bank feels that we have achieved a level in which they feel comfortable with, so – and the level for the system is around 30%, 29% in terms of dollar loans, for BCP it’ around 37% because we have more of a larger position in corporate. So we feel that we will probably see where we are in terms of dollarization. We also feel that the exchange rate will be pretty stable this year, actually it’s coming down, the sole is actually revising against the dollar during this first 40 days of the year. We feel we will be pleased to stay also, it won’t be a problem going from one currency to the other. Then in terms of Pacifico, I’m going to answer a tiny bit and then I’ll let [indiscernible] from Pacifica continue with the answer.

What I can tell you is that, Pacifico has had a good year. We have many important projects that we will undertake this year and they are really public. As you know, our property and casualty business will merge with our life business that will probably take place in August, September, the third quarter. And that will bring new synergies to our payroll. That’s already public, so I can’t disclose that to you all.

And then I’ll let [indiscernible] talk a little bit about Pacifico. Unidentified

Company Representative: Yes. In terms of the loss ratio, we’ve been growing a little bit and there’s basically for various reasons. One, we have been very aggressive in the outdoor insurance business, which we had risen up our prices. We had very good global operations of about 46% somewhere around there.

And we resilient on purpose to do that and there’s a little bit of market share. But those were extremely aggressive loan loss ratio. Also, we come up from that to – and we’ve been gaining a little bit of market share this year and brought those strong ratios back up to our levels of 56% from around there. And that is – what has obviously impacted in the loan loss ratio as a whole for the company. But I would say, it’s really nothing to worry about, because those are perfectly manageable levels and basically what we’re trying to do is disclose a little of market share at those levels.

We’ve also been a little bit in the loan loss ratio for the life insurance company in which we did have some additional or increase in loan loss ratio on the insurance that we provide for the ASPs and it’s a tranche, which we did not have in the previous year. We actually – we didn’t have in 2016, regarding to the markets, those are annual, the situations that take place and we’ll participate in that, obviously increase the loan loss ratio and we’re participating this year. And then you will see the change here from 2015 to 2016. And then there are other minor in individual life insurance that happened marginally up from the previous year.

Carlos Rivera: Okay, great.

Just – so – was – for the quarter, was ROE was closer to a 11% or 10% than it was the 14%, 15% that it was in prior quarters. What should we look out for ROE for the business is 15% a run rate, or should we look for a lower run rate?

Fernando Dasso: I didn’t get your question. Could you please repeat it?

Carlos Rivera: The 15% – this quarter, the ROE was closer to 10% than a 15% that was in the third quarter. What should we look for in terms of the run rate ROE for the – for Pacifico?

Fernando Dasso: I would say somewhere around the 15%.

Carlos Rivera: Okay, great.

Perfect. Thank you. Unidentified

Company Representative: Thank you, Carlos.

Operator: Thank you. Our next question comes from Carlos Gomez from HSBC.

Carlos Gomez: Hello, and good morning. Two questions. First, also on insurance. In the past, you have commented on the restructuring process and how you might be willing to partner kind of people in kind of line of the business, or sell the most like. We would like to know if you can give us an update on that in particular on the property and casualty business? Second, on the capital.

As I mentioned, were it be 11%, it will go to 10% after the dividend. Again, what would you consider your ideal levels? I mean, we see U.S. banks, European banks are at 11%, 12%, and as you said, you operate in Peru. What do you think the ideal level for BCP should be? Thank you.

Fernando Dasso: Carlos, sorry to tell, we didn’t understand your questions.

It wasn’t clear. Can you repeat them more slowly, please?
Unidentified

Company Representative: It’s the phone line…

Fernando Dasso: The phone line is kind of, yes, it’s not working as we should.

Carlos Gomez: My apologies, can you hear me now?

Fernando Dasso: Yes, please try to go slowly.

Carlos Gomez: Sure. So the first question was on the insurance business, and we would like to have an update on the possible sale of part or entire lines of the business, as you have commented in the past?

Fernando Dasso: Okay.

You’re asking about, we’re going to continue with the same lines of business or we’d like to do something different, acquire more selling lines of business, is that the question?

Carlos Gomez: Well, you have commented you might get partners for some lines of business, for instance, auto insurance, we would like to know where you are in that process?

Fernando Dasso: Okay. What I can tell you is, in terms of healthcare – on the health insurance business, we are very glad with the partners that we have made of Chile. They are the leading providers of this insurance and healthcare services in Chile. We actually have knowledge that they really know their business. If you see how we’re doing in that business, although the ROEs are only around 6%, but they are going very fast.

We’re coming actually from zero to a 6%, 7% level. If you see all the healthcare entities that we control, you see that all the numbers are in blue already and all of them with one exception, they’re actually reaching our budget, which is a stringent budget. So we feel that we are improving there. We are learning about the business. We feel very comfortable with our partners.

Then I talked a little bit about the merger between a typical life insurance and property and casual businesses, that’s really the target for this year. And it’s an important undertaking for both companies, both in terms of the synergy that we can achieve and the cultural mix that we will have to bring together to the table. So that’s the target and that’s the project for this year. Next year, we will probably continue to assess what’s the landscape and see what earlier opportunities.

Carlos Gomez: Very clear.

And on the capital, my question was whether 10% is the optimal capital level, or you would consider going to a 11% or 12% at BCP?

Fernando Dasso: At BCP, what we planned to have at the bottom part is the 10% level on that point in time is really in March when we declared dividends, when BCP declares dividends, we will reach that 10% and we will continue building common equity Tier 1 or capital during the year. We will probably reach at the end of the year depending on how we do in terms of net income. But our projections think that at the end of this year, we will probably have the same levels of common equity Tier 1 that we reached in December 2015.

Carlos Gomez: Thank you.

Fernando Dasso: Thank you, Carlos.

Operator: Thank you. Our next question comes from Philip Finch of UBS.

Philip Finch: Hi, Fernando, thank you for the presentation. Two questions from me as well. First, regarding your deposit growth in the fourth quarter, where we saw a 4.9% contraction year-on-year, notably in time deposits.

Can you elaborate a little bit on why we saw such a big contraction and what we should expect for 2017? My second question is regarding your strategy for rationalizing your branch network. Are you looking to close branches this year or reduce the size of branches and how does all this feed into your outlook target for your cost-income ratio? Thank you.

Fernando Dasso: [Technical Difficulties]

Operator: Excuse me, speakers, we’re having a little bit of interference coming from your lines. I’m going to switch over, one moment please.

Fernando Dasso: [Technical Difficulty]

Operator: No, sir.

There’s a little distortion coming from the line. So I’m going to disconnect the line and we’re going to transfer it back over. One moment please.

Fernando Dasso: Hello. [Technical Difficulty]

Philip Finch: Hi, Fernando, it’s Philip Finch here.

I can hear you, but I don’t know whether the operator is ready for you to reply.

Operator: Gentlemen, you may now begin.

Philip Finch: Thank you.

Fernando Dasso: I’ll try to answer first second question in regards to the branch network, and then ask you to repeat the first one.

Philip Finch: Okay.

Fernando Dasso: In general, branch network – okay. Yes, there are opportunities to bring it down to reduce it. But what we have decided here is to be really, I mean, we’ve seen years when we – when our business grew by 20%, 25%, and we don’t know if we’re going to accelerate, maybe not this year, but the next. So, we will be really behind the curve and actually being very gradual in assessing whether we should reduce it or not. Here there are some opportunities of actually many of our branches are large, I mean, reducing those – I’m not reducing the actual number.

But we’ll be very, very gradual in making those decisions, because we don’t know our country will begin and our financial system will begin growing again faster in the coming future. That’s the first, the second question. And then, yes?

Philip Finch: Fernando, can I just follow-up on that, please? So you are not planning to reduce the size of any branches, is that what you’re saying?

Fernando Dasso: I would say that, I mean, we have 450 branches, I would say that there will be no surprised if we reduce it by five branches this year, seven branches this year, but nothing really more than that.

Philip Finch: Okay.

Fernando Dasso: Very glad [Multiple Speakers]

Philip Finch: And lastly, linked to this question, do you have a target for your cost-to-income ratio, please?

Fernando Dasso: For cost-to-income ratio, as a Bank we do have a target.

As a Bank, we’re already at a 40%, 40.5%, 40.6% level. And if you remember conversations that we’ve had in the past that was really our target, where we began this process three years ago. Now, we feel that we can achieve especially we begin to grow faster that we’ll be able to achieve lower numbers. But I mean, the best brands in the world that our size are around 39%, 38%. So there’s not a lot of room to continue improvement – to continue with our improvement, but of course, we’ll try to go down as we can – as slow as we can.

Philip Finch: Okay. Thank you, Fernando. But going back to my original question, your deposit growth was negative in the fourth quarter minus 4.9% year-on-year, and it seems your time deposit contracted by 16% year-on-year. Can you just explain what’s happening there and also what’s the outlook for 2017 for deposit growth?

Fernando Dasso: We feel that this year, we’ll – I mean, those repos that the Central Bank issued like three years ago will begin to mature this year. This year and the next year are very important year in those terms.

We feel that we will replace with different repos, meaning, repos of – currency repos, not the expansion or substitution repos that we already have. But we’ll also be more active in the market looking for not only deposits, we have actually, for example, put there a new team of people that will be vote, I mean, two or three people that will be vote to bring in more time deposits. But we also will be in the market looking for no issuing new bonds that we shall began to lower rate last year and have continued actually this year, mainly low loans, deposits growth, but maybe also, I mean, in the international markets.

Philip Finch: Okay. Thank you, Fernando.

Fernando Dasso: Thank you, Philip.

Operator: Thank you. Our next question comes from Steve Ocampo from Habitat.

Steve Ocampo: Hi, everyone, thank you for taking my question. My question is regarding the recent problems in the construction sector in Peru with the Odebrecht scandal.

Can we expect any increase in the NPLs 2017 because of this company’s struggling for performance? And second, can you give us any detail of the exposure of the bank to this sector? Thank you.

Fernando Dasso: Thank you, Steve. What I can tell you, we have put there some figures especially in terms of our Brazilian companies in the construction sector. What I can tell you is that loans that we cover actually the first [indiscernible], we basically provide them with standby letters of credit rather than direct loans – performance loans – performance loans instead of direct loans. Those performance loans account for allowance 95% of the credit facilities that we provided to them, okay..

Second is, since this progress began some years ago, maybe two years ago, our exposure to these companies has come down by two-thirds. We have already been working on this and it has come down by two-thirds. Third, that exposure accounts for only 0.6% of our loan book – so of our total loan book. So we feel pretty, I mean, we’re actually very active looking at what else can we do and looking for better collateral, but we’re – I mean, we feel that we’re now on a completely safe side, but we’re fine. We feel that these companies have, although they’re in problems now that we know that they have substantial investments improve that we can get substantial collaterals and conditions from them.

We’ll follow them very close.

Steve Ocampo: Okay. Thank you very much.

Fernando Dasso: Thank you, Steve.

Operator: Thank you.

At this time, I’m showing no further questions in the queue. I would now like to turn the call back over to Mr. Walter Bayly. Walter

Bayly Llona: Thanks very much for the overview, for joining us in this year-end conference call. I wanted to give some thoughts.

Most of my thoughts that I will give have already been mentioned by Fernando, but let me give you my color on them. Indeed the first one is related to the fact that there is a certain potential downside strategically with the effects of the corruption scrambles that have been -- that are taking pace right now. The impact on the economy is two sides, one is that of course one of the drivers of growth this year of the investment and growth this year have some of the large infrastructure projects that were going to get started or are in the process of getting done. And there is a reason we have, because of all the legal issues involved, there could be some parameters from the government side in terms of taking decisions and moving forward with those projects. So there is a potential downside to growth in the economy coming from downside.

As Fernando mentioned, even though our exposure is limited and controlled, nevertheless the result is that we’re watching and it could provide as well some downside initially in the first quarter depending how these projects evolve. Now moving out from that topic, one of coupe of key things that we are focused on at the Credicorp level. Number one, by far it’s just a long-term transformation is anything related to digital. This is huge, this is big, all financial institutions in the world are growing, this involves change in processes, this involves technology, and this involves people culture. These are very important transformations and this is happening not only at BCP’s level, but also at Pacifico, at Mibanco, Credicorp Capital and Bolivia.

So this is investments that we are doing today and we will continue to be doing in order to provide and make sure that these institutions remain competitive going forward. This is important and this is one of the big projects of Credicorp. Second big challenge this year and again Fernando already alluded to this, is the transformation that is taking place at Mibanco. Mibanco, these are the process of executing, implementing a re-segmentation of its customer base and focusing on each of the top segments of customers which they have and with the value proposition adequate for each of those customers and by value proposition I mean products, prices and distribution channels. So it’s a very important change in the way the Company operates and to a certain extent we are reinvesting the way this Company operates.

All this has been discussed a lot at the Board level because we have something that this is working, so it’s about 160. But on the other hand we feel that precisely where things are going well is where you have to start preparing yourself for the future, so we are watching this very, very closely. Another topic which Fernando also mentioned is the merger between Pacifico Prima and Pacifico Vida. That of course has to be still taken to the shareholders certainly, but nevertheless we think that this will get approved and this always have challenges, putting two companies together, systems, process, reporting, there is a lot of details that has to be worked and we’re watching that very closely. On the upside, there are two elements worth mentioning.

One is that Prima last year participated and won the right to receive all the new entrants to private pension system for the next two years. Where this will start in June, we are preparing ourselves for that and we hope to even exceed the numbers of new entrants into Prima that we have budgeted for ourselves. There is of course, we’ll bring in the two years a marginal decrease in profits, because we did reduce the fee we charge to our customers, but nevertheless in the long run we think this is good, increasing the number of customers and becoming extremely competitive in pricing we think is the way to go. And the third and the final comment is that Congress has recently approved a law through which Peruvians that have money offshore will paying certain taxes be able to repatriate the funds they have invested offshore. We think that this is an important opportunity for us that we will be able to capture large interesting amounts of funds, because we think we can be the recipient of choice of many customers that have off shore funds in many banks around the world, so this is an opportunity that we are very much focused on.

And finally, to remind you that, yes, we traditionally have had our target return on equity on the 20% level. We are now because of the increased capitalization at the banks both Mibanco and Banco de Crédito lowered the target to be between 18% and 20%, but I would include in these number all non-recurring items, because what I have learnt from the past is that the only thing being common with all recurring items is non-recurring items is that they are recurring. Every year we do have something unusual and that is something that we have to live with and we have to manage, so yes, our medium terms expectations on return on equity because of the increased capitalization of the two banks is now on the 18%, 20% whereas we were in the 20% plus in the past. So with these comments, I would like to finish my presentation. And again thanking you all for joining us in this conference call and we hope that we will have this 2017 to a benefactor as it was last year.

Thank you very much.

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