Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2018-Q1

[Operator]

[Call Starts Abruptly] Please be aware that each of your line will be in listen-only mode. At the conclusion of today’s presentation, we will open the floor for questions. At that time instructions will be given as to the procedure to follow if you would like to ask a question. With us today is Walter Bayly, Chief Executive Officer; Alvaro Correa, Deputy Chief Executive Officer; Gianfranco Ferrari, Deputy Chief Executive Officer; Reynaldo Llosa, Chief Risk Officer.

And now it is my pleasure to turn the conference over to Credicorp's Chief Financial Officer, Cesar Rios. Mr. Rios, you may begin.

[Cesar Rios, Chief Financial Officer]

Good morning and welcome to Credicorp's conference call on our earnings results for the first quarter of 2018. Before we review Credicorp's performance, I would like to take a few minutes to give you some background about the political environment in Peru. On March 21 former President, Pedro Pablo Kuczynski, presented his resignation. On March 23rd, Martin Vizcarra took office as President until July 28, 2021 in a democratic process. We believe that the change in government does not imply a change in the economic model.

Mr. Vizcarra has publicly stated that his government in economic terms will be focus mainly on first increasing tax revenues without changing income and value-added taxes, but reviewing tax extensions and increasing excise tax for a specific pro such as alcohol and tobacco. Second, reducing current expenditure. Third, adjustment in El Nino reconstruction construction initiative to speed up project execution, moreover the government has announced that it will soon publish Law 24 0 0, which dictated civil preparations that companies involve in the Lava Jato case must be paid. And four promoting private investment, by reducing red tape. On May 02, the Congress granted a vote of confidence to the cabinet.

Next page please to Slide number 2. Here I would like to discuss the international environment and evolution of the local economy in this context. In chart number one, the figure showed a positive international environment, IMF forecast suggested that the global economy may expand at the highest rate in seven years. In chart number two, you can see that commodity prices has performed well in particular copper and zinc, which accounts for 36% of our exports.

In chart number three, you can see that Peru’s GDP grow as well as the domestic demand have been improving slightly, however growth is still below our initial estimates for 2018. In chart number four, you can see that our trade balance also shows some improvement. Finally, the quota for the first anchovy fishing season of this year is the highest seen in the last seven years. In this scenario, the fishing sector which effect in primary manufacturing and services will account for 0.4% points of the 3.5% real growth expected in GDP this year. Fishing exports are expected to grow for $1.5 billion to around $2 billion this year.

Next page please. Let me comment on the evolution of the key interest rate that effect our businesses. First in the two charts at the top, we see the evolution of the three month LIBOR rate and the yield curve for the Peruvian sovereign bonds, these rates are important for our short and long-term funding respectively. At the bottom of the page in chart number three, you can see that the Central Bank cut its reference rate were 100 basis points during 2017 and another 50 basis points in the first quarter of 2018. Finally, the orange line in the chart number four shows that loans expanded 7.6% year-over-year in the Peruvian financial system, while quarter end loan balances for Credicorp grew 8.8% year-over-year.

Next slide please. Regarding to our lines of businesses, I would like to mention some important aspects. In the case of universal banking, first it has been faced pressure on margins due to aggressive competition in particular our corporate banking segment. Second, the decision to improve the risk quality of our retail banking loan book has translated into risk adjusted pricing that put downward pressure on margins, but allow us to improve risk adjusted NIM.

Third, we adopted the new requirements of IFRS9, which among other things set new guidance for measurement of allowances for loan losses. From January 1, 2018 onwards, we use our forward-looking expected loss model instead of the incurred loss models required under IAS 39, which represents an increase of S/320.7 million in the allowance for loan losses. All the aforementioned resulted in an increase of S/94.6 million in deferred income tax and a reduction of S/226.1 million in retained earnings.

Fourth, we sold about S/177 million of non-performing loans under judiciary process that were provisioned and had real-estate collateral. With regard to microfinance, Mibanco posted year-over-year improvement in several performance metrics such as loan growth, efficiency ratio and cost of risk, an important driver of such performance is the improvement in productivity of loan officers, which is in turn associated with a strategic project Cliente Soy that is focused on client segment and branch efficiency.

In the case of insurance and pension funds, life insurance keeps posting good levers of profitability in particular after the pension fund reform hit our annuities business. It is recovering due to [indiscernible] that allows clients to personalize monthly coverage maturity initial date of disbursement and other key features of the products. Medical service continues improving its profitability. Profit in casualty faces challenges mostly in its car insurance business, which operates in a market that is contracting.

In terms of our pension fund management business, our subsidiary Prima AFP registers a level of new affiliates that is above our expectations due to the tender for new affiliates that we won in December 2016, which implied a reduction of fees. This shows their full effects throughout 2018. Furthermore due to changes in the accounting rule IFRS9, there is an impact related to the recognition to the P&L of the profitability generated with our safe requirement. Before that the profitability was booked against equity. In investment banking, we still face challenges in corporate finance and capital market due to market conditions particularly in Chile and Columbia. Private banking offshore was negatively affected by the Amnesty for repatriation of capital, however, BCP captured around 80% of the total capital was repatriated at the country level.

Now another page please, Slide number 5. Let’s review the most important figures and indicators that show Credicorp performance in the first quarter. Credicorp reported net income of S/1,038 million, which represented a 2.4% reduction quarter-over-quarter, but a 16.7% increase year-over-year. All this imply our return on average equity and average assets of 19.3% and 2.4% respectively. Loan growth of 2.8% quarter-over-quarter and 7% year-over-year in average daily balances, which represents a recovery in loan growth considering the evolution posted through our 2017.

Loan expansion quarter-over-quarter and year-over-year was due to better dynamics in retail banking and Mibanco, and an increase in Wholesale Banking market share although a lower rates; second, net provisions for loan losses decreased 15.9% quarter-over-quarter and 30.8% year-over-year, mainly as a result of improvement in risk quality achieved in SMEs, Mibanco and consumer financing business segments in the last three years. The aforementioned has been captured in the methodology of forward-looking expected loss required by IFRS9 as we will briefly explain later.

Furthermore, the first quarter of 2017 posted a high level of provisions for loan losses due to the effect of El Nino phenomenon and Lava Jato case. As a result, the cost of risk decreased 28 basis points quarter over quarter and 84 basis points year-over-year. Third, net interest income decreased quarter over quarter due to a contraction in interest income of loans, which was partially offset by the reduction in interest expenses. On a year-over-year basis, net interest income increased slightly due to loan growth of 7% in average daily balances.

In this context net interest margin contracted 11 basis points quarter-over-quarter and 28 basis points year-over-year. This was mainly due to the significant reduction in wholesale banking spreads and our decision to improve risk quality of retail banking that we mentioned earlier. All of the aforementioned, together with the production cost of risk translated in an increase of 8 basis points quarter-over-quarter and 23 basis points year-over-year in the risk adjusted net interest margin.

Fourth, the efficiency ratio decreased 250 basis points quarter-over-quarter due to seasonality and operating expenses every four quarter, but increased 100 basis points year-over-year due to low growth in income generation. Finally in terms of capital ratios, our BCP standalone, BAS and Tier 1 ratios increased quarter-over-quarter after the annual general meeting of shareholders approved the capitalization of earnings as well as the increase in legal reserves in March 2018. In the other hand, the common equity Tier 1 ratio considered the most rigorous capital ratio, dropped to 11.22% due to the effect of the declaration of dividends in the last quarter.

Slide 6 please, as you can see in the charts at the top left hand side, average daily loan balances expanded 3% quarter-over-quarter, this expansion was mainly driven by growth in wholesale banking loan book, both in corporate banking and middle market banking, which are segments with low margins and accounted for 68% of growth in loan volumes. It is awarded the year-over-year expansion of 7% in average daily balances, nevertheless market conditions represent a significant challenge in particular for wholesale banking.

Next page please, at the end of first quarter 2018, Credicorp finding a structure continues to reflect higher growth in deposits as a funding source, which have a positive impact in funding cost given that the expansion in deposits was mainly attributable to non-interest bearing demand deposits and saving deposits. Additionally, this funding source has replaced central bank instruments, which continued to decline in this quarter as they mature. In this context, Credicorp's funding cost contracted 9 basis points quarter-over-quarter and 7 basis points year-over-year. This reduction was primarily attributable to BCP standalone whose handing cost in local currency fell and offset the increase in funding cost in foreign currency. Finally, Credicorp's loan-to-deposit ratio decreased quarter-over-quarter and year-over-year to situate at 102.4% given the deposits expanded at a faster pace and total loans.

Slide 8 please, in terms of portfolio risk quality as you can see in the chart at the top of this page, coverage ratios of internal overview and nonperforming loans have increased quarter-over-quarter and year-over-year. The improvement in coverage ratio was mainly due to: first, the one effect related to the adoption of IFRS9 requirements in January 1, 2018, which we explained earlier; second, the provision for loan losses net of recoveries made in the first quarter of 2018; third, the S/ 177 million of nonperforming loans.

Moreover, as you can see in the chart at the bottom of this page, Credicorp's cost of risk at 1.48%. This level represents a contraction of 28 basis points quarter-over-quarter and 84 basis points year-over-year, which was due to the contraction quarter-over-quarter and year-over-year in provisions for loan losses. This was in turn achieved due to: first, the enhancement of our risk adjustment pricing methodologies and risk rating model as well as some specific changes to credit policies in micro segments of our retail portfolio has led to significant improvements in risk quality of [indiscernible] all aforementioned has gradually showed at portfolio level.

In some cases, these measures imply that we reduce interest rates in order to improve risks and level of collateral; second, the improvement of risk quality in Mibanco loan book based on our improved risk-adjusted pricing, which we deployed with precise client segmentation. All aforementioned together with a slight and gradual recovery of several macroeconomic scenarios was also captured by the IFRS methodology. Next page please.

With regard to net interest income, quarter-over-quarter analysis showed that it contracted 0.8% due to the reduction of 1.3% in interest income, which was in turn driven mainly by a decrease in interest income and loans and dividends on investment. The aforementioned was attenuated but a contraction of 2.6% in interest expenses, which reflect the reduction of funding cost as we explained earlier. Although average daily loans balances expanded quarter-over-quarter, interest income on loans contracted because loan growth was mainly driven by wholesale banking, whose margin has been under pressure due to aggressive competition in corporate banking.

In the year-over-year analysis, net interest income grew 1.8% due to an increase of 2.3% in interest income on loans, which offset expansion of 2.7% interest expenses. All of the aforementioned translated in a drop of 11 basis points quarter-over-quarter and 28 basis point year-over-year in net interest margin. However, a decrease in cost of risk allowed posting an improvement in risk-adjusted net interest margin on a quarter-over-quarter and year-over-year basis.

Next page please, slide 10. Credicorp's efficiency ratio decreased 250 basis points quarter-over-quarter, mainly due to the seasonality on the operating expenses every four quarters. This level usually represents the lowest level of each year on a quarterly basis. On year-over-year basis, the efficiency ratio increased 100 basis points and situated a 42.8%. This was due to lower growth in operating income than the operating expenses. The drop in operating income growth was due mainly to low expansion in net interest income while increasing operating expenses was the result of increasing salaries and employee benefits.

It is important to note that year-over-year reduction in Mibanco cost-to-income ratio was attributable to improvement in productivity of loan officer, which is in turn associated with the strategic project Cliente Soy that we explained earlier. I think that we can go to the guidance. As you can see for the full year 2018, we presented the guidance in the previous conference call. And now we are maintaining the guidance that continued facing challenges due to the competition and low economic growth, which we have compensated with the improvement in efficiency and risk management.

With these comments, I would like to open the Q&A please.

[Operator]

Thank you. At this time, we will open the floor for questions. [Operator Instructions] Our first question comes from Ernesto Gabilondo with Bank of America Merrill Lynch.

Ernesto Gabilondo

Hi, good morning. Thanks for taking my call. Three questions from my side. The first one is in terms of your loan growth. I just wanted to understand if the acceleration we saw in wholesale during the quarter was explained by offering lower rates to be more competitive in the market. And I appreciate how do you see competition? My second question is related to NIM. Your loan growth continues to be driving by low margin segments. What should we expect for the NIM in the next quarters? And the last question is about this implementation of IFRS9. What should we expect in terms of provision charges in the P&L? I think the customer risk was 1.5% in the quarter with the new accounting changes. So I just want to know if this ratio is sustainable going forward. Thank you.

Gianfranco Ferrari

Okay, this is Gianfranco Ferrari. In terms of your first question, loan growth, as you mentioned, we grew importantly last quarter and basically focused in Corporate Banking. We feel we are comfortable with where we are today. We don't foresee being as aggressive in terms of pricing in that segment. And we are basically focusing in being much more intelligent in terms of pricing across all segments, not only in corporate and middle market, but also in retail.

So we might expect slower growth over next quarter – quarters but sustaining NIM. And that gets me to your second question, which is we're really focusing on NIM after provisioning rather than NIM by itself. As you can see even thought it was in page – in Slide 9, as you can see even though NIM has been going down over – as you compare quarter-over-quarter and year-over-year risk-adjusted NIM has been increasing and that’s – in the end, that's what matters really. So we expect risk adjusted NIM to improve slightly and/or to be stable in the near future. I will ask Cesar to answer the last question.

Cesar Rios

Regarding to provisions, actually I will link my answer to Gianfranco's. We are very focused on our risk adjustment and pricing methodologies and in this methodology we case by case, segment by segment try to maximize bottom line profitability making constant changes between return – based on margins, risk and volume with the objective to maximize bottom line. In some cases, we are going to reduce consciously the risk level, for example last year we focused mainly on consumer loans because the risk was above our expectations, but in other segment we can increase volume because we think we can make a profitable offset. As a result you suspect a better risk adjusted NIM.

Ernesto Gabilondo

Just a follow up in the last question. So is it reasonable that the cost of risk should be maintaining 1.5% in the next quarters?

Reynaldo Llosa

This is Reynaldo Llosa. I would say we should expect stable cost of risk for the following months. Since the portfolio performing quite well in the last few months and we see that continuing in the next quarters and the rest of the year. And having said that, there is also some things we’re doing and trying to get into new segments that might offset the positive results – marginally offset the positive results we are getting today. So in general, I would expect the cost of risk to be stable in the rest of the year.

Ernesto Gabilondo

Perfect, thank you very much.

[Operator]

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

Carlos Macedo

Thank you. Good morning gentlemen. A couple of questions, actually just one question on the couple parts on your guidance. I just mentioned that you expect the cost of risk remains stable, obviously the margins started up the year slower than you're guiding would suggest, but risk-adjusted margins are higher, your loan growth is already at the top of your guidance and you talk about accelerating growth in the consumer book, and hopefully, gaining some acceleration there. ROE for the quarter was above 19%. Your guidance is 17.5% to 18.5%, but do you – is it time, would you already revise guidance at this early in the year? I mean, it looks from the quarter that you're going to beat it quite handily. Or maybe that the next three quarters won’t be as good as the first quarter was. How should we think about that?

Cesar Rios

Yes, I will say that we are at the peak of the ROE. We're maintaining our guidance. And the first quarter due to seasonality effects, we usually have lower expenses. And in particular, in relation to the transformation efforts, we are starting to accelerate and we don’t capture these costs at the beginning of the year. In terms of…

Carlos Macedo

Okay…

Cesar Rios

As Reynaldo mentioned we are talking about narrow range at the end between 150 basis points and 160 basis points. I will say this is a narrow ranging relation to the bottom line.

Carlos Macedo

Okay, but would you say that there is more – that you will be closer to the upper end of the range of your ROE given where you started or would there be – would the bottom end of the range still be very much in play given where you started?

Gianfranco Ferrari

Well, that’s what guidance are for…

Carlos Macedo

Yes…

Gianfranco Ferrari

We provide a range. As a matter of fact, we’re in the upper part of the range, but it's too early in the year to tell.

Carlos Macedo

Yes…

Gianfranco Ferrari

There is seasonality in terms of expenses and also seasonality in terms of the effects we’re doing in the transformation process within BCP. So, we give our guidance in terms of ROE for the year.

Carlos Macedo

Okay, thank you so much and Watler I hope…

[Operator]

Thank you. Our next question comes from Jason Mollin with Scotiabank.

Jason Mollin

So that is the – one of the questions I had was that the change in methodology for provisions resulting in this 1.5% cost of risk and the fact that you have made some provisions or some allowances for loan losses and book value. They were to remain stable at 1.5% that would be lower than the guidance that you’re providing of 1.6% to 1.7%. I understand the expense side given the implementation of your digitalization strategy.

So maybe if you can comment for me on the outlook for provision if it seems like the guidance there from the statements we just heard, 1.5%, that was stable would be below the cost of risk and in the guidance under new IFRS9 methodology. And in the case of – maybe you can give us an update on the implementation of the digitalization strategy and investments you’re doing on that front. Thank you.

Cesar Rios

I would like to emphasis that improvement is not only due to the change in methodology. I will say this is the second effect. The most important underlying effect is the change in policies. There are new methodology in pricings and risk measurement that has been improvement the quality of our new vintages and as these new vintages are starting to weigh more heavily in the portfolio we start to see better results. The changing methodology was significant at allowance level in which we charge to S/320 million at the January 1st, but the methodology is only capturing the underlying improvement of the risk profile of our portfolio.

Jason Mollin

Maybe a follow up on that…

Walter Bayly

Looking…

Jason Mollin

Sorry, maybe a follow up there. What would the cost of risk have been if you haven’t changed the methodology?

Reynaldo Llosa

We will have that number, but if you compare our results to local accounting practices, you would see that they are very much aligned, and you would see an improvement there that the other portfolio is performing as well. So in general, I would say that we are seeing a very good quarter, this first quarter, in terms of the results of the new business as Cesar has mentioned.

Jason Mollin

Okay. And maybe an update on the implementation of the digitalization strategy and investments that you are making.

Gianfranco Ferrari

General comments or do you have a specific question. General comments? Okay. We started – yes, go ahead.

Jason Mollin

You mentioned as expenses yet in the first quarter, so we should start to see them and maybe some color on just general comments on what’s going on there and how that’s evolving that would be great. Thank you.

Gianfranco Ferrari

Yes, I would say that and we have had some conversations regarding this issue in the past. What we foresee that in the near future, we might have a -- I believe in terms of cost-to-efficiency ratio, but in the long run that cost-to-efficiency ratio should be reduced. As a matter of fact, our guidance is to keep the efficiency ratio stable over the year. And we're pretty sure that that's achievable this year. We might expect that 2019 onwards to start getting the benefits of the transformation. That's our view today.

Jason Mollin

That’s great. And maybe just an update, Walter are you – is Walter back resuming fully his responsibilities?

Unidentified Company Representative

[Indiscernible]

Walter Bayly

Yes, I am here and thank you very much. I was just going to do my usual closing comments. Thank you very much for asking. Yes, I am back but trying to take slowly recovering and getting into the old pace, but, yes, I am back. Thank you.

Jason Mollin

Great.

[Operator]

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

Carlos Rivera

Hi, good morning everyone and thanks for the opportunity to ask questions. My first question is related to the sale of the non-performing loan portfolio. I wanted to understand a little bit better that transaction. So first just to confirm if due to this sale, if you have released any provisions or if in any way the cost of risk at 1.48 was benefited from these. And if you booked any gains when you saw the portfolio, was this provision probably 100% and then you were able to gain a little bit from this.

And my second question probably also related to if there were any gains on the service portfolio. Is if there were any other elements that might be nonrecurring or difficult to repeat, you mentioned the sale of proprietary investment, mainly sovereign bonds from Peru, any gains as you could disclose there, that would be very helpful. Thank you very much.

Cesar Rios

Yes, when we saw the portfolio was for 177 million face value. We are actually booked again but it’s not registered in the cost of risk. It's registered in other income line due to the accounting nature because it was previous year – previous year account. It's recorded as an extraordinary income. But the effect is reflected in the nonperforming loans level. You capture this effect in the NPL level, and it's around 15 basis points.

Carlos Rivera

Okay and can you disclose the amount of this gain that was reflected in other income?

Walter Bayly

Yes.

Cesar Rios

Yes, it’s around S/29 million.

Carlos Rivera

Okay. And what about the second question, the sale of proprietary portfolio there?

Walter Bayly

Sorry, can you repeat the question please. Yes, as a part of the strategy last year in which we sold our low growing loan portfolio. We increased our investment portfolio and now we are starting to sell these portfolioss and realized gains.

Alvaro Correa

But that’s part of the…

Walter Bayly

It’s part of the current business.

Alvaro Correa

Not an extraordinary section or whatsoever…

Walter Bayly

Based on the situation we can do the same…

Alvaro Correa

Anytime…

Carlos Rivera

Okay, understood. Thanks all for that clarification.

[Operator]

Thank you. Our next question comes from Marcelo Telles with Credit Suisse.

Marcelo Telles

Hello, gentlemen. Most of my questions have been answered, but if you could elaborate a little bit. How you see the competitive environment? It seems that in some segments you are still growing below your competitors. So if you can describe a little bit how things are in that way that will be great. Thank you.

Gianfranco Ferrari

Actually, we don’t, we – there might be some lower growth in our portfolio, specifically in the consumer finance business. And I am talking this quarter, last quarter, but besides that we’ve gained – either maintained or gained market share this quarter. So even though we see that there’s harsh competition in across all segments. We are gaining market share. We are not gaining market share in consumer finance, but we are keep all – gaining market share in the rest of the businesses.

Cesar Rios

Only to complement, we don’t have figures of March, but as such February we have a total market share in BCP standalone of 29.2%. In first quarter 2017, we have 29.1%, that’s the same.

Marcelo Telles

But can you comment on the consumer segment specifically, I mean, the one is what the competition has been like, I mean it’s been – if you have been like raising the bar a little bit more versus your competitors. So if you can operate on that that would be great.

Gianfranco Ferrari

Yeah, sure, the reason behind is what I mentioned before. We’re looking – we’re rather looking for a NIM after provisions rather than NIM by itself. Therefore maybe two years ago due to the where – where we wanted them to be in terms of risk appetite, we started to – we raised the bar, as you mentioned. Nowadays, the vintages are much better. We feel much more comfortable. And as a matter of fact where we are entering with better risk models segment that pulled out a few months ago. So that’s the main reason while we – we have slightly lost market share in consumer finance business.

Marcelo Telles

Thank you and just one – one final question, I mean, when you look at in terms of your sustainable ROE right expectation of around 19%, how do you – do you think that number could be maybe too conservative in light of everything you guys have been doing on the risk side, on the efficiency side because when you look in the first quarter, as one of question is kind of addressed that as well and we know there is the seasonality of costs and so on, but you are slightly above 19%, right, and given that you have opportunities for you know to – opportunities to grow loan portfolio, have more operating leverage. It wouldn't it be reasonable to effort with the digitalization of the bank, would it be reasonable to expect a high ROE in the long-term than this 19%?

Gianfranco Ferrari

The issue – well, we give our guidance and the issue is that there is a counterforce and we will view that we might be more efficient and so on, but there's a counterforce that due to competition, there might be a reduction in – further reaction in NIM. So in the long run, we expect a stable ROE around 19%.

Marcelo Telles

Okay, that’s very clear. Thank you.

[Operator]

Thank you. Our next question comes from Domingos Falavina with JP Morgan.

Domingos Falavina

Thank you for taking the questions. Congrats on the quarter. My question – and I think it’s been widely explain the outlook for provisions and in fact the IFRS9 I guess in the future, but I guess a little bit of a theatrical question as what exactly happen. Because my understanding is that IFRS9 basically forces you to provision on your securities portfolio debentures, and that you changed from into an expected loss model. So what I am having difficult to hear is that you make a statement saying that it’s helped your provisions because your improvements in models basically you have a lower expected loss in the future and that drove some benefits in your lower provision during your credit costs.

My question is when I think about IFRS9, is that you should keep the same old provisions on existed loss already on the incurred losses and add for the future expected ones, so you should add actually not only a one-off book value, but at least some pressure on your credit cost. So my question is really theatrical, what exactly of the IFRS9 support the lower provision expenses?

Cesar Rios

Probably I will split the answer in two parts. In terms of investments, the most significant impact of the changing methodology was the reclassification of portfolios from available-for-sales to trading for around S/1.6 billion and was already a charge of around S/68 million in terms of allowances. In terms of current provisions, I will say that the impact in investment is at this point negligible. We have not seen any significant impact. In terms of loans, the fundamental changes we already mentioned is the change in the profile of the portfolio.

What happened with the new methodology is due to the forward-looking expected loss nature of the methodology, you capture the improvement probably a little bit quicker than they all methodology of incurred loss, but this is only a timely effect, but nothing significantly different happens in the medium-term of the risk portfolio due to the methodology by itself.

Domingos Falavina

It’s super clear. Thank you very much for the explosions on the book value changes. But if I have – if you have already incurred losses, let’s assume a billion in already provision for incurred losses. When you change methodology and you go into forecast losses, you don’t – you don’t remove the S/1 billion you have already incurred loss, but you do add something on future, so to me it would actually occur one-time off of adding provision expenses. So this is the report that I am having from difficult understanding of did you actually reverse back provisions that you had on incurred losses?

Cesar Rios

No, I think probably, I understand you question a little bit better, the new methodology, you have three different stages, probably the most significant difference is in the second stage. In the second stage with the new methodology, you don’t have only expected a loss for example a very early delinquency, but an expected loss for the entire life of the loan. So if you cross certain threshold, you in the methodology, have a present value calculation of the whole life expected value of the loss in this specific loan, so you book one-time in the case of our adjustment you have realigned or the expected losses that was not captured and they all methodology, but once you are set up this new and higher bar, you only have the marginal effects as in old methodology.

Domingos Falavina

So you basically use whatever allowances you already have at credit for this new methodology?

Cesar Rios

Yes, I think there are two differences. One is in the current methodology and the changing allowance you make a one-time realignment. In our case in the loan portfolio was 320 million additional allowances.

Domingos Falavina

No, no, it’s clear now. Thank you very much.

[Operator]

Thank you. [Operator Instructions] At this time there are no further questions in the queue. I would like to turn it over to Walter Bayly, CEO. Sir, go ahead.

[Walter Bayly, Chief Executive Officer]

Thank you. After a very disappointing growth for the country and for the financial system last year, it seems that this year both the country and the system again are poised for most robust growth. This of course in the back of a very positive international environment and a more stable political environment domestically. This first quarter all of our businesses have performed well clearly with microfinance, particularly at Mibanco being the more – having the most outstanding results. Bright spots on the corporation again, microfinance, Mibanco and BCP risk and volumes. The weak spots of course the pressure on margins due to the intense competition of the domestic market, but as Gianfranco mentioned, we’re being very cautious and managing the risk, the NIM after risk.

So we are focusing a lot in maintaining profitability of our businesses. The overall result for the quarter was a very healthy, 19.3 return on equity, which was not impacted as was mentioned by any non-recurring results. We expect and hope that this sets the tone for the rest of the year, but particularly I think the topics that have been discussed the ones that will be a recurring throughout the year: risk, volume and growth. Again, we’re very satisfied with this first quarter and hope that the remaining quarters of the year proves to be equally as good. With this we conclude the conference call and thank you all very much for attending this call and for your questions. Thank you and good bye.

[Operator]

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