Credicorp Ltd

NYSE:BAP

Earnings Call Transcript 2018-Q4

[Operator]

Good morning, everyone. I would like to welcome all of you to Credicorp Ltd. Fourth Quarter 2018 Conference Call. We now have our speakers in conference. Please be aware, each of your lines is in a listen-only mode. At conclusion of today’s presentation, we will open the floor for questions. [Operator Instructions].

With us today is Mr. Walter Bayly, Chief Executive Officer; Mr. Alvaro Correa, Deputy Chief Executive Officer; Mr. Gianfranco Ferrari, Deputy Chief Executive Officer; Mr. Cesar Rios, Chief Financial Officer; Mr. Reynaldo Llosa, Chief Risk Officer; Ms. Francesca Raffo, Head of Transformation at BCP.

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

[Cesar Rios, Chief Financial Officer]

Thank you. Good morning and welcome to Credicorp’s conference call on our earnings results for the fourth quarter of 2018. Before we review Credicorp’s performance in the fourth quarter of 2018, I would like to highlight some important matters that characterize the scenario in which we have operated in the last few months as tailwind for our businesses.

First, we expect that real GDP growth in the last quarter of 2018 grew to 5% year-over-year. With this result, the economy will have grown around 4% in 2018, one of the best results in the region, the efficient sector with investments on private mining investment were the main drivers of growth in 2018.

Second, there were important investment announcements in 2018; one of the most notable was the Quellaveco mining project in Moquegua for $5 billion. Third, the average price of copper is $2.96 per pound in 2018, which represented a full-year peak. The price ended a $2.7 per pound. A headwind for our businesses, first, global economy activities, this accelerated in the last quarter of 2018. Second, so 2018, we’ll serve an escalation of tensions between the U.S. and China. This has implied risk for global economy growth.

Third, in 2018, we’ll serve several episodes for financial volatility that impacted our trading related activities. On the local front, Peru reduced there is a slight decrease in copper output during the second half of 2018. Lastly, the Lava Jato handle offset negative effect on economic activity to a paralysis of certain investment projects and political uncertainty. With regard to the political environment, the referendum on December 9 had no material impact on the business environment. Finally, the most important political event in 2018 was in March, 2018 when President Vizcarra took off.

Please let’s move to the next page. Here, I would like to discuss the evolution of the local economy and the full quarter. In chart number one, you can see that GDP growth fixed in the last quarter, in the year, I’ve mentioned in the previous slide. In chart number two, you can see the domestic demand is estimated to have recovered in 2018 and reach a five-year peak. In chart number three, you can see the local and international interest rates, which affect our funding cost and businesses decreased in the last quarter of the year in parallel the Peruvian Central Bank reference rate has remained stable at 2.75% since March 2018.

Finally, in chart number four, the orange line shows that total loans in the Peruvian banking sector expanded 10.2% in 2018, which represents the highest growth rate in three years. Consumer loans expanded 12.6% in 2018, which represent a three year peak it is important to highlight that quarter-end loan balances of Credicorp grew 10.3% in 2018.

Please next page. Result with the full-year performance, there are important aspects of our lines of businesses I would like to mention. In the case of Universal Banking, BCP improved base of loan growth in all segments after low loan expansion in 2017. The loan in the first half of the year, put downward pressure on NIM, but towards the end of the year, retail banking accelerated the space of loan growth leading to a treatment recovery in net interest margin.

Moreover, for the fiscal second year, the cost of risk dropped leading to a subsequent increase in Credicorp, risk adjusted net interest margin. However, although income generation improved the cost-to-income ratio deteriorated due to acceleration in the pace of loan of operating expenses, which was internally registered particularly in the last quarter of the year and changed the decreasing trend of the efficiency ratio of serve in previous quarter. We will explain this topic in detail later on.

BCP Bolivia reported a good level of loan growth on a reduction in provisions; however, the funding costs and operating expenses increased and accordingly profitability for us. With regard to micro finance, Mibanco got a good level of loan growth of the loan origination slowdown in the third quarter. The cost of risk was relatively stable in comparison to 2017 level even though it’s deteriorated in the second and third quarter; Mibanco improved its cost of risk during the last quarter.

Moreover, Mibanco has improved its funding structure by increasing of retail deposit share of total funding. After significant improvement in its operation efficiency in 2017 and 2018, Mibanco has started building capabilities to sustain business role, which translated in an acceleration of the pace of growth of these operating expenses. Mibanco has started increasing its number of loan officers and building new channels, leveraging its digital capabilities. Regarding the challenges, these subsidiaries, it is important to mention that did not work pressure in margins due to competition.

With regard to the insurance and pension funds, the insurance business posted an increasing its contribution to credit through an improvement index that posted by the life insurance business until a good result of health business from the association with Banmedica. All the formation offset the deterioration in the underwriting results of the P&C business as the increasing net claims and acquisition costs were higher than the increase in the net earned premiums.

The pension fund business also improved performance after recovering the profitability of this fund under management on those results. However, the tender for new affiliate that was held on December 2018 was not awarded to Prima in the investment banking and wealth management.

In 2018, wealth management income grew in Peru and Chile offsetting a decrease in income in Colombia. Additionally, total expenses remained stable, although the cost-to-income ratio deteriorated due to a decrease in total income. In the last quarter of 2018, Credicorp’s Capital Chile posted an impairment in goodwill for S/ 38 million, which was mainly due to the adjustment of the discount rate. Finally, the mark-to-market of proprietary investments deteriorated mainly due to the increase in interest rate – in interest rate business.

In this chart, you can see the most important to use of Credicorp performance in the fourth quarter. Credicorp net income of S/ 957, which was 5.4% below the third quarter results of the previous year – of the previous quarter and 10% below those registered in the fourth quarter of 2017. The results represent a return on average equity and average assets of 16.3% and 2.2% respectively. The quarter-over-quarter evolution reflects the effect of a significant increasing operating expenses, which offset the favorable evolution posted by the net income coincident with non-financial income and provision for loan losses.

The year-over-year drop in net income is attributable to three factors and acceleration in the pace of the world operating expenses and an impairment of S/ 38 million Credicorp Capital Chile, both report in 2017 and the sale of financial in the fourth quarter of 2017 with generated income of S/ 163.7 million. Finally, it is the acceleration in the pace of loan growth and its positive impact in net interest income, which posted the highest quarterly loan rate in 2018 and second the improvement in cost of risk.

Next page please. In this chart, you can see the full year results. Net income reached a level of S/ 3.9 billion, which represented a return on average equity and average assets of 17.5% and 2.3%, respectively. These results were 2.6% below those obtained in 2017, due to first, the gain of S/ 444.7 million [ph] from the sale of too long trend equity investments. BCI and Enel registered in 2017. And secondly, to a lesser extend increasing operating expenses and impairment at Credicorp Capital Chile.

However, it is important to highlight the significant improvements in core items such as, that acceleration in the base of loan growth, the significant reduction in cost of risk and those the recovery of risk adjusted net interest margins and expansion of fee income and gains on FX transactions. Finally, in terms of capital ratio, BCP Stand-alone the BIAS and Tier 1 and core equity Tier 1 ratios decreased due to a strong growth in risk weighted assets, in line with long expansions. It is important to remember that we keep our Credicorp’s level a reserved fund of approximately net S/ 1.5 billion, which is invested in liquids lower risk assets. These funds have the effect of reducing Credicorp’s return on average equity by 100 basis points.

Let’s review the main periods and indicators in more detail. As you can see in chart number one, first, interest earning assets measured in quarter and balances remained relatively stable quarter-over-quarter and year-over-year. Second, there was a change in the composition of interest earning assets in favor of the most profitable assets loans, which increased their share in total interest earning assets. This trend was observed throughout 2018. Third, as shown in chart number two, average daily loan balances expanded 9.2% in 2018.

Furthermore, in terms of loan mix by business segment, loan expansion was mainly driven by Wholesale Banking, followed by Retail Banking and Mibanco. It is important to note that loan expansion in Retail Banking was led by the mortgage loan book. Fourth, in chart number three, you can see the loan growth was posted in both local and foreign currency, however, the expansion in local currency loans outpaced that of the foreign currency loans.

Next page, please. In terms of funding, first, as you can see in chart number one, the reports funding as chart shows an increase in deposits shares of total funding, which is more evident in the year- over-year analysis, this was the trend we observed throughout 2018. Second, in chart 2, for deposits side by side, you can see that initial deposit has also favorable funding even below core deposits, such as savings and demand deposits increased the share. The 13.8 year-over-year increase in saving deposits is now working on last driven mainly by the initial results posted by saving accounts opened at kiosks, which was the first program launched by BCP’s strategic initiatives transformation.

Third, as shown in chart number three, Credicorp’s funding costs has remained relatively stable despite the upward trend in international rates mainly due to a more favorable funding mix both by currency and by funding source.

Next page, please. Net interest income grew 4.9% quarter-over-quarter, 8.6% year-over-year and 5.2% in 2018, which represents an improvement compared to the results posted in the previous quarter and in 2017. Performance shows first the positive effect of loan growth on interest income where all segments of BCP and Mibanco expanded their portfolios. Second, the moderate increase in interest expenses, which was attributable to a more favorable funding structure while in previous years as we explained earlier.

Next page, please. With regard to risk quality, in chart number one, you can see the quarter-over-quarter evolution of the total cost of risk which decreased 20 basis points due to, first, the decrease in the provisions required for BCP due to the improvement of the risk quality of the portfolio and the probation due to reduction in the exposure of the clients related to the Lava Jato effect.

Second, the decrease in the provision required Mibanco, after the adjustments made at the end of the second quarter of 2018 to recover risk quality. The analysis of full-year results are shown in chart number two. The contraction of 40 basis points in the total cost of risk is now working and due mainly to first, the reduction of BCP’s provision required and due to improvement in the risk quality of the portfolio, in particular, in the consumer and credit card segments and to the reversal of provisions from the Lava Jato case clients.

And second, the effect of 2017 of the provisions requirement for the El Nino phenomenon and Lava Jato case. It is important to remember that on January 1, 2018, Credicorp adopted the requirements of IFRS9 for loan provisions whose first effect was a one-off increase of PEN 320 million loans and off-balance sheet exposures, due to methodology changes.

Next page, please. As we discussed in previous slides, Credicorp’s net interest margin was relatively stable in 2018, reaching a level of 5.26%. Furthermore, for the fourth consecutive year, the cost of risk improved and reached a level of 1.38%, 44 points below the level positive, in 2012. As a result, Credicorp’s risk adjusted net interest margin increased 20 basis points on which a level of 4.31% higher than six years. These results represent clear evidence of the Air Force and the sourcing that we have been roll out with trend, our risk management capability as well as pricing and commercial strategies. After challenging years, in terms of risk quality and loan growth, risk adjusted NIM has reached a healthy level.

Next page, please. On this page, we will discuss the evolution of non-financial income. As you can see in chart number one, non-financial income responded 6% quarter-over-quarter due to good performance for core items. Fee income, net gains in foreign exchange transactions and the net gain for associates, which refer to the third business from association with America.

On a full year basis, as you can see in chart number two, the core items of non-financial income that we’ve mentioned before also post a good performance. However, total non-financial income contracted 5.9% compared to the level in 2017, this was mainly attributable, first, the income of PEN 447.7 deteriorated in 2017, that fell of equity investment in BCI and Enel and lesser expand the favor of market volatility throughout the year that was sorted in the decrease in the net gains sense of securities and net gains in the business.

Next page, please. In the year-over-year analysis, net operating efficiency, which eliminates the analytics [ph] and the full year analysis, you can see that the cost to income ratio deteriorated due to an acceleration in the pace of growth of operating expenses. This was mainly due to an increase in salary and employee benefits, administrative and general expenses and acquisition costs of the insurance business. In 2018, approximately, 50% of the increase of operating expenses was registered in BCP Stand-alone. 30% in Pacifico, and 10% in Mibanco.

If we start with Mibanco, expansion in the operating expenses was mainly due to the developing of new capability to support the growth of our operational businesses, international expansion and the creation of digital. In the case of Pacifica, approximately 60% of its increase was mainly related to the expansion of sales in life insurance businesses and the remaining 40% was mainly due to a change in the accounting of profit and cash volatility of underwriting fees that previously were booked up front and 2018 and on our accrued over the life of insurance policy.

In case of BCP Stand-alone, one-third of degrees is due to the strategic initiatives transformation whose budget execution was accelerated at the end of the year, the remaining two-third were mainly due to three different types. First, expansion of transactional activities. Second, the increase in productivity and variable compensation, which were mainly explained due to sales volume above target and the out performance in another KPIs such as customer satisfaction. And third, at BCP Stand-alone, net income to pass budget so provision and additional profit sharing for employees.

Now, I would like to hand over this call to Francesca Raffo, Head of Transformation on BCP, who will talk about the strategic initiative transformation executing at BCP.

[Francesca Raffo, Head-Transformation at BCP]

Thank you. I’d like to show the starting slide the slide with the purpose on BCP’s Northstar. We have signed and established to Northstar goals since 2021. We’re being number one in customer experience in Peru and the next one having the highest efficiency ratio in the region. So despite how those look like in more complete trends, we have set six key results for 2021 and we have very challenged also significantly to define them and we know we might not achieve all of them, but the purpose is to inspire and give sight to our ambition and to move the organization towards key results. They key results are according to the income ratio site to our ambition and to move the around NIM 30 [ph], to duplicate the gross sale ratio for our customers, to be able to pre approve 50% of the economically active population. To be handle one and improve the NIM to serve 70% of our sales digitally and also a non-disclosed net income goal.

The next slide shows the way we approach the transformation. We started some years ago and we described it as we are on board of a small over a large spaceship on our way to planetxx, the planet of experience and efficiency. Our performance currently organized strong, these referred to as tangents of the transformation and I would briefly comment on some of them. The first one was really [Technical Difficulty].

Slide number 16. So our main achievement of our 2018 is as follows: Looking at our digital results by the end of 2018, 31% of our customers are digital customers, going from 21, two years ago. Considering our customer base has grown 30% in the same period, it means that the number of digital customers has grown more than 90% in the last two years. In terms of transactions, the transactions performed as a percentage of digital channels continues to grow, and the percentage advantage decreases. In December 2018, 48 of our transactions were done via digital channels. That number turned into 59 when we include clear with transactions. And on the 4% of the transactions are execute through branches.

Next slide, digital sale. Regarding digital sale, in 2018 – in 2019 [indiscernible] and 33% was digital and service channel. If you look the chart alone, those numbers are based on [Technical Difficulty] We continue to work on delivering new products we are digital as we are convinced this brings both better experience for our customer and not additional fees. Because of opening our savings and costs is nine times lower than compare to that.

The next slide, finally in terms of customer satisfaction we remain at the market leader in a private banking and small, medium and mid-sized business and we do not get corporate banking and institutional segment. And we have achieved from first to third place in our customer and consumer segment market which is a previous market in terms of customer – number of customers. Thank you.

[Cesar Rios, Chief Financial Officer]

Thank you, Francesca. Finally, in Slide 19, we present our guidance, 2019 for reference for what we expect in terms of results. We perceive that the macro-economic contexts will be very similar to that same in 2017 and loan growth will be in the range of 8% and 10%. Second, the cost of risk should remain within the range of between 1.3% and 1.5%. Third, net interest margin should post at levels between 5.4% and 5.7%, which represent a slight increase. Fourth, we suggest that net interest margin should recover slightly. Fifth, the efficiency ratio to remain stable in comparison to the level posted in 2018; Six, the return on average equity should be between 17.5% and 18.5%.

Finally, it is important to mention that we are in the process in which we significantly deal digital and self-service capabilities and at the same time, we’re very prudent for serving the traditional distribution capabilities.

Thank you. With these comments, we would like to open up the Q&A, please.

[Operator]

Thank you, sir. [Operator Instructions] Our first question comes from Gabriel Moraga [ph] with Citi.

[Unidentified Analyst]

Hi, everyone. Thank you for the opportunity to ask questions. I actually having the question on your loan growth guidance – hello? Are you listening? Okay. So I’ll just go on. And just very quickly. I just want to understand here, why you were expecting a loan growth of around 8% to 10%, which is what you already delivered in 2018, given that the Peruvian economy could improve further during the year, and also here, if I can ask may be give us some more color on what segments you are expecting to grow more that would be very helpful? Thank you.

[Technical Difficulty]

[Operator]

[Operator Instructions] Our first question comes from Gabriel Moraga with Citi. Please repeat your question.

[Unidentified Analyst]

Hi, everyone. Thank you for the opportunity to ask questions. I actually have a question regarding your loan growth guidance. I’ve been just kick your brains on what you’re expecting and what are you seeing in terms of loan demand and why do you expect maybe on loan growth to remain in the same levels? And given that’s the Peruvian economy could improve further in 2018 and also here, if I can ask may be, some more color on what segments you expect to grow the most? Thank you.

[Cesar Rios, Chief Financial Officer]

Yes. First, we expect that economy growth at similar pace in 2019 that is, 2018 – sorry, first, 2019 and 2018. We expect that 2018, the growth is going to be around 4% and in 2019, we expect 3.7%, that is very similar. In terms of growth, our guidance is in sync with level with previous year between 8% and 10%, but probably with a different composition. During 2018, we have had significant growth in Wholesale Banking and we expect it’s like the difference in 2019, probably, with higher levels of growth in consumer credit cards mixed market and probably not in the Wholesale Banking.

[Operator]

Thank you. [Operator Instructions] Our next question comes from Philip Finch with UBS.

[Philip Finch, UBS]

Thank you for the presentation. I’ve got two questions, I’ll ask one question at a time. The first question is regarding your costs, your operating expenses. We saw this grow by around 11% year-on-year, which is significantly above inflation. Now you’ve given us efficiency guidelines for 2019. So really what I’d like to ask is, what cost growth should we assume for 2019? The same level that we saw in 2018? And what are the drivers for that? And I will come back to my second question later. Thank you.

[Cesar Rios, Chief Financial Officer]

Probably, it will be more wide to the drivers of the cost increase during 2018. As we mentioned previously, around 50% of the increase was produced in BCP Stand-alone. In case of BCP Stand-alone, we have probably have one-third of the cost increase due to the transformation efforts. The transformation is investing heavily in people, advisory, IT product, but if register as new asset and experiment that we charge in the P&L. Put forth of increase in BCP Stand-alone where in the traditional business and in this, we have two many drivers; one driver is due to the increased volumes and transformational levels, but IT expenses, markets team, loyalty programs and so on. And another important target is due to the variable compensation, but what linked to commissions and incentives to stay to the sales forces.

Through the year, the productivity of the sale forces increased and as – especially in the last quarter, we excelled well above targets and this crossed two different things. One is, you have utterly more volume than U.S. bank so the level of payments goes above the target level. And additionally, we improve in some key aspects for earnings example, customer satisfaction, the three-year additional bonuses. Down the road, we expect to have a quick in sales efficiency, but probably we’re doing to recalibrate the payment in a shorter period of time from quarterly to monthly.

Monthly means this company. We see that as a positive results. As a whole, at BCP Stand-alone, we excelled our budget, so we certify more funds for profit sharing. Another important driver in the cost was in Pacifico. In Pacifico, we grew significantly in terms of sales in life insurance business, in the products Renta Flex similar growth to that. And we see significant commissions on front. This has placed probably 60% of increase in Pacifico and the remaining is due to an accounting change that most – mainly from the in time recognition throughout the life of the policy.

The works of increase was in mainly Mibanco with basic capabilities also. For the next year, the efficiency ratio, as a whole, is going to maintain similar levels in 2018, because we are going to have overlapping capabilities increased in the transformational efforts. In BCP, more expenses in Mibanco and Pacifico and at the same time, we are very prudent maintaining the traditional distribution capabilities.

Later on probably, we are going to reduce costs. Probably, I could give you one example. For example, in the reduction of branches as Francesca mentioned, we reduced a number of branches to the 125 as she mentioned, but the cost structure was only equivalent to 1/3 because we translate the selling and distribution people to our branches. We’re going monitor this very carefully and when we feel comfortable that we’re not going to sacrifice $1 of sales to save $0.20, of course, we’re going to manage this cost accordingly.

[Operator]

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

[Ernesto Gabilondo, Bank of America]

Hi, good morning and thanks for the opportunity. Two questions from my side, The first one is a follow-up in terms of expenses. So, can you repeat the expenses growth for this year? And given your Transformation process, should we stick OpEx to start going down after 2021. And my second question is after incorporating your 2019 guidance, if it’s reasonable to expect net income to perform low to mid-teens growth? Thank you.

[Cesar Rios, Chief Financial Officer]

We have a target base on cost-to-income, where we expect, down the road is that the income is going to grow faster than the cost and a result of that, we’re going to improve efficiency.

[Gianfranco Ferrari, Deputy Chief Executive Officer]

Just to add on – this is Ferrari, just to add on Cesar’s comment, as he mentioned before, at this time we’re having sort of an overlap between the position and distribution strategy which Francesca mentioned early on. So what we foresee going forward is that at some point in time maybe the expense of our digital world will stay stable. However, the operating cost in the traditional distribution is going to decrease. So overall, the aspiration we have at BCP and strength the word, the word aspiration is the cost to income in [indiscernible]. However, we do see that it’s achievable to be below 40 in three more years.

[Operator]

[Operator Instructions]. Our next question comes from Andres Soto with Santander.

[Andres Soto, Santander]

Hi, thank you. My question is related to Mibanco’s performance. We saw a normalization in cost of this quarter, but are we going to remain below these certain levels. This is due to weak in AI performance, increase in expenses and higher tax burden. I’d like to understand if these trends reflect a change in Mibanco’s operating model as you’re probably validating growth in less profitable segments and employing people on the collection stage of the process. In the end, I would like to get a sense of what this structural profitability that we can expect from Mibanco looking ahead? Thank you.

[Cesar Rios, Chief Financial Officer]

Thank you for your question. If you compare 2018 with 2017, you’ll see that Mibanco improved in the matter of the last quarter, basically Mibanco, for the full-year quality deteriorated over the last actually two quarters. However, what we’ve seen in the new vintages, all of them are within the capital. Going forward, in 2019 – sorry, going back to 2018 as compared to 2017, net cost to income with Mibanco, has improved dramatically and if you compare net cost of income to Mibanco’s main competitor, it’s significantly better than those of our competitors. Going forward, we do see slight deterioration cost to income, because you have to bear in mind that Mibanco distribution model, which by the way, we’re not changing this yet. It’s based on people, hiring people and training people. And therefore, the benefits of bringing new people cost you a lot at the beginning. Since we expect to increase sales forces by 2019, there’s going to be a short-term impact in this year.

[Operator]

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

[Jason Mollin, Scotiabank]

My first question is on the impairment charge that you mentioned, that Credicorp Capital. We saw the subsidiary go from a gain to a large loss. If you can quantify the charge? And what this was attributed to? And if we should see other charges like this in the future, if you’re anticipating any others? Thank you.

[Cesar Rios, Chief Financial Officer]

Yes. The impairment was for PEN 438 million. As mentioned – we mentioned during the presentation, our key factor in this impairment was the increase in the discount rate and then a lesser extent, adjustment in low expectations. We don’t envision an additional charge-off actually. We are confident with a book volume levels at this point.

[Operator]

[Operator Instructions]. Our next question comes from Carlos Gomez with HSBC.

[Carlos Gomez, HSBC]

Hello. Good morning. I’m wondering if you could comment on the competitive landscape. In the past, you have mentioned how, in particular, in corporate you were increase in competition. But now you’re expecting higher margins from it here? Should we understand that competition has lessened somewhat? And if is not, which areas do you see under more pressure? Thank you.

[Cesar Rios, Chief Financial Officer]

Yes. Competition has been very harsh here, especially, in the corporate segment. Thus at that point in time, gross margins very low. However, the last quarter margins in that segment picked up. Having said that, I would say we do feel that the corporate business, a lot of our lending business that has gone up, and overall business where lending is the commodity side of the business. We make new market sharing in that corporate, in the lending side at that point in time. However, what we follow very tightly is our market share in terms of payments, savings, payrolls and things like that. The fee income businesses where we still gain market share. So even though, we see that maybe – as a matter of fact, again, we’re seeing again competition in the corporate banking segment in terms of net interest margin. We see the basis in an overall sense. It is also that next level towards a midsized – midmarket with gains market share or market since last year, at the same time, we improved the gain in that segment. So the overall wholesale business, we are reaching a stable market share. And at the same time, improving NIM.

[Gianfranco Ferrari, Deputy Chief Executive Officer]

Both of these things are very important, because we have the lending business, the reporting on the transactional services. And the latter are gaining benefit important overtime and strengthened the relationship.

[Operator]

[Operator Instructions]. Our next question comes from Jason Mollin with Scotiabank.

[Jason Mollin, Scotiabank]

Hi. I just wanted to understand better as a follow-up on the Credicorp Capital impairment. You mentioned the increase in discount rate in growth – and potentially lower growth projections. What was this? Was this a project? Were these projects that you’re analyzing? Or was it just? What kind of assets were these? Or what kind of investment was this that you had to take the charge on?

[Cesar Rios, Chief Financial Officer]

If I understood well, now we have two different thinking that, that one data – the business that we build, we have goodwill in this business. So each year we make sure that net production value with the current value. And we have a significant project to develop the world management business. The potential gains of this wealth management business has not been incorporated in the calculation that I mentioned previously. We see it as two different things for this regard.

[Walter Bayly, Chief Executive Officer]

Hi, Jason. This is Walter Bayly. Being very specific what we have written down in the last quarter, which related to the acquisition of IAF Trust achieving and some remaining goodwill of that to evaluation. And we have completely eliminated any remaining goodwill of that acquisition. As Cesar mentioned, the main reason for that was an increase in the discount rate of achieving those assets. We do not any further goodwill that can be impaired in achieving anymore with what we answer that over the past couple of years have required a certain level of year-to-date review and internals. If this is done and overviewed and related specifically to one transaction, the acquisition of investment bank focussing this issue.

[Operator]

Thank you. Our next question comes from Alonso Aramburú with BTG.

[Alonso Aramburú, BTG]

Hi, good morning and thank you for the call. I wanted to follow up on the expenses questions. If we look at your guidance of loan growth, 8% to 10%, with margins improving between 15 and 45 basis points and stable efficiency. It would seem that expenses will grow double digits in 2019? So I’m just wondering if that’s the ballpark figure that you have of expenses growth this year?

[Walter Bayly, Chief Executive Officer]

The expenses when we consider the NIM, we need to also the consider the other income – fee income, that growth is slightly below the pace of a NIM. So, the expenses are going to grow a similarly to the combined effect of the NIM and the other income.

[Operator]

[Operator Instructions]. Our next question comes from Carlos Gomez with HSBC.

[Carlos Gomez, HSBC]

Yes. Thank you again. And sorry to come back to expenses, but obviously, it is the focus here. Could you explain to us if you have a particular budget? If you have a certain amount that you’re willing to spend in the transformation process? How long it’s going to take one year, two years, five years, 10 years? And what are the key elements that they view from the current 44% cost income ratio? It’s expected mid-30, it’s a big, big change. So where – what are the keys? Is it the reduction in benches? Is it to increase alternately and what brings that from here to there? Thank you.

[Cesar Rios, Chief Financial Officer]

Just to be very specific, the mid-30 subdivision is at BCP level, not at Credit Card level. Probably, the for the BCP level cost to income close to flow [indiscernible] last year. You can do the math. We do have a plan on inventing the digital and the overall being sold – that plan can help us – should help us reduce the important way to the cost income ratio. I don’t know if it’s ensured it specifically. You don’t give us a little more flavor of how much we’re spending on the dealer proximity.

[Francesca Raffo, Head-Transformation at BCP]

The way we look at as a transformation expense is, it’s difficult to separate few transformation to improving of the way we start customers in a digital work. So the way we look at it – about a third of the investment we have is related to making our current business better. And that’s investing in technology, in channels et cetera. The other two thirds is investing in disruptive technology, disruptive data process and so forth. And we do have budget we set a target annually, we discuss with the rest of the bank, the appetite of the bank wants to include in the transformation and we also set these AGMs that we talked about in the conference relating to engines focused on achieving cost reduction, but also new income forces. The channels, i.e. the distribution channel, the IT engine, that data engine are really much focused on reducing the cost to profit and serve our customers.

[Cesar Rios, Chief Financial Officer]

Yes. Probably to add, we had hit that – we’ve announced framework to classify the costs and investment in run, grow and transform and we have the specific methodologies to improve project and begin to set up expectations for each of these categories.

[Operator]

Our next question comes from Andrew Grieco [ph] with Wells Fargo.

[Unidentified Analyst]

Hi. Thank you for the opportunity. Early in the presentation, you mentioned that you had adjusted your profit sharing, because you exceeded revenue goals. I was wondering what the expense of that adjustment was? And if you have an idea what your cost to income ratio was before the adjustment? Thanks.

[Cesar Rios, Chief Financial Officer]

Yes. The specific comment was related to BCP Stand-alone and [Technical Difficulty] 5% of the yearly increase. That is significant in the fourth quarter in which the whole adjustment was made.

[Operator]

Thank you. [Operator Instructions]. Our next question comes from Miguel Tola with CAPIA.

[Miguel Tola, CAPIA]

Hi guys. Thanks for the opportunity. My question comes from the funding cost. We have seen – sorry, you said that there’s going to be a pressure of margins because of competition at Mibanco. I want some guidance of earning costs for subsidiary for the next couple of years and also we have seen a reduction in the loan and deposit ratio in Mibanco for the quarter-over-quarter and year-over-year retails, what’s your guidance for the next year on this ratio? Thanks.

[Cesar Rios, Chief Financial Officer]

We don’t provide specific guidance for these issues, but we can you give some comments. In general, we expect that the short-term rates are going to increase slightly at the end of the year and we are improving our funding structure, both in BCP and in Mibanco. In the case of Mibanco, they are working actively in creating distribution in to exceptional capabilities so they’re going to improve the needs, probably at a higher rate paced than the previous years. As a result, they are probably going to improve the cost of funding that there are significant pressures in terms of interest rates, it’s a very competitive market.

[Walter Bayly, Chief Executive Officer]

Mainly just to compliment what Cesar just mentioned. At the Mibanco level may be the most – if the weakest part of the business at Mibanco is the financial structure and this comes from the previous Mibanco. Because Mibanco has most of the – like the finest institutions get the – their funding through the local capital market or professional investors. So Mibanco is developing – is investing on developing the whole transactional value propositions for their clients, so that they can get funding from those clients. You’ll have to bear in mind that Mibanco already has 2 million clients. So, we do see an opportunity to that a very low cost funding going forward. Obviously, in the premium retail business it’s a long-term strategy.

[Francesca Raffo, Head-Transformation at BCP]

The group itself has the relative profit last year.

[Walter Bayly, Chief Executive Officer]

Sure, sure.

[Francesca Raffo, Head-Transformation at BCP]

Funding costs…

[Walter Bayly, Chief Executive Officer]

Yes. But just to be specific, lower funding cost at the Bank of Columbia was mainly because Mibanco have launched very successful campaigns to for tangible profits. Going forward, what we’re planning to do or what we’re doing actually is to being a provider the right value proposition in order to get saving account, current account, funds, recharge even at lower costs.

[Operator]

Thank you. There are no additional questions at this time. I would now like to turn the conference back over to Mr. Walter Bayly for closing remarks.

[Walter Bayly, Chief Executive Officer]

Thank you very much, Stefanie. During 2018, the main characteristics were clearly an event of political volatility during the first half, it’s not very often that we go through such level of political change which will cause major disruptions in the economic side of the economy, unfortunately. We’ve also suffered mainly as a consequence of this political volatility, slow growth. Both of these events created a certain deterioration of the cost of risk particularly with the sale and that will adjust to our BCP. It’s a very specific issue at Mibanco, which has already been addressed. Therefore, dimensions during this last quarter have been very encouraging. The result, nevertheless, has been impacted by increase in operating expense. I think that has been well explained already. We are not concerned, but it is very important to give the market the confidence that we continue to have a very strict discipline in cost control.

After many years of a very successful efficiency program at BCP, we are probably going to lunch in going to a second stage of that, a cost discipline is a necessary item going forward and we have not lost, and we’ll not lose that very strict discipline that has proven to be very successful for us in the past couple of years. And we believe in our confidence that we are very well directed towards continuing to improve the efficiency ratio, particularly at BCP. As just Francesca explained at Mibanco, on the other hand, we have decided to pursue further growth and expect to deteriorate somewhat our short-term efficiency ratio because of the expense of hiring and training sales force. We have already corrected the statistic risk issues and, again, are ready to pursue growth at Mibanco.

Overall, at Credicorp, we’re confident that our short, medium and long-term strategies are well defined, well executed and have the appropriate confidence to monitor developments, deviations and timely equations to market and technology developments. We continue to see growth opportunities in the markets in which we operate through the continued existence of a bank and bank segments of the populations and grow in the economies in which we operate. And we’re very confident that our different subsidiaries and initiatives are very well-positioned to continue to capture the growth. We are optimistic regarding the future results of Credicorp both in the short, medium term.

For this, I really want to thank your continued presence in the conference call and look forward to meeting you one-on-one and to be with you in the end of the results – in showing of the results of the first quarter of this year. Thank you very much, and with this, we finalize this conference call.

[Operator]

Thank you, ladies and gentlemen. This concludes today’s presentation. You may now disconnect.